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Financial Management > Chapters 13-15 > Flashcards

Chapters 13-15 Flashcards

(65 cards)

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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
who loses out if the dollar is weak
importers
26
what is a spot rate
exchange rate currently offered on a currency for immediate delivery
27
what currency do export sales result in
revenue in a foreign currency, so they will want to sell foreign currency and buy dollars
28
what happens if the cost is in a foreign company
they will need to sell dollars to buy foreign currency
29
who gets the lower rate of the spread
importer who is selling dollars
30
who gets higher rate of the spread
exporter who is buying dollars
31
what is a forward contract
a contract with a bank agreeing a exchange rate on a specific day
32
what is matching in the sense of managing risk
where possible creating costs in the same foreign currency
33
what is leading in the sense of managing risk
taking steps to encourage early payment by customers assuming the dollar is strengthening
34
what is invoice in domestic currency in the sense of managing risk
passes exchange rate risk to customers
35
adv's of forward contracts
simple zero up front costs available for all currencies
36
disadv's of forward contracts
its a fixed date can be an unattractive rate
37
how can you eliminate exchange rate risk for an export
borrowing in foreign currency today convert into dollars at todays spot rate use foreign revenue to repay foreign currency loan
38
steps to create a money market hedge for an export
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
steps to create a money market hedge for an import
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
what are currency futures
a contract to purchase or sell a standard quantity of a currency by an agreed future date at a specified exchange rate
41
difference in currency futures and forward contracts
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
advs of currency futures
more flexible risk is lower
43
disadv's of a currency future
only in available in large standard contract sizes and limited currencies
44
what is currency options
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
is a currency option a contract
no, they dont have to do it
46
what must you do if you obtain a currency option
pay a premium up front
47
what is a swap
a formal agreement whereby two organisations contractually agree to exchange payments on different terms, ie in different currencies
48
what will happen if a country has relatively high levels of inflation
it will experience a fall in the value of its currency
49
how to calculate expected spot rate with inflation
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
what is the interest rate parity theory
in the short run, banks use interest rates to calculate forward exchange rates
51
formula to calculate forward rates
so x (1+ic)/(1+ib) where so is current spot rate b is base country c is foreign country
52
what is translation risk
the risk that the domestic currency value of a foreign currencys assets falls, or the value of foreign currency liabilities rises
53
what is economic risk
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
2 things companies can face interest risk on
borrowings | investments
55
what kind of interest rate risk is on investments
lower rates will reduce the return on cash investments
56
2 basic ways you can manage risk
smoothing matching
57
what does smoothing mean
prudent mix of floating or fixed finance
58
what does matching mean
creating assets that are based on the same interest rates as there liabilties
59
what does FRA mean
forward rate agreements | a contract with the bank on a specific amount of money to be borrowed at an agreed interest rate
60
adv's of FRA
simple zero up front costs fixes interest rate
61
disadv's of FRA
fixed date | unattractive date
62
what is interest rate futures
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
what is a contract to buy in terms of interest rate futures
a contract to receive interest at a fixed rate
64
what is a contract to sell in terms of interest rate futures
a contract to pay interest at a fixed rate
65
what is an interest rate swap
an agreement whereby the parties to the agreement exchange interest rate commitments

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