Advanced Financial Management
Advanced Financial Management
Advanced Financial Management
Security Token Offering
- regulated method to raise capital by issuing blockchain based tokens that represent ownership in real-world assets
Euromarkets
large, OTC international financial markets for deposits, loans etc denominated ina currency foreign to the issuer
Eurocurrency/Eurocredit Markets
- Markets in which international banks accept deposits and may make loans in eurocurrency
- Eurocurrency loan = ST
- Eurocredit loan = LT
Money market vs Capital Market
Money Market
- OTC
- perosnalised
- ST Debt
Capital Market
- Exchange Traded/Security Market
- OTC
- LT debt / Equity
what are the roles of the Treasury department?
Main Responsibility: Ensure the company has enough liquidity to operate, while managing financial risks efficiently and at lowest cost.
- Cash & Liquidity management
- ensuire liquidity
- invest excess cash
- Funding & Capital Management
- raising finance & managing debt portfolio
- Financial Risk Management
- FX
- IR
- Counterparty risk
Benefits of a centralised Treasury departement
- Avoids the need to have many bank accounts and therefore reduces transaction cost/bank charges
- large cash deposits may give access to a larger range of investment opportunities
- can offer the possibility of matching income & expenses and reduce the need for excessive risk mgmt
- they could hire experts
- may be better able to assess what is beneficial for the entire company
Benefits of a separate Treasury departement
- better able to match and judge the funding required with the need for asset purchase for investments on local level
- individual departements within a subsidiary may have better relationship with the treasury departements of the subsidiary
- may make subsidiaries management more empowered. this in turn may increase the level of motivation, as they have more control on their future, which could lead to better decision making
EPS
Profit for the year - equity preference dividends / weighted average nr of shares outstanding
Diluted EPS
Profit for the year - equity preference dividends + PDS adjustments / Weighted average ordinary shares + PDS outstanding
Dividend cover
Profit for the year - equity preference dividends / ordinary dividend
dividend payout ratio
ordinary dividend / profit for the year - equity preference dividend
dividend yield
Dividend per share / share price
Earnings yield
EPS / Share price
TSR
Share price year end - share price start + dividends / share price start
Inventory turnover period
average inventory / Cost of sales
Receivables collection period
receivables / credit sales * 365
Payables payment period
average payables / Credit purchases * 365
Working Capital Cycle
Inventory holding period + receivables collection period - payables payment period
Nr of working capital days an entity needs before it starts to receive cash
ROCE
Operating Profit / Capital Employed
= Operating profit margin * Asset turnover
Asset turnover = Revenue / Capital Employed
ROE
Profit before income taxes / Share capital + reserves
Payback Period vs. Discounted Payback Period
Payback Period = Time for operating CF of a project to equal the initial investment
Discounted Payback Period = Time for Present Value operating CF of a project to equal the initial investment
How to calculate ROCE and how is it also called?
ROI & Accounting Rate of Return
average EBIT / (average) Initial Investment
average EBIT = opeating profit = Cashflow - depreciation
average Initial Investment = Initial Investment + Scrap Value / 2
Discount factor for Perpetuities
1/r
How to calculate changing discount factors ? e.g. 2% y1 / 1% y1
= 1.02^-1*1.01^-1
how to calculate discount rate for non-annual cashflows
1+r = (1+R)^1/n
r= periodic discount rate
R = annual discount rate
Internal Rate of Return
what it is & formula
IRR = discount rate at which PV of project's CF is zero
The return the project itself is expected to generate.
If IRR > Cost of Capital → Accept the project
If IRR < Cost of Capital → Reject the project
IRR = A+ (Na / (Na-Nb))* (b-a)
A = lower discount rate
b = higher discount rate
which cashflows must be included/excluded for discounting
only include future, incremental cash flows
(e.g. no interest, no sunk costs, non-cashflows, book values, unavoidable costs etc)
interest = cost of finance is measured in the cost of capital/discount rate
Explain the following categories of capital market efficiency
- Allocative Efficiency
- does the market attract funds to the best companies
- Operational Efficiency
- does the market have low transaction costs & a convenient tradingn platform
- Informational Efficiency
- Is all info available to investors at all times
- Pricing Efficiency
- do share prices quickly & accurately reflect all known info about the company
Explain:
weak-form Efficiency
Semi-strong form Efficiency
Strong-form Efficiency
Why is it relevant?
the value of share is based on expectations of future CF from owning the shares. The strength of the link between company performance & share price depends on pricing efficiency of markets.
