Theory Flashcards
(149 cards)
Name the corporate finance models of lu1
Shareholder model (only FV)
Refined shareholder model (FV + b * Sv + C * EV) (B and C < 1)
Stakeholder model = FV + b* Sv
Integrated model FV + SV + EV
What are externalities
Cost or benefits created by the organisation that are borne by others
How do we align FV, SV and EV?
Charge ‘‘true prices’’ that include hidden EV and SV
Why is integrated value advantageous for companies?
Ethical case -> companies are expected to be ethical, both by employees and consumers
Business case -> Companies that create SV and EV are more likely to be healthy FV-wise in the long run
Four driving forces between internalisation of SV and EV into FV
License to operate
Regulation and taxation
Technological advancement
Customer preferences
Formula for expected transition losses (ETL) for company i in sector j (ETLij)
ETLij = EATij * PT * LGT
EAT = exposure to transition
PT = probability of transition
LGT = loss given transiction
Can be further broken down into
b * vi * pt * (1-a)
With b = level of transition in sector j, and
vi = value of company i
a= adaptability of company a
Current and future benefit should be treated the same. If so, why is there even a discount rate for social/environmental value?
Growth rate of consumption and elasticity of marginal utility of consumption
so accounting for productivity and consumption increases ( I think )
Name social factors
Labour practices
combatting poverty
Interaction with commonuities
Name environmental factors
Pollution
Use of scarce resources
Restoration of nature
How to calculate consumer surplus?
DeltaP * Q * 1/2
So difference between current price and price where Q = 0
Somewhere else it says Sales / Price elasticity * 1/2
Name two types of valuation
Relative valuation (e.g., P/E)
Absolute valuation (E.g., DCF)
What could be a problem with relative valuation and integrated value?
It doesn’t account for integrated value and future performance as a result of possibly lacking EV and SV.
What is a problem with measuring integrated value?
We can hardly measure sustainability -> ESG ratings are poor, so we need to go deeper
Describe double materiality
Financial materiality only looks at how E and S values can impact finance -> e.g., by decreasing long-term cashflows?
Impact materiality only looks at outward impact, so co2 emissions
Double materiality equals integrated value, you look at FV + EV + SV = IV
So you don’t only take into account possible future effects on FV, but you take the values into account separately.
What are steps for calculating integrted value?
1 Analysing social and environmental factors (purpose + stakeholder map)
2 Materiality
3 Quantification
4 Monetisation
5 Integrated valuation
6 Conclusions
What is the 2.2% discount rate made up of?
2% social discount rate
0.2% risk premium
What is the paradox for strong form EMH?
For strong form EMH, all information is incorporated immediatly, and thus stock analysis has no use.
However, information can only be incorporarted through analysis / information discovery.
What valuation methods are best for integrated value?
Fundamentals -> better understanding of company
Comparables lack detail
Summarize adaptive markets hypothesis
Price efficiency of markets depends on number of analysts + quality of analysis -> can lead to inefficiences and not fully incorporating S&E values
Debt to equity ratio
D/E
Debt to value ratio
D/(D+E)
How does S&E relate to MM propositions?
Financially material S and E externalities are already incorporated in the basic MM model
Because future cashflow predictions incorporate the possibilities of impacts
However, if we know there will never be a carbon tax, the externalities are not financially material, thus not incorporated.
How should we record unpriced positive and negative externalities on an integrated balance sheet?
Positive externalities are assets, negative externalities are debt
Explain economic and financial distress
A firm that makes significant losses is in economic distress
Whether economic distress results in in financial distress depends on the firm’s leverage