HKSI Licensing Examination Paper 8 (Securities) — All Questions

The price-to-earnings (P/E) ratio, used in fundamental analysis, measures:

• a.The share price relative to earnings per share, indicating how much investors pay per unit of earnings✓
• b.A bond's yield to maturity
• c.The dividend paid per share
• d.A company's total outstanding debt divided by its shareholders' equity, showing its overall financial gearing and leverage

The P/E ratio divides the share price by earnings per share, showing how much the market will pay for each unit of a company's earnings. It is a core valuation metric in fundamental analysis, distinct from gearing or dividend measures.

Technical analysis of a share differs from fundamental analysis in that it primarily studies:

• a.Macroeconomic GDP forecasts
• b.The company's audited balance sheet and profit-and-loss statements over recent financial years
• c.The quality of the firm's management
• d.Past price and volume patterns to forecast future price movements✓

Technical analysis examines historical price and trading-volume data, using charts, trends and indicators to anticipate future movements, whereas fundamental analysis assesses intrinsic value from financial statements and the wider economy.

Spreading a portfolio across different, imperfectly correlated securities primarily aims to:

• a.Increase transaction costs
• b.Reduce unsystematic (specific) risk through diversification✓
• c.Guarantee a fixed positive return regardless of overall market conditions in any given year
• d.Eliminate all possible risk

Diversification reduces unsystematic (company- or sector-specific) risk because losses in one holding may be offset by gains in others. It cannot remove systematic (market-wide) risk or guarantee a return.

A share trades at HK$40 with earnings per share of HK$2.50. Its price-to-earnings (P/E) ratio is:

• a.25 times
• b.100 times
• c.10 times
• d.16 times✓

P/E = price / earnings per share = HK$40 / HK$2.50 = 16 times. The P/E shows how many dollars investors pay for each dollar of the company's annual earnings.

A company earns HK$200 million attributable profit with 50 million shares in issue. Earnings per share (EPS) is:

• a.HK$0.25
• b.HK$10.00
• c.HK$4.00✓
• d.HK$40.00

EPS = profit attributable to shareholders / number of shares = HK$200m / 50m = HK$4.00. EPS is the earnings generated for each ordinary share and is a building block of the P/E ratio.

A share trades at HK$24 and its net asset (book) value per share is HK$8. The price-to-book (P/B) ratio is:

• a.8.0
• b.2.0
• c.3.0✓
• d.1.0

P/B = price / book value per share = HK$24 / HK$8 = 3.0. The P/B ratio compares the market price with the accounting net worth per share; a value above 1 means the market values the firm above its book equity.

A share priced at HK$30 pays an annual dividend of HK$1.50 per share. The dividend yield is:

• a.5.0%✓
• b.2.0%
• c.0.5%
• d.20%

Dividend yield = dividend per share / price = HK$1.50 / HK$30 = 5.0%. It expresses the annual cash return from dividends as a percentage of the current share price.

A company reports net income of HK$120 million on shareholders' equity of HK$800 million. Its return on equity (ROE) is:

• a.6.7%
• b.8.0%
• c.12%
• d.15%✓

ROE = net income / shareholders' equity = HK$120m / HK$800m = 15%. ROE measures how efficiently the company generates profit from the capital its shareholders have invested.

Net income is HK$90 million and total assets are HK$1,500 million. Return on assets (ROA) is:

• a.15%
• b.60%
• c.1.7%
• d.6.0%✓

ROA = net income / total assets = HK$90m / HK$1,500m = 6.0%. ROA shows how efficiently a company uses all of its assets, regardless of how they are financed, to generate profit.

Current assets are HK$600 million and current liabilities are HK$300 million. The current ratio is:

• a.0.5
• b.2.0✓
• c.3.0
• d.1.5

Current ratio = current assets / current liabilities = HK$600m / HK$300m = 2.0. This liquidity ratio indicates whether short-term assets are sufficient to cover short-term obligations.

Current assets are HK$600 million, of which inventory is HK$200 million; current liabilities are HK$250 million. The quick (acid-test) ratio is:

• a.2.0
• b.2.4
• c.1.6✓
• d.0.6

Quick ratio = (current assets - inventory) / current liabilities = (HK$600m - HK$200m) / HK$250m = HK$400m / HK$250m = 1.6. It is a stricter liquidity test that excludes less-liquid inventory.

Revenue is HK$1,000 million and gross profit is HK$300 million. The gross profit margin is:

• a.3.0%
• b.30%✓
• c.70%
• d.300%

Gross profit margin = gross profit / revenue = HK$300m / HK$1,000m = 30%. It shows the proportion of sales left after the direct cost of goods sold, before other expenses.

