Formulas

Question 1

Conversion Premium / Discount Formula

Answer 1

((Market price of convertible stock / Conversion ratio x market price of ordinary shares) -1) x 100

Question 2

How to calculate interest yield

Answer 2

coupon / clean price x 100

Question 3

How to calculate modified duration

Answer 3

Macauley’s duration / 1 + Gross redemption yield

Question 4

Rental property yield formula

Answer 4

rent / purchase cost

Question 5

How to calculate futures

Answer 5

Portfolio value / (FTSE 100 futures contract value x 10)

Question 6

Sharpe ratio formula

Answer 6

Return - Risk free return / standard deviation

Question 7

Information ratio formula

Answer 7

Return - benchmark return / tracking error

Question 8

EPS formula

Answer 8

net profit attributable to ordinary shareholders / number of ordinary shares in issue

Question 9

What does earnings per share represent

Answer 9

It represents the amount in pence that the company has earned during the year for each ordinary share

Question 10

Dividend yield formula

Answer 10

dividend per share / share price

Question 11

Dividend cover formula

Answer 11

EPS / dividend per share

Question 12

If a dividend cover is high, what does this suggest?

Answer 12

The higher the figure the more likely the company can maintain the existing dividend if profits fall in the future. A high dividend cover suggests that the company is retaining a lot of its earnings for reinvestment

Question 13

P/E formula

Answer 13

Share price / Earnings per share

Question 14

What is P/E ratio

Answer 14

A P/e ratio gives an indication of the number of years that it would take at the current EPS to repay the share price (ignoring the time value of money).

Can therefore provide an indication of value of an equity

Question 15

How to calculate NAV

Answer 15

net assets attributable to ordinary shareholders / number of ordinary shares in issue

Question 16

Future value formula

Answer 16

PV (1+r)n

Question 17

How to calculate compound rate of interest

Answer 17

1) Future value / initial investment
2) to the square root of how many years
3) - 1 x 100

Question 19

Annual equivalent rate formula

Answer 19

(1+ r/n)n - 1

Question 20

How to calculate amount that needs to be invested now

Answer 20

Future value / (1 + r)n

Question 21

Accumulating and discounting regular savings formula

Answer 21

1) Present value times by

2) (1+r)n-1 / r

Question 23

Real rate of return formula

Answer 23

Nominal return - inflation

Question 24

Undiluted NAV formula

Answer 24

Net assets / Number of ordinary shares in issue

Question 25

Top slicing relief process

Answer 25

1) Work out what amount of the gain falls in each tax bracket and work out the total tax 2) Work out the tax already paid within the fund, so 20% of the gain and deduct this off total liability 3) find the annual equivalent of the gain by dividing total gain by years 4) Work out the total tax now due on this top slice, also take into account tax paid on top slice 5) deduct step 4 from step 2

Question 27

Holding period return

Answer 27

D + V1 - V0 / V0

Question 28

Relative return calculation

Answer 28

Portfolio return - benchmark return

Question 29

What is gearing ratio

Answer 29

Long term debt + preference shares / ordinary shareholder funds x 100

Question 30

Liquidity ratio

Answer 30

current assets - stock / liabilities

Question 31

Operating margin profit

Answer 31

profit before interest and tax / sales x 100

Question 32

Net profit margin

Answer 32

profit after tax and interest / sales x 100

Question 33

Interest cover

Answer 33

Profit before interest and tax / gross interest payable

Question 34

Working capital ratio

Answer 34

current assets / current liabilities

Question 35

Debtor turnover

Answer 35

sales / debtors

Question 36

Stock turnover

Answer 36

cost of sales / stock

Question 37

Working capital formula

Answer 37

assets - liabilities

Question 38

Creditor turnover

Answer 38

cost of sales / trade creditors

Question 39

Dividend discount model

Answer 39

dividend / return on equity

Question 40

Gordon’s growth model

Answer 40

Dividend / (return required - dividend growth)

Question 41

Pay out ratio

Answer 41

Dividend per share / EPS

Question 42

Explain purpose of pay out ratio

Answer 42

determines sustainability of a companies dividend payment dividends paid to shareholders relative to to EPS