Professional Documents
Culture Documents
CH 1: Financial Strategy Formulation and the role and responsibilities of senior financial executive
Financial Involve (planning): 1. Establish and identify objectives 2. identify alternative courses of action 3. evaluate 4. select 5.
Investment Investment Appraisal + Financing Decision + Dividend Decisions
Factors to Cost, risk, flexibility, matching/purposes, amount involved, security
Methods of 1. Prospectus 2. Placing (with issuing house/institutional investor) 3. Stock exchange introduction 4.Offer for Sale (To issuing
Problems facing Risk, Security, Marketability of ordinary shares, Tax considerations, Cost, Lack of information, Funding gap, maturity gap
Dividend Traditional theory – Dividend payout influence the market value bc 1. Information content (Dividend signaling) 2.
Dividend Modigliani and Miller (M&M) – value of the firm is determined by its future earning stream and thus dividends and retention
CH 3: Cost of Capital
Cost of Equity P0 = D0(1+g)/(Ke-g)
Gordon's Growth G = rb. Assumption: 1. Entity is entirely equity financed 2. Retained profit is the only source of finance 3. Constant
Cost of Kps = D(net)/P0(ex-div)
Cost of debt Irredeemable: Kb = Interest (1-T)/MVd(Ex-div); Redeemable: Kb = yield to maturity = internal rate of return
WACC Basic Principles: Cost of capital required for investment appraisal = cost of raising more capital (historical cost of capital =
CH 6: Reporting financial Performance, Investment Appraisal techniques and the use of FCF
Investment Accounting Rate of Return (ARR = Annual profit post depreciation/Average investment), Payback period, Discounted
Appraisal CF:NPV and IRR (Yield = a%+NPVa/(NPVa-NPVb)*(b5-a%))
Techniques
Modified Internal Adv: 1. eliminate multiple IRR 2. address the reinvestment issue facing IRR 3. Provides ranking which is consistent with
Rate of Return NPV 4. Provide % instead of value; Steps to calculate: (1) Convert all investment phase output into a single equivalent
(MIRR) payment at time 0 (2) All net cash inflow convert to single terminal receipt at the end of the project's life, reinvestment rate
using company's cost of capital (3) MIRR =(Outflow/inflow)^1/t – 1
Discounted Length of time the DCF required to recover the original cash outlay
Payback
Duration Avg time taken to recover the CF on an investment. Steps: 1. Calculate value of each fcf and discounted at DF, 2. Calculate
each year's DCF as a proportion of the original outlay, 3. Take the time from the investment and multiply with the proportion
in (2), 4. Sum the weighted year values – Duration. If duration is based upon the avg time to recover the initial capital
investment, DF = IRR; IF the duration is based upon the avg time taken to recover the PV of the project, DF = Chosen hurdle
rate.
Capital Rationing Hard vs Soft; Single period vs Multi-Period; Divisible (Profitability index/linear programming) vs Indivisible (Trial and error,
Dual Values Shadow prices which reflects the change in the objective function as a result of having one more or less unit of the scarce
Free Cash Flow Cash that is not retained and reinvested in the business, available to be distributed to providers of capital = EBIT – Tax +
Free Cash Flow Represents the funds available for distribution only to ordinary $H, measures the dividend capacity of the company = FCF –
Dividend cover FCFE/Dividend paid
Risk Mtds of treating = sensitivity analysis, probability estimate of CF, certainty equivalent, adjusting Discount rate, simulation modeling
CH 16: The use of financial derivatives to hedge against Interest Rate risk
Forward rate Pre-agreed fixed interest rate for a specific level of borrowing for a given future period btw co and bank
Interest rate Binding contract btw buyer and seller for delivery of agreed interest rate commitment on an agreed date at agreed price.
Options on Right to buy or sell the related interest rate futures contract. Borrower = PUT, Investor = CALL. Steps: 1. What contract?
Interest Rate Agreement to exchange their interest rate commitment. Benefits: 1. Lower than bank 2. Easy to organize 3. Flexible,
Interest Rate Right to borrow or lend a notional amount for a given period at a specified interest rate on a specified future date. Borrower's
Interest Rate Right to a series of compensation if interest rates increase above the exercise price at each interest fixing date = borrower's
Interest Rate Right to a series of compensation if interest rates decrease below the exercise price at each interest fixing date = Lender's
Interest Rate Combination of purchasing interest rate cap and sell floors or vice versa to specify the range in which interest rate fluctuate.
Swaption Option to enter into an interest rate swap or currency swap = protection with flexibility. But once exercised irreversible
Macaulay's Total weighted avg time for recovery of a payment and principal in relation to the current market price of bond. Steps: 1.