Revenue is HK$1,000 million and net profit is HK$80 million. The net profit margin is:

• a.8.0%✓
• b.12.5%
• c.18%
• d.80%

Net profit margin = net profit / revenue = HK$80m / HK$1,000m = 8.0%. It measures the percentage of each dollar of sales that remains as profit after all costs, interest and tax.

Total debt is HK$600 million and shareholders' equity is HK$400 million. The debt-to-equity ratio is:

• a.0.67
• b.0.4
• c.2.5
• d.1.5✓

Debt-to-equity = total debt / shareholders' equity = HK$600m / HK$400m = 1.5. This gearing (leverage) ratio shows how much debt the company uses relative to its equity base; higher values imply greater financial risk.

Operating profit (EBIT) is HK$500 million and interest expense is HK$100 million. The interest cover is:

• a.50 times
• b.2 times
• c.0.2 times
• d.5 times✓

Interest cover = EBIT / interest expense = HK$500m / HK$100m = 5 times. It shows how comfortably operating profit can meet interest payments; a higher figure signals lower risk of default.

Earnings per share are HK$3.00 and the dividend per share is HK$1.20. The dividend payout ratio is:

• a.2.5%
• b.250%
• c.40%✓
• d.60%

Dividend payout ratio = dividend per share / earnings per share = HK$1.20 / HK$3.00 = 40%. It is the proportion of earnings distributed as dividends; the remaining 60% is retained in the business.

Using EPS of HK$3.00 and a dividend per share of HK$1.20, dividend cover is:

• a.0.4 times
• b.2.5 times✓
• c.1.2 times
• d.3.0 times

Dividend cover = earnings per share / dividend per share = HK$3.00 / HK$1.20 = 2.5 times. It is the inverse of the payout ratio and shows how many times the dividend is covered by earnings.

A share has a P/E of 20 and an expected earnings growth rate of 10% per year. Its PEG ratio is:

• a.200
• b.2.0✓
• c.10
• d.0.5

PEG = P/E / earnings growth rate (in percent) = 20 / 10 = 2.0. The PEG ratio relates the P/E to expected growth; the higher the PEG, the more expensive the share looks relative to its growth.

A PEG ratio well below 1.0 is often interpreted to mean a share is:

• a.a debt security rather than equity
• b.relatively cheap given its expected earnings growth✓
• c.paying no dividend
• d.certain to fall in price

A PEG below 1.0 suggests the P/E is low relative to the expected growth rate, so the share may be attractively valued for its growth. PEG standardises the P/E by earnings growth.

A relatively high P/E ratio generally reflects:

• a.investors' expectations of stronger future earnings growth✓
• b.a guaranteed loss for shareholders
• c.an imminent dividend cut
• d.that the shares are actually bonds

A high P/E usually indicates that investors are willing to pay more per unit of current earnings because they expect earnings to grow strongly. Growth expectations are a key driver of the P/E multiple.

A share priced at HK$20 pays a total annual dividend of HK$0.80. The dividend yield is:

• a.8.0%
• b.4.0%✓
• c.2.5%
• d.0.4%

Dividend yield = dividend per share / price = HK$0.80 / HK$20 = 4.0%. The yield lets investors compare the income return of shares against other income-producing investments.

Shareholders' equity is HK$1,000 million and there are 200 million shares. Book value per share is:

• a.HK$2.00
• b.HK$5.00✓
• c.HK$20.00
• d.HK$0.20

Book value per share = shareholders' equity / number of shares = HK$1,000m / 200m = HK$5.00. It represents the accounting net worth attributable to each share and is the denominator of the P/B ratio.

Return on equity can be decomposed (the DuPont analysis) into net profit margin, asset turnover and:

• a.financial leverage (the equity multiplier)✓
• b.the P/E ratio
• c.the bond's coupon rate
• d.the dividend yield

The DuPont framework breaks ROE into net margin (profitability), asset turnover (efficiency) and financial leverage (the equity multiplier). This shows the different levers that drive a company's return on equity.

Working capital is calculated as:

• a.revenue minus cost of sales
• b.net income minus dividends
• c.total assets minus total equity
• d.current assets minus current liabilities✓

Working capital = current assets - current liabilities. It measures the short-term resources available to fund day-to-day operations; positive working capital indicates the firm can meet near-term obligations.

A current ratio comfortably above 1.0 suggests a company:

• a.has enough current assets to cover its short-term liabilities✓
• b.is insolvent
• c.pays no corporate tax
• d.has no long-term debt

A current ratio above 1.0 means current assets exceed current liabilities, indicating adequate short-term liquidity to meet obligations as they fall due. It is a basic measure of a firm's short-term financial health.

