FM Flashcards

Question

Underwriting

Answer 1

Advantage Form of insurance which ensure that all funds required are raised/sold Disadvantage Can signal lack of confidence in the product/service/projects ability to sell/succeed. Market appetite may be less than expected. Underwriting is expensive to procure (1 - 2% of funds raised)

Answer 2

Alternative method of calculating company value based on future cash flows and 7 'value drivers' which are manageable by the company: ``` Length of project Sales growth rate Profit margin Fixed assets investment Working capital investment Tax rate Discount rate ```

Answer 3

Process of analysing business activities to identify how they will result in increasing sharhokder wealth: ``` Are these drivers being maximised: Sales growth rate Op profit margin Investment in working capital Cost of capital Life of projected cash flows Corporation tax rate ```

Answer 4

Systemic- risk that all companies are exposed to no matter which market sectors, e.g. war, economic crash etc. It cannot be eliminated through diversification Unsystemic- rusks which are specific to a particular market sector It can be reduced through diversification

Answer 5

When discount rate is given at 'real cost' it must be multiplied by inflation rate, then -1 to find the usable discount rate The 'money rate' is the discount rate including inflation

Answer 6

Useful when gearing changes and therefore financial risk changes Apv used when financial risk changes regardless of chang in business risk. Step 1 calculate base case cash flow: Project cashflow*CAPM Ke(using industry asset beta). This equals NPV as if the firm had no debt finance Step 2 calculate pv of finance side effects: Costs involved discounted for relevant number of periods. APV = step 1 + step 2

Answer 7

Predictive analytics: Regression analytics- quantifies relationship between 2 variables. I.e. if weather improves, more people will pay for outdoor activities Decision trees- used to consider multiple decisions and their impacts. Prescriptive analytics: Combining AI, statistical tools and Predictive analytics to calculate optimum outcomes for business decisions. E.g. identifying optimal production levels considering factors like demand, supplier lead times and use of machinery

Answer 8

Delay- postpone a project to wait for a favourable situation or see how another company succeeds with a similar project. Abandon - reject the project before starting or part way through if sales are lower than expected, costs higher, competition steeper. Follow on - expand the project if it performs well Growth - implement the project incrementally over time, rather than the full scale of the plan from the start. Flexibility - making strategic amendments to the project during its life cycle to maximise profits

Answer 9

Exam tip(if something is effected by sales volume and price, it means contribution) CF Sensitivity = NPV/PV of flow under consideration (after tax) Discount rate sensitivity=difference between cost if capital and IRR IRR= DF1+(NPV/(NPV@DF1+NPV@DF2))*(DF2-DF1) Project life sensitivity= the time when the cumulative present value of cf goes from positive to negative (in reverse order) Strengths: Relatively straightforward Identifies critical success area fpr the project e.g. sales volume, materials price Facilitates subjective judgement Weaknesses: Ignores probability Does not suggest a correct decision Assumes changes in variables can be made independently

Answer 10

Formula | Df1[given in q] + (PV of df1/(pv of df1 - pv of df2))*(df2-df1)

Answer 11

Interest rate parity claims that the difference between the spot and the future exchange rates is equal to the differential between interest rates available in the two currencies Otherwise risk free gains could be made Used by banks to calculate forward rate quoted for a currency Forward rate= current spot rate*((1+if)/(1+iuk)) iF = foreign currency interest rate for period iUK = UK interest rate for period

Answer 12

DVM shareholders benefit from owning a share by receiving dividend into the future and capital gain on value of the shares. The pv of this benefit creates the current price of the shares this share price is determined by expected future dividends discounted at investors required rate of return. CAPM specific/unsystematic risk can be diversified away by investors so it is assumed investors are rational and have a diversified portfolio. Systematic risk cannot be diversified away - micro economic factors. A company's beta is calculated from the performance of its share price against the market average and is taken as a measure of the market's view of the risk attached to the security in question. The higher the perceived risk then the higher the beta figure and thus the higher the equity return required by investors

Answer 13

Portfolio effect A portfolio of investments helps spread risk. Investors can usually spread risk themselves - they don't need managers to do it for them. Limitations come if the area a company is diversifying into requires skills and knowledge that the business does not have as this would increase the risk of the investment failing

Answer 14

PPP caims that the rate of exchange between two currencies depends on the relative inflation rates within the respective countries The country with higher inflation is subject to a depreciation in its currency In equilibrium, identical goods will cost the same in any currency Future spot rate= current spot rate*((1+inflF)/(1+inflUK))

Answer 15

Expiry date (closest date after transaction happens) No. of contracts = value of portfolio/ (current index size*£10) Calculate option premium= points associated to chosen call or put option*£10*number of contracts When receiving Gain if your chosen index is higher than the hypothetical When paying Gain When the hypothetical is higher than your index