INTP / Auditor / PwC


The value of the project is initially assessed by considering only the business risk.
Then the impact of debt financing and the subsidy benefit are considered.
Company can assess the value created from the investment activity and the additional value created by the manner in which the project is financed.


  1. IRR
    IRR assumes that returns are re-invested at the IRR.
  2. MIRR
    MIRR assumes that they are re-invested at the cost of capital.
    The cost of capital is a more realistic assumption as this is the minimun return required by investors.
    It suffers form the problem that it may lead an investor to reject a project which has a lower rate of return but ,because of its size, generates a larger increase in wealth.
    In the same way, a high-return project with a short life may be preferred over a lower-return project with a longer life.

VAR Value at risk

The VAR provides an indication of the potential riskness of a project.
If company invests in a project then it can be 95% confident that the present value will not fall by more than xxx over its life.
95% VAR = 1.645 * STD * period ** 0.5

Option value

option value = intrinsic value + time value
If an option is exercised prior to expiry, company will only receive the intrinsic value but not the time value.
If the option is sold instead, company will receive a higher value due to the time value.

BSOP assumption

  1. suitable for European style optiions
  2. There are no taxed or transaction costs
  3. The share is continuously traded
  4. Volatility of returns will remain constant
  5. Interest rates are constant and certain

BSOP variables

  1. The price of the security
    A decrease in the price of the security will mean that a call option becomes less valuable.
  2. The exercise price of the option
    A decrease in the exercise price will mean that a call option becomes more valuable.
  3. Risk free rate of return
    A decrease in the risk free rate will mean that a call option becomes less valuable. The purchase of an option rather than the underlying security will mean that the option holder has spare cash available which can be invested at the risk free rate of return.
  4. Time to expiry of the option
    A decrease in the time of expiry will mean that a call option becomes less valuable.
  5. Volatility of the security price
    A decrease in volatility will mean that a call option becomes less valuable.


The size of the modified duration will determine how much the value of a bond will change when there is a change in interest rates.

Yield curve

  1. Expectation theory
  2. Liquidity performance theory
  3. Market segmentation theory


  1. 背景
  2. Requirement
  3. Assumption
    1. P4必备
      It is assumed that all the estimates such as sales revenue, costs, royalties, initial investment costs, working capital, and costs of capital and inflation figures are accurate. There is considerable uncertainty surrounding the accuracy of these and a small change in them could change the forecasts of the project quite considerably. A number of projections using sensitivity and scenario analysis may aid in the decision making process.
    2. 汇率
      It is assumed that future exchange rates will reflect the differential in inflation rates between the two countries. It is, however, unlikely that exchange rates will move fully in line with the inflation rate differentials.
    3. Residual value
      Even if the project ceases after four years, no details are given about the sale of the land, buildings and machinery. The residual value of these non-current assets could have a considerable bearing on the outcome of the project.
      1. Bi-lateral
        It is assumed that Chmura Co will be given and will utilise the full benefit of the bi-lateral tax treaty and therefore will not pay any additional tax in the country where it is based.
      2. Additional tax
        It is assumed that no additional tax is payable in the USA for the profits made during the first two years of the project’s life when the company will not pay tax in Yilandwe either.
    4. Start immediately (新建厂必备)
      Although the scenario states that the project can start almost immediately, in reality this may not be possible and Imoni Co may need to factor in possible delays.
    5. BOSP assumtion
      The BSOP model makes several assumptions such as perfect markets, constant interest rates and lognormal distribution of asset prices. It also assumes that volatility can be assessed and stays constant throughout the life of the project, and that the underlying asset can be traded.
      Neither of these assumptions would necessarily apply to real options. Therefore the BoD needs to treat the value obtained as indicative rather than definitive.

