Component 3 (fundamental analysis)

Question 1

corporate actions?

Answer 1

decisions made by management that influence issued securities

Question 2

mandatory corporate actions?

Answer 2

initiated by the board of directors

participation of shareholders is mandatory (shareholders do nothing -> passive beneficiaries)

Question 3

voluntary corporate actions?

Answer 3

shareholders elect to participate

a response from the shareholders is required for the corporation to process the action

Question 4

dividends?

Answer 4

portion of the profit, after the payment of tax, distributed to the shareholders (preference shares get first, then ordinary shares)

remainder of the earnings will be reinvested into the company in the form of retained earnings –> may be utilised in the future, if there are small profits or even losses, to pay dividends

Question 5

total dividend calc?

Answer 5

interim dividend (after 6 months) + final dividend (end of financial year)

Question 6

timeline of dividends?

Answer 6

settlement cycle of transactions on JSE

T+3 = transaction day + 3 business days

1. announcement/ declaration: at least 13 business days before the record date

following is announced:
- dividend amount
- record date
- and the date on which dividend payments will be made (usually the business day following the record date)

2. cum-dividend: buy shares cum-dividend - including right to dividends
   last day to trade = 3 business days before record date
3. ex-dividend: one business day after the end of cum-dividend until payment date

can buy shares but not entitled to dividends

if shares are bought, the transaction only settles after the record date

4. record date: share register is closed and reviewed to see who the rightful owners are

whoever is listed, qualifies for dividends

always on a Friday for mandatory corporate actions (public holiday = previous business day)

5. payment date: dividends electronically paid into account

Question 7

capitalisation issue?

Answer 7

shareholders receive additional shares for free (in specific ratio)

takes place at the current market price

company finance issue from distribution reserves

shareholder can keep or sell the shares

Question 8

purpose of capitalisation issue?

Answer 8

provide shareholders with an opportunity to share in the prosperity of the company, especially if there is insufficient cash to pay dividends

Question 9

subdivision (stock split)?

Answer 9

existing shares are subdivided into 2 or more shares

shareholders receive more shares, but with lower average issue value (no inflow of capital)

Question 10

purpose of subdivision?

Answer 10

make shares more affordable (lower market price of shares) to incr4ease tradability and prevent hostile takeovers

Question 11

opposite of subdivision?

Answer 11

share consolidation

Question 12

technical analysis?

Answer 12

looks at economy, cycles of upswings and declines in market, correct timing

focus = when to buy

Question 13

fundamental?

Answer 13

determining value of company/ shares using financial ratios

focus = what to buy

Question 14

JSE listing requirements?

Answer 14

• limited to max 20% of issued shares at authorisation time
• no buybacks at price exceeding weighted average of market price, 5 business days preceding buyback by more than 10%
• quantity and price must be announced with every 3% bought back

Question 15

Companies Act no 71 of 2008 on share buyback?

Answer 15

directors don’t require permission from shareholders to do buyback, unless bought from director

company must be liquid and solvent after distribution

Question 16

purpose of share buyback?

Answer 16

accounting advantage and transaction can lead to increase in EPS of remaining shares (number of issued shares decrease)

Question 17

share buybacks?

Answer 17

voluntary corporate action

legislation changed in 1999 to allow it

use excess cash

Question 18

underwriting?

Answer 18

large financial institution undertakes to buy all shares not sold during rights issue at issue price (underwriter’s fee and confidence of large financial institution)

Question 19

timeline of rights issue?

Answer 19

• announcement: announce planned issue
• cum-rights trading: buy shares cum-rights, including right to the new shares
• ex-rights trading: from day after end of cum-rights until closing date, excluding right to new shares
• record date: company closes share r3egister, sends Nil Paid letters of allocation (NPL) to existing shareholders
  -closing date/ election deadline: shares allocated to applicants that gave instruction to exercise right

Question 20

purpose of rights issue?

Answer 20

acquire additional capital

Question 21

rights issue three options?

Answer 21

• exercise the rights: pay for new shares at discounted price
• sell the rights: receive the price the rights are trading for at that time; can no longer buy more shares at the discounted price
• do nothing: rights will lapse after closing date

Question 22

rights issue?

Answer 22

voluntary corporate action

existing shareholders receive the right to purchase additional shares in the company

issue at price lower than market price - issue price

Question 23

share consolidation?

Answer 23

market price is very low –> consolidate several shares into one new share

too many small shareholders = high administrative costs

number of issued shares will decrease while the average issue price (along with it the market price) per share increases

Question 24

What is the objective of financial analysis?

Answer 24

The objective of financial analysis is to obtain information about the financial position of an enterprise.

Question 25

Who are the four main groups of stakeholders identified in financial analysis?

Answer 25

- Current and potential shareholders - Current and potential providers of debt capital - Management and employees - Diverse groups (e.g., customers, raw material providers, competitors, government, etc.)

Question 26

What are the interests of current and potential shareholders in financial analysis?

Answer 26

Shareholders are interested in the enterprise's ability to generate income, the risk associated with that income, and earnings and dividends per share.

Question 27

What do current and potential providers of debt capital focus on in financial analysis?

Answer 27

They focus on the amount of debt in the enterprise’s capital structure and its ability to meet capital and interest repayments, with an emphasis on solvency and liquidity.

Question 28

Why is financial analysis important to management and employees?

Answer 28

Management uses financial analysis for efficient internal decision-making, while employees are interested in the enterprise's long-term survival.

Question 29

Who are considered diverse groups of stakeholders in financial analysis?

Answer 29

Diverse stakeholders include customers, providers of raw materials, competitors, government organizations, stockbrokers, etc., who may have an interest in the financial performance of the enterprise.

