Question practice Flashcards
Interest parity equation
middle spot *(1+ mid UK interest)/(1+Mid US interest) = forward rate
Economic risk definition
risk that longer term exchange rate movements may reduce the international competitiveness of a company. it is the risk that the PV of a company’s FCF might be reduced by adverse exchange rate movements
Divdend yield equation
= dividend/share price
£ interest rates higher than dollar and forward contract premium indicate dollar extpected to
Strengthen
Forward contract discount indicate dollar expected to
weaken
good for exporter if the £
weakens
Time value of options affected by
Time period until expiry
volatility of market price of underlying item
general level of interest rates
Predictive analysis definitoin
uses historical and current data to create predictions about the future, could be used to forecast impact of different alternatives
Prescriptive analysis
Combines statistical tools used in predictive analysis with AI and algorithms to calculate the optimum outcome from a variety of business decisions. It could be used to identify optimum pricing policy.
What are the assumptions of dividend growth model
shares have value because of dividends
dividends either do not grow/grow at constant rate
estimates of future dividends are based on historical data
what is incorporated into beta
systematic business risk and financial risk
examples of systematic risk
interest rate changes
recession
oil price changes
war
Examples of unsystematic risk
chairman resigning,
strikes by employees,
changes in regulations that affect a particular market sector
Systematic risk definition
Type of risk all companies are exposed to no matter which market sector they operate in. Cannot be eliminated through diversifiaction
Unsystematic risk definition
the risk that affects a particular market sector or individual company, most of this risk can be diversified away by investing in a portfolio of 15-20 randomly selected securities
what does portfolio theory show
the only logical portfolio to hold is one which is fully diversified to eliminate all unsystematic risk
Stock market reaction to a firm diversifying
may not welcome the diversification, as these companies usually trade at a conglomerate discount. Stock markets may assume the company does not have expertise to operate in new area.
Shareholder reaction to a firm diversifying
those holding a well diversified portfolio would not welcome diversification of operations (not doing anything that they haven’t done themselves) and therefore market value might fall.
Un-diversified shareholders may welcome the diversification
when valuing company, which methods need to subtract lt debt
EBITDA and FCF
What is P/E method useful for
Growth companies, reflects industry sentiment regarding a particular sector
Why may using a companies specific PE not be relevant
reflects market sentiment to that particular company, may be better to use an industry average
Issue with EV
simplistic and distills lots of information from different value drivers into a single number
Why is EV useful
excludes affect of how a company is financed and CAPEX, so can compare companies in the same industry with different levels of CAPEX
Assets methods issues
does not take into account earning potential of assets and ignores goodwill, balance sheet values are not always realisable
No guarantee assets sold at NRV
Closure and redundancy costs should be included
