TOPIC 7 - Other direct investments

Question 1

The FTSE 350 Index includes companies listed on the London Stock Exchange. It comprises:

a) the largest 350 companies by capitalisation.

b) the largest 350 companies by capitalisation outside the FTSE 100.

c) the largest 350 companies by capitalisation outside the FTSE 100 and 250 indices.

d) 350 smaller companies who do not meet the AIM criteria.

Answer 1

a) the largest 350 companies by capitalisation.

Question 2

A preference share:

a) ranks ahead of ordinary shares for repayment if the company is wound up.

b) receives interest payments rather than dividends.

c) is guaranteed to receive a dividend every year.

d) always carries voting rights.

Answer 2

a) ranks ahead of ordinary shares for repayment if the company is wound up.

Question 3

Certificates of deposit:

a) allow penalty-free access at any time.

b) have a minimum 12-month term.

c) are bearer securities.

d) pay interest monthly.

Answer 3

c) are bearer securities.

Question 4

Buy-to-let property has the advantage of liquidity.

a) True
b) False

Answer 4

b) False

Question 5

Karen is a higher-rate taxpayer who owns a buy-to-let flat. What is the position with tax relief on her mortgage? She will:

a) receive higher-rate tax relief.

b) receive a basic-rate income tax credit.

c) receive tax relief at her marginal income tax rate.

d) not qualify for any tax relief.

Answer 5

b) receive a basic-rate income tax credit.

Question 6

Bow Ltd has just issued three free shares for every one share a shareholder owns. This is referred to as a:

a) proportional share issue.

b) scrip issue.

c) dividend share issue.

d) rights issue.

Answer 6

b) scrip issue.

Question 7

A share’s price/earnings ratio is:

a) the share price divided by the earnings per share.

b) the number of times the dividend is covered by the company’s profits.

c) the share’s dividend as a percentage of the share price.

d) the company’s net profit divided by the number of shares.

Answer 7

a) the share price divided by the earnings per share.

Question 8

Market capitalisation is a key factor when analysing shares. It represents the:

a) number of shares the company has issued.

b) current share value multiplied by the number of shares issued.

c) annual profit figure shown in the company’s last annual accounts.

d) value of the company’s assets and reserves.

Answer 8

b) current share value multiplied by the number of shares issued.

Question 9

What percentage of a company’s share capital must be in public hands for its shares to have a full listing on the main London Stock Exchange?

a) 10%.

b) 25%.

c) 33%.

d) 49%.

Answer 9

b) 25%.

Question 10

Today is the ex-dividend date for Acme Ltd shares. The share price is most likely to:

a) decrease slightly.

b) become more volatile.

c) remain stable.

d) increase slightly.

Answer 10

a) decrease slightly.

Question 11

Direct investment in shares is low risk for individual investors
because, over the long term, equity markets have outpaced
inflation. True or false?

Answer 11

False

Question 12

Name three factors that can affect share prices.
Company profit, strength of economy, supply and demand of shares

Answer 12

Company profit
Strength of economy
Supply and demand of shares

Question 13

What are the implications for the purchaser of buying shares
ex dividend?

Answer 13

They will not receive the first dividend payment, that will go to the previous owner.

Question 14

A share with a low P/E ratio is likely to be more expensive than
other shares in the same market sector. True or false?

Answer 14

False, a low P/E ration indicates the share is not in high demand and it is likely to be less expensive.

Question 15

If a company distributes 25 per cent of its profits in the form
of dividends to its shareholders, what would the dividend
cover be?
a) 4.
b) 8.
c) 10.
d) 25.

Answer 15

a) 4.

Question 16

What is the difference between a rights issue and a scrip issue?

Answer 16

A rights issue involves offering existing shareholders the opportunity to
buy additional shares in order to raise additional capital.

A scrip issue
involves issuing additional shares to shareholders free of charge, the
effect being to increase the number of shares in issue and reduce the
share price proportionately; no additional funds are raised.

Question 17

Elliott is considering investing in a buy to let property. He
thinks this is a good way to achieve a high return. What are the
main drawbacks that Elliott should be aware of?

Answer 17

Hard to find good tenants.
Property location
Illiquid asset.
Set up costs can be expensive.
Tax position less advantageous as government discourages BTL.
Property prices may fall in times of recession.

Question 18

How can a buy to let investor claim relief for wear and tear on
furniture?

Answer 18

They cannot, they would need to buy new furniture.

Question 19

Treasury bills are zero coupon securities. What does this mean?

Answer 19

They do not pay interest, instead they are issued at a discount to their par
value.

Question 20

Commercial paper is generally issued for a term of between
three and six months. True or false?

Answer 20

False. Commercial paper is generally issued for between 5 and 45 days,
with 30–35 days being typical. Certificates of deposit are generally issued
for between three and six months