Application Flashcards
PESTEL analysis on Pixlwizz
Political
- influence of current government
- PW is multinational
- mitigates risk
- Westland effects most important
Economic
- macro variables: growth of economies and interest rates
- developed economy
- leisure time and disposable income
- game demand cheaper than consoles
Social
- society expectations
- ethics:violence, offensive language, taste for physical vs virtual, obesity due to screen time
- internet access
- from social media, newspapers
Technology
- social monitoring:social media for trends
- maintaining contract with console developers
- monitor competition
- AR/VR growth
Environmental
- energy efficiency of products
- move to digital means reduced manufacturing
Legislation
- review systems laws
- keep a lookout
- interconnected with political
- GDPR
- copyright
- licensing laws
KPIs for core values
Imagination
- MAU-customer satisfaction
- K-factor:new players being attracted
Innovation
- number of games sold
- positive game reviews
Commitment
- staff satisfaction survey
- staff suggestions resulting in new games/gameplay
Teamwork
- 360 appraisal: appraisal process
- feedback process
3 currency risks?
Economic:long term impact of exchange rate on cash flow, interest rate and inflation
Transaction risk: transaction vs settlement changes, material, arises from physical conversion of cash, short term
Translation risk:translating recorded values e.g. AL or I/E at year end, affects RE e.g W$12m from 2020, affects head office most
What is multilateral netting? What are the benefits?
defn
- internal currency risk management
- instead of subs settling individually, transactions are recorded through interco ledgers and settled via single payment
benefits
- reduction of transaction costs:less conversions and transactions
- reduction of currency risk: can choose timing
3 valuation methods?
asset based
- use net assets
- hard with high levels of intangible assets
Earnings based
-projected earnings give indications
cash flow based
-PV of its future cash flows discounted at an appropriate cost of capital
what is an asset based valuation? when is it useful
method
-sum of the value of assets, deduct borrowings
most useful when company is being broken up
- don’t need intangibles
- good for capital intensive
what are some alternative asset valuation bases?
book value:suffers due to depreciation policy and write downs, little used
replacement value:cost to replace assets, good for bidder
net realisable value:priced at best price obtainable in the market, minimum selling price for vendor, include tradeable investments
pros and cons of asset based valuations?
pro:
- readily available
- minimum value of entity
cons:
- future profitability expectations ignored
- SOFP depend on accounting conventions which may lead to valuations being different from market valuations
- difficult to allow for the value of intangible assets
- one dimensional
what is an intangible asset?
lack physical properties
economic benefit to owner
legal rights or competitive advantage
qualities:
- identifiable
- manner of acquisition
- determinate or indeterminate life
- transferability
what are the 3 basic ways of valuing intangible assets?
market approach
- compared to identical that has recently been traded
- hard to obtain public information
cost approach
- historical cost
- easy to establish, replacement cost
- ignore future benefits
income approach *
- best method
- cash flow generated
- discounted amount
- hard to distinguish individual cash flows from whole company
what is the most popular earnings based company valuation?
P/E valuation method
- simplest as it relies on just 2 figures
- unlisted can use proxy for P/E ratio
what is the P/E valuation method?
P/E ratio to business’ PAT
value of the company’s equity = PAT x P/E ratio
value per share = EPS x P/E
what are the strengths and weaknesses of the P/E method?
strength:
- commonly used and well understood
- relevant for valuing a controlling interest in an entity
- easy to obtain information needed
weaknesses:
- based on accounting profit not cash flows
- difficult to identify suitable P/E ratio, especially for unlisted
- difficult to establish the relevant level of suitable earnings
what is the dividend valuation method?
value is the PRESENT VALUE OF FUTURE DIVIDEND EARNINGS, discounted at the shareholders’ required rate of return
- links to NPV
- give same value as discounting cash flows to equity at the cost of equity
- use DVM formula
what are the strengths and weaknesses of a dividend based valuation method?
pro:
- based on present value of the future dividend income stream
- useful for valuing a minority shareholdings where you own a few shares but don’t have much control
con:
- difficult to forecast dividends and dividend growth, espeically in perpetuity
- for unlisted, hard to determine the cost of equity
- for unlisted, dividend policy with constant growth is unlikely
what is the discounted cash flow method?
future annual after-tax cash flows discounting at appropriate cost of capital
-average sustainable level of capital and working capital
what are some cash flow valuation methods?
