PCAIM Flashcards
1
Q
State the THREE main attributes that the FCA considers in regard to the ‘fit and proper’ test for an individual.
A
Honesty, integrity, and reputation
Competence and Capability
Financial Soundness
2
Q
Give TWO examples of the FCA’s Controlled Functions.
A
CF4 – Partner Function
CF30 – Customer Function
3
Q
Provide TWO reasons why Convertible Bonds may be issued by a company.
A
. Convertibles are usually issued by companies where there is a lack of fixed assets as security for debt. The conversion rights enable these companies to issue unsecured debt without restrictive coupon and servicing costs.
. If a company issue convertible bonds the coupon that they pay is likely to be lower than that of conventional bonds therefore their cost of borrowing would be lower.
4
Q
Calculate the conversion price.
A
Conversion price = Convertible Price/conversion ratio
5
Q
Define - Offer for Sale
A
The company sells its shares to an issuing house. These do not necessarily have to be new shares. For example, family shareholdings could be offered to the public in this way. The issuing house then invites applications from the general public, based on a detailed prospectus known as an offering document.
6
Q
Define - Fixed Price Offer
A
The price is fixed just below the price at which the offer is expected to be fully subscribed, in order to ensure an active secondary market. Potential investors subscribe for a particular number of shares at the fixed price. If, as is usually the case due to the price setting criteria, the issue is oversubscribed, the shares are allocated by either a scaling down or by a random selection from the applications received, as detailed in the offer document.
7
Q
Tender Offer
A
Rather than fixing a price, invitations for tenders are sought from prospective shareholders. Normally a minimum price is stipulated, and investors subscribe for a given number of shares at a price they are prepared to pay. When the offer is closed, a strike price is determined. This will normally be set with a view to achieving an active secondary market, and all bidders at or above this price will be satisfied. All successful bidders pay a uniform striking price, unlike an auction.
8
Q
Offer for Subscription
A
This is rarely used nowadays, as it does not permit the secondary sale of existing shares. It is mainly used for new investment trusts. A detailed prospectus and advertisement are required for a full listing, but nowadays they are usually published electronically on the company’s or sponsor’s website, with hard copies also available. An issuing house fully underwrites the issue for an agreed commission, ensuring the company sells all the shares on offer. Usually this is conditional upon the company achieving a minimum subscription level.
9
Q
Dividend cover
A
earnings per share/dividend per share
10
Q
Price/Earnings (P/E) Ratio
A
current market price per share/earnings per share
11
Q
Price/book ratio
A
current market price of the share/ book value (ie, net tangible assets per share)
12
Q
Earnings yield
A
earnings per share/current market price of the share X 100
13
Q
Trash and cash
A
it is deliberately spreading false bear stories in order to depress a share price, and using the opportunity to buy cheaply
14
Q
Pump and dump
A
the spreading of false stories, often on websites, in order to boost a share price, thus enabling the perpetrators to use the opportunity to dispose of shares at an inflated price.
15
Q
Outline two types of behaviour that might be regarded in the UK as market abuse.
A
. Insider dealing – when an insider deals, or tries to deal, on the basis of inside information
. Improper disclosure – where an insider improperly discloses inside information to another person
16
Q
What does the information ratio measure
A
The Information Ratio measures the stability of alpha. In other words, its ‘out- performance’
17
Q
What does Smart Beta measure
A
Smart beta is a term used in relation to tracker funds that aim to combine elements of passive and active. Like passive funds they ‘buy the index’, but like active funds not indiscriminately. The constituents are chosen systematically on the basis of factors that research suggests lead to out-performance, such as small size and ‘value’.
18
Q
Limit orders
A
Limit orders are submitted to the Order Book with a specified size and price. They are either held on the Order Book or executed in part or full, at no worse than the limit price. They can be held on the Order Book for up to 90 days.
