CIMA CIMA-F3
CIMA F3 Financial Strategy Flashcards
How does the objective of a not-for-profit organisation differ from a for-profit one — and does it still care about money?
What three things follow, for objective-setting, from a company being quoted rather than unquoted?
Value for money: what are the three Es, and what does each ask?
Why is maximising shareholder wealth not the same objective as maximising profit?
State the compound average growth rate formula, and the one thing candidates get wrong about n.
Return on capital employed versus return on equity: what goes on the top and the bottom of each, and why?
Dividend yield, dividend cover and dividend payout — the three formulae, and the relationship between two of them.
The syllabus asks you to advise on 'enhancing the value of other non-financial capitals'. Which capitals does it name, and what does 'enhancing' mean in practice?
What four properties does a usable non-financial objective have, and what is the test for whether an objective is financial or non-financial?
What are the UN Sustainable Development Goals, and what are the three steps in using them to set objectives?
Froome's earnings rose from $10.4m in 20X3 to $17.2m in 20X6, while its shares in issue rose from 100 million to 150 million. What was the compound average growth rate in earnings per share?
Cavendish has 1 million shares trading at $1.74 and $1.5 million of redeemable bonds trading at 97%. What is its gearing as debt/equity at market values, and what is the figure compared with?
Thomas has profit before interest and tax of $19.5m, profit for the year of $12.5m, debt of $18m and share capital and reserves of $138m. What are its ROCE and ROE?
Trott's share price rose from $2.35 to $2.54 during the year and it paid a dividend of $0.15. Its shareholders require 15% a year. Has the objective been met?
Kenny's share price is $2.50 and its EPS is 52c; its main competitor has a P/E ratio of 6. Which company does the market expect to perform better?
Hoy's earnings are $43.8m on 100 million shares, its share price is $1.84 and it paid a dividend of $0.15 a share. What are its dividend yield, dividend cover, payout ratio and P/E ratio?
Wiggins (revenue $134.2m, operating costs $67.6m, earnings $43.8m) expects revenue to fall 15%, costs to rise 5%, interest at 5% on its $100m loan and tax at 22%. What are next year's earnings?
How does inflation affect a company's financial objectives?
What is the primary financial objective under the shareholder-oriented and the stakeholder-oriented models of the corporation?
What is satisficing, and why does objective-setting need it?
What happens if a company sets its dividend to grow faster than its earnings?
Are non-financial objectives usually in competition with financial ones?
Why can the financial statements not evidence whether a non-financial objective has been met?
The 17 Sustainable Development Goals are conventionally grouped under five headings. What are they, and what is each about?
What is SDG-washing, and what three questions test for it?
The GRI Standards are built in three layers. What are they?
GRI 2 or GRI 3? What is the rule that decides?
Who owns the Integrated Reporting Framework now, and what is the chain?
Name the six capitals, and give the mnemonic and its trap.
List the seven Guiding Principles of the Integrated Reporting Framework — and name the two whose titles are commonly written wrong.
Read the value creation process round the loop: what are inputs, outputs and outcomes, and why is it a loop?
Three bodies, three questions. Match each to the question it answers about a non-financial objective.
Which capital does each of these Sustainable Development Goals mainly bear on: decent work and gender equality; innovation and infrastructure; climate action and life on land; reduced inequalities?
Why is 'climate action' not an objective, and what would turn it into one?
When was the ISSB set up, whose work did it consolidate, and when did it issue its first standards?
The IASB and the ISSB both sit under the IFRS Foundation. What does each set, and does IFRS S1 change any number in the financial statements?
What four measurement and disclosure problems run across all six capitals?
Why do the financial statements tell you little about an organisation's manufactured capital?
What is an integrated report, and what must happen before it can state that it is prepared in accordance with the Integrated Reporting Framework?
What are the eight Content Elements of an integrated report?
A question mixes capitals, Guiding Principles and Content Elements and asks which are Guiding Principles. What is the quickest method?
What are the main benefits of the Integrated Reporting Framework?
What are the main limitations of the Integrated Reporting Framework?
What is the difference between integrated thinking and integrated reporting?
Run the loop: how do the investment, financing and dividend decisions interlock?
The chain runs backwards too. Give three ways one decision damages another.
A company is short of cash. What are the six levers, and what does each cost?
