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1 CFA > Corporate Finance, Derivatives, PM, Alternative Investments > Flashcards

Corporate Finance, Derivatives, PM, Alternative Investments Flashcards

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CFA flashcards
1
Q

Profitability Index

A
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2
Q

Calculation of cost of debt

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3
Q

CAPM

A
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4
Q

Causes of beta differences

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5
Q

Unlevered beta for asset risk

A
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6
Q

Levering beta for a company’s financial risk

A
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7
Q

Break point WACC

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8
Q

Problems with leverage

A
  • Increases volatility of a company’s earnings and cash flows
  • Increases risk of lending to or owning a company (greater discount rate)
  • Valuation affected by degree of leverage
  • Highly leveraged companies have more risk of incurring significant losses during economic downturns
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9
Q

Business risk

A
  • Sales risk: uncertainty with respect to price and quantity of goods and services
  • Operating risk: risk attributed to operating cost structure, greater the use of fixed cost, the greater the operating risk
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10
Q

Degree of operating leverage (Operating risk)

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11
Q

Degree of financial leverage (financial risk)

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12
Q

Degree of total leverage

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13
Q

Break even number

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14
Q

Operating breakeven point

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15
Q

Primary sources of liquidity to firms

A
  • Ready cash balances from payment collections, investment income and liquidation of near-cash securities
  • Short-term funds: trade credit, bank lines of credit
  • Cash flow management: effectiveness of a firm’s cash management systems and practices
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16
Q

Secondary sources of liquidity

A

Likely to affect the normal operations of the firm: renegotiating debt constracts, liquidating company assets, and filing for bankruptcy protection and reorganization

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17
Q

Drags on liquidity

A

When receipts lag creating pressure due to decreased availabiltiy of funds

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18
Q

Pulls on liquiditiy

A

When disbursements are paid too quickly or trade credit availability is limited

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19
Q

Cash conversion cycle

A
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20
Q

Forecasting short-term cash flows

A
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21
Q

Investing short-term funds

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22
Q

Computing yield on short-term investments

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23
Q

Terms of credit

A

Net60 - full amount is due in 60 days

1/10 net 30 - 1% discount if paid within 10 days otherwise full amount is due wihtin 30 days

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24
Q

Bank sources of short-term financing

A
25
Q

Non-bank sources of short-term financing

A
26
Q

Cost of borrowing with commitment fee

A
27
Q

Cost of borrowing with all-inclusive interest rate

A
28
Q

Cost of borrowing with dealer’s and other fees

A
29
Q

Risk Governance

A
  • Risk goals
  • Top-level decisions performed at board level
30
Q

Risk identification and measurement

A

Quantitative and qualitative analytical core of risk management

31
Q

Risk Infrastructure

A

People, processes and technology in place to track risk exposure of the organisation

32
Q

Defined Polices and Processes

A

Risk governance into the day-to-day operations of the company e.g. updating and protecting data, exception handling and escalation

33
Q

Risk Monitoring, mitigation, and management

A

Putting governance, identification, infrastructure and policies togeth such that organisation can identify when risk is not aligned with organisations tolerance

34
Q

Risk Communication

A
  • Communication of risk objective, current risk position within the organisation
  • Feedback is important to allow improvements and updates
35
Q

Strategic Analysis or Integration

A

Effective risk management will imrove the performance of the organisation and increase valuations of the portfolio or organisation

36
Q

Risk Governance

A
  • The foundation for risk management that involves top-down process and guidance that aligns risk management activities of the organization with goals of overall enterprise
37
Q

Elements of risk governance

A
  • Clear Guidance in times of crisis (reactive) and normality (proactive)
  • Enterprise Risk Management - Focus on the risk of the whole organisation. Narrower View unlikely to meet goal of maximising EV
  • Regular Forum to discuss risk framework, best practice is to set up a risk committee
  • Apportionment of responsibility - formal appointment of a responsible executive such as a CRO
38
Q