19
Q
Hidden limit orders
A
Hidden Limit orders are limit orders where both the price and volume are hidden. Unlike iceberg orders there is no information as to whether there is any remaining order or not. They are only available for large orders meeting certain threshold conditions.
20
Q
At best orders
A
At Best orders are executed at the best available price. No limit price is specified; they are executed at as many different prices as necessary, any unfulfilled excess is eliminated as only limit orders remain on the system.
21
Q
Hidden Pegged orders
A
Hidden Pegged orders allow participants to peg their order to the best bid or offer price.
22
Q
Cash against Delivery
A
Cash against Delivery (CAD) provides confidence in the security of settlement because neither cash nor documents are released until both sides of the deal are ready to settle. This is also referred to as Delivery versus Payment (DVP).
23
Q
Cash memorandum accounts
A
A Cash Memorandum Accounts (CMA) is a record of a CREST member’s running total of a day’s payment obligations to or from its payment bank. CMAs are set to zero at the start of each day because at the end of each day net payments are settled between payment banks.
24
Q
Cap
A
Each bank specifies a maximum amount that it will pay at the end of each day for each member of CREST. Each member has only one CMA, but can have several bank accounts linked to that single CMA.
25
Dynamic headroom
Dynamic headroom is the difference during the day between a member’s credit limit (cap) and its net payment obligations. (It is dynamic because it expands as a result of a sold bargain settlement and decreases as a result of a bought bargain settlement).
26
Bare Trusts
. Term - Until beneficiary reaches the age of 18
. Beneficiaries - Named
. Entitlement - Specified; income accumulated or distributed; absolutely entitled to the capital at 18
. IHT - Potentially Exempt Transfer into the trust; transfer from the trust to the beneficiaries is free from IHT
. CGT - No relief
. Income Tax - Income accumulated or distributed would be taxed at the beneficiary’s marginal rate; it makes use of the child’s personal and CGT allowance
. Cost - Bare trusts are cheap to administer because there is no separate trust document
27
Discretionary trust
. Term - Maximum term of 125 years; trustees have greater flexibility over when income and capital are distributed
. Beneficiaries - There can be specified beneficiaries, but can include possible children yet unborn e.g. ‘descendants of...’ (may be guided in ‘letter of wishes’)
. Entitlement - No particular entitlements, but the trustees can select the amount of trust income or capital that each beneficiary receives in accordance with needs and fairness; income can be retained by the trustees for up to 21 years
. IHT - 20% lifetime rate on transfers into the trust (but only if lifetime gifts exceed 325,000), and a 6% ten-year charge and a proportionate exit charge on assets in excess of the threshold
. CGT - CGT holdover relief is available for gifts into discretionary trusts
. Income tax - Income tax on distributions is effectively paid at beneficiary’s marginal rate, after utilising their personal allowances, but retentions are taxed more severely at the ‘additional’ rate (45% on interest and 37.5% on dividends)
. Cost - More expensive to establish and administer
28
Business Property Relief
Business Property Relief (BPR) provides relief from Inheritance Tax on the transfer of relevant business assets. Relevant property must be held for at least two years in order to qualify for relief. There is no BPR if the business, or company is one "wholly or mainly" dealing in securities, stocks or shares, land or buildings or in the making or holding of investments.
29
Advantage and disadvantage of stop loss rather than an option
ADV
. No additional outlay
DIS
. Stop losses might not be executed at the desired level if there is a sudden plunge, unless they are ‘guaranteed’ stop losses. The strike price of an option is fixed and will not be missed in a plunge.
30
The illustration of expected pension benefit is based on:
the current fund value
the expected fund growth up to retirement date
the anticipated inflation rate up to retirement date
the anticipated annuity rate expected at retirement date
31
Deed of variation
. Must be made in writing to the revenue
. Within 2 years of date of death
. With the agreement of all affected beneficiaries
32
SETS order types
. At best - Specific number of shares to be bought or sold at a specific price. Thin trading can be an issue
. Limit - Specific amount of shares and specific buy/sell prices.
