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4. Investment appraisal
5. Business finance
6. Cost of capital
7. Business valuations
8. Risk management
CHAPTER 1
Financial management is concerned with the efficient acquisition and deployment of short- and long- term financial resources, to ensure that financial objectives of the enterprise are achieved.
Three key decisions:
- financing decisions;
- investment decisions;
- dividends decisions.
1. The nature and purpose of financial management Distinguish financial management from: - financial accounting - management accounting Financial management is about making financial decisions. Management/Financial accounting are about providing information to support decision making. Financial accounting information about historical results of past decisions; Management accounting information about day to day operations of control and decision making.
Commercial
Financial
Strategy
CORPORATE
Organic or acquisition
BUSINESS
Project returns?
OPERATIONAL
Financial objectives
1. SHAREHOLDER APPROACH
2. STAKEHOLDER APPROACH
Overall objective Maximize shareholder wealth - Maximize (increase) share-price - and/or dividend payout
Alternative objectives suggested for companies: - Profit maximization - Growth But these are problematic and not always in line with the maximization of shareholder wealth: - e.g. short-term profit maximization strategies may be detrimental to long-term maximization of wealth.
4. Stakeholder objective and conflicts A stakeholder group is one with a vested interest in the company.
Internal - Company employees - Company managers Connected - Equity investors (ordinary shareholders); - Customers; - Suppliers; - Finance providers; - Competitors External - The government -The community at large; - Pressure groups, - Regulators
Shareholders as well as Creditors wealth is affected asymmetrically if the company takes on risky/profitable projects
Shareholders get a variable dividend (if any) Creditors get a fixed interest.
Principal
Employs
Agent
Contract
1. Adverse selection problem asymmetric information about the skills of the agent 2. Moral hazard problem asymmetric information about the acts of the agent 3. Costly state verification asymmetric information about the outcome of the contract
Imperfections of the agency relationship: - Asymmetric information - Conflict of interest (goal incongruence): - Excessive remuneration and bonuses; - Empire building; - Creative accounting; - Off balance sheet finance - Avoiding takeover bids - Unethical activities
(All of the above are forms of the moral hazard problem)
- Non-executive directors (NEDs) - important presence of the board - obligation to spend sufficient time with the company - independence
- Executive directors (Eds) - separation of chairman and CEO - submit for re-election - clear disclosure of financial rewards - outnumbered by the NEDs
- Remuneration committees; - Made up wholly of NEDs - Objectively determine and make recommendations about the EDs pay - Should advice the board on the remuneration of EDs - Nomination committees; - Made up of NEDs - Establish a framework for selection of both EDs and NEDs - Annual General Meeting (AGM) - Shareholders ability to vote on separate issues - Bundling un-related proposals in a single resolution should cease
- Setting objectives Shareholders wealth max. - Measure results - Compare against objectives
Ratio analysis (Chapter 19)
- Profitability and return; - Debt and gearing; - Liquidity; - Investor.
1. Objectives: - not to make money; - but to benefit a certain group. 2. A mixture of financial and non-financial objectives - reliance placed on non-financial objectives
3. Difficulties with setting objectives: - many are difficult to quantify financially; - multiple and conflicting objectives are
VFM refers to achieving the desired level and quality of service at he most economical cost.
VFM = Economy, Efficiency, Effectiveness (the three Es) Effectiveness measures the degree of meeting the targets Efficiency a measure of outputs over inputs - input driven - output driven Economy being effective and efficient at the lowest possible cost.
Inputs: Materials
Outputs: Goods
Staff
Cash
Services