What is sensitivity analysis, and what two things must accompany it to earn full marks?
Against what four things is a proposed policy decision assessed before it is taken?
Interest cover: the formula, the direction of a covenant, and the standard error.
What are the five Cs of creditworthiness, and what does a lender test under each?
Why does a credit rating downgrade across the investment-grade boundary cost more than the change in default risk alone?
Four ways tax reaches a financing or investment decision.
What do price controls and service controls do to a regulated company's financial strategy — and what does it trade for what?
Why can a project with a positive net present value look as if it is destroying profit in its first year or two?
A project has a positive net present value. How can it still fail the organisation's objectives?
Why is debt cheaper than equity, and what does it bring that equity does not?
Why is a decision to increase the dividend also a financing decision?
What does paying a larger dividend do to the forecast statement of profit or loss, the forecast statement of financial position and the forecast cash position?
What can lenders do if a policy decision increases their risk without compensating them?
Stakeholders' interests in a policy decision conflict. How should an answer deal with that?
Skelton has a $40m 5% loan with a covenant requiring interest cover of 5 times, and profit before interest and tax of $16.5m. It issues $25m of 4% debentures. Is the covenant still met?
After its debenture issue Skelton pays $3.0m of interest, its profit before interest and tax is $16.5m and its covenant requires 5 times cover. How much headroom does it have?
A company with gearing of 40% and interest cover of 6 times plans an all-debt acquisition taking gearing to 65% and cover to 3 times. Beyond a higher price, how is a lender likely to respond?
An exam scenario states a tax rate and a tax rule that differ from those where you live. Which do you apply?
Beyond price and service controls, how can an industry regulator reach a company's financing and dividend decisions?
The three capital structure theories, in one line each.
Write the weighted average cost of capital formula, and say which values go in it.
Write the M&M formula for the cost of equity of a geared entity, and say what each symbol is.
Write the M&M adjusted WACC formula. What does it give when there is no debt, and why?
List Modigliani and Miller's assumptions.
Ungearing and regearing: what are the two steps, and what are the two traps?
Under M&M with corporate tax, how does the value of a geared entity relate to the value of the same entity ungeared?
What does raising DEBT do to the financial statements, and what does raising EQUITY do?
Where finance is raised inside a group changes five things. What are they?
What do none of the three capital structure theories contain?
Why can changing the mix of debt and equity change the value of an entity even though its cash flows have not moved?
Kepler Co: 40m shares at $3.25 ex div, $50m of irredeemable 6% debentures at $92 per $100, cost of equity 13%, tax 25%. What is the WACC?
Kepler's equity is worth $130m and its debt $46m. What is its gearing, and which gearing do covenants and the capital structure theories each use?
Under the traditional view, at what rate should projects be appraised while an entity is gearing up, and once it has reached its optimal gearing?
Ignoring tax, why is it unsurprising that Modigliani and Miller find the total market value of an entity unaffected by its gearing?
M&M 1963 concludes that an entity should raise as much debt as it possibly can. Why do real companies not gear to 99%?
London Co is ungeared with a cost of equity of 15%. It raises debt at 8% before tax to a debt to equity ratio of 0.4, and tax is 30%. What is its new cost of equity?
What is London Co's WACC before and after raising debt to a debt to equity ratio of 0.4, with a 15% ungeared cost of equity and 30% tax?
Proxy Rigel has a cost of equity of 18%, is financed 60% equity and 40% debt at market values, and borrows at 7% before tax; tax is 20%. What is the ungeared cost of equity?
Vega will finance a new business 75% equity and 25% debt at 7% before tax; the industry's ungeared cost of equity is 14.17% and tax is 20%. What cost of equity and discount rate should it use?
Altair has 20m shares, no debt and 25% tax; a $30m expansion lifts operating profit from $9m to $13m. What is EPS now, and with 10m new shares at $3.00 (Plan A) or 8% loan notes (Plan B)?
If Altair's operating profit after the expansion is only $5m, what are EPS under Plan A (30m shares) and Plan B ($2.40m interest, 20m shares), and what does that show?
What is a benchmark reference rate, and how is a floating rate quoted?
Interest yield and redemption yield: what is the difference, and whose return is each?
List the criteria for selecting a debt instrument.
Bank facility, private placement, capital market issue — what are the trade-offs?
