Questions That Often Appear on the CII R02 Exam
The most common queries we get from R02 students are around investment ratios. This week we’re looking at a couple of the ones that very often appear in the CII R02 exam (as well as the other investment exams).
This article is correct as at 5 September 2023.
The following questions have been adapted from a CII exam guide:
This question involves having to do four small calculations to get to the answer: Price earnings ratio is actually one of the easiest formulas to remember because the clue is in the title. P/E ratio is calculated as price divided by earnings. So,
For Company A
109p/8p = 13.63
For Company B
110p/11p = 10
For Company C
68p/4.5p = 15.11
For Company D
41p/3.2p = 12.81
The company that has the lowest P/E ratio is, therefore, Company B.#CII #R02 Exam Tip: PE Ratio is calculated as Price divided by earnings. Click To Tweet
The next question takes a little bit more thinking:
Dividend cover is a simple way of working out a company’s ability to pay and sustain a dividend. The formula we would use here is profit attributable to ordinary shareholders (the profit after tax, minority interests and preference dividends) by the dividends paid to ordinary shareholders. The tricky part of this question is what are the profits and what are the dividends?
Calculate the profit
The starting point is the £2m profits.
From this, deduct the interest that has to be paid to bondholders of £450,000.
This leaves £1,550,000 of available profit attributable to the ordinary shareholders.
Calculate the dividends
To calculate the dividends being paid, we deduct from the total net profits the amount retained as cash reserves and the interest paid ot bondholders. So,
£2m – £450,000 – £800,000 = £750,000.
We now have the figures we need.
The Dividend Cover Calculation
£1,550,000 of profit divided by £750,000 of dividends gives us the answer of 2.07 which means the dividend is covered 2.07 times by profits.
This figure indicates that the company can maintain the existing dividend, even if profits were to fall in the future.
These questions may only be worth a couple of marks in the exam, but you can be almost certain that questions testing these points will come up, so make make sure you practise them as every little bit helps!
Grab the resources you need!
If you’re studying for your CII R02 exam, and you want to feel confident as you walk into the exam room, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the R02 calculation workbook taster now!