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CIMA S > F3 notes 2 > Flashcards

F3 notes 2 Flashcards

1
Q

Total Shareholder Return

A

(dividend in the period + share price movement in the period) / share price at the start of the period

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2
Q

3 E’s

A

Economy; efficiency; effectiveness

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3
Q

Non-financial objectives

A

stakeholder relationship; intellectual; human; socual; environmental / natural

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4
Q

Important economic factors

A

interest rates; inflation; exchange rates

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5
Q

PPP

A

S1 = S0 x (1 + r var)/(1+r base)

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6
Q

IRP

A

F0 = S0 x (1+ r var)/(1+r base)

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7
Q

Expectation theory

A

current forward rate (F0) is an unbiased predictor of the future spot rate (S1)

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8
Q

International risks

A

currency; cultural; goods in transit; credit; economic

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9
Q

ROCE

A

PBIT / TALCL

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10
Q

Return on equity

A

Profit after tax and pref dividends / (ordinary SC + Reserves)

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11
Q

Asset turnover

A

Revenue / TALCL

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12
Q

alternative ROCE

A

Operating profit margin x asset turnvoer

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13
Q

EBITDA benefits

A

fair measue if no control over financing or capex; roughly approxinates to operating cash flow; better underlying profit figure for comparison where there is high intangible content to asset base

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14
Q

Current ration

A

current assets / current liabilities

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15
Q

Quick / acid ration

A

(current assets - inventories)/current liabilities

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16
Q

Inventory turnover

A

Cost of Sales / inventories

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17
Q

Inventory days

A

Inventory / CoS * 365

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18
Q

Receivables collection period

A

Trade receivables / Credit Turnover * 365

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19
Q

Payables payment period

A

Trade payables / Credit purchases or CoS * 365

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20
Q

Debt to equity ratio

A

Long term debt / Equity *100

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21
Q

Debt to (equity + debt)

A

Long term debt / (Equity + long term debt)*100

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22
Q

Interest Cover

A

PBIT / Interest Payable

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23
Q

Debt Ratio

A

Long term debt / total assets

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24
Q

Earning per share (EPS)

A

Profit available to ordinary shareholders / no of shares

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25
Q

Divident yield

A

Divend per share / market share price * 100

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26
Q

Dividend payout ratio

A

Dividend per share / earning per share

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27
Q

Dividend cover

A

EPS / Dividend per share * 100

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28
Q

P/E ratio

A

Share price / EPS or Market Cap / PAT

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29
Q

Earning yield

A

EPS / Share price or PAT / Market Cap

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30
Q

GRI principles for content

A

stakeholder inclusiveness; sustainability; materiality; completeness

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31
Q

GRI principles for report quality

A

balance; comparability; accuracy; timeliness; clarity; reliability

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32
Q

GRI disclosues

A

Standard (strategy and analysis; organisational profile; identified material aspects and boundaries; stakeholder engagement; report profile; governance; ethics and integrity); specific standard disclosures (management approach; indicatiors - economic; environmental; social)

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33
Q

Benefits of environmental reporting

A

commitment to issues; reduces corporate risk; improved profitability; employee morale

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34
Q

Arguments against voluntary disclosure of env info

A

lack of comparibility; lack of reliability; only present positives; bias; info overload

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35
Q

Integrated Reporting

A

explain how businesses create value over time and links strategy and fin perf to scoail; env and economic environmetn

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36
Q

Integrated reporting captials

A

financial; manufactured; intellectual; human; social and relationship; natural

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37
Q

Integrated reporting principles

A

strategic focus and future orientation; connectivity of information; stakeholder responsiveness; materiality; conciseness; reliability and completeness; consistency and comparability

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38
Q

Content of integrated reports

A

organisational overview and external environment; governance structure and value creation; business model; impact of opportunites and risks upon value creation; strategy and resource allocation; performance; outlook; basis of prepartaion and presentation

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39
Q

Financial Decision Areas

A

investment; financing and dividend

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40
Q

Motives for holding cash

A

Transaction; precationary; speculative

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41
Q

Agency problem

A

directors not knowly focused on maximising shareholder wealth

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42
Q

Constraints

A

internal - stakeholder; agency issues; funding issues; stratefic factors. External - funding; regulatory; government; taxation; economic; investor relations

