Section

Basic Techniques

Payback
ARR
NPV
IRR

Relevant Cash Flows

Working Capital

Tax

Inflation

Replacement analysis

Capital Rationing
Infientely divisible
Indivisible
Shareholder value analysis

Real options

INVESTING OVERSEAS
Sensitivity

Impact of NPV on shareholder weath

Ethical Issues in NPV
Efficient Market Hypothesis

Sales growth estimate

Predictive & Prescriptive analytics
Things to remember

1. Which method is superier better?

2. Formulas

Ignore: Sunk costs, committed costs, allocated & apportioned, non cash items, book values
Finance costs

Opportunity costs
(Lower of replacement cost & recoverable amount)

Do different types of sums for various weird percentages to use this

Working capital is always increemntal
Consider inflation as well

Ensure you are aware of which tax year to use when?

When should tax relief be given ?
A) ASSET BROUGHT AT STRAT< TAX ALLOWANCE AT T1
B) ASSET BROUGHT LAST = TAX ALLOWANCE AT t)
C) If an asset is being sold 0 Tax written down value -charge i.e. balancing figure (i.e. the 17% or whatever the tax rate is )

Add on correctly
CHECK IF QUESTION SAYS SOMETHING OTHER THAN MONEY CASH FLOWS
(1 + money rate) = (1 + real rate) (1 + inflation rate)

The effective rate is given by:

1 + effective rate =
1 + money rate/
1 + specific inflation rate

If costs need to be removed? Remove that first then apply inflation

a) Formula how to do it
b) Advantage
d) Disadvantage of it
Assumptions taken
Hard Capital
Soft Capital Rationing
Chck formula
Chck formula
The seven drivers of value
 Five that impact the size of the future cash flows:
– sales and growth in sales (maximise)
– margin (maximise)
– investment in fixed assets (minimise)
– investment in working capital (minimise)
– tax (minimise).
 Two that impact their NPV:
– discount rate (minimise)
– length of time that detailed future plans are available for (maximise).

Advantge: Forward looking, superior method

Disadv: tperpetuity ard to predct
Once competitve advatage over, growth rate is much slower,
Add short term investments and remove the debt held

1. Memorise defination of
Follow on option
Abandonment Optin
Timing Option
Growth Option

Market attractiveness
Competitive advantage
Political Risk
Cultural Risk
a) NPV - sensi/Original NPV
b) the lower the better
Variabe costs (also have tax) -
For safety might just use formula 1/(1+r)

b) Sensitivity = Residual Value

Increase in balancing charge*21%
Net cash flows
PV
Net relaisable alue
Dircetors have short ter view as that is based on their performance
Shareholder wealth looks at a long term view for performance

Decision Tree:
a) Weighted average rather than actual sales
Expected value calcs assume situation is repeated indefintely whereas this is a one of proect
Biases
Market research inaccurate
Growth higher tha industry
Status

Limitations:
No chnges in tech leading to obsolence
Assumes use of product perpetuity
ignore tax or inflation
NPV analysis only considers cash flows relating directly to a project.
However, a project with a negative (or low) NPV may be accepted
for strategic reasons. This is because of (real) options associated
with a project that outweigh the poor NPV.

Follow on options: Updated versions of the product could be

launched in the future.
The option to delay (timing): Full-scale investment may be delayed
until after the product has been reviewed or competitor products
assessed.
Option to abandon: The product may be abandoned before the end
of the project if there is a risk that fixed costs will not be covered by
the annual contribution.
Growth options: There may be opportunities to sell the product
overseas which have not yet been considered.

Political risks: Political action may restrict opportunities to export

the scooters or make this process more expensive.
Cultural risks: The product design may not be compatible with
cultural preferences in overseas markets.
Physical risks: Goods may be lost or stolen in transit, or the
documents accompanying the goods may be lost or stolen.
Credit risk: The risk of default by the customer.
Trade risk: The risk of the customer refusing to accept the goods on
delivery, or cancellation of the order in transit.
Liquidity risk: The inability to finance the credit given to customers.
Predictive analytics uses historical and current data to create
predictions about the future.
For this decision, it could be used to predict the future disposal
proceeds or maintenance costs.
By combining the statistical tools utilised in predictive analytics with
Artificial Intelligence and algorithms, prescriptive analytics software
can be used to calculate the optimum outcome from a variety of
business decisions.
For this decision, it could be used to identify the optimum
replacement policy.
Foreign exchang Risk

Transaction Risk

Economic Risk

Translation risk

Exchange rates

Hedging

Hedging with forwards

Money market hedge

Hedging with futures
Currency Options

Cryptocurrency

PPP
IRP
Risks of overseas Trade

Advantage disadvantage of various hedges

Defination Forwards

How to we manage transaction risks?

