Acca P4

Front 1

economic exposure

Back 1

results from the fact that a company's economic value will change as a result of changes in a foreign exchange rates
->transaction exposure
->real operating exposure

Front 2

real operating exposure

Back 2

longer term effects on CF and NPV after the effect of inflation has been removed

Front 3

transaction exposure

Back 3

focuses on the short term impact on CF.
Hedge - forward contract, currency options

Front 4

translation exposure

Back 4

exist because of need for multinational companies to periodically consolidate the financial statements of overseas subsidiaries with those of the parent company in order to present financial details and to assess the performance of entire group

Front 5

currency swap

Back 5

is an agreement between two parties to exchange principal and/or interest payment in different currencies over a stated time period

Front 6

currency swap
advantages

Back 6

-allow Co to undertake foreign currency hedging
-cheaper than long-term forward
-finance maybe obtained@cheaper rate than would be possible by borrowing directly
-may provide access to finance in currencies that could not be borrowed directly
-opportunity to restructure the company's debt profile without physically redeeming debt or issuing new debt
-might be used to avoid a company's exchange control restriction

Front 7

currency swap
disadvantages

Back 7

-potential defaul risk of the counterparty must be considered
-political or sovering risk:possibility that a government will inroduce restrictions that interfere with the performance of the swap
-basis risk: with a floating to floating swap basis risk might exist if the 2 floating rates are not pegged to the same index
-exchange rate risk:the swap may result in a worse outcome than would have occured if no swap had been arranged

Front 8

forex swap

Back 8

is agreement between 2 parties to exchange equvalent amount of currency for a period and then re-exchange them at the end of the period at an agreed swap rate

Front 9

forex swap
advanages

Back 9

-hedge against forex risk,possibly for longer period than is possible on the forward market
-access to capital markets, in wich it may be impossible to borrow directly
-useful when dealing with countries that have exchange controls and/or volatile exchange rates

Front 10

currency option

Back 10

is right, but not the obligation, to buy oe sell a currency at an excercise price on a future date

Front 11

call currency option

Back 11

is right, but not the obligation, to buy a currency at an excercise price on a future date

Front 12

put currency option

Back 12

is right, but not the obligation, to sell a currency at an excercise price on a future date

Front 13

currency option
schema

Back 13

1. determine the type of contract- call or put- by looking at currency requrement in the contract currency.Decide the exercise price, if necessary
2.determine number of contracts($/(exercise price*contract size)
3.BUY call/put option contracts as required. Determine option primium. Include the opportunity cost of funds
4. on the settlement date compare the option price with prevailing spot to determine whether the option would be exercised or allowed to lapse("sell big number", "buy lower number")
5. determine the net CF

Front 14

future currency contract
schema

Back 14

1. calculate the currence required in contract currency units, using the currence spot rate
2. devide by the contract size to determine the number of contracts
3. buy/sell contract as required. pay initial margin to exchange clearing house
4. close the position once the exposure period is over
5. calculate profit/loss in terms of ticks and in total
6. Adjust total quantity of currency to be exchanged if profit/loss is in the foreign currency exchange at prevailing spot rate

Front 15

centralised treasure
advantages

Back 15

- centralised knowledge of the fin dealings of the entirely group, better judgment of risk and exposure management, and the netting of inter-group currency requrements
-CT can ensure that financial actions are taken in line with the objectives of entire group rather than individual subsidiaries
-it allows greater control over inter-company receipts
-CT may reduce the cost of boorowing for Sub. by lending necessary funds at rates lower than could be obtained by Sub in local market
-CT may access to international markets, such as Euromarket, which are not directly accessable by Sub. Such m,arket may offer more favorable interest rates. Combining needs of Sub means that larger amount will be invested/borrowed->access to more favorable rates
-it will be cheaper to develop treasure management and hedging expertise in one central function rather than in each Sub.

Front 16

centralised treasure
disadvantages

Back 16

-it potentially removes decision-making and responsibility from Sub->may affect motivation and initiative within Sub
-heavily on the timely provision of information
-performance evaluation of staff in Sub may be destroyed because of luck of control in Sub
-the volume of treasury decisions withing a multinational may be too large to handle in one central function

Front 17

free CF usage

Back 17

• as a basis for evaluating potential investment projects using the NPV
technique
• as an indicator of company performance
• to calculate the value of a firm and thus a potential share price.

Front 18

CAPM

Back 18

suggest that a simple linear relation exists between beta and expected return.

Front 19

CAPM assumptions

Back 19

• investors are only interested in the mean and variance of their expected returns
• investors have the same beliefs about the mean and standard deviations of portfolio
• there are no taxes and transactions costs
• investors can borrow or lend at the risk free rate
• no individual investor can influence the market price of a security
• CAPM is ex-ante model, but data used in the model are normally ex-post

Front 20

CAPM advanatges

Back 20

• easy to apply
• widely used in capital investment decision

Front 21

APT

Back 21

is multy factor model that assume that return of investments are generated by number of industry and market factors,rather then just withing a mean-variance framework.

