CFS Learn Flashcards

Hard and Soft Rationing

Hard Rationing- External Limits of funds available

Soft Rationing- Internal constraints on funds available

Shareholder Value Analysis

Process of analysing activities of a business to identify how they will result in increasing shareholder wealth.

Key Drivers of Value

Sales Growth Rate, operating profit margin, Corp Tax Rate, Investment in non current assets, investment in working capital, cost of capital, life of projected cash flows

Real- options defenition

NPV analysis considers the cash flows related directly to the project. However there are options associate with the particular project that may outweigh the conventionally calculated NPV

The Different Real Options

Follow on, Abandonment, Contraction, Timing, Growth, Flexibility

Political Risk

Political Risk is caused through government actions

Product and Cultral Risks

Trading with foreign country creates risks relating to customs, tastes, laws and language

Techniques to deal with uncertainity

Setting maximum payback periods for projects

Increasing the discount rate subjectivly to submit the project to a higher hurdle rate in investment appraisal

Making prudent estimates of outcomes to assess the worse possible situation

Assessing both the best and worst case scenarios to obtain a range of possible outcomes

Forward Contratcs- Ads + Disads

Binding, Inflexible, no upside potiential, Arrangment fee / poor rate. Tailored to specific needs. Simple to arrange

Futures- ads and disads

Traded on an exchange, Requires inital margin and top up- cashflow implications. Rounding of contracts and basis risks can cause inefficencies. No upside potiential, Can close out contract if no longer needed.

Options- ads and disads

Call= right to buy. Put - right to sell. Can be traded OTC(tailored) or traded. Expensive Premium. Greater Flexibility. Can benefit from upside by abandoning option

Transaction Risk

This is the risk of adverse exchange rate movements occurring during normal international trading transactions

Translation Risk

This is the risk that the organisation will make exchange losses when the accounting results of its foreign brances or subsidiaries are translated into the home currency

Economic Risk

This refers to the effect of exchange rate movements on the international competetivness of a company

Interest Rate Parity Theory

Interest Rate Parity Theory states the difference between the spot and forward rate can be predicted by the differences in interest rates between the two countries

spot rate x (1+i_f)/ (1 + i_uk)

Purchasing Power Parity Theory

The theory that in the long term exchange rates between currencies will tend to reflect the relative purchasing power of each country.

Treasury Managment

4 primary functions of treasury managment-

Liquidity managment- Striking a balance between having necessary cash without holding unnecassarily high cash levels that could be deployed more profitably elsewhere

Funding management- Deciding on, organising and negotiating suitable forms of finance based on the organisation's needs.

Corporate finance- Examination and implementation of the company's financial strategies, including investment appraisal, valuation of potential acquisitions, dividend policies.

Risk management

Understanding, quantifying, and mitigating the financial risks faced by the company.

Controllable financial risks include gearing, credit and liquidity risks.

Uncontrollable market risks include interest rates, exchange rates and commodity prices.

Short Term Finances

Overdraft, Short Term Loan, Trade Credit, Factoring, Invoice Discouting.

Revenue Based Finance

Investors recieve a percentage of the companies ongoing gross revenues in exchange fro money they invested until predetermined amount has been paid which is muiple of the orignal investment- useful for subscription based businesses

Conservative vs Aggressive Financing Strategy

Conservative- Uses long term finance for all NCA, perm CA. Occasional Cash surpluses. Lower risk but typically higher costs.

Aggressive- Uses short term finance for all perm CA and fluctuating CA. Minimal Long term finance. Higher Risk but typically lower costs. Appropriate for businesses with strong bank relationships and stable markets

Long term funding- capital markets

National Stock markets, The banking system, Bond markets, international markets.

Crowdfunding

The use of internet based platforms to match companies with investors

Peer to Peer Lending

The use of internet based platforms to match lenders with borrowers

Predicitve Analytics and Prescriptive

Define Weak Form Market Efficency

Share price reflects past infomation, random walk

Semi- Strong Form

Share prices incorporate all publicly available infomation

News is reflected rapidly

Share prices are fair and market cannot be beaten unless users have inside infomation

Strong Form Market Efficiency

Share prices reflect all available infomation

Debt Vs Equity Risk

Debt increases financial risk for shareholders- Interest cover falls/ Gearing increases

However Debt finance is cheaper than equity finance- it’s less risky so lower returns for debt holders. Tax Shield on interest and lower issue costs

Debt vs Equity Ownership and Control

Loss of control for existing shareholders with new share issue

Fall in EPS with new share issue

Debt vs Equity Term

Equity Finance is permanant

Can match length of debt finance to length of project

Borrowing quicker to arrange than share issues

Debt vs Equity- Debt capacity

How highly geared is the company

Signs of financial distress

volatile cash flows

Industry Average

Covenant

Capital Structure theories only if specifically required

When Can the Existing WACC be used

Historical proportions of debt and equity are not to be changed( Financial Risk)

The area of operations is not be changed( Business risk)

The finance is not project specific

Solution to changing WACC if Financial or Business risk changes

Finance Risk- You’d calculate the APV

Business Risk- Use the Rsik adjusted discount rate

Returns to Shareholders- Sources of Equity Finance- Pecking order

Pecking Order-

Retained Earnings

Rights Issue

New issue

Capital Structure Theories

TradtionaL- As debt is increased WACC will fall until optimal level. At high levels of debt WACC will increase

M&M- Without tax, WACC does not change as debt is increased so capital structure is irrelevant

With Tax- Debt is alwasy cheaper so 100% Gearing- key assumptions to this- pefect capital market, no financial distress costs, no loan covenants and no tax exhaustion

Asset Based Valuation

Historic- Book value of equity- Ordinary Sahres + Retained Earnings

Revalued = NCA’s + CA’s -NCL’s - CL’s

PV Future Cashflows

Identify Discount Rate

Cashflows start in Y1 unless Immediate

USE =NPV

Terminal Value or delayed perpetuity

PV of perpetutity= cashflow in Y1 × 1/r

PV of growing perpetuity = cashflow in Y0 (1+g) 1/(r-g)

EV/EBITDA

Enterprise value= EV/EBITDA multiple X EBITDA

Value of Equity- Market value of debt + cash

Adjust downwards for unlisted company

Dvidend Yield

Share Price= Dvidend per share/ Dividend yield

Adjust downwards for unlisted company

Dividend Valuation

Value of company = D_0(1+g)/(Ke-g)

Adjust value downwards for unlisted company