• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

company valuation

G

Gousgounis

Member
Hi,

In Q&A Bank 7.1 (iii) as part of the valuation of a company there is an adjustment for capital calculation. This refers to capital tied up within the company (e.g. MCR, prudence in the reserves). Can you explain how and why this adjustment is made?

(We have already calculated the realistic NAV which should already adjust for any margins in the reserves)

Also: how is it possible to have a different risk discount rate to the interest earned?

In Q&A Bank 7.2 (i) the same question only mentions cat reserves, claims equalisation reserves and asset mismatch reserves. Again, how and why is this adjustment made?

Many thanks!
 
The adjustment for capital calculation can be included if it's thought that the company is going to need extra cash to cope with other things (in question 1, it mentions this may be for statutory purposes, but in question 2, more specific examples are given, such as cats and equalisation reserves - but any suitable examples would do). The adjustment is made because you'd be less willing to pay as much for a company that needs a lot of 'extra' financial help to run its business (unless you're happy to allow for this as part of higher expected returns).

The risk discount rate is not the same as the interest earned. Interest earned is that expected to be earned on those assets backing reserves. Risk discount rates are used to discount future cashflows (often for pricing purposes, for example), and will reflect risk and shareholder expectations. The two are related (by the economy), but not necessarily the same.

Hope this helps!
 
Is the capital adjustment related to the MVM on reserves (Solvency II)?
 
You must log in or register to reply here.
Back
Top