I&F 2 Past Paper PDF

I&F 2 MMag. Jirina Ley, MSc FH Kärnten 1 Overview Unit Type Topic Date 1 Onsite Debt financing / Capital Structure / Bonds 12.11.2024 2 Onsite Equities / Intro Company valuation...

I&F 2 MMag. Jirina Ley, MSc FH Kärnten 1 Overview Unit Type Topic Date 1 Onsite Debt financing / Capital Structure / Bonds 12.11.2024 2 Onsite Equities / Intro Company valuation 20.11.2024 3 Onsite Company Valuation 21.11.2024 4 asynchronous Startup-financing / Crowdfunding 23.11.2024 5 Onsite Presentation + Exam 10.12.2024 Jirina Ley | 22 Workload / Grading Workload Exam (45 min) 70% Presentation 30% Presentation: 15 minutes per group Grades 90% - 100% Excellent 80% - 89% Good 65% - 79% Satisfactory 50% - 64% Sufficient 0% - 49% Not sufficient Jirina Ley | 33 Agenda Loan Bonds Shares Business valuation Crowdfunding Start-up financing Jirina Ley |4 Loan Characteristics: ▪ Most common form of long-term debt financing ▪ Conditions are negotiated individually between the bank and the company (loan agreement) Components of the credit agreement: ▪ Lenders and borrowers ▪ Loan purpose e.g. investment loan, consumer loan ▪ Credit volume and currency ▪ Disbursement amount (loan value) ▪ Repayment form e.g. bullet repayment, constant repayment, annuity repayment, free years ▪ Duration ▪ Borrowing costs (e.g. interest, processing and account management fee) ▪ Termination rights ▪ Collateral Jirina Ley | 45 Loan Interest rate ▪ risk-free interest rate + risk premium (spread) ▪ fixed or variable (without/with reference interest rate, e.g. EURIBOR) ▪ Pre- or post-fixed ▪ annually, semi-annually or quarterly Commissions and fees ▪ Handling fee ▪ Account management fee ▪ Possible contract set-up fee Jirina Ley | 56 EURIBOR ▪ Euribor stands for Euro Interbank Offered Rate ▪ Euribor refers to the average interest rate at which many European banks (the so-called panel banks) lend money to each other with a fixed term. ▪ when setting the Euribor values, the highest and lowest 15% of the reported values are not taken into account ▪ every working day at 11:00 Central European Time, Euribor values are set and communicated to all participating partners and the international press. ▪ When people talk about Euribor, they often refer to a Euribor interest rate ▪ there are 5 different Euribor interest rates with different maturities (1 week, 1,3,6,12 months) ▪ Current values ▪ Eonia interest rate is the Euro Overnight Index Average (maturity 1 day).However, for this purpose 35 banks are asked at what interest rate they would lend for one-day interbank deposits, among others Erste Bank Group belongs to this group. Jirina Ley | 67 Nominal vs. effective loan interest rate ▪ The agreed interest rate corresponds to the nominal interest rate ▪ In order to compare loans with different interest rates as well as fees and commissions, the effective interest rate is calculated (using the approximation method → see Calculation of internal interest rate) ▪ The effective interest rate must be stated by the lender ▪ Comparison of the effective interest rate is subject to the same deficiencies (term and amount of capital commitment) as the internal rate of return method Example consumer credit 0% financing Möbelix 0% Debit interest 0% down payment Media Market 2.5% handling fee 0% Debit interest 1% account opening fee 0% down payment Term 12 months Minimum amount 299 EUR Effective interest rate: 3.5 Effective interest rate: 0% Jirina Ley | 78 Loan: Repayment and repayment terms Redemption: ▪ Amount used to repay the loan amount ▪ Total of all redemption payments equals the loan amount Repayment forms: ▪ Annuity repayment ▪ Constant redemption ▪ Repayment at the end of the term (bullet repayment) ▪ Free years: years without redemption payments, interest payments only ▪ Repayment-free years: years without interest and principal payments Jirina Ley | 89 Constant repayment - loan Graphical representation