Formulas & Ratios * some OEICs/ UT Etc Flashcards

Question

DEF Ltd has valued thei r cur rent stock at £850,000 and holds cash in the bank of £800,000. The company has short term loans worth £1,000,000. Work out the liquidity ratio and current ratio

Answer 1

Working capital ratio = (£850,000 + £800,000)/ £1,000,000 = 1.65 Liquidity ratio = £800,000/£1,000,000 = 0.8

Answer 2

= (Coupon/Clean Price) x 100%

Answer 3

The annual income provided by the bond as a per centage of what you would currently have to pay for it. Used as a measure of performance to evaluate against other securities /investments .

Answer 4

Interest yield = (5/98) x 100% = 5.1%

Answer 5

Work out the gain or loss at maturity as a % of the current price; ((Nominal Value – Clean Price) /Clean price) x 100% Divide this by the number of years to maturity to work out the annual gain/ loss as a %; % Gain (or loss) at maturity/Term to maturity Add (for a gain) or subtract (for a loss) f rom the interest yield. Interest yield +(-) % gain (or loss) /Term to maturity

Answer 6

measure of performance/return which takes not only income/ coupon payment s into consideration but al so capital gain or loss if held to maturity . If the RY < IY, then the bondholder will make a loss if they hold the bond to maturity . If the RY > IY, then the bondholder will make a gain if they hold the bond to maturity .

Answer 7

Gain or loss at maturity as % of current price = ((£100 - £98) /£98) x 100% = 2.04% Annual gain/ loss = 2.04%/5 years = 0.41% per year Redemption yield = 5.1% + 0.41% = 5.51% As the RY is higher than the IY, Peter stands to make a gain if he holds the bond to maturity.

Answer 8

Duration/ (1 + GRY) Duration refers to the length of time in years i t will take to repay the bond pr ice with cash-flows from it (coupons and redemption value). I t is sometimes refer red to as Macaulay Duration.

Answer 9

The modified duration provides an indication of the bond’ s sensitivity to changes in interest rates . In particular, the modified duration relates to the percentage fall expected in a bond price should interest rates increase by 1%

Answer 10

Modified duration = 4.54/ (1.0551) = 4.30%. This means that the price of the bond would be expected to fall by 4.30% if interest rates increase by 1%.

Answer 11

Profit attributable to ord shareholders Number of ordinary shares in issue

Answer 12

Trends in the company ’ s profitability How the company measures up to other companies in relation to profitability

Answer 13

EPS = £10,000,000/750,000 = £13.33 per share

Answer 14

= Cur rent share price/EPS

Answer 15

Shows how highly the investors value the earnings of the company . A high P/E ratio typical l y demonstrates that The investors are willing to pay more for shares and that demand is high, or The share price may be over valued based upon the profits generated

Answer 16

P/E ratio = £100/£13.33 = 7.5

Answer 17

= Total Dividend paid/No of shares in issue

Answer 18

The level of profits distributed to the shareholders .

Answer 19

DPS = £5,000,000/750,000 = £6.66 per share.

Answer 20

= (DPS/Current share price) x 100%

Answer 21

Shows the return that investors are receiving from the shares in the way of annual income. A high Dividend Yield would demonstrate that the investor i s receiving a good return from the shares , but does not necessarily mean that the level of profit distribution is sustainable.

Answer 22

Dividend Yield = £6.66/£100 = 6.66%

Answer 23

= EPS/DPS Or = Profit attributable/Dividend paid

Answer 24

Shows how many times the dividend could have been paid from the period’ s profits . A dividend cover of less than 1 would suggest that the company has to utilise reserves .

Answer 25

Dividend Cover = £13.33/£6.66 = 2 times

Answer 26

= Net assets att to ord shareholders Number of ordinary shares in issue

Answer 27

The value of the company for accounting purposes . Reflects the true value of the company , based on the balance sheet (as set s les s liabilities ) as oppose to market sentiment.

Answer 28

NAV ps = £50,000,000/750,000 = £66.66 per share

Answer 29

= (Current price – NAV per share) /NAV per share x 100% +ve result = premium -ve result = discount

Answer 30

This measure i s used to determine how accurately a share price represent s the underlying value of the company . A premium suggests that you would currently pay more than the true value, whereas a discount suggests you would currently pay less than the true value. The main driver here i s suppl y and demand for the shares (prices wil increase due to low suppl y or high demand).