DVM
DCF
-theoretically best way to value
what is the CAPM?
calculate required return from an investment given the level of risk associated with the investment (beta factor)
what is systematic vs unsystematic risk?
unsystematic: specific to the company, eliminate through diversification
- B geared= 0.71: small difference from systematic, business risk low
systematic: market risk, macro effects, cant eliminate
- B ungeared = 0.54:low level of risk
what is the Efficient Market Hypothesis?
weak form of efficiency
- share price reflect past trends
- hard to predict future market movements
- past trades sign of bid
semi-strong form of efficiency
- share price reflect all public information
- suggestion of bid
strong form of efficiency
- a share price reflects all information, even non-public
- insider trading, strong signal of news
which valuation methods should be used in what scenarios?
asset based:capital intensive, significant assets
DVM:valuing minority shareholding
P/E method and DCF method:future prospects, service businesses
what are some pre-bid defences from hostile takeovers?
communicate with shareholders
revalue non-current assets
poison pill:make itself less attractive e.g. rights issue
super majority:higher percentage needed for takeover
what are some post-bid defences from hostile takeovers?
appeal to their own shareholders
attack the bidder:management style, strategy, say it’s a bad fit
White Knight:approach a better parent
Counterbid/Pacman:offer to take them over
Refer bid to competition authorities
what are some methods of consideration in a takeover?
cash:fixed sum per share, better for smaller
share exchange:parent issues new shares and exchanges with target, all end up with parent shares
-large acqu always involve this
earn-out:management receive portion of consideration after buy out, initial amount then balance deferred, used when disagreement as long term, set targets
what is bootstrapping?
when post-acquisition value of target uses parent’s P/E ratio
won’t be able to see same returns
what are some sources of equity finance?
rights issue
IPO
placing
shares :ordinary or preference
what are some sources of debt finance?
lease vs buy
bank finance:RCFs, money market borrowings
capital markets:commercial papers (ST), bonds (LT)
what are other sources of finance?
RE cash balances sale and leaseback grants debts with or w/o warrants attached convertible debt venture capital business angels government assistance
what is the impact of capital structure on the WACC?
downward force on WACC: debt is cheaper, no obligation or tax
upward force on WACC: cost of equity (Ke) increase due to to financial risk
what are the 3 views on capital structure and WACC?
traditional view
- u shaped WACC
- shareholders want higher returns as gearing increases
M&M without tax
- unrealistic
- WACC constant
- no difference between debt or equity finance
- shareholders want max NPV and wealth
- all firms experience identical market pressure
M&M with tax
- realistic
- geared companies have advantage as they pay less tax so higher MV and lower WACC
- WACC slopes downwards
what are what is thin capitalisation?
stop excessive tax relief on interes from related partied
what is the M&M dividend irrelevancy theory?
pattern irrelevant as they will continue to get positive NPV and wealth so share price increases
assumptions unrealistic:
- no taxes on income
- no transactions costs
what is signalling?
investors watch for reduced dividends or skipped payment
read signals and see 2/3 year lag
what are the interest of shareholders?
clientele effect: want consistency, choose company based on policy
bird-in-hand theory:want certainty of payout over promise of future wealth
how can shareholders be rewarded without paying out dividends?
scrip dividend
- free bonus share
- no effect on wealth
- cash retained
- tax advantage
- EPS decrease
share repurchase
- return cash surplus when no projects
- can use to privatise
- EPS rises
one-off dividend
- same effect as repurchase
- sends signal
- EPS decreases as no/ shares are the same
what are some dividend payout policies?
stable: fixes or constant growth, for mature firms
- ratchet pattern: dividend payout lags earnings
constant payout ratio:% of equity, unpredictable CF
0 dividend: reinvest RE, common in growth phase, share price high
residual dividend: paid if no NPV projects, common in growth phase
what are the types of financial risk?
political
-overseas investments
interest rate
- gains or losses due to change in interest rate
- floating and fixed both pose risk
- refinancing risk
currency risk
- economic, translation and transaction risk
- future movements in exchange rate
what are some sources of political risk? how can they be minimised?
sources:
- exchange control regs
- import quotas/tariffs
- minimum shareholding
- discriminatory actions
minimising exposure
- research before
- part ownership
- agreements/contracts
- local financing
- negotiate
how can economic risk be mitigated?
- marketing
- diversify portfolio
- diversify sources of finance
- diversify suppliers/customers
what are the 3 exchange rate theories?
Purchasing Power Parity:higher inflation, currency worth less, exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. … The basis for PPP is the “law of one price” due to arbitrage
HIGHER INFLATION, CURRENCY DEPRECIATES
Interest Rate Parity: returns from investing in different currencies should be the same, regardless of the level of their interest rates
HIGHER INTEREST RATE, FALL IN CURRENCY
International Fisher Effect: countries with higher nominal interest rates experience higher rates of inflation, which will result in currency depreciation against other currencies.
what are some internal methods to mitigate transaction risk?
invoice in home country
leading and lagging:paying early or delaying when rates are best
offsetting
- matching:A & L in same currency
- netting:use foreign bank accounts to match
- pooling:managing cash through a central account, avoid individual overdraft
countertrade: exchange goods of similar value, not common due to tax reasons
what are some external methods of transaction risk management?
