Chapter 2 - Equities, Property And Alternative Investments

Question 1

What two factors tend to influence the price movements of an individual share

Answer 1

• Future expectations
• historic and current knowledge of a companies performance

Question 2

Is a raise in interest rates likely to raise or depress the share price of a building companies?

Answer 2

A rise in interest rates is likely to depress Builders shares prices as high mortgage costs could deter house buyers

Question 3

To what extent is a preference share difference from a corporate bond?

Answer 3

Preference shares are similar to bonds in that they pay a fixed income in the form of a dividend that has preference over normal dividends. however,

• preference share dividends are taxed as dividend income and not at the savings rates payable on the receipt of Interest
• preference shares are often issued with redemption dates

Question 4

Which type of share ranks lowest if a company goes into liquidation?

Answer 4

Ordinary shareholders are entitled to share the residual value of a companies assets after all debts are discharged and other shareholders have received the entitlements, therefore they rank as the lowest type of share

Question 5

A client is considering investing in listed private equity companies. what are the risks associated with this type of investment?

Answer 5

Whilst private equity can deliver high returns, there is a high risk of losses, some of the companies in which a fund invests will fail and others will not grow quickly. they can also carry high leverage and are vulnerable to a domestic downturn of recession. listed private equity stocks are less liquid the listed securities. this can make realising an investment difficult and it’s also makes the share price is more volatile, trading volumes can be very low

Question 6

What is a price/earnings ratio and what does it tell the investor about the potential for growth in the share price?

Answer 6

The price earnings ratio compares the companies share price with its earnings per share. a high price earnings ratio usually indicates that investors are optimistic about the future earnings growth of the company. however, a price earnings ratio does not indicate whether the share price will rise or fall

Question 7

Why might it be appropriate to include property within an investment portfolio?

Answer 7

A key reason would be to obtain additional diversification, especially from equity investments. property values tend to follow business profitability in very general terms, and are therefore less volatile than stock markets. where property is left on attractive terms to good quality tenants, it has some of the characteristics of fixed interest securities. yet, because property is asset backed it can also provide long-term protection against inflation

Question 8

What are the disadvantages of investing in a work of art?

Answer 8

Artwork usually do not generate any form of income

They often cost money to keep and may incur charges in the form of insurance premiums, specialist storage charges, security costs or maintenance

Demand is driven by the taste of collectors which can change

Authenticity can be difficult to prove

There are high costs associated with buying and selling

It can be difficult to diversify

Specialist knowledge is needed to buy successfully

Question 9

What are the two broad classifications for commodities?

Answer 9

Hard commodities - which are the products of mining and other extractive processors they include metals, crude oil and natural gas

Soft commodities, which are typically grown - include coffee, cocoa, Sugar, corn, wheat and livestock

Question 10

Equation for earnings per share

Answer 10

Profit attributable to ordinary shareholders/number of ordinary shares in issue

Question 11

Equation for Dividend yield

Answer 11

(Dividend per share/current share price) x 100

Question 12

Formula for dividend cover

Answer 12

Individual basis

• Earnings per share/dividend per share

Total profit basis

• profit attributable to ordinary shareholders/dividends paid to ordinary shareholders

Question 13

Formula for Price earnings ratio

Answer 13

Current market price of share/earnings per share

Question 14

Formula for net asset value

Answer 14

Assets attributable to ordinary shareholders/number of ordinary shares in issue

Question 15

If a company has EPS of 58p and the dividend per share was 26p, what would the dividend cover be

Answer 15

58/26

Question 16

What is the price earnings ratio of a company if the share price is 410p and the earnings per share are 38.5p?

Answer 16

410/38.5

Question 17

Types of preference share

Answer 17

• Cumulative preference shares: unless stated otherwise all are cumulative, this means if one year the company has insufficient profits to meet dividend, the shortfall is carried forward
• non-cumulative
• participating preference shares: per fixed rate of dividend and allow the holder to participate in the profits of the company, receive additional dividend that is usually proportional to any ordinary dividend
• Redeemable preference shares: these represent a temporary source of finance for the company, dividends were paid to the shareholder for a short period and then the share will be repaid. Most preference shares on dated, but summer redeemable at a predetermined date or the option of the company.
• convertible preference shares: these have the right to be converted into ordinary shares at preset dates and on preset terms.

Question 18

Dividends tax brackets

Answer 18

On dividends over £2000 per tax year

Basic rate - 7.5%
Higher rate - 32.5%
Additional rate - 38.1%

Question 19

Characteristics of private equity

Answer 19

Two types of private equity investment companies; those that invest directly in unlisted companies and those that invest in funds that invest in unlisted companies. Private equity companies are a form of collective investment whether investment company is established as a closed ended vehicle and so as a form of investment trust.

Question 20

Issues with investing in property

Answer 20

– Liquidity

• management issues

– void periods

Question 21

Residential property stand duty land tax rate and for first time buyers

Answer 21

£0 - £125,000 : 0%
£125,001 - £250,000 : 2%
£250,001 - £925,000 : 5%
£925,001 - £1,500,000 : 10%
Over £1,500,000 : 12%

£0 - £300,000 : 0%
£300,000 - £500,000 : 5%
No relief on a house over this cost

Question 22

Commercial property stand duty land tax rate

Answer 22

£0 - £150,000 : 0%
£150,001 - £250,000 : 2%
Over £250,000 : 5%