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financial management > Chapters 13-15 > Flashcards

Chapters 13-15 Flashcards

1
Q

when are independant share valuations required

A

if the company is unquoted

if stock market does not value shares correctly

if there is a takeover bid and the value of the company will change

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2
Q

what is a market capitalisation

A

total value of all shares in the company

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3
Q

what is the maximum way of business valuation

A

cash flows or earnings for controlling interests

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4
Q

what is the maximum way of business valuation

A

value dividends under existing management

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5
Q

what is the minimum way of business valuation

A

value assets using net book value

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6
Q

how to calculate net assets

A

NCA+ CA - all liabilities

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7
Q

disadvantages of the asset based approach

A

ignores intangible assets and future profits

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8
Q

how do you use P/E ratio

A

P/E ratio x earnings of target

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9
Q

disadvantages of P/E Ratio

A

difficult to estimate P/E ratio

earnings of target company may need to be adjusted

P/E ratios may be distorted by swings in the stock market

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10
Q

what is the dividend valuation method

A

value of a share is calculated as present value of future dividends that are being generated by current mngmnt team

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11
Q

disadvantages of DVM

A

difficult to estimate future dividend growth

inaccurate to assume growth will be constant

creates zero values for zero dividend companies

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12
Q

what valuation can be used for securities other than shares

A

discounted cash flow techniques

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13
Q

what is the efficient market hypothesis

A

rationale for explaining how share prices react to new info about a company

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14
Q

what is allocative efficiency

A

ability of a financial market to direct funds to those borrowers who can use them most profitaby

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15
Q

what is operational efficiency

A

ability of a financial market to operate with minimal transaction costs

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16
Q

what is information processing efficiency

A

market price for securities reflects all relevant and available information relating to securities

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17
Q

what does a weak form of efficiency mean

A

stock market is not efficient at responding to events that should affect share prices

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18
Q

what does a semi strong form of efficiency mean

A

share prices reflect historical info and also reflect all publicly available info

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19
Q

what does a strong form of efficiency mean

A

share prices affect all information

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20
Q

what does behavioural finance mean

A

an alternative view, to explain market implications of the psychological factors behind investors decisions

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21
Q

what does herding mean

A

tendency for investors to follow trends which can lead to stock market bubbles

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22
Q

what is loss aversion

A

when investors place undue emphasis on avoiding short term losses even if long term performance looks strong

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23
Q

what is transaction risk

A

risk that a transaction is recorded at one rate and settled at a different rate because of forex

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24
Q

who loses put if the dollar is strong

A

exporters

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25
Q

who loses out if the dollar is weak

A

importers

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26
Q

what is a spot rate

A

exchange rate currently offered on a currency for immediate delivery

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27
Q

what currency do export sales result in

A

revenue in a foreign currency, so they will want to sell foreign currency and buy dollars

28
Q

what happens if the cost is in a foreign company

A

they will need to sell dollars to buy foreign currency

29
Q

who gets the lower rate of the spread

A

importer who is selling dollars

30
Q

who gets higher rate of the spread

A

exporter who is buying dollars

31
Q

what is a forward contract

A

a contract with a bank agreeing a exchange rate on a specific day

32
Q

what is matching in the sense of managing risk

A

where possible creating costs in the same foreign currency

33
Q

what is leading in the sense of managing risk

A

taking steps to encourage early payment by customers assuming the dollar is strengthening

34
Q

what is invoice in domestic currency in the sense of managing risk

A

passes exchange rate risk to customers

35
Q

adv’s of forward contracts

A

simple

zero up front costs

available for all currencies

36
Q

disadv’s of forward contracts

A

its a fixed date

can be an unattractive rate

37
Q

how can you eliminate exchange rate risk for an export

A

borrowing in foreign currency today
convert into dollars at todays spot rate
use foreign revenue to repay foreign currency loan

38
Q

steps to create a money market hedge for an export

A

identify loan repayment required in the future (this matches revenue)

caculate amount that needs to be borrowed with interest

convert this to home currency at spot rate

place this on deposit using interest rate recieved on money

39
Q

steps to create a money market hedge for an import

A

identify cash required to pay foreign invoice

calculate the amount that needs to be invested today in foreign currency

convert this using spot rate to domestic amount, this is the amount of dollars that need to be borrowed today

include cost of borrowing with foreign amount, compare to a forward rate

40
Q

what are currency futures

A

a contract to purchase or sell a standard quantity of a currency by an agreed future date at a specified exchange rate

41
Q

difference in currency futures and forward contracts

A

currency futures expire, and up until that expiry date can be used at any time

a futures contract is set up to compensate for a profit or loss on an exchange rate

42
Q

advs of currency futures

A

more flexible

risk is lower

43
Q

disadv’s of a currency future

A

only in available in large standard contract sizes and limited currencies

44
Q

what is currency options

A

a right of an option holder to buy ( call ) or sell (put) a quantity of one currency in exchange for another, at a specific exchange rate on or before a future expiry date

45
Q

is a currency option a contract

A

no, they dont have to do it

46
Q

what must you do if you obtain a currency option

A

pay a premium up front

47
Q

what is a swap

A

a formal agreement whereby two organisations contractually agree to exchange payments on different terms, ie in different currencies

48
Q

what will happen if a country has relatively high levels of inflation

A

it will experience a fall in the value of its currency

49
Q

how to calculate expected spot rate with inflation

A

SO x (1+hc)/(1+hb)

where s0 is the current spot rate
hc is inflation in foreign currency
hb is base country inflation

50
Q

what is the interest rate parity theory

A

in the short run, banks use interest rates to calculate forward exchange rates

51
Q

formula to calculate forward rates

A

so x (1+ic)/(1+ib)

where so is current spot rate
b is base country
c is foreign country

52
Q

what is translation risk

A

the risk that the domestic currency value of a foreign currencys assets falls, or the value of foreign currency liabilities rises

53
Q

what is economic risk

A

due to long term movements in the exchange rate that damage the value of a company because the NPV of the businesses cash flows is diminished by expected exchange rate trends

54
Q

2 things companies can face interest risk on

A

borrowings

investments

55
Q

what kind of interest rate risk is on investments

A

lower rates will reduce the return on cash investments

56
Q

2 basic ways you can manage risk

A

smoothing

matching

57
Q

what does smoothing mean

A

prudent mix of floating or fixed finance

58
Q

what does matching mean

A

creating assets that are based on the same interest rates as there liabilties

59
Q

what does FRA mean

A

forward rate agreements

a contract with the bank on a specific amount of money to be borrowed at an agreed interest rate

60
Q

adv’s of FRA

A

simple
zero up front costs
fixes interest rate

61
Q

disadv’s of FRA

A

fixed date

unattractive date

62
Q

what is interest rate futures

A

a contract to receive or pay interest on a notional standard quantity of money at an agreed future date at a specified interest rate

63
Q

what is a contract to buy in terms of interest rate futures

A

a contract to receive interest at a fixed rate

64
Q

what is a contract to sell in terms of interest rate futures

A

a contract to pay interest at a fixed rate

65
Q

what is an interest rate swap

A

an agreement whereby the parties to the agreement exchange interest rate commitments

financial management (8 decks)

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