F Rote Flashcards
1
Q
What produces the highest return on assets for a return on assets calculation?
A
The lowest denominator
2
Q
How to calculate net book value?
A
Historic cost minus accumulated depreciation
3
Q
How to calculate return on assets?
A
Net income / total assets
4
Q
Effect on present value if market interest rates fall?
A
The present value of a loan note’s future cash flows will rise and with it the loan note’s market price
5
Q
Why do market interest rates (yields) and market value of fixed income securities (loan notes) have an inverse relationship?
A
The market value of a loan note equals the present value of the fixed future payments it will make to the investor
6
Q
What is the premise of behavioural corporate finance?
A
The idea that behavioural characteristics of managers will distort management judgment
7
Q
An example of an illusion of control?
A
A manager who believes his actions will have direct effect on the stock market
8
Q
What does the dividend valuation model assume? (equity)
A
Cost of equity will remain constant
9
Q
What does the dividend valuation model assume? (share price)
A
Share price will change at the same rate as the dividend
10
Q
What does a low price/earnings ratio indicate?
A
Earnings have limited growth potential
11
Q
What does the P/E ratio indicate?
A
That investors are not anticipating high future earnings growth.
12
Q
What does IFRS report (market value)
A
Carrying amount of equity not its market value
13
Q
Why is market price irrelevant for a bonus issue?
A
An issue of new shares to existing shareholders for zero consideration
14
Q
What does IFRS require for all leases longer than 12 months?
A
To be capitalised
15
Q
What is the underlying assumption of the constant growth model?
A
Share price will grow at the same percentage rate as the dividend.
16
Q
What form of market is when a share price reaction appears to have occurred before information concerning the new project was made public?
A
Suggests a strong form efficient market
17
Q
Share price movements in a weak form market?
A
Appear to follow a random walk
18
Q
Repeating patterns that appear to exist relate to which market type?
A
Completely inefficient
19
Q
Attempting to trade on consistently repeating patterns is unlikely to work which market type?
A
Weak form efficient
20
Q
Majority of share price reaction to news occurs when it is announced which market type?
A
Semi-strong firom efficient
21
Q
Share price reaction occurs before announcements are made public which market type?
A
Strong form efficient
22
Q
Inability to consistently outperform the market and make abnormal gains which market type?
A
Strong form efficient
23
Q
What is useful for an asset-stripping acquisition?
A
An asset-based valuation
24
Q
What are characteristics of a perfect market?
A
Shares are regularly traded and investors are rational
25
When is a control premium paid?
When buying a controlling stake, not a minority holding
26
Do scrip dividends reduce liquidity?
No, as they are paid in shares
27
What is meant by technical analysis?
Work on the basis that past price patterns will be repeated, so future price movements can be predicted from historical patterns
28
Risk linked to extent to which company's profits depend on fixed rather than variable costs (business systematic or financial)
Business systematic
29
Risk that shareholder cannot mitigate by holding a diversified investment portfolio (business systematic or financial)
Business systematic
30
Risk that shareholder return fluctuates as a result of the level of debt the company undertakes (business systematic or financial)
Financial
31
Is DGM very sensitive to changes in growth rate?
YES
32
When can DGM only be used when valuating?
If dividends have been paid or are expected to be paid
33
How to calculate current market value of a convertible bond
HIGHER OF
Sum of the present value of the future interest payments
Present value of the bond's conversion value
34
How can cost of equity be estimated for an unlisted company?
Using CAPM based on the beta of a listed company
35
When is growth expected in an efficient stock market?
When share price gets higher
36
What does dividend irrelevancy theory assume?
No tax
37
When are shares likely to be mispriced?
Information assymetry (where managers and investors have different levels of information)
38
What is meant by noise traders?
Investors who do not make investments on the basis of rational analysis
39
What risk does a good spread of shares minimise?
