F3 (New) Flashcards
Not for profit value for money measures:
Economy = spend less
Efficiency = spend well (maximum out of resources)
Effectiveness = spend wisely (don’t stretch resources so far that objectives can’t be met)
Equity = spend fairly
Dividend Irrelevancy Theory is…
as long as org invests in positive NPV projects, shareholder wealth will increase
Clientele Effect
consistent divi policy will attract a clientele of shareholders who like that approach
Bird-in-the-Hand
some prefer divi now rather than promise of uncertain divis in the future
Signalling effect
Divis give signal about performance of company so can result in selling of shares
Impact on shareholder wealth of…
scrip dividends
Share repurchase
Scrip dividends - no impact on shareholder wealth
Share repurchase - same impact as if divi were paid
VAR =
95% Z score =
99% Z score =
VAR = Z score x standard deviation
95% Z score = 1.645
99% Z score = 2.33
Allocating interest - sum of digits method
Year 1: n / { n(n+1) / 2 } x total interest
Year 2: n - 1 / { n(n+1) / 2 } x total interest
Year 3: n - 2 / { n(n+1) / 2 } x total interest
Operating profit margin =
Gross profit margin =
Operating profit / revenue x100
Gross profit / revenue x100
ROE =
ROCE =
ROE = NET profit / equity x100
ROCE = Op profit / cap employed x100
EPS =
Profit AFTER tax, interest & pref divis / no. shares
P/E =
share price / EPS
Divi Cover =
EPS / DPS
Divi Yield =
DPS / share price
Total annual return to investors =
{(Closing share price - opening share price) + divi} / opening share price
GRI
sustainability reporting standards 3 key perspectives:
Economic, environmental, social
GRI
Universal Standards:
Foundation principles
General disclosures
Material topics
Sector standards
Topic standards
Universal Standards: must be applied by all
Foundation principles - report content & guidance
General disclosures - contextual details
Material topics - how material topics are managed
Sector standards: for specific industries
Topic standards: specific topic standards selected
GRI
8 reporting principles
- accuracy
- clarity
- completeness
- timeliness
- balance
- comparability
- sustainability context
- verifiability
Integrated reporting
guiding principles for preparation
- Strategic focus & future orientation
- connectivity of info
- stakeholder relationships
- materiality
- conciseness
- reliability & completeness
- consistency & comparability
Integrated reporting
8 content elements to include
- org overview & external environment
- Governance
- Business model
- Risks & opportunities
- Strategy & resource allocation
- Performance
- Outlook
- Basis of preparation & presentation
GEARING
Traditional view
1958 M&M no tax theory
1963 M&M with tax theory
Traditional view - there is an optimum gearing level where WACC is minimised and value of co. is maximised
1958 M&M no tax theory - WACC is constant at all levels of gearing
1963 M&M with tax theory - WACC reduces as gearing increases due to the tax relief of debt
M&M equation for Keg=
Keg = Keu + (Keu - Kd) {Vd(1-t) / Ve}
M&M equation for WACC =
WACC = Keu x {1 - (Vd x t / Ve + Vd )}
Equation to degear and regear beta between proxy & actual company
Bu = Bg { Ve / Ve+Vd(1-t) }
CAPM to find Ke using beta
Ke = Rf + B(Rm - Rf)
Rf = risk free rate
Rm = avg. market return
Rm - Rf = market premium/risk premium
Business Valuation: P/E
total value of equity = PE ratio x earnings
earnings = PAT less pref divis and adjust for one off items
+ easy & quick
+ good for MAJORITY purchase
- hard to find suitable P/E ratio
- are profits sustainable?
- subjective profits, not cashflows
Business Valuation - Discounted Cashflows
To ALL investors:
EXCL interest
disc @ WACC
NPV = equity + debt
To EQUITY ONLY:
INCL interest
disc @ Ke
NPV = equity only
+ best method, time value considered
+ gives maximum value
- hard to forecast CFs & determine disc rate
- assumes rates & tax stay constant
Calculating perpetuities =
x by 1 / r-g
x by DF from prior year
Business Valuation - Net Assets
Net assets per SFP (assets - liab), then adjust for revaluations
To incl. intangibles:
PBIT X
tang assets x avg. return (X)
——–
Extra profit due to intangibles X
Tax (X)
——–
Post tax extra profit X
CIV = post tax extra profit x 1 / disc rate
Value of entity = CIV + tangible assets
+ minimum value
+ useful for liquidation
+ valuation readily available
- future profitability ignored
Business Valuation - DVM
Value per share = D1 / Ke-g
If not given g…
1+g = (Divi now / Divi before)^1/n
OR
g = rate of return x % profits retained
+ good for MINORITY purchase
- hard to find suitable Ke & forecast divis
Yield adjusted TERP =
1 / (n+1) x {(N x cum rights price) + issue price x {yield new / yield old)}
TERP =
(value of shares before issue + cash raised + NPV of project ) / no. shares after issue
To calc growth rate of given figures
Sq root ^no. years (ending figure / starting figure)
Interest Rates = FRAs & IRGs
(IRG is option to fix RFR)
HIGH - loan, call, buy FRA, use caps
LOW - Deposit. put. sell FRA, use floors
Interest Rates - Futures & Options
- Buy (deposit, call, use floor) OR sell (loan, put, use cap)
- Date
- No. contracts = (amount / contract size) x (length / 3 months)
- Initial margin = margin rate x no. contracts x contract size x 3/12
(made back if sold, paid if bought)
Forward contracts (FX)
CONTRACTUALLY BINDING
Take spot rate
HIGH - receiving from customer, sell
LOW - paying supplier, buy
Add a disc
Subtract a premium
= forward rate
Futures (FX)
- buy or sell (check contract currency)
- Date ( mar, jun, sep, dec)
- no contracts = amount of transaction / contract size
Note translate @ FUTURES PRICE
- Initial margin = no. contracts x margin per contract
Note convert @ TODAYS SPOT
Options (FX)
- Buy (call) or Sell (Put)
- Date
- no contracts = amount of transaction / contract size
Note convert @ STRIKE PRICE
- Premium = cents per pound x no. contracts x contract size = USD!
Note: convert @ TODAYS SPOT
Money market hedges
Paying Fx to supplier:
calc size of deposit needed in the fx ready to pay the supplier
convert fx deposit to home currency @ TODAYS SPOT
borrow home currency & incur interest
Receiving Fx from customer:
Calc size of Fx loan required today so that customers receipt pays it off
Convert Fx loan to home currency @ TODAYS SPOT
Deposit home currency, earning interest
