first set up the tables to 

performance test:

using methotology to assess the business performance:

ratio

trend: market share, horonzal comparation

reconstructure scheme

unbunding

corporate failure and reconstruction

• ratio analysis
• corporate failure
• practical indicators

corporate reconstruction

business unbundling

financial distress

liquidation

cashflow analysis

rations:

profitability: margin, profit EPS

liquidity: current ratio, quick ratio

gearing: interest coverate rate, gearing

market performance

strategic aspeect of acquisition

demosns the business acumen

guide you through the content in

regulatory framework for mergers and acquisitions

principle factors

weather we want to set up the acquisition and how could we pay for the acquisition

teminology

terminologies of acquisition

synergy: 1+1>2

horizontal integration:

same business line entity comnime, bottle drink water amd cola...... pen and pencil...

vertical intergration:

industry line, differnce lvel in supply chain business combine.  manufacture and raw material, product matufacture and logistics 

conglomeratisation

no relevant business, as risk diversify trategies

conglomerate

horizonal   & vertical integration

synergy: revenue, cost, financial and other synergy

forms of acquiring:

1. straight cash offer

target shareholders lose the opportunity for future growth and synergies

expensive for bidder, may change gearing

2. earn out bidding

pay if the target synergy achieves

3. share to share 

prre-bidding defence:

poison pills:

revalue its assets to reduce on the undervalued

conceal or pre-sale its asset 

post-bidding defence 

whit knights

forms of consideration:

stright cash offer:

advantages, simple and quick

disadvantage: target company lost the opportunity for future growth interest

enquire: heavy cash flow burden, may change its gearing for borrowing or asset sale

earn out offer:  meet profit target, opportunity for future grwoth benefit

shange to share exchange

reduce gearing, participate future growth, not lost all control, share future synergy from merger  vaital 

share to share:

• value bidder
• value target
• value the combined entity
• calculated number of shares
• calculate the new share price

Treasury and advanced risk management

the responsibilities pf treasury department are:

1. assess gearing and optimal mitriex of capital(cost of capital)

2. identify the risk of fianncial  interest risk, liquidation, and foreign exchange risk

3.assess the financial risk and allocate the related hedging strategies

4. process risk managment

interest rate hedge:

similar to foreign exchange rate hedge. financial plan for deposite or borrow in future term.

the interest rate may change in favour or against.

commercial acuman: is there any risk for future financial settlement? how the move of interest rate will impact on the project. the loss and gain, if the risk need to be managed? by which way, professional judgement, which financial instrument should be used(derivatives) 

sensibility test for interest rate, NPV  how about the interest rate change may influence the investment decision making.

analysis and evaluation technology

FRA forward rate agreements

IRG  interest rate guarantee   option of FRA canbe lapes 

the futures's price is opposite to the interest rate, when the interest rate rise, the future's price drop. 

when plan to deposite, then buy future which the lower rate. 

when plan to borrow, then sell futures, which is the higher rate.

interest rate =(100-future)%

foreign exchange rate:

translation risk: consolidated financial statement,

transaction: received less or paid more

economic risk: asset value decreased by the impact of exchange rate change.

applying:

single transaction

investment project appraisal

hedging: fixing the exchange rate for the future transactions

derivatives  & underlying asset

fowward

future

swaps

option

moving against 

moving in your favour

• synthetic 
• netting map

transaction risk: uncertainty of the exchange rate in future due date

solutions: hedging

economic risk :  longterm movement uncertainty of the value of the business-  solutions: be diversified,  netting map

translation: gain or loss on translation in the financial reporting    solution  fund asset with the local fund 

internal technologies:

1. all transaction under home currency

2. leading    moving against you  pay or receive early     

3. lagging    moving in your favour   pay or receive later

4. matching off: same foreign currency received and paid

money market hedge (MMH) commercial loan and bank deposit  to offset the future payment and receivable  

pay: take home currency loan, exchange in spot rate and deposit in foreign currency to meet future payment, on due, pay off the loan 

receive: take foreign loan and and covert at spot rate, on due date, use the receivable to payoff the loan.

take into account of the interest

interest rate parity:

rf--- foreign currency interest rate

rh---base currency interest rate

rationale of management of risks:

theoritical and practical

• assess exposure risk
• develop a framework

 --------mitigation

----------hedging

----------diversification  

• establish capital investment monitoring 
• outline the application of probability analysis, sensitivity analysis , and monte carlo simulation to investment appraisal
• demonstrate an understand of the measurement and interpretation of project value at risk
• derivative market

sensitivity and simulation:

sensitivity only change one thing of the project and analysis the trend consist with this thing impact with the project

stimulation is the technology which will generate sereral times of the project's outcomes with change some of the factors.

sensitivity test:

sales-revenue-project

cost-cost to project

sales volum     contribution -project

simulation test   alter several factors(variables) at a time  inline with the expected probabilities

frequency (times of outcome generate with change of variables)

outcome of the project

the most important thing is the mean(average) and the spread of the curve   deviation--standard deviation it reflect the level of risk respectively

value of risk

1. mean and standard deviation
2. 0.5-(1-confidential level)
3. normal distribution table to find the coefficient with the result of step two
4. value of risk for a single year =mean-coefficient* standard deviation
5. multiple term value of risk =mean*years-(square root of years *standard deviation)

derivative:

hedging for foreign exchange rate and interest rate

derivative products: forward, future option swap..... fixed outcome in future date

future standardised exchange traded contract====which could be traded in open market  buy or sell 

risk mamagement:

responsibilities is to manage the explosure risk and minimize the impact of the risk.