The risk in the portfolioand should ensure Mr Mays does achieve something approaching the average return for themarket
40
When can a higher PE ratio valuation be justified? (growth)
When the target company has higher growth prospects
41
When can a higher PE ratio valuation be justified? (target)
When the target is in an industry/country where the normal P/E ratio is higher than in the industry/country of the bidder
42
When can a higher PE ratio valuation be justified? (quality assets)
Better-quality assets might also be a reason for offering a price that values the target on a higher P/E
43
Effect of higher gearing ratios on P/E ratio?
Decreases it
44
An investor, who bases all his/her investment decisions on information he/she has gathered from published statements and comments on company plans and performance (which form of market is it)
Weak form efficient
45
What is efficient market hypothesis concerned with?
As to whether share prices are fair
46
What form of market is the existence of information content in dividends contradicts the idea that the stock market is which market?
Strong form market
47
When is a price/earnings ratio method or a discounted cash flow technique would be useful?
When the company is being bought for the earnings/cash flow that all of its assets canproduce in the future
48
What do asset-based measures using NRVs help with?
Identifying a minimum price in a takeover
49
When are asset valuation models useful?
When a company is going to be purchased to be broken up and its assets sold off
50
Should the earnings yield method and the dividend growth model should give similar values for a company?
NO
51
Should market capitalisation represents the maximum value for a company?
NO
52
Is the price/earnings ratio is the reciprocal of the earnings yield?
YES
53
Is the price/earnings ratio should be increased if the companybeing valued is riskier than the valuing company?
NO
54
Do share prices follow a random walk?
YES
55
WHich market forms believe in share prices following a random walk?
Weak, semi-strong and strong
56
Which terms explain why investors don't make rational decisions?
Herding and noise traders
57
What is meant by the market paradox?
Investors must believe that stock markets are inefficient in order for the markets toact in an efficient manner
58
Which market form is "A financial manager believes that if information regarding his organisation is made public, it will not affect the share price as this information is already reflected in the current share price"
Strong form
59
Share price information and strong form efficient markets?
The share price will reflect all information regardless ofwhether it is in the public domain or not
60
Share price information and semi-strong form efficient markets?
The share price would quickly react to the information being made public
61
What valuation is useful for an asset-stripping acquisition?
An asset-based valuation
62
Can workforce be valued
No, as it is intangible
63
Do replacement costs measure deprival value?
No
64
What happens in perfect market shares?
They are regularly traded and investors are rational
65
When will a control premium be paid?
When buying a controlling stake
66
How are scrip dividends paid?
In shares and do not reduce liquidity
67
When buying a minority holding?
Have to pay a higher price per share to take control of company
68
Belief investors can make abnormal returns by studying past share price movements?
Technical analysis
69
When a company is listed (PE ratio)
It is more appropriate to use company's own current P/E ratio
70
What form of risk is linked to the extent to which the company's profits depend on fixed, rather than variable costs?
Business systematic
71
What form of risk is linked to shareholder cannot mitigate by holding a diversified investment portfolio?
Business systematic
72
What form of risk is linked to shareholder return fluctuates as a result of the level of debt company undertakes?
Financial risk
73
Is DGM sensitive to changes in the growth rate?
Yes
74
When can DGM be used?
If dividends have been paid or are expected to be paid
75
When does DGM have no use?
Where dividends are not paid
76
How can cost of equity be estimated for an unlistede company?
Using CAPM based on the beta of a listed company
77
What is expected when there is a high PE ratio?
Company is expected to grow
78
What do shareholders expect in dividend growth?
A steady dividend growth
79
Characteristics of an erratic dividend policy (indifference)
Indifference between dividend and capital growth
80
Effect of information asymmetry?
Shares are likely to be mispriced
81
Is it illegal for companies to issue shares or bonds at a discount?
Shares, not bonds
82
What is investor return tied to?
Risk levels
83
Coupon rates for deep discounted bonds are lower than for conventional bonds?
Yes
84
What happens to bonds when interst rates rise?
Bonds paying out the same coupon rate as before become less attractive and their price will fall
85
What should the theoretical price be in market imperfections?
Should be the market price
86
What is market value of bond prices equal to?
PV of future receipts discounted at the investors’ required return
87
Why is book value a meaningless figure for asset based methods of business valuation?