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43
Q

IFRS 7

A

Financual instruments: disclosures

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44
Q

IFRS 9

A

Financial instruments

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45
Q

Hedging

A

method of managing risk by using a hedged instrument such that any gains or losses that are made on the hedging instrument will offset any gains or losses on an underlying transaction or hedged item

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46
Q

Hedged item

A

asset; liability; firm commitment; highly probably forecast transaction; or net investment in a foreign operation that exposes the entity to risk of changes in fair values or future cash flows

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47
Q

Hedging instrument

A

designated financial instrument whose fair value or related cash flows should offset changes in the fair value or cash flows of a designated hedged item

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48
Q

Financial assets

A

cash; equity instruemet of another entity; contractual right to recevie cash; derivative standing at a gain

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49
Q

Financial liablity

A

Contractual obligation to deliver cash to another entity; derivative standing at a loss

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50
Q

Equity instrument

A

Contract that evidences a residual interest in the assets of an entity after deducting its liabilities

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51
Q

Derivates

A

Forward contract; futures contract; options; swaps; forward rate agreements

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52
Q

IFRS 9 recognition

A

when the entity becomes a party to the contractual provisions of the instrument

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53
Q

IFRS 9 initial measurement

A

most valued at fair value +/- transaction costs (add to asset deduct from liability). Assets held at FV through P/L exclude transaction csts. Movement for these & transaction costs go through P&L

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54
Q

Hedge accounting conditions

A

consists only of eligble hedging instruments and eligible hedged items; changes in FV or cash flows must have the potential to affect p&l; formal designation and doc of relationship; expected to be highly effective; economic relationship between item and instrument; effect of crredit risk doesn’t dominate calue change; hedge ratio is same for item and relationship effectiveness of hedge must be reliably measured

55
Q

Types of hedge

A

Fair value (immediate on P&L); cash flow (specifically identifiable; highly probable; external party); hedged of net investments in a foreign operation

56
Q

Cash flow hedge accounting

A

gain or loss on effective portiion (up to value or loss of gain) is recognised in reserves/OCI (and transferred to P&L when cash flow is recognised). Any excess is recognised immeditately in P&L

57
Q

IFRS 7 disclosues

A

credit risks; liquidity risk; market risk

58
Q

Term lenghts

A

short term: <1 year; Medium term: 1-4/5 years; Long term: >5 years

59
Q

Short term finance

A

bank (overdraft; loan); commercial paper; bills of exchange; eurocurrency loans; factoring and invoice discounting; for export - letters of credit; export factoring; supplier credit; countertrade

60
Q

Medium term

A

Term loans from bank; medium term notes (mtn); floating rate notes (frn); mezzanine finance; leasing; hire purchase (hp)

61
Q

Long term

A

Term loans from bank; bonds (loan stock or debetntures - straight; zero coupon; deep discount; dual currency; convertibles; equity warrants); FRN; syndicated loans; eurobonds

62
Q

Shareholding funding & other

A

ordinary shares; preference shares; retained cash; venture capital; loan guarantee scheme (LGS); business angels or corporate venturing

63
Q

Money markets

A

short term interest rate markets for investing and borrowing. Enable borrowers and lenders to manage their working capital efficiently

64
Q

Capital markets

A

long term debt and equity markets. Enable companies to manage their capital structure efficiently

65
Q

Functions of stock market

A

raise finance; existing to sell investment; aid takeovers; enable private to realise investment by floating

66
Q

Functions of corporate bond market

A

disintermediate (deal directly with lenders); raise new debt finance; sell debt; aid takeovers

67
Q

Share price changes

A

economic factors; industry factors; company factors

68
Q

Mthods of issuing shares

A

rights issue; offer for sale; public issue; placing; subscription offer

69
Q

TERP

A

theoretical ex-rights price. Method - new value / new no of shares

70
Q

Dividend valuration model - zero growth

A

ke = d/p0. In this case Ke=PAT / Market Cap or EPS/SP

71
Q

Dividend valuration model - constant growth

A

ke = d1/P0 + g

72
Q

Estimating growth

A

g = r x b (roce / return on assets x proportion of funds reinvested) or historic growth rates

73
Q

Capital asset priceing model

A

k= Rf + (Rm-Rf)B. Rm-Rf = market risk premium. Rm = return on market as a whole

74
Q

CAPM advantages

A

A: direclty links risk and return; calculate cost of equirt when div not growing constantly