. Execute and eliminate - They have a quantity and price limit. Can be partially filled
. Fill or kill - They have a quantity and price limit. Cannot be partially filled, only fully filled.
. Market - At best order held on book during auction call period. Given top priority at end of auction period, in order of submission.
. Iceberg - Only some of the total order is visible
. Hidden order - Price and volume are both hidden
. Hidden pegged - Pegged to best bid, offer or mid price order.
33
Weighting constituents of share indices
. Free Float - represents the proportion of securities of a company available to ‘outside’ investors.
. A Free float enables a tracker fund to replicate the index fully, so reducing the tracking
error.
. Cap - Capped’ indices have an upper limit to weighting of an individual company on the basis of its market capitalisation
. Fundamental - indices weight shares according to fundamental criteria, such as cashflow, sales, book value, earnings or dividends, rather than equity market capitalization.
34
VCT
```
. 30% tax relief if held for 5+ years
. Tax free divs
. No CGT
. Max amount £200k
. No cap gains deferral
```
35
EIS
. 30% tax relief if held for 3+ years
. Divs are taxed
. CGT applicable if disposed within 3 years
. Max amount £500k
. Cap gains deferral 1 year before or 3 years after disposal
36
TWO possible reasons for low offer price of new shares
. Will not require underwriting because the nil paid are virtually guaranteed to
have a positive intrinsic value
. Will reduce the trading price to a more ‘desirable’ level
37
Companies may issue warrants
. To conserve cash flow (particularly if currently paying dividends on shares); but some candidates confused lack of yield with ‘cheap’ cost of capital.
. To provide a ‘sweetener’ to unsecured loan stock; a compensation for poor security and an alternative to a high coupon.
. To take advantage of high share price; particularly if thought overvalued or the implied volatility appears too high.
. To attract investors who desire high risk/return and prefer CGT to income tax.
38
The rationale and the key features of American and Global Depository Receipts
. American (ADR) and Global (GDR) Depository Receipts are bearer receipts.
. ADRs enable trading in UK securities in the USA without changing the registered
ownership in the UK.
. Shares in a UK company are purchased in the market and then transferred to a
holding bank.
. The bank issues a receipt which indicates that shares are under its control.
. ADRs are denominated in dollars and dividends are converted by the US holding
bank to dollars.
. They are exempt from stamp duty after creation.
. They also trade in London.
. GDRs are depository receipts created outside the USA, although also usually priced
in dollars; for foreign companies on London and Luxembourg stock exchanges; settled on Clearnet or Clearstream.
39
Advantages of stop-losses:
. Can be applied to any share in any amount, provided the broker offers the facility; traded options only available on a limited number of leading shares in multiples of 1,000 shares.
. No additional outlay; traded options involve the additional expense of the option premium, which for these type of options is depreciating time value.
. Can be varied or cancelled at any time; traded options have a limited range of exercise prices and expiry dates.
40
Advantages of traded options
. Do not have to be exercised until expiry date; therefore opportunity to take to recoup loss if share price recovers before expiry date.
. Can always be exercised at the exercise price; stop-losses might not be executed at the desired if sudden fall, unless they are ‘guaranteed’ stop losses.
. Put options will provide some hedge against a fall in the share price before it reaches the exercise price; with a stop-loss no protection until hit the stop-loss level.
. Traded options can be taken on indices as well as individual shares; can hedge a large portfolio more simply.
. Avoid realising a possible large capital gain on the shareholding.
41
The role of the Financial Ombudsman
The purpose of the Ombudsman scheme under the FSMA is to provide for the resolution of ‘certain disputes’ quickly and with minimum formality by an independent person
. Can make financial award up to £150,000
42
Role of the FPC
The Committee is charged with the primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The FPC has a secondary objective of supporting the economic policy of the government.