      1. suitable for European style optiions
      2. There are no taxed or transaction costs
      3. The share is continuously traded
      4. Volatility of returns will remain constant
      5. Interest rates are constant and certain
      6. Indicative not definitive
  4. Risk
    1. Political risks
      Investing in Mehgam may result in political risks. For example, the current government may be unstable and if there is a change of government, the new government may impose restrictions.
    2. Remittance
      The financial projections are prepared on the basis that positive cash flows from Yilandwe can be remitted back to the USA. Imoni Co needs to establish that this is indeed the case and that it is likely to continue in the future.
    3. Physical infrastructure
    4. Fiscal risks
      As much as possible, Chmura Co will want to ensure that fiscal risks such as imposition of new taxes.
    5. Local regulation
      Also, it will want to familiarise itself on regulations such as employee health and safety law, employment law and any legal restrictions around land ownership.
    6. Culture
      Imoni Co needs to take account of cultural risks associated with setting up a business in Yilandwe. The way of doing business in Yilandwe may be very different.
    7. Reputation
      1. QC
        Other areas where Chmura Co will need to focus on are the quality control procedures to ensure that the quality of the food batches is similar to the quality in the host country.
      2. Ethical
  5. Recommendatiion
    With Bulud Co’s offer, it is recommended that the BoD proceed with the project, as long as the BoD is satisfied that the offer is reliable, the sensitivity analysis/scenario analysis indicates that any negative impact of uncertainty is acceptable and the business risks have been considered and mitigated as much as possible.
    Real optiion / follow-up projects
    Imoni Co should assess and value alternative real options which it may have. It could consider whether the project can be abandoned if circumstances change against the company; entry into Yilandwe may provide Imoni Co with other business opportunities.



An acquisition creates synergy benefits when the value of the combined entity is more than the sum of the two companies’ values. Synergies can be separated into three types: revenue synergies, cost synergies and financial synergies.
Financial synergies may be available because Strand Co does not have the funds to innovate new products. On the other hand, Hav Co has cash reserves available. It may be possible to identify and quantify this synergy based on the projects that can be undertaken after the acquisition, but would have been rejected before, and their corresponding net present value.
Furthermore, as the company increases in size, the debt capacity of the combined company may increase, giving it additional access to finance.
Finally, the acquisition may result in a decrease in the cost of capital of the combined company. (Tax benefits
Cost synergies may arise from the larger company being able to negotiate better terms and lower costs from their suppliers.
And there may be duplication of functional areas and head office which could be reduced and costs saved.
These types of synergies are easier to identify and quantify but would be more short-lived.
Revenue synergies are perhaps where the greatest potential for growth comes from but are also more difficult to identify, quantify and enact.
In this case, Hav Co’s management can help market Strand Co’s products more effectively by using their sales and marketing talents resulting in higher revenues and longer competitive advantage.
The services of the scientists from Strand Co will be retained to drive innovation forward, but these need to be nurtured with care since they had complete autonomy when they were the owners of Strand Co.


The cash together with bond offer yields the highest return.
The 31·3% return is the closest to the maximum premium based on the excess earnings method and more than the maximum premium based on the PE ratio method.
initial cash payment
be diluted most
The cash and share offer gives a return in between the pure cash and the cash and bonds offers. Although the return is lower, Strand Co’s shareholders become owners of Hav Co and have the option to sell their equity immediately.
The pure cash offer gives an immediate and definite return to Strand Co’s shareholders, but is also the lowest offer and may also put a significant burden on Hav Co having to fund so much cash, possibly through increased debt.
Different impacts on shareholders’ personal taxation situations due to the different payment methods might also influence the choice of method.

FCF 定义 (201406)

Free cash flows (FCF) = after tax operating (pre interest) cash flows – net investments in assets
Free cash flows to equity (FCFE) = FCF – net interest paid

Method of development

  1. Organic growth vs acquisition
    Vogel Co may have switched from a strategy of organic growth to one of growth by acquisition, if it was of the opinion that such a change would result in increasing the value for the shareholders.
    Acquiring a company to gain access to new products, markets, technologies and expertise may be quicker and less costly.
    Horizontal acquisitions may help Vogel Co eliminate key competitors and enable it to take advantage of economies of scale.
    Organic growth may take a long time, can be expensive and may result in little competitive advantage being established due to the time taken.
    Also organic growth, especially into a new area, would need managers to gain knowledge and expertise of an area or function, which they not currently familiar with.
    Furthermore, in a saturated market, there may be little opportunity for organic growth.
  2. own investment vs licensing
    Imoni Co may be able to benefit from setting up its own plant as opposed to licensing in a number of ways.
    Yilandwe wants to attract foreign investment and is willing to offer a number of financial benefits to foreign investors which may not be available to local companies.
    The company may be able to control the quality of the components more easily, and offer better and targeted training facilities if it has direct control of the labour resources.
    The company may also be able to maintain the confidentiality of its products, whereas assigning the assembly rights to another company may allow that company to imitate the products more easily.
    Investing internationally may provide opportunities for risk diversification, especially if Imoni Co’s shareholders are not well-diversified internationally themselves.
    Finally, direct investment may provide Imoni Co with new opportunities in the future, such as follow-on options.
  3. Own investment’s Drawbacks
    higher costs
    high risks
    The licensee, because it would be a local company, may understand the operational systems of doing business in Yilandwe better.
  4. Joint venture
    1. Advantages
      A joint venture with a local partner would give company relatively low cost access to an overseas market and tax incentives or grants.
      A joint venture partner could assist with marketing, cultural and language issues and dealing with govenment restriction.
      A joint venture partner will give company the chance to share costs with the local partner.
    2. Disadvantages
      Potential effects on reputation
      JV can restrict managerial freedom.
      Cultural differences