Invoice in home currency
leading and lagging
Matching
FX bank accounts

Defination Money Market

Hedge
Def Hedging with
Futures

Def Currency Options

Cryptocurrency
Hedging

Add discount
deduct premium
See notes
Sterling future contracts
OTC
Traded options
Moves in the same direction
Future contracts

Physical risk
Trade Risk
Liquidity Risk
Credit Risk
- Provides certainty of future exchange rate - Limited flexibility if conditions change - OTC market
- Customizable contract terms might lack transparency and counterparty risk

- Can lock in specific forward rate - Utilizes - Requires access to foreign money market - Complex
existing cash balances calculation involving interest rates
- Easily tradable on standardized exchanges - Fixed contract sizes might not fit exact needs - Margin
- Liquid markets for most major currencies requirements add to costs

- Provides protection with potential for - Premium payment regardless of exchange rate
gains - Customizable based on risk appetite movement - Complex pricing models for options

- Offers diversification and exposure to new - High volatility increases risk - Regulatory uncertainty
assets - Decentralized nature may mitigate and security concerns
certain risks
Type

Profit(Avg if available)*PE
RATIO

This is profit after taxation but

before dividend

Then do a downward
Price earnings Ratio adjustment of 25%

Dividends yeild Dividend/Divid yield

EV EBITDA*EV multiple - DEBT

Net assets (historic) OS +RE

7 value drivers
SVA See if infor there or not

``
Types of buying? MBO etc
DO FEB 2017 paper
 Remember

1. Earnings may not be consistent, if not a listed

company hard to find a comparable
2. Average earning needed if not given
3. Comparable not considering the finance
structure of the company
4. Forward looking okay to use to divide by no. of shares

1. If considering a minority stake? Sure

2. Dividends look at past dat, this may not be
stable
3. May not be the best method to valuate

1. Looks at company as a whole therefore capex

structure does not matter here
2. Hard to find correct muliple tec

1. Hstoric value at costs

2. Does not take into account the future earnings
and potential
3. Undervalued
1. Curent value but also has same problems as
above

Terminal value or perptual value and remove debt+Add investment

ove debt+Add investment
Debt

Equity

Combinatuon

M&M

M&M tax

Traditional
Implications - Practical

1. Diversification from debt will increase the gearing, consider market average of gearing
2. Interest would have to bee paid
3. If gearing is too high, might cause concern to the shareholders

1. Does full fianncing by equity make a huge difference? If not

2. If the funds are raised by issuing rights and these are taken up it would not be worriying to the hareholder, but if new s
issues
3. Even iwith rights issues, it has no gurantee that these shares will be taken up and underwriting costs might be too high
4. Dividends do not have to be paid unlike interest
5. If someone equity comes from special dividends being paid this year, shareholders will not be happy

Use both debt and equity proportons that will mainatin current gearing have more equity slightly?

Theory

no advanteg to issue debt no tax world, does not matter what is issued as capital structure will remain te same, i.e. debt w

With tax, advantag to issue debt, i.e. due to tax relief

higher gearing, lesser tax a company pays, therefore consider fianancing from gearing
M&M company that has gearing is more woth than company which does not have gearing
debt cheaper than equity therefore debt increases, wacc falls, gear t 100%
the traditional theory says, there is an optimal structure of wacc i..e minimum wacc,
if industry % is considered optimal then increasing either debt or euqity will increase wacc reduce value of the copany
a) Buisness Plan

While forecasting profit or loss

EPS

Gearing
Rights issue Debentures
1. In P/L increase dividends in proportion Increase dividends
PROFIT AFTER TAX BEFORE DIV
PROFIT AFTER TAX BEFORE DIV
NOW EPS GIVEN, you may be asked to calculate
target sales
2. Rights extra above par goes to share cap

3. See what kind they want to do

a) Gordon growth model

g = r*b

Earnings 1050000
Dividend 630000
Profit 420000

Earning retention rate 0.4

Capital invested 0.125

Dividends per sahre 0.1 3.35 <<ex div prce

MVp D/P0 5.88%

Redeemable shares

Grodo growth model

assumes risk profile is similar
It assumes the accounting rate of return is constant
It assumes that earnings retention has a similar profile and does not change

CAPM considers systematic risk, i.e. industry wide risk, if the uiness wold want o diversify, i.e. if the yxyz
It assumes that most of the investors are already diversified
the B is systematic risk against MV
it is an alternative cost of equity

Relevant theories

M&M
M&M tax
Traditional
Practical
Current gearing
3.3) risks
Othe rpractical issues
o diversify, i.e. if the yxyz