Theory Flashcards
(25 cards)
What is goodwill?
-Overpayment
-Expectations of future cash inflows resulting from synergies
-Recognized as an asset
Disagio
-Bank outpayment smaller than repayment amount
-Interest payment at start of contract
Accounting for Borrowing
Bank/ Bank liability
Diasgio/
-Disagio amortization: Interest expense/ Disagio
-Interest accrual of coupon: Interest expense/ Other liabilities
Hurdle Rates
-Pfofitability comparison methods
= min. required rae of return that investment should have to be profitable
-Net profitability: min. rate = 0
-Gross profitability: min. rate = interest rate
EAA
-Converst NPVS of series of payments into equal payments
-use if projects don’t have same maturity
-EAA > 0 profitable
IRR
-Discount rate at which NPV = 0
-IRR > market interest profitable
-Problems using IRR when projects have different maturities or unequal cashflows
Financing through Equity v Debt
-Equity: Fianncing through selling shares of the company
-Debt: Liability, external obligation to 3rd party
Increasing debt = increasing return on equity?
Not always, if interest rate of debt is higher than return on assets, return on equity depreciates
-> Negative leverage effect
What is capital structure?
-Financing of company
-Equity financed (unlevered) or debt financed (leveraged)
Irrelevance of Capital Structure
Value of company does not depend on capital structure, but on the assets
Principal-Agent-Theory
-Principal provides funds and delegates decision making to agent
-Principal must ensure that agent acts in their interest
-> agency costs, e.g. covenants
Factors limiting company to take on debt
-Debt limitation through bond covenants
-Consideration of insolvency costs
Conditions for financing from depreciation assets to have financing effect?
-Capital release and capacity increase effect
-Increasing capacity per period
-Unchanged total capacity
Deferred tax expense v asset
Expense -> tax on income, for recognition of self generated assets e.g. development cost/ software
Asset -> tax deducted from loss, for provisions for onerous contracts, disagio, amortization, tax loss carryforward, impairment
Accounting for Deferred Taxes
German GAAP > Tax accounts 0
-> taxable temporary difference
-Tax assets: recognition option
Journal:
Deferred tax expense/ Deferred tax liability
Deferred tax asset/ Deferred tax income
Use of provision (asset):
Deferred tax expense/ Deferred tax asset
and Provision/ …
Accounting for Capital Increase
Bank / Nominal capital
/Additional paid in capital
Cost of capital increase:
Other expenses/ Bank
Tied up (employed) capital calculation
C2C = 360/ turnover
Tied up capital (funding requirement) = Costs/ C2C
Decisions under Uncertainty
-Maximin: Best outcome in worst scenario
-Maximax: Best outcome in best scenario
-Hurwicz: Weigh best outcome of alternative with α and worst with (1-α)
-Laplace: Highest average outcome
Leverage Effect
ra= Net result/ Equity
ra> interest rate = positive leverage effect
ra< interest rate = negative leverage effect
Capacity Increasing Effect
-Increased capacity per period
-Unchanged total capacity
-Effect can be estimated with capacity extension multiplicator:
KEM = 2x (ND/ND +1)
What is ROIC?
-Return on invested capital, indicator for value creation
-Vallue created if ROIC>WACC
What is EVA?
-Economic value added, extent to which ROIC was greater than cost
-Maximize EVA by maximizing ROIC (increase revenue or decrease cost)
-and minimzing WACC (optimal capital structure)
Internal Hedging Strategies
- Setting off cash inflows and outflows
- Leading and lagging
- Diversification
- Denomination of contracts
- Transfer FX risk to customer
- Local production
External Hedging Strategies
-FX-Borrowing: borrow in foreign currency
-Financial derivates: FX forward: At fixed date, defined volumes of 2 currencies exchanged at FX rate