43
The definition and meaning of pound cost averaging
Pound cost averaging is the strategy of investing the same sum of money each period, irrespective of price. The rationale is that the number of units purchased is inversely related to price; therefore, the average price paid is always less than the average prevailing price.
44
The illustration of expected pension benefit is based on
the current fund value
the expected fund growth up to retirement date
the anticipated inflation rate up to retirement date
the anticipated annuity rate expected at retirement date
45
State the THREE main attributes that the FCA considers in regard to the ‘fit and
proper’ test for an individual.
Honesty, integrity, and reputation
Competence and Capability
Financial Soundness
46
Improper disclosure
where an insider improperly discloses inside information to another person
47
The statutory objective of the FCA
. Ensure that the relevant markets function well
48
State the three operational statutory objectives of the FCA
to secure an appropriate degree of protection for consumers
to protect and enhance the integrity of the UK financial system
to promote effective competition in the interests of consumers.
49
Quantitative Easing
The central bank (Bank of England) buys government stock in the market in order to increase the money supply and reduce long-term interest rates.
50
The DMO
The DMO's responsibilities include debt and cash management for the UK government, lending to local authorities and managing certain public sector funds.
51
Corp bond purchase scheme
Enables the Bank of England to make purchases of certain types of corporate bonds. The purpose of the CBPS is to impart monetary stimulus by lowering the yields on corporate bonds, thereby reducing the cost of borrowing for companies.
52
Adv of VCT compared to EIS
VCT - tax free divs, EIS taxable
| VCT - CGT free no min period, EIS CGT free after 3 years
53
Dis of VCT compared to EIS
. Tax relief - VCT 30% if held 5 years, EIS 30% if held 3 years
. Max tax relief amount - VCT £200K, EIS £1m
54
Price weighted index
. Average of prices of all stocks included in the index
. Dow Jones
55
Market weighted
. Average of the market capitalisations of all stocks included in the index
. FTSE 100
56
Factors which can affect the discount for a trust
. Investor Sentiment
| . Reputation of investment managers
57
2 conditions to be satisfied for a new endowment or whole life policy to be a qualifying policy are
. Policies must have a premium payment term of at least 10 years
. The premium payable in any period of 12 months cannot exceed twice the premium
payable in any other 12-month period
58
PIBS
. PIBS are permanent interest-bearing shares issued by building societies; they are
subordinated unsecured loan stock not covered by the FSCS; therefore they have credit risk
59
NS&I premium bonds
```
. Lump sum or monthly
. No income paid
. Prizes £25 - £1m
. Invest £100 - £50k
. Prize rate 1.15%
. No income tax or CGT, no tax on prizes
. Can be encashed whenever with no loss of capital
```
60
NS&I Savings certificates
. Lump sum only
. Guaranteed rate of %
. 2 and 5 year terms, 3 years for index linked
. No income tax or CGT
. loss of 90 days % with early encashment
. Index linked lose all index linking for the year of early e encashment
. Offered alts at maturity - usually low paying
61
NS&I guaranteed growth bonds
```
. Lump sum
. 1,2,3,5 years terms
. Guaranteed fixed rate of %, if held to maturity
. % added to bond annually
. % taxable but paid gross
. Loss of 90 days % on early withdrawal
```
62
NS&I Guaranteed income bond
```
. Lump sum
. Fixed term, fixed %
. % taxable but paid gross
. Loss of 90 days % on early withdrawal
. Must have a min of £500 to keep it open
```
63
Children bonds
```
. Lump Sum 5 year term investment
. Can renew for further 5 years
. For children under 16
. Child takes control at 16
. Min balance £25
. Max balance £3,000 in each issue
. 2% AER, tax free
. Tax free for parents and child
. Loss of 90 days % on early withdrawal
```
64
Income Bonds
. Lump sum
. Have to be 16+
. Min inv £500, Max £1m or £2m jointly
. Variable rate of % - 0.75% gross AER from 01/05/17
. Income paid to Bank acc on 5th of each month
. % taxable but paid gross
. No penalty on early encashment
65
Direct Saver Account
```
. 16+
. Min Balance £1
. Max balance £1m
. Variable rate of % - 0.7% gross AER from 01/05/17
. % taxable but paid gross
. No penalty on early encashment
```
66
Investment account
```
. 16+
. Min Balance £20
. Max balance £1m
. Variable rate of % - 0.45% gross AER from 01/07/16
. % taxable but paid gross
. No penalty on early encashment
```
67
Aggregation
Aggregation is the grouping together of client orders, and is not permitted unless:
it is unlikely to work to the disadvantage of any of the clients;
it is disclosed to each client that it may work to their disadvantage;
68
Allocation
an Order Allocation Policy is implemented detailing the fair allocation of orders,
including how the volume and price of orders determines allocations, and the treatment of partial executions; it must prevent unfair precedence being given to the firm or certain clients.
