Mock exams Flashcards
Depreciation should be removed in NPV. Yes or No?
Yes they are not a cash flow
If there are 4 years of depreciation, make sure you do what?
4 years of depreciation and then do the balancing charge on the balance in the final year.
If talking about NPV what do you have to consider?
Everything is an assumption so it is only as reliable as the assumption
Advantages of simulations
Consider changes to more than one variable
Take into account the probability of variables changing
Disadvantages of simulations
Not optimising techniques and do not point to a correct decision
Can be expensive and time consuming to create
The information provided on probabilities may be unreliable
What is a systematic risk?
Systematic risk is the type of risk that companies are exposed to no matter what market sector they operate in.
Systematic risk cannot be eliminated through diversification
What is unsystematic risk?
Unsystematic risk is risk tat affects a particular market sector or individual company.
Most risks can be eliminated by having a diversified portfolio.
When doing a money market hedge you must make sure you?
State the rates you are using
When doing money market hedge you need to do what to the interest rate?
Divide by 3/12 because they are always in three month batches
When working out the premium in over the counter options what must you remember?
If there is interest to pay
What are the three factors that will affect the time value of the interest rate options?
Volatility - Higher volatility of interest rates will increase the option value as this will increase the chance of the options being in the money at expiry
Time to maturity - The longer the time to maturity the more chance there is that the option will be in the money at expiry. There will also be a greater interest element in the option.
The risk-free rate - The higher the risk free rate the higher the interest element will be in the option.
What does real cost of capital mean?
It excludes inflation
When something say paid on same dividend ratio it means what?
The amount of dividend paid per £ of profit
If doing a report on two sources of finance what do you talk about?
Gearing
EPS
Interest cover
Cost of capital
Advantages and disadvantages of both
If a question asks why is a froward rate a discount what do you do?
Interest rate parity
Work out average spot
Then do interest rates of each over the correct period eg 3 months
Then complete interest parity formula to get what forward rate should be
See that the rate goes up so discount
If a question asks why is a froward rate a discount what do you do?
Interest rate parity
Work out average spot
Then do interest rates of each over the correct period eg 3 months
Then complete interest parity formula to get what forward rate should be
See that the rate goes up so discount
What do you do for premiums when doing options on receipts?
Deduct them!!
It is a cost so remove from income
When doing advantages and disadvantages of hedging what must you do?
Make sure you say what would have happened if you hadn’t of hedged
Assumptions made to use WACC as a discount factor
Historical proportions of debt and equity are to remain unchanged
Business risk is to remain unchanged
The finance raised is not project specific
The project is small in size relative to the size of the company
What do you need to consider when saying if WACC is suitable for discounting? Not assumptions
Is dividend growth rate sustainable
Are there any other sources of finance
Tax rate changes will affect cost of debt
What are key assumptions when using cost of capital when ungeared and regeared for new industry?
The objective of the company is to maximise the wealth of the shareholders
All shareholders hold the market portfolio (they are fully diverted)
Shareholders are the only participants in the firm
What do you have to do when you do a perpetuity in SVA?
Discount the perp back to To
1/1.rate^n
To do sensitivity work out
The NPV of the part being looked at
Then divide that by the total NPV + perp NPV + Investment
Perp without growth formula
PV=Cashflow/ Rate
