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AF4 Investment planning > Equity Ratios, Types of Equities > Flashcards

Equity Ratios, Types of Equities Flashcards

1
Q

What are the chareteristics of prefrence shares?

A
  • Fixed div paid half yearly
  • Priority over dividends v o shares
  • Rank ahead of o shares on liquidation
  • No voting rights
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2
Q

What are the chareteristics of cumaltive shares?

A
  • Dividend non-payment must be carried forward
  • Usually occurs when the company has insufficient profits in one year
  • These unpaid dividends must be paid before any other type of dividend
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3
Q

What are the chareteristics of Non-Cumulative shares?

A
  • These shares lose their rights to any unpaid dividends
  • At the end of the financial year
  • No arrears will accumulate
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4
Q

What are the chareteristics of participating shares?

A
  • Fixed dividend paid plus
  • shareholders participate in the company profits
  • In the form of an additional dividend
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5
Q

What are the chareteristics of convertible shares?

A
  • Carry conversion rights into ordinary shares
  • At pre-set dates and terms
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6
Q

What are the chareteristics of redeemable shares?

A
  • Redeemable at a pre-determined date
  • Or at the option of the company
  • Temporary source of company finance
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7
Q

What are the chareteristics of ordinary shares?

A
  • Bulk of company share capital
  • Rights to profits after preference shareholders
  • Attend/vote at AGM
  • Last in line for assets in the event of liquidation
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8
Q

What are A shares?

A
  • Non voting o shares
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9
Q

Whar are deffered o shares?

A

No dividend until……
* ordinary shareholder dividends reach a set level or
* end of a specific period after issue

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10
Q

What are the factors that affect equity price?

A
  • External economic and political factors
  • Investor sentiment
  • Profit expectations
  • Dividend expectations
  • Takeover activity
  • Track record of management.
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11
Q

What are scrip (bonus) shares?

A
  • Scrip (Bonus) shares are issued to the shareholders free of cost.
  • Companies low on cash may issue scrip shares rather than dividends as a method of providing income to shareholders.
    Or
  • they may issue Bonus shares (splits) to manipulate a share price to get it trading at “a reasonable” level/increase liquidity.
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12
Q

Whar are rights shares?

A
  • Rights shares are offered to the existing shareholders by the company
  • for raising additional capital from the market. … Rights shares are
  • usually offered at a discounted price compared to the market price .
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13
Q

Whatrs are the reasons companies use rights & the options for investors that offered them?

A

Reasons
* Fund specific expansion plans
* Strengthen the balance sheet
* Refinance the company after a crisis

Options for investors
* Take up the offer (pay full amount due – “fully paid rights”)
* Sell the rights in the market – “nil paid rights”
* Sell sufficient rights to take up the balance (tail swallowing))
* Lapse (company sells rights and distributes proceeds)

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14
Q

How do you calculate the ex rights price?

A
  1. current share value + (new shares * rights price)
  2. ANS / total shares now held
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15
Q

How do you calculate the nil paid rights price?

A

ex rights price - rights issue price

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16
Q

How would you calculate the value of one bonus issue?

A
  1. calculate no of new shares on offer
  2. pre scrip value / (existing shares + new shares)
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17
Q

What is an interim dividend?

A
  • Interim declared during financial year/before AGM
  • Interim declared by board
  • Interim only if Articles expressly permit
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18
Q

What do we mean by private equity?

A
  • Unlisted privately owned companies raising capital by selling an equity share
  • High growth potential from investment in small growing companies
  • High risks – Low Liquidity
  • It involves either buying shares or acquiring whole companies that are not publicly traded on a stock exchange
  • Private Equity is essentially investing capital in an unquoted firm for the medium to long term- in return for an equity stake
  • The ultimate aim is to benefit from the growth of that unquoted firm – through some form of ultimate exit strategy
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19
Q

How do private equity investorsseek profits?

A
  • Sell shares back to senior management/ Sell shares to another investor
  • Sell to another company – or another Private Equity firm
  • Stock market listing
20
Q

How can you access private equity investments?

A
  • Listed Private Equity Companies – investing directly or via private equity funds
  • Venture Capital Trusts / Enterprise Investment Schemes
  • Business Angels – private investors investing for an equity stake
21
Q

What are the risks of invetsing into private equity?

A
  • Failure of the company
  • Failure to grow
  • Less liquid
  • Less shares traded so prices can be volatile
  • High gearing
22
Q

What are the key differnces between preferance and ordinary shares?

A

They differ in:

  • Dividends
  • Company control
  • Return of capital if company goes into liquidation
23
Q

How do you calculate earings per share?

A

Profit attributable to ordinary shareholders
_________________________________
Number of ordinary shares in issue

24
Q

What does the earnings per share show?

A
  • The profit after corporation tax and preference dividends is used in the calculation of this ratio because it represents the profit available for distribution as dividends to ordinary shareholders.
  • It represents the amount in pence the company has earned during the year for each ordinary share.
  • The trend in EPS over time indicates growth or otherwise in the profit attributable to each ordinary share
25
Q

How do you calculate dividend yield?

