important Flashcards
When is using income based methods of valuation best
when taking control of a company, when more interested in earnings than dividend policy
P/E ratio calculation
Market price per share/EPS
P/E drawbacks
Finding quoted company similar in activity
single year ratio may not be representative
may be totally different capital structure
Earnings yield valuation (earnings % of share price)
total earnings * 1/earnings yield
When does the value of debt need to be deducted for valuing a company
when looking at PV of future cash flows
When to use APV
When financial risk changes (ie gearing)
What is best KE to use (CAPM/Div)
Best to use CAPM as determines the return appropriate to the risk taken on by the shareholders
When to use risk adjusted discount rate (adjust beta)
when business risk changes (new area)
equity beta represents
financial risk (of average gearing) and business risk
asset beta represents
only the business risk for operating in that sector
Market capitalisation definition
market value
net book value definitoin
balance sheet
If market capitalisation < assets what is the worry
asset stripper will buy and sell all the assets for a proift
Real options definition
NPV only considers the CF directly related to a project, however a negative NPV project may be accepted for strategic reasons if the real options outweigh the poor NPV
Political risk
risk that political action restricts opportunities for trade/makes process more expensive
Cultural risk
risk that product design is not compatible with overseas cultural preferences
Physical risk
risk goods are lost/stolen in transit, or accompanying documents are lost/stolen
Credit risk
risk of default by the customer
Trade risk
risk that the customer refuses to accept goods on delivery / order is cancelled in transit
Liquidity risk
risk the firm is unabele to finance the credit given to customers
How to mitigate economic exposure
diversify worldwide operations for inputs and outputs
consider carefully which markets to operate in
consider where products ar esold
Business risk
variability in earnings before interest and tax associated with the industrial sector within which a firm operates. It is determined by general business and economic conditions
Derivative
a financial instrument whose value is derived from values and characteristics of underlying financial item. Options, futures and swaps
Economic exposure
risk that PV of FCF may be reduced by adverse exchange rate movements.
Risk longer term exchange rate movements may reduce international competitiveness of a company
Enterprise Value
measure of total value, price you would pay for entire business based on current market price of company’s shares and net debt
Financial risk
additional variability in returns as a result of having fixed interest debt in the capital structure. Equity holders take this risk in particular, but debt holders also suffer financial risk at high levels of gearing
Forward contract
binding agreement to buy or sell an item for settlement at future date at price agreed today.
Allow businesses to set price well in advance
Future
standardised contract to buy or sell a specific amount of commodity, currency or financial instrument at agreed price on stipulated future date
normal distribution
frequency distribution important as it arises frequency in real life, any distribution symmetrical around the mean
Opportunity cost
cash flow foregone if a unit of the resource I used on the project instead of best alternative
Political risk
risk that political action will affect position and value of the company
P/E ratio
share price / EPS
sva
Process of analysing activities of a business to identify how they will result in increase in shareholder wealth
Standard deviation
shows average amount of variability - how far on average each result lies from the mean (or expected value)
measure of risk - lower SD closer to mean, lower variability, lower risk
Systematic / Market risk
investment risk that cannot be eliminated by diversification
Transaction risk
risk of adverse exchange rate movements curing during the course of normal international trading transactions
Translation risk
Risk that the organisation will make exchange losses when the accounting results of foreign branches / subs are translated into home currency
Underwriting
process whereby in exchange for a fixed fee (usually 1-2% of total finance to be raised) institution / group of institutions will undertake to purchase any securities not subscribed for by the public
Unsystematic, unique or specific risk
investment risk that can be eliminated by diversification
Venture capital
risk capital, normally provided by venture capital firm or individual venture capitalist in return for an equity stake
Green loans principals
Use of proceeds
process for evaluation and selection (communicate to lender sustainability objectives, how appraises, eligibility criteria)
Management of proceeds
reporting
Green bond
fixed interest bond used to raise money for climate and environmental projects.
Come with tax incentives to enhance attractiveness
TO qualify for green bond status what must happen
often verified by third party such as climate bonds standards board which certifies the bond will channel finance to environmentally beneficial projects
Sustainability linked loans
loans for any purposes but with in-built pricing, so the loan is cheaper if the borrower achieves certain sustainable or ESG related targets
Green loans
Finance investment in project with specific green purpose such as reducing GHG emissions, promoting efficiency etc.
