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SCS > Application > Flashcards

Application Flashcards

1
Q

PESTEL analysis on Pixlwizz

A

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
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2
Q

KPIs for core values

A

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
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3
Q

3 currency risks?

A

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

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4
Q

What is multilateral netting? What are the benefits?

A

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
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5
Q

3 valuation methods?

A

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

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6
Q

what is an asset based valuation? when is it useful

A

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
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7
Q

what are some alternative asset valuation bases?

A

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

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8
Q

pros and cons of asset based valuations?

A

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
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9
Q

what is an intangible asset?

A

lack physical properties
economic benefit to owner
legal rights or competitive advantage

qualities:

  • identifiable
  • manner of acquisition
  • determinate or indeterminate life
  • transferability
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10
Q

what are the 3 basic ways of valuing intangible assets?

A

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
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11
Q

what is the most popular earnings based company valuation?

A

P/E valuation method

  • simplest as it relies on just 2 figures
  • unlisted can use proxy for P/E ratio
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12
Q

what is the P/E valuation method?

A

P/E ratio to business’ PAT

value of the company’s equity = PAT x P/E ratio

value per share = EPS x P/E

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13
Q

what are the strengths and weaknesses of the P/E method?

A

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
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14
Q

what is the dividend valuation method?

A

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
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15
Q

what are the strengths and weaknesses of a dividend based valuation method?

A

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
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16
Q

what is the discounted cash flow method?

A

future annual after-tax cash flows discounting at appropriate cost of capital
-average sustainable level of capital and working capital

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17
Q

what are some cash flow valuation methods?

A

DVM

DCF
-theoretically best way to value

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18
Q

what is the CAPM?

A

calculate required return from an investment given the level of risk associated with the investment (beta factor)

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19
Q

what is systematic vs unsystematic risk?

A

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

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20
Q

what is the Efficient Market Hypothesis?

A

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
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21
Q

which valuation methods should be used in what scenarios?

A

asset based:capital intensive, significant assets

DVM:valuing minority shareholding

P/E method and DCF method:future prospects, service businesses

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22
Q

what are some pre-bid defences from hostile takeovers?

A

communicate with shareholders

revalue non-current assets

poison pill:make itself less attractive e.g. rights issue

super majority:higher percentage needed for takeover

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23
Q

what are some post-bid defences from hostile takeovers?

A

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

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24
Q

what are some methods of consideration in a takeover?

A

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

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25
Q

what is bootstrapping?

A

when post-acquisition value of target uses parent’s P/E ratio

won’t be able to see same returns

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26
Q

what are some sources of equity finance?

A

rights issue
IPO
placing
shares :ordinary or preference

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27
Q

what are some sources of debt finance?

A

lease vs buy
bank finance:RCFs, money market borrowings
capital markets:commercial papers (ST), bonds (LT)

28
Q

what are other sources of finance?

A 
RE
cash balances
sale and leaseback
grants
debts with or w/o warrants attached
convertible debt
venture capital
business angels
government assistance
29
Q

what is the impact of capital structure on the WACC?

A

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

30
Q

what are the 3 views on capital structure and WACC?

A

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
31
Q

what are what is thin capitalisation?

A

stop excessive tax relief on interes from related partied

32
Q

what is the M&M dividend irrelevancy theory?

A

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
33
Q

what is signalling?

A

investors watch for reduced dividends or skipped payment

read signals and see 2/3 year lag

34
Q

what are the interest of shareholders?

A

clientele effect: want consistency, choose company based on policy

bird-in-hand theory:want certainty of payout over promise of future wealth

35
Q

how can shareholders be rewarded without paying out dividends?

A

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
36
Q

what are some dividend payout policies?

A

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

37
Q

what are the types of financial risk?

A

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
38
Q

what are some sources of political risk? how can they be minimised?

A

sources:

  • exchange control regs
  • import quotas/tariffs
  • minimum shareholding
  • discriminatory actions

minimising exposure

  • research before
  • part ownership
  • agreements/contracts
  • local financing
  • negotiate
39
Q

how can economic risk be mitigated?

A
  • marketing
  • diversify portfolio
  • diversify sources of finance
  • diversify suppliers/customers
40
Q

what are the 3 exchange rate theories?

A

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.

41
Q

what are some internal methods to mitigate transaction risk?

A

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

42
Q

what are some external methods of transaction risk management?

A

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
43
Q

what are the pros and cons of currency forward contracts?

A

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
44
Q

what are the pros and cons of currency options?

A

ads:

  • tradable
  • no transaction costs
  • fixing rates

dis:

  • future events uncontrollable
  • upfront margin
  • not tailored
45
Q

how does interest rate risk compare to currency risk?

A

less volatile

yield curve:shows the difference between interest rates in terms of maturities

46
Q

what are the internal methods of interest rate risk management?

A

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

47
Q

what are the 5 types of external hedging against interest rate risk?

A

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
48
Q

what are the 4 types of interest?

A

fixing instruments=lock in interest rate
insurance=allows some flexibility, more expensive

OTC instrument=bespoke
exchange traded= readymade

49
Q

what is an FRA?

A

fixing and OTC instrument

contract for a future SHORT TERM loan or deposit

borrow for future rise
deposit for future fall

50
Q

what is an IRG?

A

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

51
Q

what is an interest rate future?

A

fixing and exchange traded instrument

similar to FRA

  • standard size
  • bonds for LT
  • STIRS for ST

complex

  • contract size
  • speculators
  • margin/deposit
52
Q

what is an interest rate option?

A

insurance and exchange traded instrument

right to buy or sell IRF

  • flexible premium
  • fixed interest amount
  • given period
  • standardised time and amount
53
Q

what is an interest rate swap?

A

common form of hedging for short and long term

no exchange of principal

floating and fixed IRs offset

54
Q

what are the pros and cons of an interest rate swap?

A

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
55
Q

what is cross currency swapping>? what are the pros and cons?

A

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
56
Q

what is malware?

A

software with malicious intentions

stealing information, stealing money, causing disruption

57
Q

what are some examples of malware?

A

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

58
Q

PW IT core objective?

A

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

59
Q

what are lootboxes?

A

virtual treasure chests
someties banned
gambling/target vulnerable: ETHICS

60
Q

How can ERM be used to manager risks?

A

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

61
Q

what is the purpose of the audit committee?

A

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

62
Q

composition of committees

A

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

63
Q

difference between 3 types of directors?

A

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)

64
Q

what are the 2 types of audit tests?

A

compliance test: test of controls

substantive tests:figures of FS and data e.g. veracity

65
Q

what is scenario planning?

A

study of issues that will be high impact and high uncertainty

try to prepare for them through strategic decisions and risk mitigation

SCS (2 decks)

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