SBM Flashcards
1
Q
Benefits/Limitations of net asset valuation?
A
A:
- straightforward to get values
- assets are more certain than income (remember to exclude GW)
- gives a minimum value
- more useful for liquidation
D:
- book values likely to be out of date (should use FV where possible)
- ignores future earnings and undervalues intangibles
- FV may fluctuate between valuation date and acquisition date
2
Q
(Dis)advantages of future cash cash flow valuation
A
Either use FCF (WACC and deduct MV from NPV) or FCFE (Ke, no deduction from NPV)
Advantages:
- incorporates all relevant cash flows and time value of money
Disadvantages:
- can be difficult to come up with projected cash flows
- calculating a suitable discount rate will be problematic
- involves lots of assumptions being reliable
3
Q
Advantages & Disadvantages of equity finance
A
A:
- Don’t have to make interest payments/pay loan back i.e. no commitment
- Reduction in gearing
D:
- Higher cost than debt financing (due to higher risk)
- Can take longer to arrange than debt financing
- No tax relief through tax shield
4
Q
Advantages & Disadvantages of debt finance (compared to equity)
A
A:
- tax saving on interest payments
- cheaper than equity finance
D:
- Increases gearing
- Might need to abide by covenants
5
Q
Advantages & Disadvantages of issuing normal bonds (compared to bank loans)
A
A:
- typically fewer covenants than on a bank loan
- don’t usually need security
D:
- issue costs are high
- not all of the bonds might be taken up, in which case use underwriting but even more expensive
6
Q
Advantages & Disadvantages of issuing convertible bonds
A
A:
- lower interest rates than standard bonds
- might not need to pay out cash later
- encourages potential investors to take it up with the prospect of equity
- lowers gearing if shares are taken up
- cheaper way of issuing shares
D:
- uncertainty over cash flows
- covenant risk
7
Q
What are ways of hedging against currency fluctuations?
A
MMH
Forward rate agreement
