FM Summary

Question 1

Factors to consider for sources of finance

Answer 1

• Cost
• Gearing
• Control
• Security
• Cash flow
• Availability
• Exit routes
• Green finance

Question 2

CAPM equation

Answer 2

= Rf +Be*(Rm - Rf)

Rf: Risk free %
Rm: Market risk %
Be: Equity Beta

Question 3

Equity Beta equation

Answer 3

= Ba*( (D(1-T) / E)-1)

Ba: Asset beta
D: MV debt
T: Tax
E: MV equity

Question 4

WACC equation

Answer 4

= ((KeMVe)+(KpMWp)+(Kd*MVd)) / (MVe + MVp + MVd)

(MV x rate) / MV

Question 5

Ke equation

Answer 5

= (D(1+g)/P) + g

D: Div
G: Growth rate
P: Share price

Question 6

Kd equation

Answer 6

= ((i*(1-T)) / P) + 1

I: Interest rate
T: Tax
P: MV debt

=RATE(yrs,%,PV,redemption val)

Question 7

Kp equation

Answer 7

= D/P

D: Pref div.
P: MV P. shares

Question 8

Dividend growth model

Answer 8

=(D1/D0)^(1/n) - 1

D1: Latest div
D0: Earliest div
N: Years

Question 9

Gordon growth model

Answer 9

= R x B

R: Earnings/shareholder funds
B: (Earnings - Div) / Earnings

Question 10

Dividend yield valuation method

Answer 10

= Dividend / Comparable yield

Question 11

Dividend valuation method

Answer 11

= D(1+G) / (Ke - G)

Question 12

P/E ratio valuation

Answer 12

= Earnings * P/E

Question 13

Enterprise value

Answer 13

= EBITDA x EBITDA multiple

= MVe + debt + minority interest - cash

Question 14

What is peer to peer lending and what are the advantages and disadvantages?

Answer 14

Connects businesses who want to borrow, with investors who want to lend via an online platform.

+Lower interest rates (due to competition)
+Quick to arrange
+ More accessible for lower credit rating companies
- Fees
- Impacts gearing

Question 15

Adv. & Disadv. of cash consideration

Answer 15

+ Buyer gets full control and entitlement to future profits
+ Seller gets a certain, unconditional amount
- Buyer must have cash
- Seller’s expertise may be lost if they don’t stay with the business
- CGT payable immediately

Question 16

What are the Green Loan principles?

Answer 16

• Reporting/recording use
• Actual use
• Management of proceeds
• Evaluation & selection

Question 17

Methods of Green financing

Answer 17

Green loans - cheapest
Sustainability linked loans - performance based
Selling green bonds
Selling social bonds

Question 18

Adv. & Disadv. of crowd funding

Answer 18

+ More accessible for risky start ups
+ Business awareness
+ Fast
- Fees
- Legal/advisory fees
- Admin burden

Question 19

Adv. & Disadv. of loan stock for consideration

Answer 19

+ Cash advantages without the need for immediate cash
- Interest.