1. Refresher on financial analysis

2. Cash management

3. Principles of trading on options

4. Capital budgeting: Net Present Value (NPV), Internal Rate of Return (IRR), etc.

5. Leverage effect principle

6. Cost of equity

7. Weighted Average Cost of Capital (WACC)

It provides a summary of the most important principles of corporate finance and prepares you to dive deeper into the world of Mergers and Acquisitions.

• the increase of the price of the underlying asset

• the decrease of the price of the underlying asset

• the volatility of the price of the underlying asset

• the stability of the price of the underlying asset.

Such principles are detailed in the following handout:

• During a given period, the underlying asset's spot price either goes up (and is mutiplied by a number equal to u), or goes down (and is multiplied by a number equal to d). Assuming k upward moves and n-k downward moves, the generic spot price of the underlying asset on expiration date is: u^(k) x d^(n-k) x S where k is a natural number taking its values in the [0,n] interval

where:

r = risk free rate

p = probability of an upward move during a period

Cu = premium of the call at the end of the next period, assuming an upward move

Cd = premium of the call at the end of the next period, assuming a downward move

p= probability of an upward move during a period

• Vega for the sensivitity to a change in the volatility of the underlying asset

• Theta for the sensitiity to a change in time to expiration

• Rhô for the sensivitity to a change in the risk free rate.The delta also enables to calibrate a hedging strategy. But, as the delta depends on the spot price of the underlying asset, which is changing everyday, the delta is also changing and the hedging has to be adapted accordingly.

2. Growth option

3. Value of a patent in the pharma industry

4. Pricing of an oil concession

5. Breakdown of the debt value taking LGD into account

This income statement is based on a Reuter’s consensus of brokers from sales to EBIT. The assumptions for the soft landing are:

a. Linear phasing of the growth of sales

b. Sustainability of the EBITDA margin and the D&A ratio of the brokers’ last year

c. 25% corporate tax rate

For Capex: linear phasing

For WCR in the balance sheet: sustainability of the 2018 WCR/sales ratio

Then preparation of the balance sheet.

This includes the search of the appropriate maximum acquisition debt which enables the holding’s cash balance to be always positive.

Otherwise (negative cash balance), thé holding runs into debt via an overdraft which is not possible based on the loan agreement.

• For banks and other credit institutions (consumer credit, leasing, factoring...) : Basel 3

• For insurance and reinsurance companies: Solvency 2

• 4 in France: BNP Paribas, BPCE, Crédit agricole & Société générale

• 1 in Germany: Deutsche Bank

• 1 in the Netherlands: ING

• 1 in Spain: Santander

• 1 in Italy: Unicredit

• 2 in Switzerland: Crédit suisse & UBS

• 3 in the United Kingdom: Barclays, HSBC & Standard Chartered

• 8 in the USA: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, State Street & Wells Fargo

• 2 in Canada Banque: Toronto-Dominion & RBC

• 4 in China: Agricultural Bank of China, Bank of China, CCB & ICBC

• 3 in Japan: Mitsubishi UFJ, Mizuho & Sumitomo Mitsui

RWA = Risks Weighted Assets. The RWA correspond to the commitments that are undertaken by the bank, the main ones being the loans granted to retail and corporate clients.

• The bank's equity value is equal to the sum of present values of future dividends that correspond to forecasted levels of excess equity. Excess equity correspond to the maximum dividend that could be paid out to the bank's shareholders taking the target CET1 constraint into account. This is the reason why the valuation of a bank is based on a Dividend Discount Model (instead of DCF model) • A listed peers and/or M&A peers approach can also be conducted. The 3 main multiples are generally taken into account: P/E, P/BV (= market cap / book value of consolidated equity, group share), P/TBV (= market cap / book value of consolidated tangible equity, group share) & ROE correlated P/BV

An alternative approach which is also based on a multiple, but which includes only the specificities of the company to be valued, consists in applyig the (ROE - g) / (k - g) multiple to its CET1 or, by approximation, to its TBV.

The following slides present a detailed example:

• The SCR corresponds to the Solvency Capital Requirements. It includes 5 risks: Underwriting risk in life, non life and health, Market risk, Counterparty risk, Risk relative to intangible assets & Operational risk. It is reduced by diversification benefits as the SCR includes coefficients of correlation between the various risks that may be negative or equal to 0.

The following document proposes a focus on SCR. It underlines the principle of their calculation in the Solvency 2 environment and the implied calculation of benefits of diversification for an insurance or a reinsurance company:

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