75
Q

CAPM disadvantages

A

can only be used when investors are diversified; assumes components stay the same (single perod); assumes investors can invest and borrow at risk free; assumes cap markets are perfect (no transaction csots; no tax; no dominant investor); beta values are based on historic data

76
Q

Lenders percetion of risk

A

STRAP - securtiy offered; timeframe; repayment profile; amount requested; purpose

77
Q

Credit ratings

A

A - high quality; BBB and BB - medium; B - speculative; C - poor and highly speculative

78
Q

Types of security

A

fized charge - specific asset ; floating charge - not against specigic asset

79
Q

convenant

A

requires or forbids certain actions e.g. keep ratios within …; keep accounts prepared; don’t pay dividends; don’t sell assets

80
Q

interest rate risks

A

risk that loans are not renewed; gearing risk; risk of changing rates

81
Q

Interest rate swaps

A

allows companies to switch between variable and fixed rate. Low costs; flexible; compaies with different credit ratings can borrow at best cost; allow capital restructuting. BUT counterparty risk; difficult to find swap partner directly

82
Q

Currency swaps

A

get loan in different country through swap

83
Q

Identifying a lease

A

conveys the right to control the use of an idenrified asset for a period of time in exchange for consideration.

84
Q

Accounting treatment of lease - right use of asset

A

initially at cost then depericate over shorter of lease term and useful life but if reasonable certainty ownership will be obtained then useful life

85
Q

Actuarial method

A

use implicit interest rate to add to running balance and deduct payments

86
Q

Sum of digits method

A

n(n+1)/2 n=number of interest-bearing payments then line up backwards against years

87
Q

Matching

A

duration; currency; pattern of cash flows

88
Q

Finance costs

A

Issue costs (arrangement fees; underwriting fees; advisers fees); on-going servicing cost (dividends; interest; tax; reporting/info required)

89
Q

Thin capitalisation

A

aims to stop compaines getting excessive tax relief on interest

90
Q

WACC

A

Multiple spurces needs formula extension. Can use for hurdle rate of projects but risks must stay the same

91
Q

Components of risk

A

business risk - beta factor. Financial risk

92
Q

Portfolio and business risk

A

diversification eliminates unsystematic risk leaving systematic risk (general market factors) which is measured by a beta factor

93
Q

Impact of debt - traditional theory

A

Adding debt makes sense up to a certain point. If gerating gets too high cost of equity and debt rise so WACC rises

94
Q

Impact of debt - M&M (no tax)

A

As debt increases the benefits are offset by cost of equity increasing so WACC stays constant

95
Q

Impact of debt - M&M (with tax)

A

because of tax relief lower cost of debt outweighs cost of equity increasing therefore use as much debt as possible

96
Q

M&M assumptions

A

debt is always risk free; perfect capital markets; individuals and companies can borrow at the same rate; investors are indifferent between personally or corporate gearing

97
Q

Impact of capital structure on company value -M&M with tac

A

Vg = Vu +TB (value ungeared + Tax*MV of debt)

98
Q

Dividend policy - general factors

A

What do shareolders want? How will markets perceive the dividend announcement? Is there cash to pay a dividend? Tax implications? Availability and conditions surrounding debt financing? Are profits consistent / stable? Competitior policy?

99
Q

Dividend policies

A

stable; constant %; zero dividends; residual theory; irrelevancy thoery

100
Q

Share buyouts

A

A: doesn’t lead to future div expectations; may be favourable from an investor tax perspective; fewer shares therefore increase EPS and PS. D: increased div are sign of strength; often only big institutions benefit

101
Q

Scrip dividends

A

Additional shares free of charge instead of cash

102
Q

Reasons why valuation needed

A

seeking stock market floatation; buying another business; sell all or part; for banks lending; for tax purposes

103
Q

Methods of valuation

A

asset based; earnings based; cash flow based

104
Q

Asset based valuation

A

book values (only at historic); realiseable value (minimum acceptable price); replacement cost (more appropriate if trying to duplicate a business)

105
Q

Asset based valuation (advantages and disadvantages)

A

A: quick and simple; gives starting point or minimum val; D: not as food at valuing on going potential; does not consider assets not on SoFP e.g. intangible; reliant on account conventions

106
Q

Earnings based

A

P/E ratio. May need to adjust profit to get sustainable earnings. Earnings yield

107
Q

Earnings val advantages and disadvantages

A

A: quick; considers future potential; useful for valuing unquoted; good for valueing a controlling company; D: adjustments needed; based on profit not cash; which P/E to use in a takeover

