Corporate Finance, Derivatives, PM, Alternative Investments Flashcards
1
Q
Profitability Index
A
2
Q
Calculation of cost of debt
A
3
Q
CAPM
A
4
Q
Causes of beta differences
A
5
Q
Unlevered beta for asset risk
A
6
Q
Levering beta for a company’s financial risk
A
7
Q
Break point WACC
A
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
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
10
Q
Degree of operating leverage (Operating risk)
A
11
Q
Degree of financial leverage (financial risk)
A
12
Q
Degree of total leverage
A
13
Q
Break even number
A
14
Q
Operating breakeven point
A
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
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
17
Q
Drags on liquidity
A
When receipts lag creating pressure due to decreased availabiltiy of funds
18
Q
Pulls on liquiditiy
A
When disbursements are paid too quickly or trade credit availability is limited
19
Q
Cash conversion cycle
A
20
Q
Forecasting short-term cash flows
A
21
Q
Investing short-term funds
A
22
Q
Computing yield on short-term investments
A
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
24
Q
Bank sources of short-term financing
A
25
Non-bank sources of short-term financing
26
Cost of borrowing with commitment fee
27
Cost of borrowing with all-inclusive interest rate
28
Cost of borrowing with dealer's and other fees
29
Risk Governance
* Risk goals
* Top-level decisions performed at board level
30
Risk identification and measurement
Quantitative and qualitative analytical core of risk management
31
Risk Infrastructure
People, processes and technology in place to track risk exposure of the organisation
32
Defined Polices and Processes
Risk governance into the day-to-day operations of the company e.g. updating and protecting data, exception handling and escalation
33
Risk Monitoring, mitigation, and management
Putting governance, identification, infrastructure and policies togeth such that organisation can identify when risk is not aligned with organisations tolerance
34
Risk Communication
* Communication of risk objective, current risk position within the organisation
* Feedback is important to allow improvements and updates
35
Strategic Analysis or Integration
Effective risk management will imrove the performance of the organisation and increase valuations of the portfolio or organisation
36
Risk Governance
* 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
Elements of risk governance
* 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
Risk Budgeting
Will quantify and allocate tolerable levels of risk using specific metrics. The risk budgeting process will help implement the risk tolerance decision
39
Conditional VaR
Weighted average of all loss outcomes in statistical outcome that exceed the VaR loss
40
Value at risk
* 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
Risk modification
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
Risk Prevention/Avoidance
* Taking measures to avoid risk altogether
* Decision on how much risk to accept, given the trade-off between benefits and costs
43
Risk Acceptance
* Self-insurance: bearing a risk considered too costly to remove by external means
* Diversification accepting risk in the most efficient manner portfolio
44
Risk Transfer
* 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
Risk Shifting
* 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
Corporate Governance and Stakeholder Management Framework
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
Cumulative voting
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
Policies on related party transactions
Mitigate, manage and disclose conflicts of interest regarding related-party transactions
Directors and managers required to disclose conflict they may have with company
49
One-tier board
Executive (internal) directors - employed by company
Non-executive directors - provide objective decision making, monitoring and performance assessment
50
Two-tier board
Supervisory and management board independent of each other
Increasingly CEO and chairperson separated
51
Staggered board
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
Board of directors responsibilities
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
Negative screening
Excludes companies based on business practices or environmental concerns
EXCLUSIONARY
54
Positive screening
Select companies based on ESG criteria, typically relative to peers
Key difference is hierarchy of preference
55
Thematic investing
Investing in themes or assets related to ESG
56
Engagement
Using shareholder power to influence corporate behaviour around ESG factors
57
Impact investing
Investments made with the intention of generating positive and measurable social and env. impact whilst at the same time making financial return
58
Net Cost of Carry
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
Effect of higher proportion of variable costs
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