Risk / Failure

The Board of Directors of Vogel Co needs to ensure that there are good reasons to undertake the acquisition, and that the acquisition should result in an increase in value for the shareholders.
Research studies into mergers and acquisitions have found that often companies are acquired not for the shareholders’ benefit, but for the benefit or self-interest of the acquiring company’s management.
The non-executive directors should play a crucial role in ensuring that acquisitions are made to enhance the value for the shareholders.
Procedures need to be established to ensure that the acquisition is not overpaid. Vogel Co should determine the maximum premium it is willing to pay and not go beyond that figure.
Vogel Co needs to ensure that it has proper procedures in place to integrate the staff and systems of the target company effectively, and also to recognise that such integration takes time.


  1. eliminate debt
  2. higher reputation
  3. raise funds more easily
  4. provide the current owners with a value for their equity stake
  5. ensure sufficient liquid funds

Regulation 0

In a similar manner to the Competition and Markets Authority in the UK, the European Union (EU) will assess significant mergers and acquisitions’ (M&As) impact on competition within a country’s market.
It will, for example, use tests such as worldwide turnover and European turnover of the group after the M&A. It may block the M&A, if it feels that the M&A will give the company monopolistic powers or enable it to carve out a dominant position in the market so as to negatively affect consumer choice and prices.
Sometimes the EU may ask for the company to sell some of its assets to reduce its dominant position rather than not allow an M&A to proceed. It would appear that this may be the case behind the EU’s concern and the reason for its suggested action.

Regulation 1

  1. Mandatory-bid condition
    The mandatory-bid condition through sell out rights allows remaining shareholders to exit the company at a fair price once the bidder has accumulated a certain number of shares. The amount of shares accumulated before the rule applies varies between countries.
    The bidder must offer the shares at the highest share price, as a minimum, which had been paid by the bidder previously.
    The main purpose for this condition is to ensure that the acquirer does not exploit their position of power at the expense of minority shareholders.
  2. Principle of equal treatment condition
    The principle of equal treatment condition stipulates that all shareholder groups must be offered the same terms, and that no shareholder group’s terms are more or less favourable than another group’s terms.
    The main purpose of this condition is to ensure that minority shareholders are offered the same level of benefits, as the previous shareholders from whom the controlling stake in the target company was obtained.
  3. Squeeze-out rights condition
    The squeeze-out rights condition allows the bidder to force minority shareholders to sell their stake, at a fair price, once the bidder has acquired a specific percentage of the target company’s equity. The percentage varies between countries but typically ranges between 80% and 95%.
    The main purpose of this condition is to enable the acquirer to gain 100% stake of the target company and prevent problems arising from minority shareholders at a later date.