What actually happens in a public bond issue?
What is the target debt profile, and what does each of its three dimensions manage?
Give the five-step method for an interest rate swap question.
Three things swap examples usually leave out.
A convertible bond has three values. What are they?
Lease versus buy: what is compared, at what rate, and what are the two tax lags?
A company's 7% bonds, redeemable at par in four years, are quoted at $94 per $100 nominal and interest has just been paid. What are the interest yield and the gross redemption yield?
If market yields rise, what happens to the price of an existing fixed-coupon bond, and why?
Why are preference shares counted as debt for gearing analysis, and is a preference dividend interest?
A project will generate no cash at all until it is complete. Is it better matched by a deep-discount bond or a zero-coupon bond, and what is the risk in either?
An entity has issued fixed-rate bonds but wants more floating-rate exposure. How does it adjust its debt profile, and what limits the target it can set?
What is a borrower's interest deduction worth when it has no taxable profit to relieve, and which rules can restrict the deduction?
What covenants does a lender typically attach to long-term debt, and what does a breach usually mean in practice?
Sirius has borrowings of $180m and book equity of $220m, and a covenant caps debt divided by equity at 90%. What is its headroom, and could it raise a further $40m as debt?
X can borrow fixed at 10% or floating at BR + 3%; Y fixed at 12% or BR + 6.5%. X wants fixed and Y floating, sharing any saving equally. What is the saving, and what does each end up paying?
A can borrow fixed at 10% or at BR + 1%, B fixed at 11% or BR + 1.5%, and A's income moves with interest rates. Sharing the saving equally, with BR at 9%, what does each pay in year 1 on $20 million?
An 8% bond converts in three years into 20 shares per $100 or $100 cash. The share price is $4.50, growing at 7% a year, and investors require 10%. What are its market value and the value of the conversion right?
How does exercising a warrant differ from converting a convertible bond, for the entity's cash and its debt?
Buy a $100,000 machine on the last day of the year (scrap $10,000 after 4 years; 25% reducing-balance allowances, balancing allowance; tax 30% paid a year later) or lease it for $35,000 a year in advance?
Name the four methods of flotation and say when each is used.
Who are the parties to a flotation and what does each do?
What does a flotation mean for MANAGEMENT?
What does a flotation mean for SHAREHOLDERS?
Write the TERP formula and define N.
Why is a rights issue made at a discount, and how deep?
The value of a right: two figures, and which is which.
A shareholder in a rights issue has three choices. What happens to wealth under each?
Write the yield-adjusted TERP formula, and say what Y_old is NOT.
Bonus issue against stock split: what changes and what does not?
An unquoted company's shares are already held by several hundred investors, it needs no new money and wants the cheapest route to a listing. Which method of flotation suits it, and why?
A company with 10 million shares at $2.50 issues new shares at $2.40 to raise $2.4 million for a project with an NPV of $3.5 million. How is the $3.5 million gain split between existing and new shareholders?
10 million shares trade at $2.50 and $2.4 million is to be raised for a project with an NPV of $3.5 million. At what issue price would all the NPV go to existing shareholders, and why does a rights issue avoid this?
The share price is $8.00 and a 1-for-3 rights issue is made at $6.00. Mrs X holds 1,200 shares, takes up half her rights and sells the rest. What happens to her wealth?
250 million shares trade at $2.25. A 1-for-4 rights issue is made at a 10% discount, and the new funds will earn 14% against a WACC of 12%. What are the funds raised, the TERP and the yield-adjusted TERP?
When is the yield-adjusted TERP above, equal to or below the ordinary TERP?
How can an unquoted entity raise equity without floating?
What entry requirements do stock exchanges typically impose, and what is the trade-off of a growth market against a main market?
40 million 50c shares at $6.00; equity is share capital $20m, share premium $12m, retained earnings $48m. What do a 1-for-4 bonus issue and a 2-for-1 stock split each do to the shares, share capital and price?
Are retained earnings a cheap source of finance?
State Modigliani and Miller's dividend irrelevance argument, and date it.
What is a 'home-made dividend' and what does it prove?
List the assumptions of the dividend irrelevance argument.
M&M say the dividend is irrelevant. What exactly is irrelevant, and what is not?
Three practical reasons dividend policy DOES matter.
