HKSI Paper 11 (Corporate Finance) English Free Trial

Similar to forwards and futures, a contract’s net initial value to each party should be zero and as one side of the swap contract gains the other side loses by the same amount. Swaps in which two parties exchange cash flows include interest rate and currency swaps.

Hybrid securities have characteristics of both debt and equity. Another term for hybrid securities is mezzanine debt. Hybrid securities are usually tax-driven financing arrangements or techniques.

Earlier in this Topic, we discussed the question of issuing options to executives. However, many companies need to provide an incentive for shareholders to keep faith with the company and retain their shares.

There is a wide range of methods of assessing the economic return of projects under consideration. There are four principal methods, each of which contains a number of sub-approaches:
(1) Accounting rates of return;
(2) Payback period;
(3) Net present value (“NPV”); and
(4) Internal rate of return (“IRR”).

(2) Inadequate strategic understanding. It is necessary to understand the competitive environment in which a company operates, how that environment changes, and how the company must anticipate or adapt to the changes. CEOs who lack such understanding often feature among the ranks of those responsible for corporate collapses;

In the final analysis, there are four basic strategies for resolving non-performing equities (“NPEs”) and non-performing loans (“NPLs”). The strategy for every company is different, but each will contain some of the following elements: workout, liquidation, legal action against sponsors, guarantors and other associated parties, and “walk away”.

While not a recommended strategy, this is definitely valid where the financial institution discovers that, for one reason or another, there is little or no sensible motive to pursue any form of recovery strategy. Reasons might include:
(a) The financial institution’s legal documents may be faulty;
(b) The borrower or investee may be so hopelessly insolvent that there would be little likelihood of any recovery;
(c) The actual borrower may be considered more incompetent than dishonest; and
(d) There may often be an element of lender or investor incompetence in the original decision.

(1) All other things being equal, a company will normally choose a more profitable venture over a less profitable venture; and
(2) Proposals that over time do not recoup all their costs and generate an appropriate return are unlikely to be considered.

Every financial institution is exposed to a wide range of risks. The most commonly recognized risks can be segregated into two main categories:
(1) Balance sheet risks – risks related to the nature and make-up of assets on a financial institution’s balance sheet.
(2) Transaction risks – risks attaching to specific transactions or groups of related transactions.

To a layman’s perception, risk often refers to the possibility of incurring a loss, but this is only partly true of risk, as such a perception only looks at the loss or downside risk.