Advanced Financial Management
Advanced Financial Management
Advanced Financial Management
Set of flashcards Details
| Flashcards | 19 |
|---|---|
| Students | 1 |
| Language | Deutsch |
| Category | Finance |
| Level | Other |
| Created / Updated | 27.02.2026 / 27.02.2026 |
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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.
