ifa 4 - investment nov 2019 - final paper€¦ · microsoft word - ifa 4 - investment nov 2019 -...

© The Chartered Governance Institute 2019 of 19

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Subject no. 51B

Paper 3 Investment Tuesday afternoon, 26 November 2019 Time allowed: 1 hour 30 minutes Do not open this examination paper until the presiding officer or an invigilator tells you to. You must not take this paper out of the examination room. The examination paper contains 18 questions and is divided into three sections. You must attempt all questions in Section A and Section B and two questions in Section C. Section A contains 15 marks, Section B contains 30 marks, and Section C contains 30 marks. There are 75 marks available in total for the paper. You may continue your answers on the continuation sheets at the back of the booklet if necessary. Note: Unless otherwise specified, you should assume that an Act or an organisation referred to in the questions is a UK Act or organisation.


Section A Answer all questions in this section. Continue your answers on the continuation sheets at the back of the booklet, if necessary. 1 What is elasticity of demand? __________________________________________________________________________

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(1 mark) 2 Give one reason why a Real Estate Investment Trust (REIT) might find it difficult to accumulate

sufficient capital, from its earnings alone, which it can subsequently use to invest in additional property?

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(1 mark)

3 The price of an option premium has two components. Name these two components.

i _______________________________________________________________________

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ii _______________________________________________________________________

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(2 marks)

4 Annabel has received notification of a rights issue from a company in which she has a substantial shareholding of ordinary shares. She has decided to take up 50% of the rights. The consequences of this decision are that: (Tick one box only) A Annabel’s percentage control of the company will increase and her bank balance will increase. B Annabel’s percentage control of the company will increase, however, her bank balance will decrease. C Annabel’s percentage control of the company will decrease, however, her bank balance will increase. D Annabel’s percentage control of the company will decrease and her bank balance will decrease.

(1 mark)


5 When an unlisted company brings its securities to the main market of the London Stock Exchange

(LSE) for the first time, it may only use certain permitted methods. Name two of these methods.

i _______________________________________________________________________

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ii _______________________________________________________________________

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(2 marks)

6 Why might the price of an exchange traded fund (ETF) differ from the value of the index it tracks?

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(1 mark)

7 Give two uses of forward exchange contracts (FECs).

i _______________________________________________________________________

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ii _______________________________________________________________________

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(2 marks) 8 State the two key principles applicable when creating an investment portfolio.

i _______________________________________________________________________

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ii _______________________________________________________________________

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(2 marks)


9 An increase in nominal GDP always means that a country’s economy is expanding.

Is this true or false? (Tick one box only)

True

False

(1 mark)

10 An institutional investor successfully bought £2 million nominal of three-month UK treasury bills for £1.994 million and used two different methods to evaluate the annual returns. The results

of these calculations were: (i) 1.2033% and (ii) 1.2069% respectively.

Name the methods used in (i) and (ii) in the correct order.

i _______________________________________________________________________

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ii _______________________________________________________________________

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(2 marks)

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Total for Section A = 15 marks


Section B Answer all questions in this section. Continue your answers on the continuation sheets at the back of the booklet, if necessary. 11 Explain what the public sector net cash requirement (PSNCR) represents and its method of

funding.

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(6 marks)


12 Give reasons why hybrid companies might be used.

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(6 marks)

13 Explain how dark pools work and some of the criticisms of dark pools.

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(6 marks)


14 Explain why many companies no longer provide defined benefit (DB) pension schemes for their employees.

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(6 marks)


15 In the financial year ending April 2019, a car manufacturer made a gross profit of £25 million. Other relevant figures are:

Corporation tax: £2,475,000. Loan interest: £1,125,000. Preference share dividend payments: £80,000. Number of issued ordinary shares: 82,000,000. The market price of each ordinary share is £1.6250 and the stated dividend cover is 4.

Using the information provided and showing your workings in the box below, calculate: (i) The earnings per share (EPS).

(ii) Retained earnings and the dividend payment made to ordinary shareholders.

(iii) The annual dividend yield.

(6 marks)

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Total for Section B = 30 marks


Section C Answer two questions only. Continue your answers on the continuation sheets at the back of the booklet, if necessary. 16 Discuss four risk factors which may affect the returns on bonds and the strategies which could be

used by investors to either eliminate or reduce these factors.

(15 marks)

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17 Meghan is 48 years old and is a senior partner in a firm of solicitors based in the City of London financial district. Her annual salary is in excess of £250,000 and she has significant assets and is mortgage free. She has no dependants. She has recently received a significant legacy of approximately £1 million which she considers to be ‘spare’ cash.

Meghan does not have sufficient time to manage her own investments and is prepared to invest all

of the legacy in a tax-efficient collective investment scheme over a period of 5 to 7 years to coincide with her retirement at 55.

She had considered investing in an open-ended scheme, however, recently they have received significant adverse press. One of her colleagues has suggested she might consider venture capital trusts. Analyse a range of advantages and disadvantages of venture capital trusts, and suggest whether

or not they would match Megan’s investment profile.

(15 marks)

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18 Evaluate the potential consequences, both positive and negative, for those who buy credit default swaps (CDSs).

(15 marks)

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Total for Section C = 30 marks

Total for paper = 75 marks

END

The scenarios included here are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental.

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Do not write on this page – examiner use only Section A Section B Section C

Question Marks Review Question Marks Review Question Marks Review

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4 14 Total

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