What has to be true before a cash dividend can be paid?
The four dividend policies, and the consequence of each.
What does a scrip dividend do, for the entity and for the shareholder?
Share repurchase against a cash dividend: what differs?
Deneb Co has profit of $60m, 200m shares and paid a $24m dividend last year. What is the total dividend and dividend per share under a 40% payout, 8% growth, and a residual policy after $50m of investment?
Deneb has retained earnings brought forward of $310m and profit of $60m; it holds $12m of cash, expects $50m from operations and plans $50m of investment. Can it pay a $25.92m dividend?
The residual policy is Deneb's only self-financing option and the value-maximising one on M&M's reasoning. Why would the board hesitate, and what does the chapter recommend instead?
Deneb declares 12.96c a share on 200m shares with a scrip alternative at $3.24 a share, and holders of 60% of the shares take the scrip. How much cash is paid out and how many new shares are issued?
Deneb pays 12.96c a share with a scrip alternative at $3.24; holders of 60% of its 200m shares take scrip, leaving 204,800,000 in issue. How do a 1,000-share holder taking scrip and one taking cash compare?
Antares has 80m shares at $5.00, $40m of surplus cash earning nothing and profit of $32m. What are the share price and EPS after a $40m special dividend, and after a $40m buy-back at $5.00?
An Antares shareholder with 1,000 shares does nothing while the company buys back 8m of its 80m shares at $5.00. What is the position, and what does a buy-back offer that a dividend does not?
A board justifies a buy-back by the rise in earnings per share it produces. Why should that be treated with caution?
What are the three ways an entity can repurchase its shares, and why does buying from one specific shareholder normally need the other shareholders' approval?
What are the arguments against a share repurchase programme?
Is 'shareholders prefer a dividend today to a capital gain in the future' one of the assumptions behind M&M's dividend irrelevance argument?
What is the difference between a source of financial risk and a type of financial risk?
Name the four types of financial risk in the F3 syllabus, and the one thing that distinguishes economic risk from the other three.
An entity has no foreign currency transactions, no foreign subsidiary and no foreign currency borrowings. Can it suffer currency risk?
What is the difference between cash flow risk and value (or reporting) risk, and why does the second still matter?
Give the three-line definition of value at risk.
At the 95% confidence level, which figure do you look up in the normal distribution table, and what Z does it give?
How does the standard deviation scale from one period to several, and what does that do to the value at risk?
Give three criticisms of value at risk.
Distinguish macro from micro political risk, with two examples of each.
Name the four families of response to political risk, in order of effectiveness.
When an entity locks in an exchange rate or an interest rate with a forward contract or a forward rate agreement, what is it managing, and what has it given up?
A company quotes a price to an overseas customer in the customer's currency. When does its currency exposure begin?
When can the right recommendation be to accept a financial risk rather than hedge it, and what is never acceptable?
On 1 June a company decides to take a six-month $100,000 loan at a fixed rate from 1 September; the rate today would be 10%. What exactly is its interest rate risk?
Why does keeping distribution and critical technology outside a host country, and retaining the brand and the customers, reduce the risk of expropriation?
No contract can hedge a competitive position. How, then, is economic risk managed?
A trading portfolio has a mean value of $2,400,000 and a daily standard deviation of $60,000. What is its 95% value at risk over one day and over 16 trading days?
A holding's daily value is normally distributed with a mean of $50,000 and a standard deviation of $2,000. What is the probability it is worth less than $47,000, and what is its one-day 99% value at risk?
In a rate quoted $/£ 1.50, which is the base currency, and how do you convert each way?
A bank quotes a pair of rates. Which one do you get?
State the purchasing power parity formula and the rule that governs which rate goes where.
What is the one distinction to carry away from the parity relationships?
State the international Fisher effect and what it links.
Name the three currency risks and say which of them move cash.
Name the four internal hedging techniques, and say which one is not really a hedge.
How does a money market hedge work, for a receipt and for a payment?
What is the direction rule for currency futures, and give two reasons the hedge is never perfect.
What is a currency swap, and how does it differ from an interest rate swap?
The rate is $/£ 1.70, inflation is 5% a year in the US dollar economy and 2% in the sterling economy. What exchange rate does purchasing power parity predict in one year and in two years?
