Contract Design Onwards Flashcards
What is the Contract Design Acoronymn?
AMPLE DIRECT FACTORS
What are the factors in the first word of the Contract Design acronymn?
AMPLE Admin systems Marketability Profitibility Level and form of benefits Early leaver benefits
What are the factors in the 2nd word of the Contract Design acronymn?
DIRECT Discretionary benefits Interests and needs of customers Risk appetite Expenses vs charges Competition Terms and conditions of contract
What are the factors in the 3rd word of the Contract Design acronymn?
FACTORS Financing (capital requirements) Accounting implications Consistency with other products Timing of contributions or premiums Options and guarantees Regulatory requirements Subsidies (cross)
What costs do product providers need to think about?
RAPID COST
Renewal admin Asset managements Profits Initial admin Design of contract
Commission
Overheads
Sales/advertising
Terminal e.g. paying benefits
What are the characteristics of a well run project?
PROJECT CRAMPS
Planning (full)
Risk analysis (thorough)
Objectives (clear and reflect customer needs)
Judge (monitor) development
Excellent intercommunication
Conflict management (leads to development)
Thorough testing at all stages
Critical path analysis
Relationships with external suppliers (challenging and stable)
Appropriate pace, so deadlines reach on time
Milestones review schedule
Performance and quality standards are set and measured
Supportive environment
What are the contents of a written strategy document?
PROSE
Policies Roles and responsibilities Objectives Schedule Expected cost
What criteria would be used in an initial appraisal?
SPURS
Synergies with other projects Political constraints Upside potential Results (financial side) Scarce resources
What tools do you use to identify risks?
DR RUB
Desktop analysis Risk analysis at high level Risk register/matrix Upside as well as downside risks identified Brainstorming
What types of risk to the project are there? (identify causes of risk)?
PNE FC PB
Political (opposition from 3rd party, sponsors)
Natural (storms/volcanoes)
Economic (interest rate, curr, infln)
Financial (refinancing issues, incorrect cashflow estimates)
Crime (fraud)
Project (poor design, over-budget)
Business (competition, loss of key personnel, safety)
What are the fat risk mitigation techniques?
FAT SIR
Further research
Avoid
Transfer
Share
Insure
Reduce
How do you evaluate risk mitigation options?
OFFER
Overall impact on distn of NPV's Feasibility and cost Further mitigation required in response to secondary risks Effect on frequency/severity/correlation Resulting secondary risks
What are the contents of an investment submission? (submission for whether to take on project)
FIRM PEN
Financial results (ENPV, distn of NPV’s)
Identifying and analysing key residual risks
Recommendation
Mitigation strategy (best one)
Proposed method of financing it
Effect on investors
Non-Monetary issues, e.g. synergies, political risks
What more do you consider beyond the investment submission?
HO-LAND
Hunch
Overall credibility
Last minute considerations
Allowance for approximations and bias
Nowledge not in possession of those preparing the submission
Doubts over feasibility
What are the types of policies considered in the strategy documents
FLIRTC
Financial Legal IT Risk management Tech Communications
What are the 4 things that should DEFINITELY be included in strategy document?
AIRA
Aims
Issues necessary for implementing project
Risk areas effecting viability
All strategies for dealing with risk areas
What is the definition of a capital project?
Initial expenditure, with future income and running costs (not necessarily a physical asset constructed)
Explain what WACC is?
The cost of raising incremental capital to carry out a project, the rate which a project must earn so shareholder are no better/worse off
Explain the formula for WACC
The weighted average cost of raising capital, with weights set to the optimal proportions of bonholders (debt) and shareholders (equity)
What is the WACC formula?
WACC=MVdebt/(MVdebt+MVeq) * debtholder req return + MVeq/obvious * eq holder req return
What is the debtholder required return?
Real return on IL bonds plus margin for creditworthiness * (1-corp tax)
What is the equity holder required return?
Real return on IL bonds + eq risk prem
The WACC is a real discount rate, what does that mean?
It should be applied to cashfolows in todays values
What do you do to the WACC if project is higher risk than normal?
Increase as higher systemic risk, look at other companies, or take arbitrary increase
