Discussion

Question 1

Prescriptive analytics - pros and cons

Answer 1

Advantages
- able to identify optimum investment decisions
- consider impact of multiple decisions and variables

Limitations
- complex to create
- requires specialist data science skills
- reliability depends on reliability of inputs

Question 2

EBITDA multiple

Answer 2

Enterprise value = EBITDA x EBITDA multiple

Question 3

Enterprise value

Answer 3

MV of equity + pref shares + minority interest + debt - cash

Question 4

SVA - pros and cons

Answer 4

Advantages
- not distorted by accounting policies

Disadvantage
- dominated by terminal value
- dependent on inputs - CFs and g cal

Question 5

Bond vs Rights issue

Answer 5

Bonds
- secured against assets so can’t dispose
- increase gearing
- lower issue costs

Rights issue
- additional div may need to be paid
- reduced gearing
- shares don’t need to be repaid

Other considerations
- impact on cost of capital
- industry gearing, interest cover

Question 6

DVM

Answer 6

PV of benefits from owning share creates share price

Benefit:
1/ receiving dividends
2/ capital gain on share value

Question 7

Sensitivity analysis - pros and cons

Answer 7

Advantages
-identifies areas critical to success of project
- straightforward

Disadvantage
- assumes changes to variables can be made independently
- ignore probability
- does not point to a correct decision
- not an optimising technique

Question 8

Simulation - pros and cons

Answer 8

Advantages
- can change multiple variables at a time
- takes into account probability

Disadvantage
- not used to make a decision
- time consuming and expensive
- assumptions made may be unreliable

Question 9

Earnings valuation

Answer 9

Price = earnings x P/E ratio

Question 10

ICO

Answer 10

Investor received token - share/ utility token to use product/ service

Payment made in crypto

Question 11

Gordon model - cons

Answer 11

• relies on accounting profits
• assumes b and r stay constant
• can be distorted by inflation
• relies on historic info
• assumes all new finance is from equity
• assumes gearing is constant

Question 12

Models to estimate required return to equity

Answer 12

CAPM
DVM
APT (Arbitrage Pricing theory)
Bond yield plus premium

Question 13

Reasons for imperfect hedge

Answer 13

Basis risk - closing out before the expiry date. future price may differ to spot rate at date it closed out.
Rounding - number of contracts

Question 14

Traded vs OTC currency option

Answer 14

OTC
- purchased from a bank
- tailor made, lack negotiability

Traded
- standardised amounts
- can be traded
- not available in every currency

Question 15

DVM assumptions

Answer 15

Shares have value because of dividends
- some companies have deliberately low payout policy

Dividends do not grow/ grows at constant rate

Based on historical data
- useful to consider future market conditions, investor confidence

Question 16

Difference between spot and forward rates

Answer 16

Interest rate parity theory
- equal difference between interest rates available in the 2 currencies

Current spot rate * (1+if)/(1+iuk) = forward rate

• Rf gains possible if rates not aligned
• forward rate is unbiased predictor of future exchange rates

Question 17

Swaps pros and cons

Answer 17

• Lower arrangement costs then terminating existing loan
• Save on interest rates
• Long term unlike FRA, futures, options
• Flexible
• Reversible
• swapping to fixed assists in cash flow planning

Question 18

Expected value - pros and cons

Answer 18

Advantage
- easily understood
- reduces info to single number for a decision option

Disadvantage
- probability may not be accurate
- ignores risk as average gives no indication of the spread of possible results

Question 19

Valuation of start ups and tec

Answer 19

• no track record of profit
• unpredictable market acceptance of product
• unknown competition
• inexperienced managements
• difficult to value digital assets and associated income streams

Question 20

Real options

Answer 20

• Follow on
• abandon
• timing/delay
• growth
• flexibility

Question 21

Environmental costing

Answer 21

A PIE

If possible should be included within NPV

Appraisal
Prevention
Internal failure
External failure