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FM > Discussion Areas > Flashcards

Discussion Areas Flashcards

1
Q

Dividend Policies

A

BS CAT MD

Signalling - change may send out signal to the market

Clientele Effect - change in policy may cause investors to sell shares

Bird in the hand/Traditional theory - prefer dividends now than capital gains later

Tax Effect - some shareholders prefer dividends to capital gains for tax purposes

Agency problem - shareholders don’t want something to happen but have no say

M&M - shareholder wealth not increased by paying dividends, increased by positive npv investments

DIY Dividends - shareholders can sell shares if needed

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2
Q

Real options - definition and examples

A

Project value due to flexibility not accounted for in the DCF:

Follow on - new products

Abandonment - ability to abandon

Timing - one project beginning now, another beginning later

Growth - start small and then grow investment later

Flexibility - option to be flexible (eg manufacturing overseas)

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3
Q

Shareholder Value Analysis

A

SLOWCAT

Sales growth rate
Length of projects (increased is good)
Operating margins
Working capital

Cost of Capital
Asset investment
Tax

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4
Q

Predictive vs Prescriptive Analytics

A

Predictive - linear regression, simulation, correlation
Predictive use historical and current data to create predictions about the future

Prescriptive - optimal outcome using predictions/AI
Prescriptive combine statistical tools with AI and algos to calculate optimal outcome

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5
Q

Hedging methods advantages and disadvantages

A

Forward:

Specifically tailored, avoids downside risk
No secondary market

Future:

Easily tradable, no counterparty risk, cheaper
Imperfect hedge due to standardisation

Money market:

Complex to implement
Might use up lines of credit

Options:

Allows exploitation of upside, no downside risk
No secondary market
Premiums can be expensive

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6
Q

Explain/identify risk of trading overseas (not forex)

A

Political - political actions restricting market
Cultural - product not compatible with overseas culture
Physical - lost/stolen/damaged in transit
Credit - customer default risk
Trade - cancellation of order in transit
Liquidity - unable to finance credit given to customers
Taxes - increased taxation
Remittance - restrictions on remittances

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7
Q

Market price of a bond?

A

=PV(discount rate, nper, interest, redemption value)

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8
Q

Yield of redeemable debt?

A

=RATE(nper, interest, -market price, redemption value)

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9
Q

Factor to multiply by for interest rate options

A

£500,000 x 3/12

125,000

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10
Q

Financing written parts considerations

A

Financial risk - debt = more risk
Analysis and discussion - numbers
Theory

Practical gearing
Ratios
Industry averages

Control
Exit routes
Security
Cost/Cash flows

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11
Q

Sensitivity analysis formula

A

Total NPV / NPV of CFs affected

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12
Q

Capital rationing

A

Hard
External capital markets limit supply of funds

Soft
Firm imposes own internal constraints

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13
Q

Assumptions when using WACC as discount rate

A
  • Constant gearing (if not use APV)
  • Constant systematic business risk (if not use CAPM)
  • Finance is not project specific
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14
Q

APV

A

1) Ungeared ke to calculate base case value (use ungeared ke as discount for npv)

2) PV of tax shield arising from extra debt

3) Less issue costs

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15
Q

Why do you need APV

A

Because financing will change the gearing of the firm therefore changing the WACC

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16
Q

Earnings multiples and company valuations

A

Earnings waterfall:

PBIT
- less interest
PBT
- less tax
Earnings/Profit
- less dividends
Earnings retained

P/E ratio * Earnings

ER Methodology ->

EV = market cap (MV of equity) + pref shares + minority interest + debt - cash

17
Q

Pros and Cons - Asset based valuation

A

Asset based:

Pro - Assets more certain than predicted income

Con - intangibles not included balance sheet (people etc) left out

18
Q

Pros and Cons - Dividend based valuation

A

Pro - Good for minority interest, no dividend policy control
Pro - Easy

Con - Estimating
Con - Finding similar listed companies
Con - Ke estimate
Con - Private company discount

19
Q

Pros and Cons - Earnings based valuation

A

Pro - Good for controlling interest, can extract all the earnings out of a company

Con - Earnings can be erratic
Con - Accounting policies could manipulate earnings figures
Con - Finding similar listed companies
Con - Private company discount

20
Q

Levels of efficient markets

A

Strong:

All information reflected in share price (even secret)
Impossible to beat market
Information affects shares price as soon as it exists

Semi strong:

All publicly available information reflected in share price
Beat market using inside information
Information affects shares price when published

Weak:

Past share price movement information incorporated
Not by using trends - use secret and published information
Information slow to affect share price

21
Q

Prescriptive analytics - pros and cons

A

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

22
Q

Gordon growth model formula

A

g = r x b

r - ARR % on new investment
b - earnings retention %

ARR:
earnings for the year
/
(opening capital (opening re) + share capital)

23
Q

Cost of equity for an acquisition

A

Use targets asset beta with acquirers gearing ratio

24
Q

Intrinsic value of an option

A

current price - exercise price

25
Q

Time value of an option

A

option premium - intrinsic value

26
Q

Intrinsic value is affect by

A

market price
exercise price

(components of formula)

27
Q

Time value affected by

A

Volatility (increase = increase)
Interest rates
Time to expiry

28
Q

Which option/future would an interest rate borrower need

A

Put option
Sell future contracts

29
Q

How to settle futures contract?

A

Calculate profit or loss on contracts

Change PRINCIPAL + PROFIT OR LOSS at future SPOT RATE

30
Q

Interest rate parity theory and equation

A

Risk free gains are not possible if rate are out of alignment.
Exchange rates move in directions to compensate for interest rate/inflation differences.

ave spot * (1 + ave o/s)/(1 + ave uk)

don’t forget to apportion rates!

31
Q

Why is a hedge not 100% effective?

A

Basis risk - futures price not exact same as the underlying product

Contracts rounded

32
Q

Economic risk

A

Economic risk is the variation in the value of the business (i.e. the present value of future cash flows) due to unexpected changes in exchange rates.

33
Q

Formula for a perpetuity

A

CF * ( 1 / r )

growing:

CF * ( 1/ r -g )

FM (1 decks)

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