Business reorganization

  1. MBO Management buy-out
    A management buy-out (MBO) involves the purchase of a business by the management team running that business.
    Management buy-out costs maybe less compared with other forms of disposal such as selling individual assets of the division or selling it to a third party.
    It may be the quickest method in raising funds compared to the other methods.
    There would be less resistance from the managers and employees making the process smoother and easier to accomplish than if both divisions were to be closed down.
    It may offer a better price. The current management and employees possibly have the best knowledge of the division and are able to make it successful. Therefore they may be willing to pay more for it.
    The existing management is likely to have detailed knowledge of the business and its operations.
  2. MBI Management buy-in
    A management buy-in (MBI) involves purchasing a business by a management team brought in from outside the business.
    Existing management may lack new ideas to rejuvenate the business. A new management team, through their skills and experience acquired elsewhere, may bring fresh ideas into the business. A management buy-in is normally undertaken when it is thought that the division or part of the company can probably be run better by a different management team compared to the current one.
    It may be that the external management team already has the requisite level of finance in place to move quickly and more decisively, whereas the existing management team may not have the financial arrangements in place yet.
  3. Sell-off
    A sell-off normally involves selling part of a company as an entity or as separate assets to a third party for an agreed amount of funds or value.
    The company can then utilise the funds gained in alternative, value-enhancing activities.


Delta hedging

The writer of a call option can use delta hedging to manage its exposure to the risk the asset increasing in value.
A call option will increase in value in a rising market as it fixes a lower strike price allowing the holder to buy at a cheaper price.
A delta hedge ensures that the option writer also owns the underlying asset which will show a gain as the price rises.

Transaction risk

  1. Invoice in $
  2. Matching – creating $ costs
  3. Leading / Lagging – in advance / delay
  4. Multilateral netting
    Multilateral netting involves minimising the number of transactions taking place through each country’s banks.
    This would limit the fees that these banks would receive for undertaking the transactions and therefore governments who do not allow multilateral netting want to maximise the fees their local banks receive.
    On the other hand, some countries allow multilateral netting in the belief that this would make companies more willing to operate from those countries and any banking fees lost would be more than compensated by the extra business these companies and their subsidiaries bring into the country.

Margin & marked-to market

Both mark-to-market and margins are used by markets to reduce (eliminate) the risk of non-payment by purchasers of the derivative products if prices move against them.
Mark-to-market closes all the open deals at the end of each day at that day’s settlement price, and opens them again at the start of the following day. The notional profit or loss on the deals is then calculated and the margin account is adjusted accordingly on a daily basis.
The impact on Daikon Co is that if losses are made, then the company may have to deposit extra funds with its broker if the margin account falls below the maintenance margin level. This may affect the company’s ability to plan adequately and ensure it has enough funds for other activities.
On the other hand, extra cash accruing from the notional profits can be withdrawn from the broker account if needed.

Basis risk

Basis risk occurs when the basis does not diminish at a constant rate.

WTO , EU 之类乱七八糟的东西


The World Trade Organisation (WTO) was set up to continue to implement the General Agreement on Tariffs and Trade (GATT), and its main aims are to reduce the barriers to international trade.
It does this by seeking to prevent protectionist measures such as tariffs, quotas and other import restrictions. It also acts as a forum for negotiation and offering settlement processes to resolve disputes between countries.
The WTO encourages free trade by applying the most favoured nation principle between its members, where reduction in tariffs offered to one country by another should be offered to all members.
Mehgam could benefit from reducing protectionist measures because its actions would make other nations reduce their protectionist measures against it.
Normally countries retaliate against each other when they impose protectionist measures. A reduction in these may allow Mehgam to benefit from increased trade and economic growth.
Such a policy may also allow Mehgam to specialise and gain competitive advantage in certain products and services, and compete more effectively globally. Its actions may also gain political capital and more influence worldwide.


A free trade area like the European Union (EU) aims to remove barriers to trade and allow freedom of movement of production resources such as capital and labour.
The EU also has an overarching common legal structure across all member countries and tries to limit any discriminatory practice against companies operating in these countries.
Furthermore, the EU erects common external barriers to trade against countries which are not member states.
It should find that it is able to compete on equal terms with rival companies within the EU.
Companies outside the EU may find it difficult to enter the EU markets due to barriers to trade.
A common legal structure should ensure that the standards of food quality and packaging apply equally across all the member countries.


To support stability of the international monetary system by providing support to countries with balance of payment problem.
When a member is having difficulties overcoming balance of payments problem, the IMF will offer advice on economic policy and lend money at subsidized rates.

World Bank

Partially funded by the IMF, exists to fund reconstruction and redevelopment and to eliminate poverty. Loans are normally made directly to governments, for period of 10-20 years and tied to specific projects.

Central Banks

Normally have control over interest rates and support the stability of the financial system.
Collaboration between central banks is supported by the bank of international settlements.

Credits to MJ


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