Exam prep Flashcards
Money rate =
Real rate x general inflation
EAC
Equivalent annual cost = NPv of one cycle / AF for cycle
Name SVA key drivers of value
Sales growth rate Life of projected cash flows Operating profit margins Working capital ( investment) Tax rate (Corporation) Non current Asset (investment) Cost of Capital
What is SVA as a concept?
Process of analysis the activities of business to identify how they may increase shareholder wealth
Name follow on options
Timing, abandonment , follow on, growth , flexibility
Sensitivity formula
NPV of project / PV of cash flows subject to uncertainty
Strengths of Sensitivity analysis
Facilitates judgement
Identity areas critical to success of project
Not complicated to understand
Weakenesses of Sensitivity
One factor at a time
Assumed variables change independently
Identified how far but not probability
Does not point to a correct decision
Simulation advantages
Gives probabilities
Useful for problems that cannot be solved analytically
Limitations of Simulation
Does not make decision
Expensive
Monte Carlo needs assumptions about variables and probably distributions
Unsystematic risk and systematic risk
Can be eliminated by diversification
And cannot be eliminated
Beta (E) in CAPM measures systematic risk
Risk free carries no
Weaknesses iN CAPM
Company shareholders may not be diversified Shareholders not only parucupants CAPM depends on a perfect market Need to determine risk free rate Errors in stat analysis
FRA advantages and disadvantage
Only available on loans 500k
Difficult to obtain for long periods of time
Remove upside
No secondary market
Protect borrower from movement
Tailor made
Why do we hedge
Costs Exposure Risk attitude Portfolio effect Insolvency risk
PPP?
Theory that long term exchanges rates between countries represents purchase power of that country
Currency options? Adv and Disavd
Upside risk
Tailor made
Not available in all currencies
Premium
No secondary market
Three methods to raise equity
Retained earnings
Rights issue
New issue
Underwriting
Process is here in exchange for fixed fee an institution will purchase shares not subscribed for by the public
Behaviour finance
Overcongince Narrow forming Cognitive dissonance Availability bias Conservatives
What affects option price
Time period to expiry
Volatility of share
Risk free interest rate
g=rb meaning
R is the return in equity
And
B is the proportion of profits retained
When can WACC also be used for a project
Proportions of debt and equity are not to be changed
Business risk is not to be changed
Finance is not specific to the project
Name 5 Dividend Policies
M&M irrelevance - patter of dividends over time is irrelevant
Traditional theory - cash in hand is better as certain than later
Signalling - investors unsure on companies future
Clientele - good dividends policies attract investors
Cash availability - unable to pay now
Valuation - NRV
Advantages
Simple
Assets certain than income
Asset stripper
Valuation - NRV
Disadvantages
Book value out of date
Ignores future
Service businesses and Digital assets underrepresented
P/E
Advantages and disadvantages
Reflects stock market
Using industry average may not be right
Earnings manipulated by accounting policies
Past does not equal future
Enterprise methods
Ignored capex and tax
Past earnings not predict future
Industry average not useful
Takes net debt into account
enables comparison
Adjusted for non marketability
Enterprise value and equity forimuka
Enterprise value x EBITDA
Equity = EV - net debt + cash
