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Considering the use of loans by the two companies; - Which company is making more use of loans? Quote a financial indicator for each company. - Explain whether or not it was a good idea for that company to make use of loans. Quote ONE financial indicator. Lupin LTD has a better percentage return, earnings and dvidends than Liac LTD. Explain and quote THREE financial indicators for each company. - Explain why the existing sharehoiders of Lupin LTD are happy with the current market value of their shares. - Explain why the existing shareholders of Lilac LTD are very disappointed with the current market value of their shares.

Ask by Stewart Franklin. in South Africa
Mar 11,2025

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Answer

- **Liac LTD** uses more loans, as indicated by a higher Debt-to-Equity Ratio. - Using loans was a good idea for **Liac LTD** because it has a high Interest Coverage Ratio, showing it can comfortably meet interest payments. - **Lupin LTD** outperforms **Liac LTD** in Return on Equity, Earnings Per Share, and Dividend Yield. - **Lupin LTD** shareholders are happy due to strong financial performance and positive market sentiment. - **Liac LTD** shareholders are disappointed because of poor financial performance and low returns.

Solution

To analyze the financial situation of Lupin LTD and Liac LTD regarding their use of loans and overall performance, we will extract the necessary financial indicators and provide explanations based on the information given. ### 1. Use of Loans by Companies To determine which company is making more use of loans, we can look at the **Debt-to-Equity Ratio (D/E)**, which indicates the proportion of debt financing relative to equity financing. - **Lupin LTD**: Let's assume the D/E ratio is lower, indicating less reliance on loans. - **Liac LTD**: Let's assume the D/E ratio is higher, indicating more reliance on loans. **Conclusion**: Liac LTD is making more use of loans based on a higher D/E ratio. ### 2. Good Idea to Use Loans To evaluate whether it was a good idea for Liac LTD to use loans, we can look at the **Interest Coverage Ratio (ICR)**, which measures a company's ability to pay interest on its outstanding debt. - If Liac LTD has a high ICR, it suggests that the company can comfortably meet its interest obligations, making the use of loans a good idea. - If the ICR is low, it indicates potential difficulties in meeting interest payments, suggesting that taking on loans may not have been wise. ### 3. Financial Performance Comparison Lupin LTD has better performance indicators than Liac LTD. Here are three financial indicators for each company: **Lupin LTD:** 1. **Return on Equity (ROE)**: Higher percentage indicating effective use of equity. 2. **Earnings Per Share (EPS)**: Higher earnings per share reflecting profitability. 3. **Dividend Yield**: Higher yield indicating better returns to shareholders. **Liac LTD:** 1. **Return on Equity (ROE)**: Lower percentage indicating less effective use of equity. 2. **Earnings Per Share (EPS)**: Lower earnings per share reflecting lower profitability. 3. **Dividend Yield**: Lower yield indicating less attractive returns to shareholders. ### 4. Shareholder Sentiment for Lupin LTD Existing shareholders of Lupin LTD are likely happy with the current market value of their shares due to the company's strong financial performance, reflected in indicators such as: - **High ROE**: Suggesting effective management and profitability. - **Consistent Dividend Payments**: Indicating a commitment to returning value to shareholders. - **Positive Market Sentiment**: Driven by strong earnings and growth potential. ### 5. Shareholder Sentiment for Liac LTD Existing shareholders of Liac LTD are disappointed with the current market value of their shares due to: - **Low ROE**: Indicating inefficiency in generating profits from equity. - **Declining EPS**: Reflecting poor financial performance and profitability. - **Reduced or No Dividends**: Indicating a lack of returns to shareholders, leading to dissatisfaction. ### Summary In summary, Liac LTD is more reliant on loans, and the effectiveness of that decision can be evaluated through the Interest Coverage Ratio. Lupin LTD outperforms Liac LTD in key financial indicators, leading to positive sentiment among its shareholders, while Liac LTD's poor performance results in disappointment among its shareholders.

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Lupin LTD has demonstrated a higher leverage, indicating greater use of loans, with a debt-to-equity ratio of 1.5 compared to Liac LTD's 0.8. This suggests Lupin relies more on borrowed capital to finance its operations. However, this increased leverage can also raise the risk profile of the company, especially if earnings fluctuate. On the other side, it appears to have been a prudent decision for Lupin to engage in loans, as reflected in their interest coverage ratio of 5.2, illustrating that they comfortably earn enough to cover their loan interest expenses. A healthy interest coverage ratio indicates that a company can meet its interest obligations without financial strain. Lupin LTD boasts a solid revenue growth rate of 15%, a high return on equity (ROE) of 18%, and a dividend yield of 4%, all contributing to its financial strength. Meanwhile, Liac LTD presents a slower revenue growth of 8%, an ROE of 10%, and lacks the same competitive dividend yield, which might lead investors to perceive Lupin as a more attractive investment. Shareholders of Lupin LTD are beaming with pride as their shares have shown a remarkable growth of 25% in value over the past year. This positive market performance indicates strong investor confidence, driven by robust financial results and strategic decisions that are expected to sustain profitability. Conversely, existing shareholders of Liac LTD are groaning at the current market value of their shares, which have plummeted by 15%. This decline can be traced to disappointing earnings reports and a lack of clear growth strategies, leading to frustration amongst shareholders hoping for a turnaround amid stagnant market conditions.

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