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FM > important > Flashcards

important Flashcards

1
Q

When is using income based methods of valuation best

A

when taking control of a company, when more interested in earnings than dividend policy

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2
Q

P/E ratio calculation

A

Market price per share/EPS

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3
Q

P/E drawbacks

A

Finding quoted company similar in activity
single year ratio may not be representative
may be totally different capital structure

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4
Q

Earnings yield valuation (earnings % of share price)

A

total earnings * 1/earnings yield

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5
Q

When does the value of debt need to be deducted for valuing a company

A

when looking at PV of future cash flows

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6
Q

When to use APV

A

When financial risk changes (ie gearing)

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7
Q

What is best KE to use (CAPM/Div)

A

Best to use CAPM as determines the return appropriate to the risk taken on by the shareholders

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8
Q

When to use risk adjusted discount rate (adjust beta)

A

when business risk changes (new area)

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9
Q

equity beta represents

A

financial risk (of average gearing) and business risk

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10
Q

asset beta represents

A

only the business risk for operating in that sector

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11
Q

Market capitalisation definition

A

market value

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12
Q

net book value definitoin

A

balance sheet

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13
Q

If market capitalisation < assets what is the worry

A

asset stripper will buy and sell all the assets for a proift

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14
Q

Real options definition

A

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

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15
Q

Political risk

A

risk that political action restricts opportunities for trade/makes process more expensive

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16
Q

Cultural risk

A

risk that product design is not compatible with overseas cultural preferences

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17
Q

Physical risk

A

risk goods are lost/stolen in transit, or accompanying documents are lost/stolen

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18
Q

Credit risk

A

risk of default by the customer

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19
Q

Trade risk

A

risk that the customer refuses to accept goods on delivery / order is cancelled in transit

20
Q

Liquidity risk

A

risk the firm is unabele to finance the credit given to customers

21
Q

How to mitigate economic exposure

A

diversify worldwide operations for inputs and outputs
consider carefully which markets to operate in
consider where products ar esold

22
Q

Business risk

A

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

23
Q

Derivative

A

a financial instrument whose value is derived from values and characteristics of underlying financial item. Options, futures and swaps

24
Q

Economic exposure

A

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

25
Q

Enterprise Value

A

measure of total value, price you would pay for entire business based on current market price of company’s shares and net debt

26
Q

Financial risk

A

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

27
Q

Forward contract

A

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

28
Q

Future

A

standardised contract to buy or sell a specific amount of commodity, currency or financial instrument at agreed price on stipulated future date

29
Q

normal distribution

A

frequency distribution important as it arises frequency in real life, any distribution symmetrical around the mean

30
Q

Opportunity cost

A

cash flow foregone if a unit of the resource I used on the project instead of best alternative

31
Q

Political risk

A

risk that political action will affect position and value of the company

32
Q

P/E ratio

A

share price / EPS

33
Q

sva

A

Process of analysing activities of a business to identify how they will result in increase in shareholder wealth

34
Q

Standard deviation

A

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

35
Q

Systematic / Market risk

A

investment risk that cannot be eliminated by diversification

36
Q

Transaction risk

A

risk of adverse exchange rate movements curing during the course of normal international trading transactions

37
Q

Translation risk

A

Risk that the organisation will make exchange losses when the accounting results of foreign branches / subs are translated into home currency

38
Q

Underwriting

A

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

39
Q

Unsystematic, unique or specific risk

A

investment risk that can be eliminated by diversification

40
Q

Venture capital

A

risk capital, normally provided by venture capital firm or individual venture capitalist in return for an equity stake

41
Q

Green loans principals

A

Use of proceeds
process for evaluation and selection (communicate to lender sustainability objectives, how appraises, eligibility criteria)
Management of proceeds
reporting

42
Q

Green bond

A

fixed interest bond used to raise money for climate and environmental projects.
Come with tax incentives to enhance attractiveness

43
Q

TO qualify for green bond status what must happen

A

often verified by third party such as climate bonds standards board which certifies the bond will channel finance to environmentally beneficial projects

44
Q

Sustainability linked loans

A

loans for any purposes but with in-built pricing, so the loan is cheaper if the borrower achieves certain sustainable or ESG related targets

45
Q

Green loans

A

Finance investment in project with specific green purpose such as reducing GHG emissions, promoting efficiency etc.

FM (11 decks)

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