Spot is $/£ 1.2500 and one-year interest rates are 2.5% for sterling and 4.5% for dollars, but a bank quotes a one-year forward of 1.2700. What risk-free profit can an entity that can borrow £1,000,000 make?
Why can a purchasing power parity forecast of the exchange rate be wrong, sometimes for years?
An exporter is owed AUD 100,000 in three months; the rate is AUD/£ 1.80 today. What is the receipt worth if the rate moves to 2.00, or to 1.70, and what is the real problem?
A US subsidiary has $2.0m of assets, funded either wholly by equity or half by a $1.0m dollar loan. What is the translation loss in each case if $/£ moves from 1.60 to 2.00?
An exporter prices its goods at £100 and sells into the euro area. If the euro weakens from €/£ 1.10 to €/£ 1.30, what happens, and why can no contract hedge it?
A euro-reporting manufacturer will receive £500,000 in three months. The three-month forward rate is €/£ 1.2014 - 1.2026. What does a forward contract give it, and what if sterling then strengthens to 1.50?
Spot €/£ is 1.2501 - 1.2631 and the three-month forward margin is 0.0030 - 0.0040 pm. What is the three-month forward rate?
A sterling exporter will receive $2 million in three months. Dollar rates are 0.54% - 0.66% a year, spot is $/£ 1.4701 and sterling deposits earn 1.2% a year. What does a money market hedge produce?
A sterling entity will receive $500,000 on 30 November and buys 5 December sterling futures at 1.5136 (£62,500 each). They close at 1.6997 and spot is then 1.71 - 1.75. What sterling does it receive?
A euro-reporting importer must pay $200,000 in three months and buys a call option on the dollar at €/$ 0.77 for a premium of €4,000. What is the total cost if the rate is then 0.70, or 0.80?
What are the intrinsic value and the time value of an option, and what makes the time value larger?
An entity is tendering for a contract that would bring in foreign currency. Why is an option, rather than a forward contract, the right hedge?
USCo can borrow dollars at 5.0% and euros at 4.2%; EuroCo dollars at 5.4% and euros at 3.8%. USCo wants euros, EuroCo dollars. What does a currency swap save each?
What is a benchmark reference rate, and how should a floating rate be written?
Does borrowing at a fixed rate remove interest rate risk?
How is a forward rate agreement named, and which side does a borrower take?
What is the price of an interest rate future, and which way does it move?
How many interest rate futures contracts are needed, and what is the direction rule?
How does a borrower, and how does a depositor, use interest rate options?
Define a cap, a floor and a collar, and say how each is built.
Where does the gain in an interest rate swap come from, and how big is it?
Give the five-step method for any interest rate swap question.
What does an interest rate swap NOT do?
Why does uncertainty about interest rates matter beyond the interest charge itself?
What is smoothing as a response to interest rate risk, and is it a hedge?
An entity has $520,000 borrowed at BR + 4% and $500,000 deposited at BR + 1%. What does a rise in BR from 3% to 5% do to its net interest cost, and why so little?
An entity borrows on a ten-year mortgage at a fixed 6% to buy a property it lets for five years at a yield of 8%. What risk has it taken, and what would have avoided it?
Nero buys a 4 - 7 FRA at 5% on a $2 million three-month borrowing. What is its net interest cost if the market rate on the day is 6.5%, and if it is 4%?
X will borrow $6 million for six months from 1 January and hedges with January futures at 92.00 ($500,000 contracts). On 1 January rates are 10% and futures 90.00. What is the net cost?
Why is an interest rate option the right instrument where a planned borrowing may not happen?
A borrower of $10m for three months buys a cap at 6.5% (premium $7,500) and sells a floor at 4.5% (premium $5,000). What is its total cost if rates are 7%, 5% or 4%?
A can borrow at 8% fixed or BR + 2%; B at 9% fixed or BR + 5%. A wants fixed and B floating. What gain does a swap offer, and where does each end with an equal split?
A can borrow at 10% fixed or BR + 1%; B, cheaper in both markets, at 9% fixed or BR + 0.5%. Can a swap still help, and how was the saving shared when a bank arranged it?
Distinguish a merger from an acquisition, and a recommended bid from a hostile one.
What are the only two ways an acquisition can increase the predator's shareholders' wealth?
Name the four sources of synergy, with an example of each.