108
Q

Cash flow based valuations

A

FCF to equity: PBIT + Dep - Tax - Capex - Interest + proceeed from disposal of fixed assets + changes in working capital + new debt raised - debt repaid

109
Q

Cash flow based val - adv and disadv

A

A: considers future potential; can be used to value any; considers time value. D: future cash flows are estimates; requires a cost of capital to be estimated

110
Q

Dividend yield

A

MV of shared = Div / Div yield. Div yeild = DPS / SP

111
Q

Dividend growth model

A

rearrange to estimate value of equity in business. Views cash flows the shareholder might receive rather than overall cash flows gernerated

112
Q

Dividend growth model - adv and disdvan

A

A: considers future cash flows to shareholder; relevant for minority interests. D: assumed fividends grow at a constant rate forever; requires a cost of equity to be estimated; spurious results arise for businesses that don’t pay dividends or where growth > cost of equity

113
Q

Forms of intellectual capital

A

human; intellectual assets (drawings; software; reports etc.); intellactual property (patents; copyrights etc)

114
Q

Valuation of intellectual capital

A

Calculated intagible value (CIV) - estimate annual return and then value as perpertuity. Market to book values - market cap - book value of assets (if no shre price use earnings based valuation). Tobins Q = market cap - replacement cost of assets

115
Q

Efficient market hypothesis

A

Weak form - only historic info and tends in shre price are in current share price. Semi strong - adds all publically available new info. Strong form - adds all privately known info of the directors

116
Q

Why acquire another business

A

improced market reach; eliminate competitor; asset strin and undervalued target; gain economies of scale/improve efficience/use big data; use of surplus cash

117
Q

Operating economies

A

economies of scale; elimination of inefficeinces in target; staff reductions; combining expertise; vertical integration

118
Q

Financial economies

A

financial (raising capital); tax; reduced risk

119
Q

Other M&A benefits

A

acquiring new technology; knowledge and expertise / big data; quicker growth than organic

120
Q

Forms of consideration

A

cash; shares; convertibles; bonds / loan stock issued to target company shareholders; earn-out arrangement

121
Q

Cash acquistions

A
  1. value business; 2. suggest an initial offer abover the current share price but belwo maximum the business would be prepared to pay; 3. consider the likelihood of acceptance by other party and other factors
122
Q

Acquistions with share exchagnges - max to pay

A

MV(A+B) - MV(A)

123
Q

Regulation of takehovers

A

Market power; bid behaviour (sufficient info given to allow informed decisions; directors must allow shareholders to make decision; if control (30%) is acquired then a general offer to all remaining shareholders is normally required)

124
Q

Defensice tactics - pre-bid

A

Effective comms with shareolders; poison pill; flip-in pills; alter constitution to require super majority (shark repellent); asset revaluation to make SoFP look healthier

125
Q

Defensive tactics - post bid

A

Revised financial targets; issue rejection letter; look for white knight; try to get bid referred to competition authorities; issue negative statements about the bidders style; cultrue; counterbid for the the predator company

126
Q

Post acquistion integration rules

A
  1. share a common core of unity; acquires ask “what can we offer them?”; acquirer treat with respect; acquirer provide top management with relevant company within a year; cross-company promotions of staff within one year
127
Q

Post-acquistion value enhancement strategies

A

Review business units for cost cutting and synergies; consider staffing and possible redundancies; good comms of post-acq intentions; identify economies of scale; review of redundant assets and resource audit; strong marketing campaign implemented; align corporate objectives

128
Q

Impact on stakeholders

A

shareholders in predator will want vfm; shareholders in target want decent price in correct format; stock market and regulator want rules followed; suppliers want continued relationships; employees want jobs; banks want no covenants breached

129
Q

Demerger

A

allows focus. Distribute shares in the business to be spub off to shareholders of the companying carrying out the demerger in proportion to their shareholdign in the original company

130
Q

Sell off

A

sold to third party for cash

131
Q

Liquiditation

A

only when seeen as best way of returning any value to investors

132
Q

Initial Public Offering

A

sale of shares on stock exchange realising cash for investors. Costly process with an uncertain outcome

133
Q

Franchise

A

legally very complicated

134
Q

Management buyout

A

key players: managemetn team; directors; financiers. Financed throguh management team; banks (senior - secured and subordinated - less secured debt; mezzaning) and venture captial

CIMA S (3 decks)

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