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Corporate finance theory > Week 1 and 2 > Flashcards

Week 1 and 2 Flashcards

1
Q

What is the the company’s integrated value (IV) equation?

A

Max IV: FV + SV + EV
The traditional goal is maximising financial value for shareholders. The goal function is broadened toward steering on financial value (FV), social value (SV), and environmental value (EV) in an integrated way.

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2
Q

What are the four driving forces behind the internalisation of SV and EV into FV:

A

License to operate
Regulation and taxation
Technological advancement
Customer preferences

Dynamic perspective, but timing is uncertain

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3
Q

Why is it in companies’ interest to manage for integrated value?

Two reasons

A

If company management neglects SV or EV, that will hurt long-term FV as well. Two reasons:

  • Ethical case - license to operate -> corporate responsibility (case for SV and EV)
  • Business case – long-term value creation (case for FV)
    Companies that create value on SV and EV are more likely to be value creative on FV in the long run
    As external impacts are being internalised, they affect FV
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4
Q

I. Planetary Boundaries
What is the purpose of the planetary boundaries?
A. Defines the limits in nine areas of the planet which humanity must not exceed to maintain a liveable planet.
B. Outlines the maximum GDP levels beyond which climate change will be irreversible.
C. Shows the amount of import / export that a country should not exceed, to protect domestic companies.
D. Indicates the annual date when the earth’s yearly resources have been exhausted.

A

A. Defines the limits in nine areas of the planet which humanity must not exceed to maintain a liveable planet.

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5
Q

II. Integrated shareholder model
How does the integrated stakeholder model differ from the traditional version?

A

It recognises that good relations with stakeholders might boost financial firm value.

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6
Q

III. Social and ecological value creation
A company that generates economic profits, will likely…
A. Create social and ecological value.
B. Destroy social and ecological value.
C. Create social value but destroy ecological value.
D. Destroy social value but create ecological value.
E. All of the above are possible.

A

E. All of the above are possible.

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7
Q

IV. Price Internalisation
If the negative externalities of a product are internalised into the price, but the cost of sales remains the same, how does a firm’s gross profit margin change?
A. Increase
B. Decrease
C. Remain
D. Not possible to say based on the provided information.

A

A. Increase

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8
Q

V. Corporate Governance
Which of the following broad statements about corporate governance issues is false?
A. The two core problems of corporate governance aggravate one another.
B. Information asymmetry can be broken by social and ecological reporting.
C. Amount of debt does not impact the main corporate governance problems.
D. Corporate governance must consider non-financial factors.

A

B. Information asymmetry can be broken by social and ecological reporting.

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9
Q

VI. Governance and company value
How does governance impact the valuation of a company?

A

Strong governance reduces the risk of a firm and accordingly its cost of capital.

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10
Q

Why are EV and SV necessary when there is already FV

A

EV and SV focus on externalities that are not priced in FV but are necessary. Regulation will not be perfect
* Record unpriced positive externalities as assets
* Record unpriced negative externalities as debt
* Residual value is equity = net externality

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11
Q

What are examples of priced E and S externalities that are financially materialised

A
  • (Expected) carbon pricing and other regulations
  • Consumers’ higher willingness to pay for environmentally friendly products
  • Positive reputational effects on marketing and brand
  • Technological risks associated with operating carbon-intensive assets
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12
Q

What is value creation? And what is the difference in value creation for a responsible company and “irresponsible” company

A

In financial terms, value creation is defined as an increase in the net present value (NPV) of a company’s projects
Currently, FV is often generated at the expense of SV and EV as resources are depleted without sufficient investments in maintaining them
Responsible companies manage for integrated value creation (profit and impact) rather than merely shareholder value (profit)

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13
Q

What is the the planetary boundaries framework? How would integrating SV and EV for companies around to world help manage this framework?