Classify combinations by the relationship between the two businesses, and say which attracts most regulatory attention.
Competition control and takeover regulation: whose interests does each protect, and what does each do?
State the four general principles on which takeover codes rest.
Why do predators overpay? Give three reasons.
Share purchase or asset purchase? Set out the tax trade-off and say who prefers which.
Cash or shares: why does the form of consideration change what a target shareholder receives, after tax?
Explain the co-insurance effect and the two ways shareholders respond to it.
A predator pays a premium equal to the whole of the synergy it expects from an acquisition. Who gains from the deal?
Why is diversification a weak argument for an acquisition, and how can it still create value?
A supermarket group buys the wholesaler that supplies its stores, and a brewer buys a chain of bars. How is each combination classified?
Two airlines combine under a new holding company, and an entertainment group buys a chain of fitness studios. How is each classified, and which will a competition authority examine closely?
After a bid is announced, the target's board plans to issue new shares to a friendly investor without asking its shareholders. Which takeover code principle does that breach, and why does it exist?
Separately from whether to make an acquisition, what three questions does the predator's financing decision raise?
Why does the target's board want to know where the predator's synergies come from, and what sets the lowest offer it should recommend?
Why must a poison pill be in place before a bid is made, and where does its value lie?
A board opposing a bid introduces a white knight or arranges a management buy-out. What has it conceded, and what do its shareholders gain?
J's 100,000 T shares cost $1.20 each. P offers $4.00 cash a share, or one P share worth $8.10 for every two T shares. Gains are taxed at 20%; a share-for-share exchange is not a disposal. What is each offer worth today?
Interest on acquisition borrowing is normally tax deductible. Why might heavy gearing still fail to deliver the expected relief, and what affects a cross-border deal?
Name the divestment routes, and give the two questions that separate them.
Give the reasons a company divests.
What is reverse synergy, and how is a conglomerate discount measured?
Name the exit routes available to an investor, and the four criteria for recommending one.
Define MBO, MBI and BIMBO, and list the parties to a buy-out.
Set out the layered finance package for a buy-out.
Why do buy-outs create value, and what goes wrong?
Private equity versus venture capital: contrast them on target, stake, debt, return and exit.
What terms will a private-equity or venture-capital investor require?
Give the tax consequences of a divestment.
C's three divisions are worth $440m, $350m and $192m on their sector P/E ratios, and C's market capitalisation is $840m. What is the conglomerate discount, and what could a demerger release?
Why might a demerger fail to release the whole of a conglomerate discount?
Why is liquidation said to put a floor under all the other divestment and exit routes?
In a demerger or a spin-off, does the parent company cease to exist, and what really distinguishes both routes from a sell-off?
Why might a parent company prefer to sell a division to its own managers rather than on the open market?
What is an equity ratchet in a buy-out, and why should the management team negotiate it hard?
A fund buys D for $200m with $60m of its own money and $140m of debt. D's cash flows repay $50m, and after five years D is sold for $310m. What is the equity worth, and where did the gain come from?
Had D been sold for $180m instead, with its debt still at $90m, what would the fund's $60m of equity be worth, and what does that show?
What does a listed company gain and lose by going private?
Give the dividend valuation model for constant dividends and for constant growth, defining every symbol.
Distinguish an ex-div from a cum-div valuation, and give the relationship between them.
Why does a buyer of CONTROL not use the dividend valuation model?
Define free cash flow and free cash flow to equity, and set out the pro-forma.
Which discount rate goes with which cash flow, and what does each give you?
Name the two simplifying assumptions in the free-cash-flow pro-forma taught in this chapter.
How is a terminal value calculated in a discounted cash flow valuation, and what year does it belong to?
State the basis on which traded debt is valued, and the three things it depends on.
How do you value irredeemable and redeemable debt, and why does the price sit above or below par?
Is the market value of a company's debt the same as the figure in its own financial statements?
Beta's 50c shares have just paid a dividend of 15c, which is expected to stay constant, and shareholders require 12%. What is a share worth, and what part does the 50c nominal value play?
Beta is about to pay its constant 15c dividend, and shareholders require 12%. What are the cum-div and ex-div values per share?
Gamma has just paid a dividend of 30c, dividends grow at 4% a year and shareholders require 15%. What is a share worth?
