Module 13

Question 1

Why is a level of dividend thought to be important?

Answer 1

Communicates a message about profitability
Cash in hand, more certain than expectation of capital growth
Investors place heavy emphasis on past dividend performance on

Question 2

Dividend can only be paid out of

Answer 2

Retained profits and not share capital

Question 3

Quoted companies tent or pay dividend when?

Answer 3

Semi annual basis
Interim after 6 months and final at year end

Shareholders have the final say by voting on proposed dividend

Question 4

Dividend dates

Answer 4

Announcement date
(Trading cum dividend)
Ex dividend date (from which new buyers not entitled)
(Trading ex dividend)
Record date (shareholders who are registered here)
(Trading ex dividend)
Payment date

Question 5

Between ex dividend and record date if someone buys the share, dividend goes to?

Answer 5

The seller

Question 6

Trading cum dividend between

Answer 6

Announcement date

Ex dividend date

Question 7

Trading ex dividend between

Answer 7

Ex dividend date
Record date
Payment date

Question 8

Residual theory of dividend policy?

Answer 8

Companies should take care to ensure company pays out right amount

Higher returns than shareholders (IRR exceeds shareholders required rate) RETAIN CASH

IRR below required rate, pay out any profits as shareholders will make better returns

Question 9

IRR and shareholder returns?

Answer 9

IRR < ke pay out

IRR > ke retain to invest

Question 10

What is the client effect?

Answer 10

MM
Investors with a preference for capital gains rather than dividends will gravitate towards companies with a policy of retaining profits for reinvestment

Seeking income want high dividends

SO no advantage to choose policy provided intentions are well known

Question 11

Portfolio theory

Answer 11

Don’t put all eggs in one basket

Aim for balanced

Question 12

What is certainty?

Answer 12

Only one possible outcome exists and outcome predicted absolutely

Question 13

What is risk?

Answer 13

All possible outcomes are known and their respective probabilities can be assessed with reasonable accuracy

QUANTIFIABLE
from historical data

Question 14

What is uncertainty?

Answer 14

Not all possible outcomes are known

No historic data

Question 15

Sensitivity comes from

Answer 15

PESTEL

Question 16

Relationship between risk and return

Answer 16

Seek to maximise returns whilst minimising risk

More risky the higher the return

Question 17

Expected return calculation?

Answer 17

Sum of (probability x outcome)

Question 18

How to calculate amount that is anticipated to vary form expect return?

Answer 18

Variance = Probability x (return from event - expected return)^2

Standard deviation is square route of variation

Question 19

Correlations indicate?

Answer 19

+1 prefect linear relationship one increase so does other

-1 perfect linear relationship, one increases other decrease

Question 20

Risk and return of combined portfolio of investments parts of formula

Answer 20

Existing/new investment

Anticipated return re/rx
Standard deviation se/sx
Fund invested p/(1-p)

Cex is correlation coefficient

Question 21

Stock market values securities in the context of a diversified portfolio

Answer 21

Share prices set by market in expectation that an investor will have eliminated risks through diversification

Question 22

What is systematic risk? (Market risk)

Answer 22

Inherent in political and economic environment that is common

Part of system

Question 23

What is specific risk? (Unsystematic/unique risk)

Answer 23

Risks specific to the company

Question 24

Formula for CAPM

Answer 24

Rf + ß(Rm-Rf)