- weaj form efficiency
- current shareprices reflect all information in record of past prices
- price movements cant be forecasted based on past trends
- semi strong form efficiency
- current shareprices reflect all publicly available information
- price only alters with new info & share prices follow random wallk
- to beat: insider trading
- strong form efficiency
- share price reflects all published & unpublished information
- predictio not possible & insider trading not possible
Paradox of Efficient Markets
Market efficiency relies on investors researchiing public information to find under-over priced shares. However, if market is effiicient, there will be no mispriced shares.
= market becomes more efficient when investors believe it is inefficient and do research to discover information
Market value of Shares (constant dividend)
P0 = D1/1+re + D2//1+re^2 etc
P0 = D/Re (constant dividend to infinity)
P0 = current ex-div market value
re = shareholders required rate of return = cost of equity ke
which price of shares can be estimated with the Dividend Valuation Model
- theoretical FV of shares in unlisted companies where a quoted market price is unknown
- for listed companies w. known share price: required rate of return of shareholders / companies cost of equity finance ke
Gordons growth model
g = b*re
what is b & re?
b = proportion of profits retained = retained profit / profit
re = actual return = RoE = Profit / Net assets
determination of cost of equity for preference shares
same as of shares with constant dividend to annuity
ke=re=D/P0
how to calculate the market value of an irredeemable bond
Po = I / kd
kd = bondholders required return
P0 = ex interest market price
how to calculate the MV of redeemable bonds
MV of coupon interest + redemption price discounted at investors required rate of return (=kd = yield to maturity)
yield to maturity =
100 treasury note, 4%, trading at 98
ytm = 104/98
MV of convertible bonds
PV of future interest payments
plus higher of
- redemption value
- forecast conversion value
both discounted at bondholders required rate of return (kd)
kd = IRR of pre-tax cash flows
from the bond
Semi annual Interest payments (bondhodlers cost of debt)
(1+semi annual cost)^2-1
Bond duration - impact of changes in interest rates on market prices
if market interest rates increase,market price of bonds will decrease.
Bond prices fall when market interest rates rise because existing bonds become less attractive compared to new bonds.
Bond prices fall when market interest rates rise because existing bonds with lower fixed coupons must drop in price to offer investors the new higher required return.
Maculay vs modified duration
helps investors understand when they can expect to receive the bond's principal and interest payment
modified duration = approx. percentage price change in a bond for a 1% in yield
maculay duratin / (1+YTM)
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- 1 / 113
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Lernkarten
Trade Credit
- Kauf auf rechnung
- allows company to delay payment and therefore providing interest free finance
- improves CF management
- late payments might result in damaged supplier relationships
Commercial Papaer
- ST unsecured debt issued by high quality companies. Investors can trade the paper on the secondary market
- requires no security, relies on creditworthiness of company
- only available to large companies with investment grade credit ratings
Supply Chain Finance
- works best when buyer has better credit rating than seller (supplier)a
- allows supplier to receive early payment
- supplier sends goods and an invoice to the buyer who approves it
- buyer informs a financial institution to fund the invoice
- financial institution offers to pay the supplier early
- buyer pays full invoice amount to the fin. institution on the original later due date
Bank loans
- medium term finance
- fixed rate, specific period, agreed payment schedule
- no risk for early recall
- easy to budget due to agreed payment schedule
- interest = tax deductible
- banks might require security collateral
- possible covenants
Leases
- matches finance to the right to use the asset
- allos use of asset that might be too expensive
- LT leasing more expensive than purchase
- LT lease: right of use asset & lease liability recognised in BS
- ST lease: lease payments are expensed
Sale & Leaseback
- Immediate injection of cash that can be used for investment opportunities
- operational continuity in use of asset
- maybe profit on sale
- company wont profit from value appreciation
- future borrowing capacity reduced
Preference Shares
- Shares with a fixed rate of dividend that have a prior claim on profits available to distribution
- legally equity but often treated as debt
- not deductible for tax!
