Assignment

Economic and Accounting Assignment Answers

Question 1
The following financial information is contained in the report and accounts of EP Plc for March 2016: (8)
£m
Non-current (‘fixed’) assets 310
Current assets 160
4% cumulative preference shares 50
Nominal issued equity capital (100m 25p ordinary shares) 25
Equity share premium reserve 40
Revenue reserve 150
Revaluation reserve 35
Non-current liabilities (long-term bank loans) 50
Current liabilities 120

EP has recently announced an operating profit of £68m and an EPS of 47p. It proposes to increase the
ordinary dividend per share to 12p. The most recent share price was 980p.

Calculate:

a) Dividend yield
b) Price-earnings ratio
c) Price: book ratio
d) Capital gearing ratio

Question 2
Outline FOUR differences between OEICs and unit trusts (4)

Question 3
Quantitative easing (QE) is the process by which central banks inject cash into economies by buying
vast amounts of government debt and other assets. This both increases the money supply, and also
lowers bonds yields to reduce borrowing costs for corporates and individuals. However, some
economists believe that Europe is facing Debt Deflation.

Explain this concept and discuss how fiscal and monetary policy can be used to ease this situation
and the implications for stock markets (12)

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Question 1

a) The (prospective) dividend yield = 12p/980p x100% = 1.22%

b) P/E ratio =980p/47p = 20.85

c) Net asset value per share = Nominal Capital + reserves

=£25m+£40m+£150m+£35m/100m = 250p

Price:Book ratio = 980p/250p = 3.92

d) Capital Gearing ratio =Debt/Equity (or Debt/ Capital Employed)

=£50m/ £250m

Question 2

OEIC Unit Trust

Fund is a company Fund is a trust

Issues shares Issues units
Open-ended Open-ended
Dual price -Bid/offer spread, including
Single price - initial charge separate initial charge

Can issue different classes of shares, with Only difference between units is
differing charging structures or in different whether they are ‘distribution’ or
currencies ‘Accumulation’.

Charges paid from fund Charges included in managers’ fees

Independent depositary protects Trustee oversees fund on unit holders’
shareholders’ assets behalf

Managed by an Authorized Corporate

Director Fund Manager.

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Question 3
Falling prices, the rise in value of money, cause debts to expand in real terms. Also the real interest
rate, which is usually seen as the nominal rate less inflation, is greater when inflation becomes
negative.

The increase in real debt burden and real interest rate can lead to:
1. Debt liquidation
2. Contraction money supply and a slowing down of velocity of circulation.
3. Falling demand for goods and services
4 .Falling asset values
5. Falling profits
6. Falling output and employment of labour.
7. Losses, bankruptcies and unemployment cause pessimism and loss of confidence

The traditional solution for excess debt is to reduce interest rates to ease the cost. This tends to
increase asset values, particularly for houses and fixed interest investments. Once rates are close to
zero, there is little scope for further reduction, but with price deflation rather than inflation, it means that
real interest rates are positive even when the nominal rate is almost zero. In theory the central bank can
exert pressure to lend by a negative interest rate on deposits.

A boost to government spending can stimulate the economy, but drives up the debt level. If economy is
contracting, the ratio of public debt to GDP will rise through GDP falling.

Quantitative Easing is a relatively new idea, to reduce long-term interest rates. The central bank buys
government securities by creating money,
Boosting money supply is supposed to encourage inflation and low interest rates should also reduce the
exchange rate and make exports more competitive

When policy interest rates came down to almost zero and central bank balance sheets expanded due to
large-scale market interventions in the wake of the Global Financial Crisis, the consensus was that this
unconventional monetary policy (UMP) would be temporary.

But, nearly 10 years on we are in an unprecedented situation where nominal interest rates in a number
of European countries are negative across a range of maturities in the benchmark yield curve, from
overnight out to five years. That, instead of paying interest, a number of governments in continental
Europe are now being paid to borrow.

How will negative interest rates translate into improved growth rates?

The monetary stimulus aims to lift short-term growth via five main channels: by boosting credit to the
real economy (the credit channel), by lifting asset prices (the asset valuation channel), by forcing
investors away from safe assets towards riskier ones (the portfolio balance and risk- taking channels),
by lowering the exchange rate (the exchange rate channel) and by attempting to nudge inflation up
towards objectives with a view to warding off a so-called deflationary spiral (the reflation channel).

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