69
WPB vs Stock market bond
Issuer
. Life Assurance co - WPB
. Various - SMB
Determination of growth
. Reversionary & terminal bonuses - WPB
. % of market growth
Withdrawal facility
. 5% - HR tax deferral - WPB
. Not unless life ass - SMB
Charges
. High and opaque - WPB
. Charges implicit, normally no explicit - SMB
Tax
. Can be placed offshore - WPB
. Some can go into S&S ISA
70
Advantage of using a broker
. ease of admin
| . Generally lower dealing costs
71
Disadvantage of using a broker
. Loss of right to attend meetings such as the AGM
| . Inconvenience should you wish to deal through another broker
72
S class shares
S’ shares are subscription shares issued by investment trusts. ‘S’ shares are also known as ‘perpetual C shares’. They are used to issue new shares on the market without incurring the costs generally associated with launching a new investment trust
73
FTSE4Good
FTSE4Good are ethical indices; screening companies in each of the FTSE indices for specified positive and negative criteria (reviewed every six months). FTSE4Good Index series selects from the FTSE All-Share Index and the FTSE All-World Developed Index
74
APCIMS
The Association of Private Client Investment Managers and Stockbrokers (APCIMS) Private Investors’ Indices are designed to provide a benchmark for private client portfolios.
75
2 ways of establishing domicile
Origin: acquired at birth; usually that of the father in the UK; of mother if unwed (not necessarily the country where born)
Deemed : this affects those who live in the UK for a long period of time without acquiring domicile of choice here. Once one has lived in the UK for 17 out of the last 20 years, one is deemed domiciled for IHT purposes.
76
Tax effect of domicility
Liability to IHT is determined by domicile; non-domiciled persons pay IHT on UK assets only (above NRB), whereas UK domiciled pay on world-wide assets
77
Rights of a reg holder of old shares
To receive the annual report and accounts
To receive notice of the AGM and other meetings of members
To attend, speak (if called) and vote at meetings
To appoint a proxy
To share in the profits of the business, and the residue on a winding up
To subscribe for new share capital (and securities with conversion
rights).in proportion to existing holdings (`pre-emptive` rights)
To transfer shares freely.
78
Reduction in yield
a measure of the impact of charges on performance that takes into account TER but also includes both initial and exit charges, averaged over a specified period
79
SETS (Stock Exchange Electronic Trading Service )
Features - Highly liquid electronic order book with executable (firm) quotes.
Coverage - FTSE100, FTSE250, FTSE Small Cap Index constituents, Exchange Traded Funds, as well as other liquid AIM and Irish securities.
80
SETSqx (Stock Exchange Electronic Trading Service – quotes and crosses)
Features - Combines a periodic electronic auction book with standalone non-electronic quote driven market making.
Coverage - It is a trading platform for securities less liquid than those traded on SETS
81
SEAQ (Stock Exchange Automated Quotations System)
Features - Non-electronically executable quotation service where market makers quote prices.