Front 22

APV

Back 22

APV = Investment decision + Financing decision;
(3) Value of a
geared project
= (1) Value of an all equity
financed project
+ (2) Present value of
financing side effects

Front 23

APV issue cost

Back 23

let issue cost be 3%, investment=2m
-> issue cost = 2m*3/97

Front 24

APV advantages

Back 24

• Stepbystep
approach gives clear
understanding of the elements of the
decision
• Can evaluate any type of financing
package
• More straightforward than adjusting
the WACC which can be very complex

Front 25

APV disadvantages

Back 25

• Based on M&M’s withtax
theory. Therefore ignores:
– Bankruptcy risk
– Tax exhaustion
– Agency costs
• Based on M&M’s withtax
theory. Therefore assumes:
– Debt is risk free and
irredeemable

Front 26

APV best fit at the case:

Back 26

• significant change in capital structure as a result of investment
• the investment involves complex tax payments and tax allowances, and/or has period when taxation is not paid
• subsidised, grands or issue costs exist
• financing side effect exist which require discounting at a diffrent rate than the applyed to the main straem project

Front 27

basis risk

Back 27

• The current cash market price and a futures price are normally different.This difference is called the ‘basis’.The basis is zero on the last day of the contract.
• Between now and the date the position is closed the ture rates do not normally move by exactly the same amount as the cash market rates, in which case a perfect hedge will not occur and the future in could be smaller or greater than the cash market loss.The risk of this occurring is known as ‘basis risk’.

Front 28

coeficient of variation

Back 28

shows the amount of risk per pound of the expected return
(risk/expected return)

Front 29

Advantages of organic growth (disadvantages of growth by acquisition)

Back 29

• Organic growth allows planning of strategic growth in line with stated objectives.
• It is less risky than growth by acquisition – done over time.
• The cost is often much higher in an acquisition -significant acquisition
premiums.
• Avoids problems integrating new acquired companies – the integration process is often a difficult process due to cultural differences between the two companies.
• An acquisition places an immediate pressure on current management resources to learn to manage the new business.

Front 30

Advantages of growth by acquisition (disadvantages of organic growth)

Back 30

• Quickest way is to enter a new product or geographical market.
• Reduces the risk of oversupply and excessive competition.
• Fewer competitors.
• Increase market power in order to be able to exercise some control over the price of the product, e.g. monopoly or by collusion with other producers.
• Acquiring the target company’s staff highly trained staff – may give a competitive edge.

Front 31

The reasons for acquisitions

Back 31

• Entry to new markets and industries.
• To acquire the target company’s staff and knowhow.
• Managerial motives – conscious pursuit of selfinterest by managers.
• Arrogance factor/Hubris hypothesis.
• Diversification.
• A defence mechanism to prevent being taken over.
• A means of improving liquidity.
• Improved ability to raise finance.
• A reduction of risk by acquiring substantial assets (if the predator has a high earnings to net asset ratio and is in a risky business).
• To obtain a growth company (especially if the predator’s growth is declining).
• To create a situation where rationalisation (which would otherwise be shirked) may be carried out more acceptably.

Front 32

synergy

Back 32

means that the value of the new whole is greater than the sum of the privious values of the component parts.

Front 33

Ke usage

Back 33

Is used for valuation income flow(such as dividends or free cash flow to equity) which go directly to the equity investor

Front 34

WACC usage

Back 34

Is for valuing flows attributable to the business entity such as project CF flows or NOPAD
для дисконтирования денежного потока к ФИРМЕ таких как CF или NOPAD

Front 35

EVA formula

Back 35

EVA® is an estimate of ‘economic’ profit – the amount by which earnings exceed the required minimum rate of return that investors could get from other securities of comparable risk.
NOPAt-capital employed*cost of capital
NOPAt is normally measured in CF terms after numerous adjustments to accounting profit

Front 36

EVA advantages

Back 36

*it measure the value added to an company after deducting a charge for the use of capital made by the organization
* based on CF and less easy to manipulate then accounting data
* EVA may be consistent with a goal to maximize s/h wealth
* can easily be communicate to managers and employees
* may be linked to remuneration schemes

Front 37

EVA disadvantages

Back 37

* calculation is complicated and require many adj to accounting info
* EVA is normally historic, not to help decide future investments and strategy
* not suitable for young Co
* WACC calucation based upon CAPM-> restrictive assumption-> potentially not accurate

Front 38

EVA & NPV relationship

Back 38

If the EVAs for each year of an investment were summed over the entire life of the investment and then discounted, the result, in theory, should be equal NPV of the investment