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Franchise value
- economic value of profits that will be earned in the future years from the future renewals of the current policies
- reflected in a firm's stock price
- based on PV of future CF -> subject to int rate risk
- usually invisible to senior execs -> unmanaged
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Calculations of franchise value
- y = rf, k = target ros, C = current econ value
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Interest rate sensitivity of F
- k = a + by
- most cpies use b = 0
- D = (a - b + 1) / [(1 + y)(a + by - y)] + 1 / [1 + y - cr]
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Franchise value dilemmas
- as F incr, more diff to manage int rate risk
- if reduce D of assets, might puzzle regulators
- should use pricing strategy k = a + by
- (-) desired combination can only be maitained for small rate chg
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