Explanation ▪ Constant partial amounts from the credit amount Constant repayment 1.500 ▪ Due to falling interest charges, the total periodic charge decreases 1.000 EUR 500 0 1 2 3 4 5 Years Repayment Interest Jirina Ley | 910 L1: Loan - constant repayment Conditions: Nominal interest rate: 9% p.a. Loan amount: 60.000 EUR Repayment form: constant repayment Duration: 4 years Handling fee: 1% of the loan amount Account management fee: 100 EUR per year year 0 1 2 3 4 Deposit 60,000 Repayment 15,000 15,000 15,000 15,000 Disbursements Interest 5,400 4,050 2,700 1,350 Handling fee 600 0 0 0 0 Account management fee 100 100 100 100 Debt level 60,000 45,000 30,000 15,000 0 Jirina Ley |11 Annuity loan Graphical representation Explanation ▪ Equal repayment rates (annuities) ▪ Ratio between interest and Annuities Repayment repayment portion changes during 1.500 the term 1.200 900 EUR 600 300 0 1 2 3 4 5 Years Repayment Interest Jirina Ley |12 L2: Loan - annuity repayment Conditions: Nominal interest rate: 9% p.a. Loan amount: 60.000 EUR Repayment form: annuity repayment Duration: 4 years Processing fee: 1% of the loan amount Account maintenance fee: 100 EUR per year Calculation of the annuity AN = 18.520 Jirina Ley |13 Solution L2: Annuity amortization year 0 1 2 3 4 60.000 Deposit 18.520 18.520 18.520 18.520 Annuity 13.120 14.301 15.588 16.991 Repayment Disbursements 5.400 4.219 2.932 1.529 Interest 600 Handling fee 100 100 100 100 Account management fee Debt level 60.000 46.880 32.579 16.991 0 Jirina Ley |14 Final repayment - loans Graphical representation Explanation ▪ The entire loan amount is repaid at the end of the term Final redemption ▪ In the free years (years 1 - 4), only interest payments are made 6.000 ▪ Periods that do not provide for 4.000 repayment of principal or interest EUR are referred to as repayment-free 2.000 periods. 0 1 2 3 4 5 Years Repayment Interest Jirina Ley |15 L3: Loan - bullet repayment Conditions: Nominal interest rate: 9% p.a. Loan amount: 60.000 EUR Repayment form: bullet Duration: 4 years Processing fee: 1% of the loan amount Account maintenance fee: 100 EUR per year year 0 1 2 3 4 Deposit 60.000 0 0 0 0 Repayment 0 0 0 0 60.000 Disbursements Interest 0 5.400 5.400 5.400 5.400 Handling fee 600 0 0 0 0 Account management fee 0 100 100 100 100 Debt level 60.000 60.000 60.000 60.000 0 Jirina Ley |16 Summary - Loan justifies at the beginning Loan amount Debt level increase debt Reduces debt level in case of Basis for level NON-payment interest calculation Other Repayment Interest payments e.g. fees Repayment amounts are allocated to the individual Priority III Priority II Priority I items in the following order Jirina Ley |17 Consequences of changes during the term Loan with constant repayment Annuity loan Calculate new repayment with Calculate new annuity with residual Change of the term residual debt and residual term debt and residual term Calculate interest with new interest Calculate new annuity with new Change of the interest rate interest rate, the remaining term and rate the remaining debt Debt reduced by repayment paid Debt reduced by repayment paid Repayment is not or only Calculate new redemption payment Calculate new annuity with new partially paid with remaining debt residual debt and the residual term Debt increases by unpaid interest / Debt increases by unpaid interest / fees fees Interest or fees are not paid or only partially paid Calculate new redemption payment Calculate new annuity with the new with the new remaining debt residual debt and the residual term Jirina Ley |18 L4: Change in constant amortization loan (see L1) In the 2nd year there is no redemption payment In the 3rd year, only EUR 4,000 is repaid In the 4th year, the interest rate is raised to 10% and the term is extended to 5 years year 0 1 2 3 4 5 Deposit 60.000 0 Repayment 0 15.000 0 4.000 20.500 20.500 Disbursements Interest 0 5.400 4.050 