netting
- settle in cycles
- intercompany payments to each sub
- low transaction and conversion costs
currency forward contracts
- MOST COMMON
- settles at future date
- bank takes risk
- premium or discount charged
money market hedge
- mirror future A&L
- payments:borrow in domestic and use deposit to pay supplier
- receipt:borrow in PV of future earning, settle with receipt
currency futures
- standardised
- traded
- in few currencies
currency options
- no obligation
- premium for flexibility
swaps
- swap for period
- swap back later
what are the pros and cons of currency forward contracts?
buy/sell specific amount at a future rate
ads:
- can tailor
- fixes FX rate
- simple
- accessible
- low cost
cons:
- obligation to pay
- no upside potential
what are the pros and cons of currency options?
ads:
- tradable
- no transaction costs
- fixing rates
dis:
- future events uncontrollable
- upfront margin
- not tailored
how does interest rate risk compare to currency risk?
less volatile
yield curve:shows the difference between interest rates in terms of maturities
what are the internal methods of interest rate risk management?
smoothing: balance between fixed rate and floating rate borrowing
matching: A&L have common interest rate so move together
netting: aggreagate all positions to determine net exposure
what are the 5 types of external hedging against interest rate risk?
forward rate agreements :fixing and OTC
interest rate guarantees:insurance and OTC
interest rate futures:fixing and exchange traded
interest rate options:insurance and exchange traded
swaps
- interest rate swap:MOST COMMON
- cross currency swap
what are the 4 types of interest?
fixing instruments=lock in interest rate
insurance=allows some flexibility, more expensive
OTC instrument=bespoke
exchange traded= readymade
what is an FRA?
fixing and OTC instrument
contract for a future SHORT TERM loan or deposit
borrow for future rise
deposit for future fall
what is an IRG?
option to exercise i.e. option on an FRA
- more expensive than FRA
- if favourable movement:lapse option
to borrow:buy FRA/IRG call
to deposit:sell FRA/IRG put
what is an interest rate future?
fixing and exchange traded instrument
similar to FRA
- standard size
- bonds for LT
- STIRS for ST
complex
- contract size
- speculators
- margin/deposit
what is an interest rate option?
insurance and exchange traded instrument
right to buy or sell IRF
- flexible premium
- fixed interest amount
- given period
- standardised time and amount
what is an interest rate swap?
common form of hedging for short and long term
no exchange of principal
floating and fixed IRs offset
what are the pros and cons of an interest rate swap?
pro:
- no underlying borrowing
- protects fair value of fixed rate debt instruments
- cheaper financing
con:
- may lock in unfavourable rates
- creditworthiness of bank not guaranteed
what is cross currency swapping>? what are the pros and cons?
swap a currency for a fixed period then swap back at same rate at the end, usually with bank
pros:
- changes currency profile of debt
- may help reduce interest costs so can raise debt more easily
- part of managing currency strategy
cons:
- bank might default
- principals exchanged
- cash flow in different currency is default of bank
what is malware?
software with malicious intentions
stealing information, stealing money, causing disruption
what are some examples of malware?
ransomware: access for money
botnets: network of private computer infected
trojans:seems useful but secretly includes malware
malvertising:ads with malware written inside
viruses;replicate and infect, destroy servers
spyware:spy on victim’s software, steal IP
PW IT core objective?
availabilityL 24/7 in all environments, service contract if denied
confidentiality:of customers, IP
integrity of data: veracity, no modification
integrity of processing: consistent with policies and procedures
what are lootboxes?
virtual treasure chests
someties banned
gambling/target vulnerable: ETHICS
How can ERM be used to manager risks?
Enterprise risk management
systematic way
8 components of the process:identification, risk response
4 objectives of risk types:strategic, operations, reporting and compliance
4 levels of the organisation:entity, division, business unit and subsidiary
what is the purpose of the audit committee?
monitor and review risk management and internal control system of PW
create internal audit and appoint internal auditors
audit committee review process of risk committee reviewing and managing risks
appoint and remove external auditors
composition of committees
2+ NEDs for larger companies
remuneration: NEDs only
audit: only NEDs/INEDs due to self review threat, need someone with accounting/more recent experience
nomination: can have mix, majority should be NEDs
risk: can have mix, majority should be NEDs
difference between 3 types of directors?
executive: dual role of employee and director, inside perspective
non-exec:only sit on the board, may hold shares
independent non-exec:sit on board, complete independence especially financially (no shares)
what are the 2 types of audit tests?
compliance test: test of controls
substantive tests:figures of FS and data e.g. veracity
what is scenario planning?
study of issues that will be high impact and high uncertainty
try to prepare for them through strategic decisions and risk mitigation
