Things I Didnt Know

Question 1

If an option is paid when in an overdraft

Answer 1

Interest is paid on the premium using the £ borrowing rate

Question 2

If an option is paid out of a reserve account/ they have funds on deposit

Answer 2

Premium is increased by the interest using the £ deposit rate

Question 3

Growth formula

Answer 3

Nroot(newest/oldest) -1

Where n=amount of growth periods

Question 4

Interest cover formula

Answer 4

Interest cover = operating profit / interest

Question 5

EPS formula

Answer 5

Earnings / number of shares

Question 6

Money rate

Answer 6

(1+m) = (1+r) x (1+i)

Question 7

Ve=?

Answer 7

Ve= our number of shares x our market share price

Question 8

Vd=?

Answer 8

Vd= book value/100 * our market price

Question 9

Vp=?

Answer 9

Vp= our share price x our number of shares

For premium though

Question 10

When re gearing what values do you use?

Answer 10

Ve

Vd

If Vp is included then do
Be=Ba(1+ P+D(1-T)/E)

Question 11

Kp =?

Answer 11

Kp = D/P0

Where D is the percentage eg 12% is 0.12

Question 12

Kd=?

Answer 12

Kd= interest(1-T) / P0

Question 13

How to calc g=rb

Answer 13

b= proportion of earnings retained

PAT-Div / PAT x100

r= PAT/ net assets b/fwd

If there are no prior values net assets b/fwd is RE-share cap - dividend

Question 14

Overseas risks

Answer 14

Political risk
Cultural risk
Physical risk
Credit risk
Trade risk
Liquidity risk

Question 15

Kd1

Answer 15

Kd1= interest(1-T)

Question 16

Vd1

Answer 16

Book value

Question 17

Hard capital rationing

Answer 17

When external capital markets limit the supply of funds to a company

Question 18

Soft capital rationing

Answer 18

When the firm imposes it’s own internal constraints on the amount of funds use to finance projects. E.g. budgets

Question 19

Economic risk

Answer 19

The risk that longer term exchange rate movements might reduce the international competitiveness of a company.

Question 20

APV

Answer 20

When WACC cannot be used

1) Calculates a base case value at ungeared cost of equity
2) Calculates the PV of the tax shield arising from the extra debt
3) Adjusts for issue costs

Question 21

APV

Answer 21

Normal NPV

Then calculate the PV of the tax shield:
Debt of £2000interest0.17= PV

Then discount over y years:
PV*3.312 = tax relief

APV= 
Base case NPV
\+ tax relief on debt
- issue cost
=APV

Question 22

When can you not use WACC

Answer 22

When historical proportions of debt and equity change

When business risk changes

When finance raised is project specific

When the project is not small in size relative to the size of the company