Question 30

What financial statements are required by the Companies Act?

Answer 30

The Companies Act requires the publication of several financial statements, including the statement of profit or loss and the statement of financial position.

Question 31

What does the statement of profit or loss summarize?

Answer 31

The statement of profit or loss provides a summary of a company’s financial performance over a specific period, usually one year, showing how revenue is allocated and what remains as retained earnings.

Question 32

Does the statement of profit or loss represent cash flow? Why or why not?

Answer 32

No, it does not represent cash flow because it includes non-cash flow items like depreciation, credit sales, and credit purchases.

Question 33

What is "revenue" in the statement of profit or loss?

Answer 33

Revenue represents all compensation received for products or services provided by the enterprise during the period. For a trading concern, revenue is the company's sales.

Question 34

How is the "cost of sales" calculated?

Answer 34

Cost of sales = Opening inventory + Purchases - Closing inventory.

Question 35

What is "gross profit"?

Answer 35

Gross profit is calculated by subtracting the cost of sales from revenue. It represents the profit from the enterprise's sales activities.

Question 36

How is "operating profit" calculated?

Answer 36

Operating profit is calculated by subtracting operating expenses from gross profit. It shows the profit generated by the enterprise's primary activities.

Question 37

What is "profit before tax"?

Answer 37

Profit before tax is calculated by adding investment income and non-recurring profits (like gains from PPE sales) to the operating profit and then subtracting finance costs (interest paid).

Question 38

What is "profit after tax"?

Answer 38

Profit after tax is the amount of profit remaining after income tax has been subtracted from the profit before tax. It’s available for paying preference share dividends.

Question 39

What are "attributable earnings"?

Answer 39

Attributable earnings are the profit remaining after subtracting preference dividends and tax. This is the amount available for ordinary shareholders and can be paid out as ordinary dividends.

Question 40

What are "retained earnings"?

Answer 40

Retained earnings are the portion of earnings not paid out as dividends, reinvested in the enterprise, and transferred to the company’s reserves to finance future activities.

Question 41

What is the Statement of Financial Position?

Answer 41

A summary of the financial position of an enterprise on a specific date, showing how capital is invested in assets and where it comes from (equity and liabilities).

Question 42

What are the two main sections of the Statement of Financial Position?

Answer 42

The asset side (capital invested in assets) and the equity and liability side (sources of capital).

Question 43

What are the two types of assets in the Statement of Financial Position?

Answer 43

Non-current assets and current assets.

Question 44

What are non-current assets?

Answer 44

Assets used for a long period (usually more than one year), often part of the fixed infrastructure of the enterprise.

Question 45

What is "PPE at cost price"?

Answer 45

Physical assets such as property, equipment, and vehicles shown at their original purchase price.

Question 46

What is accumulated depreciation?

Answer 46

The total depreciation accumulated on PPE, reflecting how much value has been depreciated over time.

Question 47

How is PPE at carrying value calculated?

Answer 47

By subtracting accumulated depreciation from PPE at cost price.

Question 48

What are intangible assets?

Answer 48

Non-physical assets like goodwill and patents that are still valuable for generating income.

Question 49

What are current assets?

Answer 49

Assets used for a short period (less than one year), easily converted into cash or part of production, like inventories, trade receivables, and cash.

Question 50

What is equity in the Statement of Financial Position?

Answer 50

Capital provided by shareholders, including ordinary share capital, reserves, and preference share capital.

Question 51

What are ordinary share capital and ordinary shareholders’ equity?

Answer 51

Ordinary share capital is the proceeds from selling ordinary shares, while ordinary shareholders’ equity includes their total shareholding (share capital and reserves).

Question 52

What are non-current liabilities?

Answer 52

Long-term debt capital that must be paid after more than one year, such as long-term loans and mortgage loans.

Question 53

What are current liabilities?

Answer 53

Short-term debt capital that must be paid within one year, including trade payables, bank overdrafts, and short-term loans.

Question 54

What are the characteristics of ordinary shares?

Answer 54

Ordinary shareholders have voting rights, share in profits via dividends, limited liability, pre-emptive rights, and can benefit from capital gains.

Question 55

What are preference shares and their types?

Answer 55

Preference shares offer fixed dividends and priority over ordinary shares. Types include cumulative, non-cumulative, participating, convertible, and redeemable preference shares.

Question 56

What is a cumulative preference share?

Answer 56

A share where unpaid dividends accumulate and must be paid when funds are available.

Question 57

What are the three main sources of capital in the equity and liabilities section?

Answer 57

Shareholders' equity, non-current liabilities, and current liabilities.

Question 58

What is a redeemable preference share?

Answer 58

A type of preference share that will be repurchased by the company at a specific future date at its par value.

Question 59

What is the first prerequisite for financial statements to be useful in fundamental analysis?

Answer 59

Financial statements must be relevant and contain the necessary information required.

Question 60

Why must financial statements be understandable?

Answer 60

So that the users of the financial statements can interpret and use the information effectively.

Question 61

What is required for financial statements to be considered reliable?

Answer 61

The information in the statements must be reliable and complete.

Question 62

How should financial statements represent the enterprise’s financial situation?

Answer 62

Financial statements must provide an objective representation of the enterprise’s financial situation.

Question 63

Why is it sometimes difficult to provide an objective representation of certain items in financial statements?

Answer 63

Items like trade receivables and inventory values may involve subjective interpretations, which can differ from person to person.

Question 64

Why must financial statements be timely?

Answer 64

Timely financial statements ensure the information is up-to-date and valuable for fundamental analysis.

Question 65

What is the importance of comparability in financial statements?

Answer 65

Financial statements must be comparable, ensuring that information is handled consistently, allowing for effective comparison between different enterprises.