A company has a market capitalisation of HK$800 million, debt of HK$200 million and cash of HK$50 million. Its enterprise value (EV) is:

• a.HK$950 million✓
• b.HK$550 million
• c.HK$1,050 million
• d.HK$800 million

EV = market capitalisation + debt - cash = HK$800m + HK$200m - HK$50m = HK$950m. Enterprise value estimates the total cost to acquire the whole business, netting off its cash.

If a company keeps its dividend unchanged but its share price falls, the dividend yield will:

• a.rise✓
• b.become negative
• c.stay the same
• d.fall

Dividend yield = dividend / price. With the dividend fixed and the price falling, the ratio increases, so the yield rises. Yield moves inversely to price for a given dividend.

The goal of fundamental analysis is to:

• a.guarantee short-term trading profits
• b.set the government's stamp-duty rate
• c.chart past prices and trading volumes only
• d.estimate a security's intrinsic value from financial and economic data✓

Fundamental analysis seeks a security's intrinsic (fair) value by examining financial statements, ratios, industry conditions and the wider economy, then comparing that value with the market price. It contrasts with technical analysis, which studies price action.

Using the dividend discount (Gordon growth) model, a share expected to pay a dividend of HK$2 next year, with a required return of 10% and constant growth of 4%, has an intrinsic value of:

• a.HK$33.33✓
• b.HK$14.29
• c.HK$50.00
• d.HK$20.00

Gordon model value = D1 / (r - g) = HK$2 / (0.10 - 0.04) = HK$2 / 0.06 = HK$33.33. The model values a share as the next dividend divided by the required return minus the constant growth rate.

A share will pay a HK$3 dividend next year, growing at 6% a year, with a required return of 12%. Its Gordon-model value is:

• a.HK$36.00
• b.HK$25.00
• c.HK$50.00✓
• d.HK$18.00

Value = D1 / (r - g) = HK$3 / (0.12 - 0.06) = HK$3 / 0.06 = HK$50.00. A smaller gap between the required return and the growth rate produces a higher valuation.

A discounted cash flow (DCF) valuation estimates value as:

• a.the total of all dividends ever paid
• b.the latest quoted share price
• c.the historical accounting cost of the company's assets as recorded on its most recent balance sheet
• d.the present value of expected future cash flows, discounted at a required rate of return✓

A DCF values an asset as the sum of its projected future cash flows, each discounted back to today at a rate reflecting their risk and the time value of money. It is a core intrinsic-value technique.

In a DCF, raising the discount rate applied to future cash flows will:

• a.raise the valuation
• b.raise the future cash flows
• c.lower the present value and hence the valuation✓
• d.leave the valuation unchanged

A higher discount rate reduces the present value of each future cash flow, so the overall DCF valuation falls. Discount rate and present value move inversely, reflecting the greater risk or opportunity cost.

An equity's required rate of return generally rises when:

• a.the share undergoes a stock split
• b.the board-lot size changes
• c.its dividend is cut to zero
• d.its risk, and the risk premium demanded by investors, increases✓

The required return compensates investors for risk, so as perceived risk (and the demanded risk premium) increases, so does the required return. A higher required return, all else equal, lowers a share's intrinsic value.

If, in the earlier example (dividend HK$2 next year, required return 10%), the constant growth rate is instead 5%, the Gordon-model value becomes:

• a.HK$66.67
• b.HK$20.00
• c.HK$33.33
• d.HK$40.00✓

Value = D1 / (r - g) = HK$2 / (0.10 - 0.05) = HK$2 / 0.05 = HK$40.00. Raising the growth assumption narrows the (r - g) denominator and increases the valuation from HK$33.33 to HK$40.00.

In a multi-stage DCF, the 'terminal value' represents:

• a.the total cost of the company's annual external audit over the whole explicit forecast period
• b.the dividend paid in the current year
• c.the stamp duty on the shares
• d.the value of the cash flows expected beyond the explicit forecast period✓

Terminal value captures the present value of all cash flows arising after the detailed forecast horizon, often estimated with a perpetuity growth formula. It is typically a large part of a DCF valuation.

A stock's last five daily closing prices are HK$20, HK$22, HK$24, HK$26 and HK$28. Its 5-day simple moving average is:

• a.HK$26
• b.HK$22
• c.HK$28
• d.HK$24✓

5-day SMA = (20 + 22 + 24 + 26 + 28) / 5 = 120 / 5 = HK$24. A simple moving average is the arithmetic mean of the closing prices over the chosen number of periods.

A moving average is used mainly to:

• a.guarantee future prices
• b.measure a bond's duration
• c.smooth out short-term fluctuations and highlight the underlying trend✓
• d.compute the company's dividend

A moving average averages recent prices to filter out short-term noise, making the prevailing trend easier to see. Crossovers of moving averages are also used as trend signals in technical analysis.