Coverage - Less liquid AIM securities (not traded on SETS or SETSqx) with at least two market makers, as well as a number of fixed interest securities
82
International Order Book
Features - Electronic order book similar to SETS using American and Global depositary receipts. Quoted in US dollars Opening/closing auctions; continuous trading in-between
Coverage - Covers leading shares from 46 countries
83
3 stages of money laundering
. Placement - putting money into the system
. Layering - is where the dirty money passes through a series of transactions in
order to obscure the origin of the proceeds.
. Integration - the final stage of the process is for the dirty money to reappear as legitimate funds or assets, for example, through income from legitimate business
84
Selection criteria for FTSE4Good indices
FTSE4Good are ethical indices; screening companies in each of the FTSE indices (reviewed every six months).
FTSE4Good screens companies for specified positive and negative criteria.
The main requirements are: environmental sustainability; positive relationships with stakeholders; observing universal human rights; good supply chain labour standards; countering bribery; and climate change.
Excluded companies are specifically those involved in tobacco and weapons ( but civil nuclear is no longer excluded.)
FTSE4Good is moving from emphasising negative to positive screening criteria. Companies are now given an ESG rating according to three criteria: Environment, Society, and Governance.
85
Composition of FTSE4Good indices
As regards composition, the FTSE4Good Index series selects from the FTSE All- Share Index and the FTSE All-World Developed Index (Global).
FTSE4Good covers Global and European regions and three countries, US, UK and Japan. Except Japan, there are also traded (size) indices of leading shares; 100 shares for the Global and USA, 50 for Europe and the UK. The Global benchmark covers 23 markets and around 2,000 potential constituents, but does not include emerging markets.
86
Reverse yield gap
The reverse yield gap is the gross redemption yield on gilts in excess of the (grossed-up) dividend yield on shares. It is called ‘reverse’ because the expectation would be, as now, for more risky shares to yield more than less risky gilts (It existed from 1959 until recently because the growth in shares more than compensated for the income shortfall)
87
The inverted yield curve
The inverted yield curve is when short term interest rates are higher than long term interest rates; the yield curve slopes down to the right. It usually indicates that short term interest rates are expected to fall. The yield curve is normally expected to rise to the right because of the liquidity premium
88
Backwardation
Backwardation (or ‘back’) is when a future price is LOWER than the spot price; (normally expect the future price to be higher -contango- because of the cost of carry); or in the ‘cash’ market when temporarily the offer price is BELOW the bid price.
89
Short ETF
An Exchange Traded Fund is a low cost means of tracking an index; a short ETF moves inversely to that index. Some candidates incorrectly thought that the investor shorted the fund, rather than being a long investor in a short fund.
90
Reasons for preferring Strips to the underlying gilt
A single cash flow can be matched against a future liability; there is no reinvestment risk; and Strip principals have higher duration than equivalent gilts, providing gearing to interest rate changes.
Most candidates could outline two of these, as required.
91
Taxation of Gilt strips
Strips are taxed on the basis of ‘marked to market’ each fiscal year (i.e. change in market value is liable to income tax).
‘Relevant discounted securities’ are also subject to income tax, but only on sale or redemption.
There was some confusion between income tax and capital gains tax (or candidates simply referred to ‘taxation’) and timing.
92
absolute return funds
. Absolute returns are made in the base currency of the fund. Investors may be subject to currency losses, should the base currency be different to their domiciled/invested currency. Currently, only funds that are trying to achieve an absolute return in sterling are classified to the sector.
. Funds listed in this sector do not guarantee returns.
93
Children bonds
.Previously called Children’s Bonus Bonds. Terms changed September 2012.
.Matures once it reaches its first five-year anniversary on or after the child’s 16th birthday.
.For children under 16 years. Parents, grandparents, great grandparents can invest.
.Minimum balance £25, maximum £3,000 in each issue.