BSOP: 

black-scholes option pricing module

five principle drivers:

value of underlying

exercise price    P

time to expire     t

volatility    σ  standard deviation S

σ=s^2

risk free rate   r

real option

delay

expand/follow on

redeploy/switch

withdraw/abandon

assumptions: 

type of option:

american option: can be exercised (buy or sell underling good) at exercise price at  any time up to expire date.

european option: only can be exercised  (buy or sell underling good) at exercise price on the expire date.

traded option: option in standard set can be trade(sell /buy) in financial market like stock(share)

OTC(over the counter option) tailed to special size and date, usually  arranged at a bank

premium: fees to take out an option

the price =intrinsic value + time value

intrinsic price: supluse of comparing of option exercise price & item maket real price

time value: time to expire, votality of the item market price, and interest rate influence

delta,  option price change consisted with asset price change   N(d1)   △Pa=1$

gamma rate of delta 

vega   voltitilty sensitivity △s=1%

rho       sensitivity  of risk free rate

theta     sensitivity of expire time

real option:

Pe   cost of the choice,  need to pay for take the option(choice)  

Pa PV of future cash flow of the project

volatility will be given

time: year to process the choice

risk free rate , will be given

WACC cost of capital

project specific cost of equity and cost of capital

business risk

financial risk

CAPM 

adjust or not depending on the change of business area( geographic ,multinational, or new industry,ways of operating....) , or gearing

same gearing, similar business  means same business and financial risk

otherwise, adjust WACC, and APV will be applied in investment project appraisal 

no gearing change: WACC for similar business

                                 adjusted WACC for different business

with gearing change(no mater similar business or new area): raising debt     APV

same industry, similar business, exist fiance to fund the new project, means the fiancial risk(gearing), the same(the pool of finance argument)

cost of capitl (WACC)

CAPM:

Kd cost of debt

principle rating agencies?

credit spread

Dividend policy:

key issue:

policy of dividend  

• stable growth dividend
• fix rate (constant pay out ratio) dividend
• zero dividend
• residual approach

MM dividend irrelevent theory: patern of dividend paid have no effect the entity's value: 

assuptions: perfect market, no transaction cost,reinvestmnet in NPV, no taxes, FCF no relation to dividend,

dividend capacity

retention policy

current and projected dividend capacity

price strategies of international transaction

forms of dividend payment

• cash payment
• script dividend-- bonus or free share equity instead of cash
• share buyback 

factors affect dividend policy:

1. clientale effection

2. cash needed ---dividend capacity

3. signalling to market--cut in or increase

4. legal-restrict on dividend paid out

5. debt covenants- dividend capicity

6. tax implication- choice between capital gain and dividend 

7. refinancial and investment -capital

gain from internal improvement or positive NPV new project, compare with dividend take off

8. inflation---purchase power panelty-WACC-ROC

avoid the remittance restrict for multinational company from investment subsidinaries:

1. internal transaction pricing

2. chages

3. lending

financial decision：

1. capital asset structure mixture-- optimum capital mix

2. appropriate of range of source of finance: availablility, equity, hybrids, lease finance, venture capital, business angel, private equity, asset securitisation, sale, Islamic finance

3. Islamic financing, rationale, benefits...

4. assess the impact of financing the organisation with the respect to:

• Modigliani and Miller proposition, before and after tax
• static trade-off theory
• pecking order peopositions
• agency effects

5. assess and advise on the costs and benefits of alternative source of finance available within the international equity and bond markets

key skills: communication, scepticism, comercial acumen, and analysis and evaluation

practice factors need to consider in financial resouces:

1. cost of capital shares (equity)  low risk, most expensive for share holders expect high return

2. debt:  liquility risk barriers to obtain, interst cost 

3. how long the finacial needed

security: & debt  ratio gearing 

1. what kind security or debt should the company to use to fiance its projects

2. different level of return

3. liquilirity

4. interest will reduce the dividend the company may pay and reduce the tax payment

5. level of equity will change the balance sheet

MM thory gearing1958 model:

assumptions:

1. there is no transaction cost （perfect capital market)

2. there is no different on Kd 

3. rational and riskless

4. there is no tax 

5. 0 gearing, the wacc is  no impact on  gearing

1963 model with tax on business cash flows