Chapter 2

Question 1

9. The directors of Harvest PLC have decided to reduce dividend payments. This was unexpected. In terms of the likely effect of this on their share price, you would expect
   A. no effect on their share price.
   B. an increase in their share price.
   C. a decrease in share prices in their sector.
   D. a decrease in their share price.

Answer 1

D - An unexpected reduction in dividends from Harvest PLC is likely to result in a decrease in their share price as investors like to see a steady growth in dividends.

Question 2

10. Billy has been offered non-voting ordinary shares in a UK company. He should be aware that
    A. he will rank behind ordinary shareholders in the event of liquidation.
    B. he will not qualify for a dividend until the dividend on the ordinary shares has reached a pre-determined level.
    C. he will be entitled to a smaller proportion of profits than ordinary shareholders.
    D. the market price will usually be lower than that of the ordinary shares.

Answer 2

D - Non-voting ordinary shares are exactly the same as ordinary shares, except that they have restricted, or no voting rights. Because they cannot influence company decisions, their market price is usually lower than that of the (voting) ordinary shares.

Question 3

11.
Share A: Price 210p / EPS 29p
Share B: Price 190p / EPS 23p

These two company shares sit in the same sector. From the information given we can make the general comment that
A. share A is overpriced.
B. share B is under-priced.
C. share A will provide better returns than B.
D. share B is expected to grow more than Share A.

Answer 3

D - Price earnings ratio (P/E ratio) is calculated by dividing the share price by the earnings per share. The higher the P/E ratio, generally, the more highly the company is rated and expected to grow.

The formula for calculating the P/E ratio = market price / earnings per share. So, share A’s P/E ratio = 7.24 (210 / 29) and Share B’s P/E ratio = 8.26 (190 / 23). As share B has a higher P/E ratio to Share A, the general expectation would be that it will grow more than share A;
hence, the answer is (d).

Question 4

12. Yellowstone’s accounts show that dividends paid to ordinary shareholders over the last 12 months was £315,000 whilst dividends paid to preference shareholders was £175,000. Their profit after taxation was £1,114,000. What is their dividend cover?
    A. 3.54 times
    B. 2.98 times
    C. 1.98 times
    D. 6.37 times

Answer 4

B - The dividend cover is the number of times a company is capable of paying dividends to shareholders from the available current earnings. The calculation is: Profit attributable to ordinary shareholders / Dividends paid to ordinary shareholders.

Profit attributable to ordinary shareholders = Profit after tax and preference dividends (£1,114,000 - £175,000 = £939,000)
Therefore, Yellowstone’s dividend cover = 2.98 times (£939,000 / £315,000).

Question 5

13. Brynwold Accounts at year end contain the following information:
    Total assets £14,150
    Current liabilities £2,120
    Long-term debt £1,140
    Ordinary shares in issue 5,750
    Preference shares in issue 1,500

What is Brynwold’s net asset value?
A. £1.89
B. £1.63
C. £1.50
D. £2.40

Answer 5

B - The net asset value (NAV) = Net assets attributable to ordinary shareholders/number of ordinary shares in issue.
NAV = (Total assets - liabilities - debt - preference shares) / 5,750
NAV = (£14,150 – £2,120 - £1,140 – 1,500) / 5,750 = £1.63.

Question 6

14. The FTSE 100 is an arithmetically weighted index based on
    A. size of the company.
    B. share price movements.
    C. number of shares of company.
    D. market capitalisation of each company.

Answer 6

D - The FTSE 100 is an arithmetically weighted index based on the market capitalisation (the number of shares x the market price) of each company.

Question 7

15. Charlie and Juan each have a rental property, the details of which are as follows
    Name Cost of Property Purchase Costs Rental Income Expenses
    Charlie £160,000 £2,300 £600 pm £100 pm
    Juan £130,000 £2,100 £550 pm £90 pm

What are the respective net rental yields for Charlie and Juan?
A. 3.70% and 4.18%
B. 3.75% and 4.25%
C. 4.5% and 5.08%
D. 4.44% and 4.50%

Answer 7

A - Rental Yield is calculated as ((annual rent – annual expenses) / (market cost + purchasing costs)) x 100
Charlie’s rental yield = (£7,200 - £1,200) / (£160,000 + £2,300) x 100 = 3.70%.
Juan’s, rental yield = (£6,600 - £1,080) / (£130,000 + £2,100) x 100 = 4.18%.

Question 8

16. First-time buyers Sarah and Ian are purchasing their new home for £260,000; what rate of stamp duty land tax is payable?
    A. 0%
    B. 1%
    C. 2%
    D. 5%

Answer 8

A - First-time buyers pay no SDLT on the first £300,000 of the purchase price.