4.050 4.100 2.050 Handling fee 600 0 Account management fee 0 100 100 100 100 100 Debt level 60.000 45.000 45.000 41.000 20.500 0 Jirina Ley |19 L5: Change in annuity loan In the 2nd year there only 10,000 is repaid Beginning of the 3rd year the interest rate is 10% and duration is extended to 5 years year 0 1 2 3 4 5 Deposit 60.000 0 Annuity 0 18.520 14.830 14.830 14.830 10.000 11.142 12.256 13.482 Repayment 0 13.120 Disbursements Interest 0 5.400 4.219 3.688 2.574 1.348 Handling fee 600 0 Account management fee 0 100 100 100 100 100 Schuldenstand 60.000 46.880 36.880 25.738 13.482 0 Jirina Ley |20 L6: Loan with annuity repayment Conditions: Loan amount: EUR 300,000 Repayment form: annuity repayment Duration: 6 years Handling fee: 1.5% Nominal interest rate: 2.5% p.a. Account maintenance fee: 50 EUR p.a. In the 2nd year you make an additional unscheduled repayment of 50,000 EUR, and you can also negotiate a reduced interest rate of 2.25% with your bank, which will be used for the calculation from year 3 onwards. year 0 1 2 3 4 5 6 Deposit 300.000 Annuity 54.465 54.465 40.926 40.926 40.926 40.926 46.965 98.139 37.441 38.284 39.145 40.026 Repayment 7.500 6.326 3.485 2.643 1.781 901 Interest Handling fee 4.500 Account management fee 50 50 50 50 50 50 Debt level 300.000 253.035 154.896 117.455 79.171 40.026 0 Jirina Ley |21 Leverage effect (1/2) You have the opportunity to purchase a house with 4 residential units in Villach for 1.000.000 EUR. Before you contact the bank regarding financing, consider what ratio of equity to debt you are aiming for. On what basis will you make the decision regarding an optimal capital structure? We assume that you will finance the house with 100% equity, so the balance sheet is as follows: Assets Liabilities Assets 1.000.000 Equity 1.000.000 The property generates an annual profit of €80,000, which is the balance of rental income of €100,000 and depreciation of €20,000 (for the sake of simplicity, other costs and also taxes are ignored here). Rental income 100.000 Return on equity = profit / equity (-) Depreciation 20.000 Return on equity = 80,000 / 1,000,000 = 8%. (=) Profit 80.000 Jirina Ley |22 Leverage effect (2/2) Now assume that half of the equity, i.e. €500,000, is replaced by debt (a bank loan of €500,000 with an interest rate of 5%). Assets Liabilities AV 1.000.000 EK 500.000 FK 500.000 How does the profit change? Rental income 100.000 (-) Depreciation 20.000 (-) FK interest 25.000 (=) Profit 55.000 The return on equity has thus increased from 8% to What is the return on equity? 11% as a result of the use of borrowed capital. In Return on equity = 55,000 / 500,000 = 11 other words, the debt capital "leverages" the return on equity upwards. Jirina Ley |23 Limits of the leverage effect ▪ Theoretically, it would be possible to keep replacing equity with debt, thereby increasing the return on equity. ▪ BUT: Increasing debt leads to higher interest rates. With increasing indebtedness (due to the higher risk), the interest to be paid increases and the bank will not provide any further loans if a certain level of indebtedness is exceeded. In the example presented, this is not yet a problem, as the equity ratio of 50% represents a comparatively high value. ▪ The return on investment must be higher than the interest rate on borrowed capital! Furthermore, the leverage effect is only effective (positive) as long as the return on investment (the return on assets) is greater than the interest rate on borrowed capital - in this case, one also speaks of the leverage opportunity. Positive leverage effect (FC interest rate < return on assets) In the above example, the return on investment of the property is 8%, the interest on the loan is only 5%. The leverage effect has a positive effect: you borrow money at 5% and make 8% from it with your company - the difference benefits the owner; his return on equity increases as a result. Negative