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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
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
26
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
27
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
28
Future
standardised contract to buy or sell a specific amount of commodity, currency or financial instrument at agreed price on stipulated future date
29
normal distribution
frequency distribution important as it arises frequency in real life, any distribution symmetrical around the mean
30
Opportunity cost
cash flow foregone if a unit of the resource I used on the project instead of best alternative
31
Political risk
risk that political action will affect position and value of the company
32
P/E ratio
share price / EPS
33
sva
Process of analysing activities of a business to identify how they will result in increase in shareholder wealth
34
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
35
Systematic / Market risk
investment risk that cannot be eliminated by diversification
36
Transaction risk
risk of adverse exchange rate movements curing during the course of normal international trading transactions
37
Translation risk
Risk that the organisation will make exchange losses when the accounting results of foreign branches / subs are translated into home currency
38
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
39
Unsystematic, unique or specific risk
investment risk that can be eliminated by diversification
40
Venture capital
risk capital, normally provided by venture capital firm or individual venture capitalist in return for an equity stake
41
Green loans principals
Use of proceeds process for evaluation and selection (communicate to lender sustainability objectives, how appraises, eligibility criteria) Management of proceeds reporting
42
Green bond
fixed interest bond used to raise money for climate and environmental projects. Come with tax incentives to enhance attractiveness
43
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
44
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
45
Green loans
Finance investment in project with specific green purpose such as reducing GHG emissions, promoting efficiency etc.

FM (11 decks)

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