As it is based on historical costs
88
What do asset based methods of business valuation ignore?
Intangible non-SFP assets such as loyal customer base
89
The most appropriate price for the seller to consider for the sale of the business as agoing concern for asset based methods of business valuation?
The break-up value rather than the replacement value
90
4Ts on dividends?
4Ts will accept a lower level of dividends on the convertible preference sharescompared to normal preference shares
91
4Ts and CAPM?
4Ts are likely to prefer to use CAPM in valuing Loki shares
92
Best valuation method for a capital intensive business?
Net realisable value of assets
93
What does a strong form market imply for shares?
Shares are fairly priced, even taking into account secretinformation
94
What does a semi-strong form market assume for secret information?
Would enable an investor to outperform the market by identifying undervalued companies
95
What information does a semi-strong market incorporate?
All publicly available information in share price
96
What should an investor to when developing a portfolio (CAPM)
Where the anticipated return exceeds CAPM required return
97
What should compensate investing in companies with higher beta factors?
By appropriately higher returns than for lower risk companies
98
How is a decision by owner/managers how to take funds out of a company isusually made?
To reduce tax
99
When is using asset valuations a bad indicator of market value?
For a service industry that is not capital intensive
100
Are DCFs the best valuation method?
Yes
101
Issue with dividend valuation model (valuing majority)?
Is less useful for valuing a majority stake
102
What is net realisable value?
An indicator of the minimum amountthe current owners will want for their company
103
What unreasonable assumption does dividend valuation model make?
That average dividend growth is constant
104
What can insider information not be used for?
Make abnormalgains in a strong form efficient capital market
105
How do share prices react in a weak form efficient market?
Share prices react more slowly than in a semi-strong form efficient one
106
What do shares prices react quickly and accurately to in a semi-strong form efficient market?
Newly-released information about a company
107
What determines the share price?
Capital market supply and demand for shares
108
Is there an obvious pattern when analysing past movements in a share price?
There is no obvious pattern
109
Dividend growth model assumptions (decisions)
Investors make rational decisions
110
Dividend growth model assumptions (constant)
Dividends show either constant growth or zero growth
111
Dividend growth model assumptions (rate)
The dividend growth rate is less than the cost of equity
112
Why might valuations of the equity and loan notes of company be necessary (additional)
Company is planning to go to the market for additional finance
113
Why might valuations of the equity and loan notes of company be necessary (takeover)
The company has received a takeover bid from a rival company
114
What valuations are useful in asset-stripping acquisitions?
Asset-based valuations
115
Do asset based valuations take into future incomes or cash flows
No
116
What is deprival value the lower of in asset based valuations?
Replacement cost and recoverable value
117
How do investors react to news in an efficient market?
Rationally to news, whether expected or not
118
Issue with low trading levels for a company?
Market will struggle to come to an efficient equilibrium price for the shares
119
When is a control premium paid?
On shares when buying a controlling stake
120
How to scrip dividends affect shares?
Increase the liquidity of shares as there are more shares in issue
121
Why is an unlisted company more difficult to value?
As there is no market price to use as a guide
122
Insider trading in a semi-strong form efficient market?
Occur between the time that new information about the business happens and the time that the news is released to the public
123
How is share price based off of in semi-strong form efficient markets?
It is based on publicly available information
124
Is tax rate applied when valuing preference shares?
No
125
Are redeemable preference shares classified as debt or equity?
Debt
126
Are preference shares a good way of raising finance?
No as they are not tax-efficient
127
Issue with preference shares that have a variable rate of dividend?
Are difficult to value
128
Share buyback and number of issued shares?
Decreases the number of issued shares and reduces marketability
129
What does random walk theory suggest?
Share price movements cannot be forecast
130
What can prevent a share price dropping when it has cut its dividend?
Market expectations of good future prospects
131
What does the momentum effect suggest?
Investors must buy shares in the belief that a recent rise in share prices will continue into the future
132
What do share price anomalies undermine?
