I questioned on Friday whether the PRA transitional benefit has any value. It’s a regulatory asset that produces no income and moreover its value decreases every year until it is zero in 2032. How would you value the company using the standard techniques of modern science?
Actually there is an answer to this, sort of. Suppose the PRA gives me £1bn of transitionals. Thanks PRA! I now have a fresh £1bn to put on the asset side of the balance sheet.
However I have to repay this on an amortised basis over 13 years until year-end 2031. Assuming a straight line basis, I have to repay about £77m each year until the coffers run dry. I assume a yield curve roughly in line with current market rates, and calculate a discount factor accordingly. This gives me a present value for my PRA repayments. See the table below.
The sum of the present values is about £923m, which goes on the liability side, so I make an instant profit of about £77m! Of course that’s fake equity, but all I need is to get the auditors to sign off and I can sell it to some fool.
Makes up for bloody dry January, eh?
| 1,000,000,000 | -923,412,444 | |||
| 1 | -76,923,077 | 0.75% | 0.992528 | -76,348,312 |
| 2 | -76,923,077 | 0.75% | 0.985112 | -75,777,842 |
| 3 | -76,923,077 | 0.82% | 0.9757 | -75,053,855 |
| 4 | -76,923,077 | 0.82% | 0.967732 | -74,440,930 |
| 5 | -76,923,077 | 0.88% | 0.956954 | -73,611,843 |
| 6 | -76,923,077 | 0.95% | 0.944594 | -72,661,082 |
| 7 | -76,923,077 | 1.02% | 0.931089 | -71,622,260 |
| 8 | -76,923,077 | 1.09% | 0.916494 | -70,499,521 |
| 9 | -76,923,077 | 1.16% | 0.900865 | -69,297,298 |
| 10 | -76,923,077 | 1.25% | 0.882497 | -67,884,377 |
| 11 | -76,923,077 | 1.30% | 0.866754 | -66,673,390 |
| 12 | -76,923,077 | 1.35% | 0.850441 | -65,418,554 |
| 13 | -76,923,077 | 1.40% | 0.833601 | -64,123,180 |