A

It is defined a safe operating space for humanity within the boundaries of 9 productive ecological capacities of the planet
The planetary boundary lies at the intersection of the green and orange zones
Currently, many companies are value destructive on SV or EV. For society and the economy to operate within social and planetary boundaries, we need companies on aggregate to stop being value destructive on SV and EV

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14
Q

What are external impacts (also called externalities)?

A

They are costs or benefits that are created by organisations or persons but whose costs are borne by society as a whole

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15
Q

What is the difference between a succesful and unsuccesful transition

A
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16
Q

What is the formula to calculate expected transitionloss

A

Expected transition loss =
B = between 0 and 1. if b is very small the industry is not in transaction, 1 whole sector is moving
PT = how likely will it happen
LGT = if it happens, how quick is your loss
(1-a) = a: 0, not prepared at all (working in an old economy), fully prepared a = 1

17
Q

What does the societal discount rate consist of?

A
18
Q

How do we measure SV and EV?

*Value flow formula and dcf formula

A
19
Q

Example: What are the steps of calculating the value flow of a carbon emission project?

* from CF to VF

A
20
Q

Example: What are the steps of calculating the IV of a project?

A
21
Q

What are the three steps in the value calculation for SV and EV

A
  1. Materiality assessment - determine important SV and EV factors;
  2. Quantification - express these factors in their own units Q; and
  3. Monetisation - express these factors in money with shadow prices SP
22
Q

What are three core set of factors which should always be included in the materiality assessments to determine which S and E factors are important

A

Greenhouse gas emissions - including carbon emissions
Labour practices - including discrimination and inclusion
Business ethics - including corruption and fraud

23
Q

How do you calculate the consumer surplus? and what is it used for?

A

Well-being of customers – calculated as consumer surplus, which is the difference between the price of a product and what consumers want to pay

24
Q

How do you define shadow prices

A
  • Shadow prices reflect the ‘true scarcity’ of resources to stay within planetary boundaries
  • Organisations such as the Impact Economy Foundation and True Price provide regularly updated lists of impact and shadow prices (see Appendix of Chapter 5)
    True prices are based on two welfare categories:
  • Rights (human, labour and environmental rights)
  • Well-being
25
Q

perpetuity formula

A
26
Q

What are the responsibilities of the General Partner (GP), Investment Manager and Limited Partners (LPs) within a PE

A
27
Q
A
28
Q
A
29
Q

What is the cost of capital of each company

A

a) The WACC of A: 5% - calculated as 90/1503% + 60/1508%
b) The integrated cost of capital of B: 4.5% - calculated as 90/1803% + 60/1808% + 30/1802%
c) The integrated cost of capital of C: 6.5% - calculated as 90/1003% + 60/1008% + -50/1002%

30
Q

How do you calculate customer wellbeing value flow?

A

(sales/price-elasticity)*0.5 50% attribution

31
Q

How do you calculate empoyee wellbeing value flow?

A

Well-being of employees – additional to the salary received, measured by life satisfaction points (on a scale of 0 to 100)

number of employeespointsSP

32
Q

How do you calculate carbon emission value flow?

A

mn metric of tons * quantity

33
Q

I. Materiality
What is NOT true regarding materiality?
A. Materiality looks at all potential impacts on people and environment
B. Materiality changes over time
C. Materiality differs per country and industry
D. Labour practices and business ethics are always material

A

A. Materiality looks at all potential impacts on people and environment

Materiality assessments aim to determine which S and E factors are sufficiently important for consideration in SV and EV. Material social and environmental topics are those that reflect a company’s most significant impacts (positive or negative) on people and environment. This is the outward impact of Fig. 2.5 in Chap. 2. Given the impact on a company’s stakeholders and wider society, stakeholder engagement is crucial for companies to understand and determine materiality.

34
Q

II. Consumer surplus
Assuming a company has a revenue of €200 million and a price elasticity of demand of 1.67. What would be the estimated consumer surplus?

A

Corporate finance theory (7 decks)

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