Using of financial information such as audited report and accounts

Question 1

What is the WACC (Weighted Average Cost of Capital)?

Answer 1

The cost of capital is the expected return to equity owners (or shareholders) and to debtholders; so, WACC tells us the return that both stakeholders can expect

WACC can act as a benchmark for investment and is commonly used as discount rate in DCF analyses

Cost of debt - need to consider taxes and interest

Incorporates all sources of a company’s capital—including common stock, preferred stock, bonds, and any other long-term debt

Can be used as a hurdle rate against which companies and investors can gauge ROIC performance

Question 2

What is account auditing?

Answer 2

Plays key role in ensuring company’s accounts = accurate and finances = distributed in fairest / most efficient manner

Can be internal process = mitigate risk and identify where cost savings can be made

OR can be independent specialists = conduct external audits on company accounts

E.g. likes of Deloitte, EY, KPMG, PwC

Question 3

Why are accounts useful?

Answer 3

Helps track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions

Question 4

What are the THREE key financial statements?

Answer 4

Income statement = information about the profit and loss

Balance sheet = picture on the financial position of your business on a particular date

Cash flow statement = bridge between income statement and balance sheet and reports the cash generated and spent during a specific period of time.

Question 5

What are audit reports and how are they useful?

Answer 5

Auditor’s report = document containing auditor’s opinion of whether a company’s financial statements comply with Generally Accepted Accounting Principles (GAAP)

UK GAAP = body of accounting standards published by the UKs Financial Reporting Council (FRC)

Audit report = important because banks, creditors, and regulators require an audit of a company’s financial statements

Question 6

What do the THREE paragraphs in a report usually cover?

Answer 6

The first paragraph states the responsibilities of the auditor and directors

The second paragraph contains the scope, stating that a set of standard accounting practices was the guide

The third paragraph contains the auditor’s opinion

Question 7

What are the FOUR types of audit reports?

Answer 7

1. Clean or Unqualified Report
2. Qualified Opinion
3. Adverse Opinion
4. Disclaimer of Opinion

Question 8

What is a clean or unqualified audit report?

Answer 8

A clean audit report means a company followed accounting standards while an unqualified report
means there might be errors

Question 9

What is an adverse opinion audit report?

Answer 9

An adverse report means that the financial statements might have had discrepancies, misrepresentations, and didn’t adhere to GAAP

Adverse opinion = worst possible outcome for
company and can have a lasting impact and legal ramifications if not corrected

Question 10

What is an qualified opinion audit report?

Answer 10

Whilst company didn’t follow proper accounting standards, the company didn’t do anything wrong, e.g. mistake in calculating operating expenses / profit

Auditors will state specific issues present so that company can fix them

Question 11

What is a disclaimer of opinion audit?

Answer 11

For some reason, auditor couldn’t complete the audit / chose not to provide opinion

Examples include when auditor can’t be impartial / wasn’t allowed access to certain financial information.

Question 12

What property taxes are there?

Answer 12

Taxes include:
 stamp duty land tax (SDLT);
 value added tax (VAT);
 capital gains tax (CGT);
 capital allowances;
 tax on rental

Question 13

How does taxation differ on different properties?

Answer 13

Difference between commercial and residential property taxation

Difference between type of property investment and whether direct and/or indirect ownership (i.e. REITS / PAIFS) taxation

Difference in choice of ownership structure = significant area affecting taxation; ownership via company structure = popular in UK due to corporation tax rate being < income tax rates

Question 14

What taxes are applicable to which types of property during purchase and sale?

Answer 14

When buying property, buyers = required to pay SDLT =different rates depending on property value

Sale of commercial property = generally exempt from VAT. However, commercial property owners can ‘opt to tax’ and charge VAT at standard rate 20%, therefore all supplies on property, including rent, would attract VAT

During due diligence on property purchase, vital that the tax history = fully researched as may be a tax relief called capital allowances that can help reduce future tax bills

When selling property, further tax = CGT. Rate of tax applied differs depending on ownership structure with companies being able to pay corporation tax

When financing commercial property, possible to claim tax relief for loan finance costs relating to commercial property. This is no longer applicable to residential buy-to-let properties but it is for commercial property.

Question 15

What vehicles are available for tax-efficient investing?

Answer 15

Property Authorised Investment Funds (PAIFs)

Real Estate Investment Trusts (REITs)

Question 16

How do PAIFs enable tax-efficient investing?

Answer 16

Tax-exempt investors, including individuals holding their investment in an ISA / SIPP = benefit from the PAIF structure

This is because both property income and interest income can be paid gross of tax

Question 17

How do REITs enable tax-efficient investing?

Answer 17

Broadly a closed-ended publicly-traded company

Provides investors with tax-efficient investment exposure to property assets

To meet REIT status various conditions need to be adhered to

REITs do not pay UK direct taxes on their income and capital gains from their qualifying property rental business, provided certain conditions are satisfied

Shareholders = generally taxed on distributions they receive from REIT as if they were profits of a property rental business

REITs = required to distribute at least 90% of profits arising from their qualifying property rental business

Question 18

What are PAIFs?

Answer 18

An open-ended investment company (OEIC), authorised by the Financial Conduct Authority (FCA)

Specialises in holding property and where taxation on property investment business profits lies with its investors