.Fixed rate of interest. Five year term.
.Current issue is No. 35 paying 2.50% AER, tax-free.
.Tax-free for parents and child.
.Penalty of 90 days’ interest.
94
Bonus issue
. 2 for 5 - you get 2 new shares for every 5 you own
. The value of the 7 shares will now be the value of the original 5 shares divided 7
. Net assets remain the same, the additional shares are funded via the share premium account
95
Rights issue
. 4 for 7 - 4 new shares for every 7 owned
. current price is £4.10 - so 7 @ £4.10 - £28.70
. New price £3.30 - so 4 @ £3.30 - £13.20
. total - £41.90, divided by 11 = £3.81 - this is known as the theoretical ex rights price, TERP
96
Selling Nil paid rights
. TERP - Subscription cost
97
Max subscription at nil cost
. Number of rights (so if 4 for 7 and already have 7000 then the number of rights is 4000)
. Times subscription price
. Divided by TERP
98
Share screening methods
. Share screening methods enable an investor to filter a large population of shares and isolate
a much smaller number that match the identified investment criteria.
. But preferably should be used as a basis for further research rather than a precise selection
method because quantitative criteria generally use historic data, and ignore qualitative
factors
. May result in a very unbalanced sector concentration (‘value trap’)
. FTSE All-Share index (631 companies) covers a wide spectrum of market capitalisations,
including FTSE 350 and SmallCap, but excluding Fledgling and AIM
. How frequently will the screener be run, and constituents changed? What will happen if in future the screener generates too many or too few companies?
99
Dividend cover/Yield
. Dividend cover and dividend yield should be viewed together. A high dividend yield is
usually indicative of high risk and / or low growth
. The dividend yield represents the cash return on the cash; therefore it is more reliable than
paper (‘accrual’) earnings
. The dividend cover is EPS / DPS (or earnings yield / dividend yield). It is the reciprocal of
the payout ratio. A dividend cover of 1.5 means that earnings exceed dividends by at least
50%; less than 1 would mean that dividend uncovered and paid out of reserves
. Dividend cover provides some evidence of the security of the dividend. But dividends and
cover are historic, and may not be maintained, particularly if there is high operational or
financial gearing
. A dividend yield of at least 2% means that investor receives at least a modest income, but
less than current rate of inflation, and less than the average for FTSE All-Share index of
3.47% (cover 1.02); and earnings partly matched by cash
100
Average growth
. Average growth of 5% per year over three years indicates earnings are growing, supporting
the dividends and rating of the shares
. But three years is short, and only requires 15% over three years (could be one large
increase from a depressed base, followed by smaller declines). Can be affected by
accounting treatment, such as impairment
101
Net Gearing
. Net gearing is net debt (total debt less liquid assets) / equity. (Sometimes expressed as % of
equity + debt). Minus means that liquid assets exceed debt. It measures the burden of debt
capital; the lower the ratio the less the financial risk
. Net gearing is affected by the selection of debt instruments (pension liabilities?); interest
cover is affected by profitability and interest burden, and more directly measures ability to
service debt
102
P/E Ratio
. Price-earnings ratio is Share Price / EPS. Generally, the lower the ratio the cheaper the
share. (20 is less than FTSE All-Share average of 28.3). A maximum PE ratio of 20 is
equivalent to a minimum Earnings Yield of 5%
. PE ratio is generally historic; sometimes prospective is used but more subjective. EPS
affected by accounting policies
103
Price/Book ratio
. Price / book ratio is the ratio of market price / book value of net assets. Net assets is
equivalent to ordinary shareholder funds. Net assets usually deduct intangibles and
goodwill. The lower the ratio the cheaper the share in terms of underpinning by assets
. But Price / book less relevant to ‘new economy’ companies with few tangible assets
104
Income Index
. 52% Equities
| . 25% FI
105
Balanced Index
. 62% Equities
| . 18% FI