A 'golden cross', a bullish technical signal, occurs when:

• a.trading volume falls to zero
• b.the RSI reaches exactly 50
• c.the price falls sharply below a well-established support level on unusually heavy trading volume
• d.a shorter-term moving average crosses above a longer-term moving average✓

A golden cross is formed when a shorter-term moving average rises above a longer-term one, suggesting upward momentum and a potentially bullish trend. The opposite crossover is the bearish 'death cross'.

A 'death cross' is generally read as bearish because it occurs when:

• a.a bond in the portfolio matured
• b.the dividend was just increased
• c.a shorter-term moving average crosses below a longer-term moving average✓
• d.the P/E ratio fell

A death cross forms when a shorter-term moving average falls below a longer-term one, signalling weakening momentum and a possible downtrend. It is the bearish counterpart of the golden cross.

In technical analysis, a 'support' level is a price at which:

• a.trading is suspended by exchange rule
• b.buying interest tends to halt a decline✓
• c.the company pays its dividend
• d.selling pressure usually halts a rise

Support is a price area where demand is strong enough to slow or stop a fall, as buyers step in. If support breaks, technicians often expect the decline to continue to the next support level.

A 'resistance' level in technical analysis is a price at which:

• a.selling pressure tends to halt a price rise✓
• b.the index rebalances its constituents
• c.stamp duty doubles
• d.buying interest halts a fall

Resistance is a price area where selling pressure tends to cap an advance, as sellers become active. A decisive move above resistance (a breakout) is often read as a bullish signal.

An uptrend is technically defined by a series of:

• a.higher highs and higher lows✓
• b.equal daily closing prices
• c.days with zero trading volume
• d.lower highs and lower lows

An uptrend is characterised by successively higher peaks (higher highs) and higher troughs (higher lows), showing that buyers remain in control. A sequence of lower highs and lower lows defines a downtrend.

A Relative Strength Index (RSI) reading above 70 is commonly taken to indicate a market that is:

• a.overbought✓
• b.fairly valued
• c.in liquidation
• d.oversold

An RSI above 70 traditionally flags an overbought condition, where the price may have risen too far too fast and could be due for a pullback. The RSI is a momentum oscillator ranging from 0 to 100.

An RSI reading below 30 is generally interpreted as:

• a.oversold✓
• b.overbought
• c.an imminent bond default
• d.a dividend signal

An RSI below 30 traditionally indicates an oversold condition, where selling may have been excessive and a rebound could follow. Together with the 70 level, it frames the RSI's overbought/oversold bands.

A 'head and shoulders' top pattern is usually regarded as:

• a.a dividend announcement
• b.a reversal pattern warning that an uptrend may be ending✓
• c.a bond yield curve
• d.a continuation pattern confirming the uptrend

A head and shoulders top is a classic reversal pattern: after an uptrend, three peaks (with the middle 'head' highest) and a break of the neckline suggest the trend is turning down. It is one of the best-known chart reversal formations.

Technical analysts often use trading volume to:

• a.set the coupon on a bond
• b.determine the dividend record date
• c.calculate earnings per share
• d.confirm the strength or conviction behind a price move✓

Rising volume accompanying a price move is taken as confirmation that the move has conviction, whereas a move on thin volume is viewed as less reliable. Volume analysis complements price-pattern study.

When a price decisively rises above a well-established resistance level on strong volume, technicians call this a:

• a.breakout, often read as bullish✓
• b.reverse split
• c.margin call
• d.dividend

A breakout occurs when the price pushes through a resistance level, and one confirmed on strong volume is often interpreted as a bullish signal of a new advance. Old resistance may then act as new support.

A key assumption of technical analysis is that:

• a.dividends and reported earnings are wholly irrelevant to a security's true intrinsic value
• b.market price action tends to repeat and already reflects known information✓
• c.only balance-sheet data matter
• d.interest rates never change

Technical analysis assumes that all relevant information is already reflected in price, that prices move in trends, and that historical patterns tend to repeat. This is why technicians study charts rather than financial statements.

A stock closed at HK$16, HK$18 and HK$20 over the last three days. Its 3-day simple moving average is:

• a.HK$54
• b.HK$16
• c.HK$18✓
• d.HK$20

3-day SMA = (16 + 18 + 20) / 3 = 54 / 3 = HK$18. The simple moving average is the mean of the closing prices over the selected number of days.

A moving average is described as a 'lagging' indicator because it:

• a.is based on past prices and reacts only after the price has moved✓
• b.predicts future prices with certainty
• c.leads the market by exactly one week
• d.ignores all past data

A moving average is computed from historical prices, so it follows price changes rather than anticipating them, which is why it is called a lagging indicator. It confirms trends after they have begun.