leverage effect (FC interest rate > return on assets) If the interest rate on the loan were to rise to 9%, for example, the leverage effect would have a negative impact. It does not make sense to borrow money at 9%, invest the borrowed money in the company, which generates only 8% return from it. The difference would have to be borne by the owner. Jirina Ley |24 Agenda Loan Bonds Shares Business valuation Crowdfunding Start-up financing Jirina Ley |25 Bonds Characteristics: ▪ Classic instrument for long-term debt financing ▪ typically in the case of a higher financing requirement than can be covered by a loan ▪ Breakdown of the total nominal amount into partial bonds with the character of securities ▪ Variety of creditors ▪ Often traded on the secondary market (e.g. stock exchange), thus easy to sell Involved: ▪ Company: issues/issues the bond, is debtor ▪ Investor: subscribes/acquires partial bond, is creditor ▪ Banks, stock exchange: intermediary institutions Jirina Ley |26 Bonds - Features (1/2) ▪ Maturity: usually 6 - 12 years for corporate bonds ▪ Currency: home currency or foreign currency bond ▪ Volume and denomination: – Volume for exchange-traded bonds usually from € 50 million – Denomination mostly € 1,000 ▪ Redemption: – bullet – in installments Jirina Ley |27 Bond - Features (2/2) ▪ Interest rate: – fixed (straight bond) – floating rate note - reference interest rate + spread ▪ Issue and redemption price: – Issue price indicates what percentage of the nominal value is payable on purchase – Example 1: Issue price 97%, i.e. the subscriber can acquire a bond with a nominal value of EUR 1,000 for EUR 970 → Discount – Example 2: Issue price 102%, subscriber must pay EUR 1,020 for the partial bond with a nominal amount of EUR 1,000 → Premium – Repayment rate usually 100% ▪ Termination (usually not foreseen for creditors, as the bond can be sold on the stock exchange; not unusual for issuers. Investors receive call risk premium as compensation). ▪ Collateral (e.g. covenants relating to corporate policy) Jirina Ley |28 Final maturity coupon bond ▪ Interest payments are due regularly during the term ▪ Repayment is made in full at the end of the term Final maturity coupon bond Jirina Ley |29 L7: Final maturity coupon bond (1/2) ▪ A company issues a bullet coupon bond with a nominal value of EUR 5,000,000. The term is five years, the nominal interest rate is 6% p.a. with annual interest payments. The issue price is set at 97.7%, the redemption rate is 100%. In addition, one-time charges of 2.4% of the nominal amount are due on the occasion of the issue. During the term, EUR 3,000 per year will be incurred for the settlement of the coupon payments. A) What is the redemption schedule for the company (issuer)? Years 0 1 2 3 4 5 Deposit 4.885.000 0 0 0 0 0 Repayment 0 0 0 0 0 5.000.000 Disbursements Interest 0 300.000 300.000 300.000 300.000 300.000 Fees 120.000 3.000 3.000 3.000 3.000 3.000 Debt level 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 0 Jirina Ley |30 L7: Final maturity coupon bond (1/2) B) What would the repayment schedule look like if 20% of the nominal value is repaid in year 2? Years 0 1 2 3 4 5 Deposit 4.885.000 0 0 0 0 0 Repayment 0 0 1.000.000 0 0 4.000.000 Disbursements Interest 0 300.000 300.000 240.000 240.000 240.000 Fees 120.000 3.000 3.000 3.000 3.000 3.000 Debt level 5.000.000 5.000.000 4.000.000 4.000.000 4.000.000 0 Jirina Ley | 31 Zero coupon bond ▪ Bonds without current interest payments (interest retention), the yield results from the difference between issue and redemption price (liquidity advantage) ▪ idR issue with high discount ▪ Repayment at maturity Zero coupon bond Jirina Ley |32 L8: Zero coupon bond A company issues a zero coupon bond with a nominal value of EUR 6,000,000. The term is 10 years, the issue price is 58.8%, and the redemption price is 100%. On the occasion of the issue, 1% of the nominal value