Answer 31

Difference = £70 - £66.66 = £3.33, which means the shares are trading at a premium. Premium = (£3.33/£66.66) x 100% = 5%

Answer 32

= (Gross rent /Market price) x 100% Or = (Gross rent – expenses) x 100% (Market price + costs of buying)

Answer 33

The return, as a %, generated by renting out an investment property . A high rental yield would demonstrate that the investor is receiving a good return from the property , but the sustainability of the yield will be reliable on the qual it y of tenant and the cost of ongoing maintenance.

Answer 34

= D + V1 – V0 / V0 D = Income paid out (Dividend) V1 = Value at end of the period V0 = Value at star t of the period

Answer 35

The holding period return shows the return on an investment, taking account of the capital growth and income generated. This does not take ac count of withdrawals or additional investments over the period, nor does it take ac count of the timing of withdrawals /additional investments , however it is often used for making simple performance comparisons .

Answer 36

Holding return = £5,000 + £135,000 - £100,000 / £100,000 Holding return = £40,000/£100,000 = 0.4 = 40%

Answer 37

= D + V1 – V0 – C / V0 + (C x (n/12)) D = Income paid out (Dividend) C = New money introduced (-C) or money out (+C) V1 = Value at end of the period V0 = Value at star t of the period n = Number of months remaining in the year

Answer 38

The money weighted rate of return shows the return on an investment, taking ac count not only of capital growth and income generated, but al so cash-flows in and out of the investment. It therefore prov ides a more ac curate reflection of investment performance than the holding period return. Limitations Strongly influenced by timing of additional investments /withdrawal s Additional investments /withdrawal s are often out s ide of the investment manager’s control and therefore cannot be mitigated. Doesn’t show whether the return is down to management skill or the impact of additional investments /withdrawals .

Answer 39

MWR = £5,000 + £135,000 - £100,000 - £20,000 / £100,000 + (£20,000 x 9/12) MWR = £20,000/£115,000 = 0.1739 = 17.93% This is considerably lower than the holding period return, which demonstrates that a huge component of the performance was the additional investment .

Answer 40

= (1 + HPR 1) x (1 + HPR2 )…x Where each HPR is calculated by breaking the period into sub-periods valued at each capital investment or withdrawal.

Answer 41

The time weighted rate of return prov ides a more accurate rate of return by removing distortions caused by the timing of cash-flows . TWR is used for comparing performance with other investments .

Answer 42

HPR 1 (£5,000 + £105,000 - £100,000) /£100,000 = 0.1 = 10% HPR 2 £135,000 – £105,000 - £20,000 / £105,000 + £20,000 = 0.08 = 8% TWR = (1.10) x (1.08) = 1.188 = 18.8% Given that the TWR is higher than the MWR, this tells us that the rate of return was heavily influenced not only by the size of the additional investment but also the timing of it .

Answer 43

E(R ) = Rf + (β x (Rm – Rf)) E(R ) = Expected return on the risky investment Rf = Rate of return on a risk-free asset β = Measure of sensitivity of the investment to movements in the market Rm = Expected return of the market portfolio

Answer 44

Shows the expected return on a stock/ security with reference to it s market and the return that could be achieved through a risk-free as set. The higher the beta, the more volatile the stock/ security in relation to its market A beta of les s than 1 suggests that the s tock/ security is defensive. A beta of greater than 1 suggests that the s tock/ security exaggerates market movements . A beta equal to 1 suggests that the s tock/ security moves exactly in line with the market.

Answer 45

E(R ) = 2.5% + (0.7 x (6% - 2.5%)) = 4.95%

Answer 46

5% = 3% + (β x (3.5% - 3%)) 2% = β x 0.5% β = 4

Answer 47

= Actual portfolio return – CAPM CAPM = Rf + (β x (Rm – Rf))

Answer 48

The alpha shows whether the investment has outperformed or underperformed its ’ benchmark in light of its ’ beta. It is another way of demonstrating the skill/quality of the investment manager

Answer 49

CAPM = 3% + (1.5 x (4% - 3%)) = 4.5% Alpha = 5% - 4.5% = 0.5% Harpal’s portfolio has outperformed in light of its beta.

