Section A Flashcards
What is the formula for teh Annual Return to Investors and explain
(Pi - Po) + Dividends
—————-
Po
Shows the capital gain for the year, plus any dividends. Highlights that S/H wealth can be gained without dividends
What is RoA and explain
Annual Profits
Avg. Net Assets
Its considers profit and therefore can be manipulated with accounting policies. It also ignores Time Value of Money
Explain the 3 E’s in Public Sector VFM + the 4th E
Economy - Spend Less
Efficiency - Spend Well
Effectiveness - Spend Wisely
Equity - Spend Fairly (resources available to all)
What is ROCE Formula and explain
Operating Profit (PBIT)
—————
Cap Employed
CE = S/h Funds + LTD Debt
Shows the return generated from resources available.
What is ROE and explain
PAT
——
Equity
Only difference is Financing costs. The amount of return that related to S/H
When looking at Gearing. What values can be considered under Debt & Equity for Book Value calculations
Debt - LTD + Redeemable Preference Shares
Equity = Share Cap, Share Prem, Reserves & Irredeemable Preference Shares
What is Debt Ratio calculation and explain
Total LTD
_____
Total Assets
Availability of assets in relation to debt
What is meant by Ex-Div and Cum-Div
Ex-Div price is the share price and the investor will not be included in the next dividend payment
Cum-Div price is the share price and the investor will particpate in the next dividend.
Therefore:
Ex Div = Cum Div - DPS
Explain the relationship between Payout Ratio and P/e Ratio
A entity with a high P/e ratio will tend to have a low PO Ratio and the funds will be need to be reinvested for growth.
Therefore, generally:
High P/e - Low PO
Low P/e - High PO
What does Dividend Cover represent
EPS
___
DPS
A High Div Cover says that the business retains profits for reinvestment by considering how many times Div can be covered by this years Earnings
What are some of the effects of changes in Interest Rates increase
- Assests Fall
- Spending Falls
- Inflation Falls
- FX Rises
Explain relationship of P/e Ratio and EY
They are recipricol of each other. Therefore,
High P/e Ratio = Low EY
Low P/e Ratio - High EY
Explain the relationship between Div PO Ratio and Div Yield
Div Payout / Div Yield = P/e ratio
Explain teh relationship between Asset T/o, Profit Margin and ROCE
A T/o x OPM = ROCE
FS provide historica data.
What other 4 things can the integrated reporting help with
- How the business is managed
- Its future prospects
- Policy on enviornment
- Attitude towards social responsibilty
What does GRI & IIRC help with?
GRI - further disclosuers are needed re Sustainability rather than just the standard. In particular about Econmic, Environment & Social performance indicators
IIRC - Looks at Integrated Reporting and fundemental change to the way entity is managed and report to stakeholders
Where would you expect to find the GRI extra disclosuers
The can be found in a seperate
- Environmental/Sustainability Report
- MGMT commentary
- CSR
- Use GRI as guidlines for the format
GRI Sustainability Reporting has 2 options for disclosures. Core and Comprehensive. Explain both
Core looks at Economic, Environmental, Social and Governance Performance
Comprehensive looks more extensive reporting of Strategy and Analysis, Governance, Ethics and Integrity
For GRI reporting what are the principles for reporting Content:
- Materiality
- Stakeholder Inclusivness
- Sustainability Context
- Completeness
For GRI reporting what are the principles for reporting Quality: (BARTCC)
- Balance
- Comparability
- Clarity
- Accuracy
- Relaibility
- Timley
For GRI there are 2 different types of Standard Disclosures. What are they and what do they consist of?
(GROSSME) Genera
General STD
- Governance
- Report Profile
- Org Profile
- Stakeholder engagement
- Strategy and Analysis
- Ethics and Integrity
- Material Aspects and Boundaries
Specific STD
- Indicators
- MGMT approach
The Indicators are then further split into 3 categories, Economic, Environmental and Social with Social being further sub divided into 4 categories. What are they?
- Labour Practices and decent work
- Human rights
- Society
- Product responsibility
Give examples of types of disclosures under the Econmic, Environment and Social (and then further 4 sub categories)
Economic
- Revenues/Costs/Pension Cont/Taxes Paid
Enviormental
- Ommissions/Fuel/Energy
Social - Labour Practices
- Staff T/o - Benefits provided to staff/Training
Social - Human Rights
- Measures taken to support right to exercise freedom of association
Social - Society
- Ops with local community/Donations to political Parties
Social - Product responsibilty
- Complaints about privacy issues/Breaches of H&S
What is the mission of the IIRC
To have a globally accepted framework for communication of how value is created over time
What are the 6 Categories of Capital under IR
- Financial
- Manufactured
- Intellectual Capital
- Human
- Social and Relationship
- Natural
In the Preperation of the IR there are 7 guiding principles:
These underpin the preperation on IR
- Strategic focus and future orientation
- Stakeholder Relationship
- Connectivity of info
- (hollistic view and interrelated)
- Consistency and comparbility
- Concise
- Completness and Reliability
- Materiality
What are the 8 content elements required to be included in IR Framework (PROBBOGS)
- Org overview and External Enviorment
- Governance
- Business Model
- Risk and Oppurtunites
- Strategy and resource allocation
- Performance
- Outlook
- Basis of preperation and presentation
What are the 4 principles when applying MGMT commentary
- Compliment FS
- MGMT view of performance and progress
- Future focused
- Possess qualitative characteristics of relevance
Upon a rights issue what happens to Shareholder wealth initially and then once the project return a positive NPV
Initally - No change to S/h wealth as they will have more share holding (even though share price (TERP) will fall)
Positive NPV - Share holder wealth will increase if the money is used for a positive NPV project
When looking at credit rating explain the Grade and Risk for S&P and Moody
AAA (Aaa) Investment Garde & Lowest Risk
AA, Aa, A, BBB, Baa - All investment and Low risk (BBB & Baa is Medium Risk
All else is Junk and High risk
What External Influences/considerations should be considered on financial strategy
- Any debt covenants
- Gearing - getting a balance of debt to attract Tax relief but not too much to worry investors
- Ability to get finance - liquidity/creditworthiness
- Government influences
- Regulatory bodies
- Economic influences - INF, IR, FX
What 4 ways can a government influence business activity
- Tax - Higher taxes on profitable companies
- Regional Policy - Make funds available to areas of low employment and poverty
- Employment Policy - Training programmes and funding employment programmes
- Legislation - How business should be conducted
When raising new debt finance how do you calculate new share price?
Current SP = £2.70
Current Ordinary Shares = 16m
NPV of new project = £8m
New Share Price = 2.70 + (£8m / 16m) = £3.20
Calculate TERP and New Share Price with NPV project
Current SP = £2.70
RI = 1:2 (@£2.5)
Shares = 16m
NPV = + £8m
TERP
2 x 2.70 = £5.40
1 x 2.50 = £2.50
((2 x 2.70) + 2.50) / (2+1) = £2.63
New Shre price
£2.63 + (£8 / (24m) = £2.96
By reducing the level of dividend what impact could it have on investor ratios?
Reducing Div outflow could allow entity to invest in + NPV project and therefore increase profits and growth
EPS will rise
Share price may rise with increased profits and growth prospects
Interest Cover could rise