The perfect capital market theory
133
Advantage to a company of issuing convertible loan notes (interest)
Lower annual interest expense compared to non-convertible loan notes
134
Disadvantage to a company of issuing convertible loan notes (EPS)
Dilution of EPS upon covnersion
135
Disadvantage to a company of issuing convertible loan notes (holder)
Loan note holder can choose whether to redeem or covert the loan notes
136
Advantage to a company of issuing convertible loan notes (equity)
New equity finance raised upon conversion
137
How can governments keep interest rates low (money market)
By purchasing short-dated government bills in the money market
138
Why does the normal yield curve slope upward (compensation)
To reflect increasing compensation to investors for being unable to use their cash now
139
Market price when buying treasury bills?
Their market price rises and the yield (market interest rate) falls
140
What do interest rate options give the holder?
The right but not the obligation to exercise the option.
141
What is an FRA?
A customised contract between a bank and its client and provides a fixed interest rate for a fixed period in the future
142
What are forward rate agreements the interest rate equivalent of?
Forward exchange contracts
143
Why is it not always possible to completely hedge interest rate exposure using interest rate futures?
Fixed contract sizes and durations
144
Does interest income offset interest expenses?
Yes
145
How do share options reward managers?
Due to general stock market momentum rather than the company’s specific performance
146
How can EPS be increased (share)
Share consolidation which has no effect on wealth
147
What are financial intermediaries?
institutions that connect borrowers with lenders
148
How does a crowdfunding platofmr work (investors)
puts investors directly in contact with business ventures, rather than taking deposits
149
What does profit only deduct?
Debt financing costs
150
What sharheolder wealth related to?
PV of future cash flows than profit
151
How does EPS increase for a share repurchase scheme
Shares would then be cancelled, leaving fewer shares in issue
152
What is a share repurchase scheme?
Company uses surplus cash to buy-back its own shares from investors
153
What happens if total value of equity falls?
Leading to an increase in financial gearing
154
What happens for increase in operating profit exceeds the increase in interest expense? (loan note issuance)
Earnings per share
155
Cost of equity in a loan note issuance?
Rise due to increased financial risk
156
Tax shield in a loan note issuance?
Increase because of tax-allowable interest expense
157
What is the discounted payback period?
Time taken for the cumulative net present value to change from negative to positive
158
How would expected NPV only be achieved?
If a project is repeated many times into the future
159
Are government restrictions related to soft or hard capital rationing?
Hard
160
What do asset replacement cycles require?
Cash flows to be discounted using an appropriate discount rate that reflects the risk of the project
161
What cash flows are discounted at the after-tax cost of debt?
Financing cash flows
162
if share prices reflect all information about the company, including material non-public (insider) information. What sort of market is it?
Strong form
163
Overvaluation and PE ratio?
Increases it
164
What does a fall in payout lead to?
Higher reinvestment back into the business and higher growth
165
What may a share buy-back programme lead to?
Lower total earnings as there would be less capital invested in the business
166
If the company is currently below its optimal level of gearing?
Additional debt would reduce WACC
167
If the company is currently above its optimal level of gearing?
Additional debt would increase WACC
168
An investor cannot make abnormal returns by using technical analysis (which form of market)
Weak-form efficient
169
What does allocational efficiency ensure?
Capital markets direct funds to their most productive use
170
Share prices in a semi-strong form efficient market?
Share prices reflect all historic data about the share and all materials publicly available information about the company that issued the share
171
What is an asset-based valuation useful for?
An asset-stripping acquisition
172
When are shares likely to be mispriced?
Where managers and investors have different levels of information (information asymmetry)
173
Is tax rate applied when valuing preference shares?
No
174
Are preference shares a tax-efficient way of raising finance?
No
175
What are redeemable preference shares classed as?
No
176
When are preference shares difficult to value?
When they pay a variable rate of dividend
177
What do market expectations of good future prospects mean?
Share price of a company can rise even when it has cut its dividend
178
What does a share buyback decrease?
Number of issued shares
179
What does the momentum effect suggest?
Investors may buy shares in the belief that a recent rise in share prices will continue into the future
180
What do share price anomalies undermine?
Perfect capital market theory