is due, during the term EUR 500 per year in expenses. What is the redemption schedule from the issuer's perspective? Years 0 1 2 3 4 5 6 7 8 9 10 Deposit 3.528.000 0 0 0 0 0 0 0 0 0 0 Disbursements Repayment 0 0 0 0 0 0 0 0 0 0 6.000.000 Expenses 60.000 500 500 500 500 500 500 500 500 500 500 Debt level 6.000.000 6.000.000 6.000.000 6.000.000 6.000.000 6.000.000 6.000.000 6.000.000 6.000.000 6.000.000 0 Jirina Ley |33 Floating Rate Note (1/2) ▪ Floating rate notes are bonds with variable interest rates ▪ The interest rate is periodically adjusted (on so-called roll-over dates, e.g. every six months) to a reference interest rate ▪ The bond interest rate is composed of the reference interest rate (e.g. EURIBOR) and the spread ▪ The extent of the spread depends on the creditworthiness of the issuer: The worse the credit rating, the higher the spread ▪ The advantage for the issuing company is mainly when interest rates fall, as in this case the interest rate of the floating rate note also falls ▪ For the investor, the variable interest rate results in a very low price risk ▪ The reference interest rate reported at a certain point in time t determines the bond interest rate for the coming period and thus the interest payment at the end of this period (in t+1) 0 1 2 t Interest rate adjustment: Interest payment: 5% Interest payment: 6% etc. Bond interest rate = 5% New interest rate adjustment: bond New interest rate adjustment: Bond interest rate = 6% interest rate = 4% Jirina Ley |34 L9: Floating Rate Note An investor subscribed to a nominal amount of EUR 30,000 of the following floating rate note 5 years ago: ▪ Nominal interest rate: 12-month Euribor plus 3 percentage points, but at least 4% p.a. ▪ Issue price: 102% ▪ Repayment rate: 100% ▪ Term: 5 years ▪ Form of redemption: bullet coupon bond ▪ On the occasion of the purchase, one-time payments of EUR 300 were incurred What were the inflows and outflows for the investor if the following values for Euribor were observed during the years of the term? Beobachtungszeitpunkt 0 1 2 3 4 12-Monats-Euribor p.a. 2,3% 1,7% 0,5% 0,8% 1,2% Calculation bond interest Observation time 0 1 2 3 4 12-month Euribor p.a. 2,3% 1,7% 0,5% 0,8% 1,2% Spread 3% 3% 3% 3% 3% Bond interest rate 5,3% 4,7% 4,0% 4,0% 4,2% Jirina Ley |35 Solution Floating Rate Note Beobachtungszeitpunkt 0 1 2 3 4 12-Monats-Euribor p.a. 2,3% 1,7% 0,5% 0,8% 1,2% Spread 3,0% 3,0% 3,0% 3,0% 3,0% Anleihezinssatz 5,3% 4,7% 4,0% 4,0% 4,2% Years 0 1 2 3 4 5 Purchase 30.600 0 0 0 0 0 Fees 300 0 0 0 0 0 Repayment 0 0 0 0 0 30.000 Interest 0 1.590 1.410 1.200 1.200 1.260 Receivables status 30.000 30.000 30.000 30.000 30.000 0 Jirina Ley |36 Rating agencies ▪ To determine credit risk, rating agencies analyze operational risk (industry, competitive situation, management, etc.) and financial risk (leverage, profitability, cash, investments) ▪ Ratings are an indicator (probabilities) regarding the ability to make principal and interest payments ▪ In addition to banks' internal ratings as part of their credit assessment, ratings prepared by external parties play a key role in assessing the creditworthiness of debtors, especially on international credit and bond markets ▪ Rating refers to both the process of evaluation and its result. ▪ The best-known external rating agencies are Moody`s Investor Service (Moody`s), Standard & Poor's (S&P) and FitchRatings ▪ International investors expect rating agencies to provide objective, meaningful information about the company seeking capital ▪ Rating agencies are in a conflict of interest, as they are supposed to write objective assessments for investors but are paid by the companies they rate Jirina Ley |37 Rating levels Investment grade Some investors may only invest in bonds classified as investment grade due to corporate or government investment regulations. Bonds up to BBB- (S&P) are considered investment grade. Jirina Ley |38