- rank: after debt, before ordinary shareholders
- no voting rights = no dilution of control
- dividends dont have to be paid in a specific year
Bond
- negotiable security evidencing a long-term loan
- specified coupon rate, repayment schedule etc
- same as debenture and loan note
- fixed charge over specified asset that cant be sold
- floating charge over a class of assets. on default, the floating charge crystallises as a fixed charge
Deep discount bonds
Bonds issued at a substantial discount to NV and redeemable at their NV
- Investors receive large capital gain on redemption but are paid a low coupon during the loan term
COnvertibles
bonds or preference shares that can be converted into ordinary shares
- for investor: low-risk investment with opportunity to make hihgh returns
- for issuer: lower coupon rate than an equivalent non-convertible debt
- might be useful for newer companies
Warrant
- share option attached to debt
- investor's right but not the obligation to purchase new shares at a future date at a fixed price
Securitisation
the creation and issuance of tradeable securities backed by the income generated by an asset/loan
Initial Coin Offering
- blockchain based crowdfunding method used by startups to raise capital by issuing new digital tokes in exchange for established crypto currencies
Security Token Offering
- regulated method to raise capital by issuing blockchain based tokens that represent ownership in real-world assets
Euromarkets
large, OTC international financial markets for deposits, loans etc denominated ina currency foreign to the issuer
Eurocurrency/Eurocredit Markets
- Markets in which international banks accept deposits and may make loans in eurocurrency
- Eurocurrency loan = ST
- Eurocredit loan = LT
Money market vs Capital Market
Money Market
- OTC
- perosnalised
- ST Debt
Capital Market
- Exchange Traded/Security Market
- OTC
- LT debt / Equity
what are the roles of the Treasury department?
Main Responsibility: Ensure the company has enough liquidity to operate, while managing financial risks efficiently and at lowest cost.
- Cash & Liquidity management
- ensuire liquidity
- invest excess cash
- Funding & Capital Management
- raising finance & managing debt portfolio
- Financial Risk Management
- FX
- IR
- Counterparty risk
Benefits of a centralised Treasury departement
- Avoids the need to have many bank accounts and therefore reduces transaction cost/bank charges
- large cash deposits may give access to a larger range of investment opportunities
- can offer the possibility of matching income & expenses and reduce the need for excessive risk mgmt
- they could hire experts
- may be better able to assess what is beneficial for the entire company
Benefits of a separate Treasury departement
- better able to match and judge the funding required with the need for asset purchase for investments on local level
- individual departements within a subsidiary may have better relationship with the treasury departements of the subsidiary
- may make subsidiaries management more empowered. this in turn may increase the level of motivation, as they have more control on their future, which could lead to better decision making
EPS
Profit for the year - equity preference dividends / weighted average nr of shares outstanding
Diluted EPS
Profit for the year - equity preference dividends + PDS adjustments / Weighted average ordinary shares + PDS outstanding
Dividend cover
Profit for the year - equity preference dividends / ordinary dividend
dividend payout ratio
ordinary dividend / profit for the year - equity preference dividend
dividend yield
Dividend per share / share price
Earnings yield
EPS / Share price
TSR
Share price year end - share price start + dividends / share price start
Inventory turnover period
average inventory / Cost of sales
Receivables collection period
receivables / credit sales * 365
Payables payment period
average payables / Credit purchases * 365
Working Capital Cycle
Inventory holding period + receivables collection period - payables payment period
Nr of working capital days an entity needs before it starts to receive cash
ROCE
Operating Profit / Capital Employed
= Operating profit margin * Asset turnover
Asset turnover = Revenue / Capital Employed
ROE
Profit before income taxes / Share capital + reserves