Kappa ($000): operating profit 935, tax 20%, depreciation 120, investment in non-current assets 420 and in working capital 185, interest 170, dividends 150. On the chapter's basis, what are FCF and FCFE?
Sigma's free cash flow to equity is $6.5m, growing at 2% a year for ever; its cost of equity is 8%, it has 5 million $1 shares and its debentures trade at $90. What is a share worth?
Omega's free cash flows to equity are 340, 410 and 450 ($000) in years 1 to 3, then grow at 2% for ever; shareholders require 8%. What are the terminal value and the equity value?
P plc has $500,000 of 10% irredeemable debentures and investors require 8%. What is the market value of the debt, and why is it above nominal value?
R plc has $400,000 of 8% debentures redeemable in 5 years at a 10% premium, and investors require 12% (annuity factor 3.605, discount factor 0.567). What is the debt worth?
The free cash flow pro-forma starts from operating profit. Why is that figure not interchangeable with 'profit before interest and tax' from 2027?
Give the limitations of the dividend valuation model.
Name the three bases for valuing net assets and say what each tells you.
Give the earnings-basis formula, and the two judgements it depends on.
What is bootstrapping, and does it create value?
Set out the calculated intangible value method, step by step.
What can a quoted company's market capitalisation tell you, and what can it not?
Besides CIV, how else can an intangible asset be valued?
Give the strengths and weaknesses of the market-price, net-assets and dividend-valuation methods.
Give the strengths and weaknesses of the earnings-basis, discounted-cash-flow and CIV methods.
How should a valuation answer be framed?
An unquoted publishing company has EPS of 50c and quoted publishers trade on a P/E ratio of 18. What value per share does the earnings basis give, and what adjustment does an unquoted company need?
Dory has 10 million shares in issue, profit after tax of $550,000 and operating profit of $790,000. At a P/E ratio of 12, what is the value per share?
Nemo has 1 million shares in issue and has just declared a dividend of $4 million, giving a dividend cover of 3. At a P/E ratio of 10, what is the value per share?
Woody (P/E 8, earnings $600,000) wants to buy Buzz (P/E 6, earnings $450,000). The combined entity is expected to have a P/E of 9 and post-tax synergies of $100,000. What is the most Woody should pay for Buzz?
Woody can pay at most $5.55m for Buzz, which is worth 6 × $450,000 = $2,700,000 as it stands. What decides where the price settles, and who gains what?
Peppa: tangible assets $1.85m, earnings after tax $0.58m, industry pre-tax return on tangible assets 12%, tax 20%, WACC 8%, cost of equity 10%. What is the calculated intangible value?
Replacement value is the most a buyer should pay on a net assets basis. What does that figure leave out?
A target discloses a contingent liability that it has not recognised. How should a buyer treat it in a net assets valuation?
From 2027 operating profit is a defined, required subtotal under IFRS 18. Does that make it the earnings figure for a P/E valuation?
Give the post-transaction value identity, and the three values a pricing question needs.
Name the three kinds of synergy and say how reliable each is.
Compare cash and shares as consideration, from both sides.
What is negotiated in an acquisition apart from the price?
How is a cash offer financed, and on what four tests is the choice made?
Why is a cash offer not "cheaper" than a share offer just because debt costs less than equity?
How does the target's own debt affect what the acquirer can offer its shareholders?
What is the co-insurance effect?
What does benefit realisation require, and why do transactions fail to deliver?
Why is an exit strategy decided when a business is BOUGHT, and what makes a business exit-ready?
A has 20m shares at $6.00 and B 10m shares at $3.20. A expects synergies with a present value of $18m, costing $3m in present-value terms to achieve. What is the most A can pay for B's equity?
In the A/B deal (combined value $167.0m, A $120.0m and B $32.0m standalone) A offers $3.80 cash per B share for B's 10m shares. How is the value created split?
A (20m shares, worth $120.0m) bids for B (10m shares, worth $32.0m) with 6 A shares for every 10 B shares; the combined entity is worth $167.0m. How is the gain split between the two sets of shareholders?
A (20m shares, $120.0m) buys B (10m shares, $32.0m) but no synergies arrive: the combined business is worth $152m. What does each side gain or lose under a $3.80 cash offer and a 6-for-10 share offer?
