Formulas

Question 1

Interest Yield

Answer 1

Interest yield is money earned as a percent of the investment

Interest Yield = Coupon/clean price

e.g. 5% coupon and clean price of £125

5/125 = 4%

Question 2

Redemption Yield

Answer 2

The yield of a stock calculated as a percentage of the redemption price with an adjustment made for any capital gain or loss which that price represents relative to the current price

Interest yield - or + ((gain/years to redemption/clean price))

E.g. Coupon of 5%, clean price of £125, redemption date = 7 years

Interest Yield = 5/125 = 4%

Price is trading above nominal therefore loss

25/7/125 = 2.86%

4% - 2.86% = 1.14%

Question 3

Earnings Per Share (EPS)

Answer 3

Widely quoted statistics in relation to a companies performance

• Allows investors to see the trend of in a companies profitability
• All listed companies required to publish eps on their accounts

EPS = Profit attributable to ordinary shareholder / Number of ordinary shareholders

Question 4

Dividend Yield

Answer 4

Measure of dividend as a percentage return on the current share price

Dividend / number of ordinary shares in issue = dividend per shares

Dividend yield = dividend per share / current share price

Question 5

Dividend cover

Answer 5

How many times the dividend could be paid out of the available current earnings.

1. Individual Basis as EPS / Dividend per shares
2. Total profit basis as Profit attributable to ordinary shareholders / Dividend paid to ordinary shareholders

Question 6

Price to Earning Ratio P/E

Answer 6

How highly investors value the earning of a company

• Should be used to compare companies in same sector rather than across market
• If P/E is higher than industry average, it means shares are in great demand and higher expectations for growth

P/E = Current market share price / EPS

Question 7

Net Asset Value

Answer 7

Measures the amount available to shareholders if the company were to close down, sell down or pay all its bills.

• Provides a useful guide to the price at which shares should trade for companies
• Less useful for companies that are valued on their earnings potential

Useful valuation figures if

• Takeover bid is made
• Liquidity seems a possibility

NAV = Net assets attributable to ordinary shareholders / number of ordinary shares in issue

Question 8

Indices

• Limitations
• UK INDICES
• US INDICES
• Japanese
• German
• Hong Kong

Answer 8

• The larger the company, the bigger its weighting in the index

Limitations

• Do not include costs of buying and selling, CGT or management expenses
• Assumes investors are fully committed and hold no cash balances

UK INDICES

1. FTSE All share index
   - value of ftse 100, ftse 250 and ftse small cap, over 600 companies
2. FTSE 100
   - Biggest 100 companies listed on the London stock exchange
3. FTSE 250
   - The next 250 biggest companies, from 101 to 350 by market cap
4. FTSE 350
   - Combination of FTSE 100 and FTSE 250

US INDICES

1. Dow Jones 30
   - Top 30 blue chip companies
2. S&P 500
3. NASDAQ
   - Small young companies which are fast growing

Japanese

1. Nikkei 225
2. Topix
3. Nikkei 300

German
1. DAX 30

Hong Kong
1. Hang Seng Index

Question 9

Properties / Rental Yields

1Q ) A property is advertised at £175,000 with potential rental income of £900 per month. The legal and furnishing costs are £8,000 and general management expenses (25%) will need to be deducted from the rent
- Workout the rental yield

2Q) SDLT payable on a residential property of £275,000 (Ignores first time buyer)
Stamp duty laws

Answer 9

1A) (Gross rent - Expenses) / Market price + costs of buying
((900-225)x12) / £175,000 + £8,000
= 4.43%

2A) first 125,000 at 0%
125,000 at 2% = £2,500
25,000 at 5% = £1,250
= £3,750

Stamp duty land tax
- Payable within 14 days of the date of the transaction

Question 10

Rent a room

Answer 10

• Owners who let furnished rooms in their only or main residence
• Does not apply to unfurnished accommodations
• Must occupy the property as the same time as tenant
• No tax payable if gross rent before deducting expenses does not exceed £7,500
• Only one exemption amount per residence
• Rent taken into account is the payment for the accommodation plus any payment for related goods and services
• If tenant sub lets, they are both entitled to relief of maximum of £3,750

If the client exceeds £7,500, taxpayers have a choice they can either:

• Pay tax on the excess over £7,500 with no deductions for expenses
• Be taxed on the gross rent received, less expenses with no rent a room relief