Answer 50

Step 1 – Calculate the average/mean return over the sample Step 2 – Calculate the variance of each individual return to the average/mean Step 3 – Square each output f rom step 2 (x or ^ then ‘2’ on the calculator ). Step 4 – Total up the squared variances Step 5 – Divide by the number of returns observed (n) Step 6 – Square root the output from step 5 (x or ^ then ‘0.5’ on the calculator ).

Answer 51

Measures the volatility of the investment around it’ s mean/average return. Often used as an indicator of the investment risk associated with an investment, so a high standard deviation would typify a high risk investment.

Answer 52

Step 1 – The average return will be (4% - 2% + 1.5%) /3 = 1.17% Step 2 – The individual variances will be 4% - 1.17% = 2.83% -2% - 1.17% = -3.17% 1.5% - 1.17% = 0.33% Step 3 – The squared variances will be (2.83) = 8.01% (-3.17) = 10.05% (0.33) = 0.11% Step 4 – The total of the squared variances is 8.01% + 10.05% + 0.11% = 18.17% Step 5 – Divide by n 18.17%/3 = 6.06% Step 6 – Standard Deviation will therefore be (6.06%) = 2.46%

Answer 53

Actual Return – risk-free return / Standard deviation

Answer 54

The Sharpe ratio is essentially the risk adjusted return on an investment, and shows the additional return achieved by an investment over and above what could have been achieved by taking no risk at all . The higher the Sharpe ratio, the more value/ skill is being added by the investment manager.

Answer 55

Sharpe ratio = (5% - 3%) /10% = 0.2% Therefore, Harpal achieved a return of 0.2% for each unit of risk taken.

Answer 56

Actual return – benchmark return / Tracking error The tracking error is essentially the standard deviation, but relative to a benchmark as opposed to the average return of the investment .

Answer 57

The information ratio essentially shows the value added through active management as opposed to a more passive, index tracking approach.

Answer 58

Information rat io = (5% - 4%) /7% = 0.14 Whilst Harpal’s portfolio has outperformed the benchmark, it has done so by taking a significant amount of risk.

Answer 59

= PV (1 + r) n r = annual rate of interest / return n = number of years

Answer 60

= FV/ (1 + r )n r = annual rate of interest / return n = number of years

Answer 61

Based on an assumed interest rate, this shows the future value of a lump sum investment today , or alternatively the value required as a lump sum today to achieve a specified future value.

Answer 62

FV = £1,000 x (1.05) 10 = £1,628.89

Answer 63

PV = £1,000/ (1.05) 10 = £613.91

Answer 64

= ((1 + r /n) – 1) x 100% r = quoted rate of interest (annual) n = frequency of interest payments

Answer 65

Where an interest rate i s quoted annually , but i s paid more frequently , the AER shows the actual rate of interest paid to the investor annual l y . The more frequent the payment, the higher the AER will be in comparison to the quoted rate. The AER makes the return on an investment more comparable with other types of investment.

Answer 66

AER = ((1 + 0.04/4) 4 – 1) x 100% AER = ((1.01) 4– 1) x 100% AER = 4.06%

Answer 67

= ((1+r ) – 1) x 100% r = rate of return over a specified period/ term n = number of years invested

Answer 68

Where an investment return has been provided over a specified term (e.g. 3 year s ), the annual i sed return i s a means of working out the return the investment would have achieved on an annual basis . This makes the investment more comparable with other investments and may be used as a means of benchmarking the performance of the investment.

Answer 69

Annualised return = ((1 + 0.12) – 1) x 100% Annualised return = (1.0229-1) x 100% Annualised return = 2.29%

Answer 70

Indexes (Benchmarks) Costs/charges How to buy…. Aims/Objectives of the investment Recompense/Repayment (FCSC et al) Taxation Examples (Options & Types) Risk Ease of access to funds (liquidity) Dealing/Trading

Answer 71

Cash, Fixed Int, Equities and property

Answer 72

CASH / FI/ EQ/ PROP

Answer 73

CASH / FI/ EQ/ PROP

Answer 74

CASH / FI/ EQ/ PROP

Answer 75

CASH / FI/ EQ/ PROP