A

Net dividend per share
____________________ x 100
Current share price

26
Q

What does the dividend yield show?

A
  • This measures the relationship between the net income from a share and its price.
  • The dividend yield measures the ordinary shareholders’ annual return on investment, and may be compared with what could be obtained by investing in some other company.
27
Q

What does the dividend cover show?

A
  • The profit after corporation tax and preference dividends is used in the calculation of this ratio as it represents the profit available for distribution as dividends to ordinary shareholders
  • It represents the number of times a dividend is covered by earnings and indicates how likely it is that the company will be able to maintain future dividends on ordinary shares at their current level if profits were to fall in future years
28
Q

How do you calculate dividend cover?

A

Earnings Per Share
________________
Dividend Per Share

29
Q

How do you calculate payout ratio?

A

= Inverse of Dividend Cover
Dividend Per Share
________________
Earnings Per Share

30
Q

What does the payout ratio show?

A
  • It represents the % of profit that has actually been distributed as a dividend to the ordinary share holders
  • A high ratio may not be sustainable if profits go down, whereas a low payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends
  • Low ratio indicates growth companies i.e. reinvesting
31
Q

How do you caluclate price earnings P/E ratio?

A

Current Market price of share
_______________________
Earnings Per Share

32
Q

What does the P/E ratio show?

A
  • Market view of the earnings growth potential of the company. They should only be used to compare companies in the same sector
  • A company’s P/E ratio higher than the average for an industry sector suggests high demand for the shares. The shares are relatively expensive, but investors would expect to be compensated by higher than average earnings in the future.
  • A lower ratio than average suggests that a company is not greatly favoured by investors / have poor growth prospects.
33
Q

How do you calculate Price Earnings Growth (PEG)?

A

PE Ratio
_______________
Earnings Growth %

34
Q

What does the Price Earnings Growth (PEG) show?

A
  • Helps to determine a stock’s value while taking the company’s earnings growth into account
  • It provides a more complete picture than the P/E ratio on its own
  • The lower the PEG ratio, the more the stock may be undervalued, given its earnings performance.
  • So under 1 means shares may be undervalued, so attractive
  • Over 1 usually a sign that the share is overvalued
35
Q

How do you calculate NAV?

A

Total net assets attributable to ordinary shareholders
___________________________________
Number of ordinary shares in issue

Net Assets = Total assets – Total liabilities – Value of Preference Shares

36
Q

What does the NAV show?

A
  • A share would normally be expected to sell at a premium to its net asset value, as investors would be willing to pay something for goodwill i.e. the company’s management, expertise and reputation.
37
Q

How do you calculate gearing ratio?

A

Long Term Loans + Preference Shares
_____________________________
Total Equity – Preference Shares

38
Q

What does the gearing ratio show?

A
  • This helps determine what proportion of the company’s share capital is being “leveraged” by borrowing.
  • A number over 1 indicates the company is borrowing above its equity value, so is highly geared, perhaps being aggressive with its financing.
  • This can impact on earnings because of the extra interest expense payable
  • Financial leverage is the ratio of long term debt to equity referred to as gearing
39
Q

How do you calculate Current Ratio (Working Capital Ratio) ?

A

Current Assets
_______________________
Current Liabilities

40
Q

What does the current ratio show?

A
  • A typical current ratio should be between 1.5 and 2, but depends on the type of business and the prevailing economic conditions.
  • A low ratio for a particular business may indicate a potential future insolvency.
  • A high ratio may mean a business may have too much working capital, which usually means that assets are not being used as profitably as they might be
41
Q

How do you calculate the liquidity ratio?

A

Current Assets - Stock
_______________________
Current Liabilities

42
Q

What does the liquidty ratio show?

A
  • A more cautious ratio is the liquidity ratio (also called the ‘quick’ or ‘acid’ test), because it measures only those assets that can be quickly and definitely turned into cash.
  • As a generalisation, the liquidity ratio should be at least 1
43
Q

How do you calculate Return on Equity (ROE) ?

A

Net Profit After Taxation & Preference Dividends
______________________
Capital And Reserves (Shareholders’ Funds)

44
Q

What does the Return on Equity (ROE) show?

A
  • ROE measures the % rate of return the company is achieving on the investment funds provided by shareholders, which come from share purchase as well as retained earnings
  • Retained earnings are earnings accumulated over the years from profits not paid out as dividends these will be shown in the profit and loss section of the balance sheet as reserves
  • It indicates how efficiently a company’s management has utilised the shareholder’s funds.
45
Q

How do you calculate Return on Capital Employed (ROCE)?

A

Profit Before Interest And Taxation
______________________
Capital Employed*
*(Ordinary shareholder funds + long term debt)

46
Q

What does the Return on Capital Employed (ROCE) show?

A
  • Measures the return being achieved on capital employed in the business, so helps show how well the company assets are being used to make money AND how well costs are being managed.
  • Capital employed includes ordinary shareholder funds (+ including coy. reserves/retained funds) PLUS long-term debt (as the loans and any preference shareholder share value are being used to finance productivity)

AF4 Investment planning (7 decks)

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