Risk Budgeting

A

Will quantify and allocate tolerable levels of risk using specific metrics. The risk budgeting process will help implement the risk tolerance decision

39
Q

Conditional VaR

A

Weighted average of all loss outcomes in statistical outcome that exceed the VaR loss

40
Q

Value at risk

A
  • Estimate of minimum loss from a trading position over a fixed time horizon that would be expected with a specified probability
  • Subject to model risk
  • Three elements: an amount in currency, a time period, a probability
41
Q

Risk modification

A

When the acceptable level of risk has been identified in the governance stage, the risk metrics in the previous slides are used to align actual risk with acceptable risk

42
Q

Risk Prevention/Avoidance

A
  • Taking measures to avoid risk altogether
  • Decision on how much risk to accept, given the trade-off between benefits and costs
43
Q

Risk Acceptance

A
  • Self-insurance: bearing a risk considered too costly to remove by external means
  • Diversification accepting risk in the most efficient manner portfolio
44
Q

Risk Transfer

A
  • Passing risk from one party to another in the form of an insurance policy, surety bond or fidelity bond
  • Reinsurance market
  • Deductible helps to combine risk transfer with self-insurance
45
Q

Risk Shifting

A
  • Risk shifting similar to transfer but utilizes derivatives in order to modify the risk from one entity to another
  • Most common method used, example is protective put
46
Q

Corporate Governance and Stakeholder Management Framework

A

Defines rights, responsibilities and powers of each stakeholder group

  • Legal infrastructure: defines rights established by law and ease of legal recourse following a breach
  • Contractual infrastructure: Contractual arrangements in place with stakeholders
  • Organisational infrastructure: Internal systems, governance procedures adopted to manage stakeholder relationships
  • Governmental Infrastructure: REgulation. imposed on companies
47
Q

Cumulative voting

A

Allows shareholder to accumulate and vote all of their shares for a single candidate in an election involving more than one director

Increases the likelihood that minority shareholders are represented by at least one director on the board

48
Q

Policies on related party transactions

A

Mitigate, manage and disclose conflicts of interest regarding related-party transactions

Directors and managers required to disclose conflict they may have with company

49
Q

One-tier board

A

Executive (internal) directors - employed by company

Non-executive directors - provide objective decision making, monitoring and performance assessment

50
Q

Two-tier board

A

Supervisory and management board independent of each other

Increasingly CEO and chairperson separated

51
Q

Staggered board

A

Directors are typically divided into 3 classes that are elected separately in consecutive years

Election process limits the ability to effect a major change of control in the company

52
Q

Board of directors responsibilities

A

Duty of Care & Loyalty

  • Guides and approves strategic direction
  • Reviews corporate performance
  • REsponsible for selecting appointing, and terminating the senior managers
  • Ensure leadership continuity via succession planning
  • Ensure adequate enterprise risk management in place
  • Review proposals for corporate actions
53
Q

Negative screening

A

Excludes companies based on business practices or environmental concerns

EXCLUSIONARY

54
Q

Positive screening

A

Select companies based on ESG criteria, typically relative to peers

Key difference is hierarchy of preference

55
Q

Thematic investing

A

Investing in themes or assets related to ESG

56
Q

Engagement

A

Using shareholder power to influence corporate behaviour around ESG factors

57
Q

Impact investing

A

Investments made with the intention of generating positive and measurable social and env. impact whilst at the same time making financial return

58
Q

Net Cost of Carry

A

Benefits - Costs

-(costs) + benefits

Benefits REDUCE cost of a forward and costs increase it, a cost to carry the forward increases the compensation you pay to the counterparty for holding it

59
Q

Effect of higher proportion of variable costs

A

Higher proportion of variable costs relative to total costs will have a higher AVC curve and closer to ARC curve, so will have a higher required price for shutdown

1 CFA (26 decks)

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