A values B's business, before any financing, at $77m. B has borrowings of $30m; a more heavily borrowed B would have borrowings of $45m and surplus cash of $5m. What can A offer B's shareholders in each case?
What do loan notes or preference shares offer as consideration, for the acquirer and for the target's shareholders?
What is an earn-out, and why is it more than a pricing device?
Which four questions decide whether an acquirer offers cash or shares?
Between the floor and the ceiling, what shifts the bargaining power that decides the price?
What is the winner's curse, and what is the defence against it?
Why is an offer of cash and shares (or a cash alternative) a negotiating instrument rather than a compromise?
How does an acquirer decide how far to integrate a target, and when should it decide?
Distinguish unsystematic from systematic risk, and say which one earns a return.
State the CAPM formula, define every symbol, and give the trap.
What do beta values of 1, above 1, below 1 and 0 mean?
What is the security market line, and what three things can be read off it?
How is CAPM used to appraise a project?
What is an alpha value, and what do you do with one?
Distinguish the geared beta from the ungeared beta, and give the formula linking them.
Give the three steps for finding a discount rate for a project in a different industry.
Two rules of arithmetic discipline when ungearing and regearing a beta.
Give the limitations of CAPM.
Q plc has a beta of 1.5, the market is giving a return of 12% and the risk-free rate is 5%. What return is required from Q plc?
R plc has a beta of 0.8. A question gives a risk-free rate of 8% and a market risk premium of 8%. What return is required from R plc?
S plc is giving a return of 20%, the stock exchange as a whole 25% and government securities 8%. What is S plc's beta, and what kind of share is it?
All-equity T plc appraises a project with a beta of 1.4, unlike its own business: outlay $100,000, then $15,000 a year in perpetuity. The market return is 11% and the risk-free rate 6%. Is it worthwhile?
D plc has a beta of 0.6 and is giving a return of 8%. The market return is 10% and the risk-free rate 4%. What is D plc's alpha value, and what does it suggest?
Why does a CAPM-derived cost of equity understate the return the owner-manager of an unquoted company actually requires?
P plc has debt to equity of 0.4 and a share beta of 1.8; Q plc 0.2 and 1.5; tax is 30%. Which has the more risky shares, and which the more risky business?
X plc, an oil company with a share beta of 1.48, plans to build ships. Quoted shipbuilder Y plc has debt to equity of 0.2 and a share beta of 1.8; tax is 25%. Which beta does X start from, and what is its asset beta?
Shipbuilding asset beta 1.5652, risk-free rate 8%, market return 18%, tax 25%. What return do shareholders require (cost of equity) if the project is all equity, and if debt to equity is 1 : 1?
The shipbuilding project's cost of equity is 23.7% with no debt, 28.3% at a debt to equity ratio of 0.4 and 35.4% at 1 : 1. Why does it rise, and which cash flows does each rate discount?
Distinguish an EFFICIENT market from a PERFECT one.
Set out the three forms of market efficiency and the information each reflects.
Which method of picking shares does each form of efficiency destroy?
What is the random walk, and why does it create an apparent paradox?
What does the evidence say, and where do real markets sit?
What does market efficiency imply for new issues, rights issues and the cost of capital?
What does market efficiency imply for a takeover?
What does market efficiency imply about creative accounting, and about disclosure?
Give the anomalies the hypothesis struggles with, and the behavioural explanations for them.
What are the limits to arbitrage, and what should a financial manager conclude from all this?
An exploration company's geologist finds oil. When does the share price react under strong form, semi-strong form and weak form efficiency?
The market is semi-strong form efficient. Which of these can still make a systematic gain: a chartist, an analyst studying the published accounts, or a director who deals before the results are announced?
Why is the quoted price of a small company that two analysts follow and that trades a few times a week weaker evidence of its value than the price of a large index share?
When valuing a business for an acquisition, why does the chapter treat the target's quoted share price as evidence of value rather than as the answer?
A company changes its depreciation policy, raising reported profit without changing what the business earns. What does the evidence say happens to its share price?
An investor keeps a share that has fallen well below the price originally paid, but quickly sells one that has risen. Which behavioural biases does that show?
A board believes its shares are undervalued and plans to wait for a 'better' price before issuing new shares. What does the chapter say about that reasoning?
Card 1 of 350. Question side.