INTRO, RISK&RETURN, MPT
Role of a financial manager?
Relationship of corporate finance to accounting an economics?
Why is the objective of financial management to maximise the value of the firm?
What is financial management?
how should Co pay (finance) these investments?
when should dividends be paid and how much?
which assets should Co invest in?
because shareholders desire value maximisation
maximization of firm's value
Issues with profit maximisation?
does not reflect cash flows
accounting profits does not account for the cost of equity capital
timing of returns
risk - if higher profits come with much higher risk, then the share price may fall
manipulation of accounting profits
opportunities to create wealth
Finance from capital markets
Issue of shares
Working capital investments
Issue of debt
Non-current assets
Finance from creditors
Investing in financial assets
Finance from retained earnings
Finance from money markets
Investing in operating assets
accounts receivable
inventory
cash
PPE
intangible assets (e.g. patents, trademarks)
Loans
Derivatives
Bonds or preference shares
Investments in non-operating assets
Financing decision
Selecting the optimal finance mix
sources of finance
cost of financing is linked to the risk associated with the investment
risk depends on
cost and risk of financing
type of project undertaken
length of time for which funds are provided
long term financing
equity vs debt financing depends on risk preference of the investor
equity shares
high risk but high expected return
debenture/bonds
low risk
short term financing
based on cyclical nature of business
working capital financing
use of accumulated profits of prior years
retain or distribute profits through dividends
3 types of markets
Secondary market
Over the counter (OTC) market
if not traded on an organised exchange
its said to trade in the OTC market
Primary market
trading in:
previously issued shares and bonds
of established public companies
outstanding
new public offerings
additional
by privately held firms
the inital public offering (IPO) market
sold by established public Co's
e.g. rights issues
shares/bonds.debentures
Fundamental concepts in Corporate Finance
Risk and return
Efficient market hypothesis
TVOM
Portfolio theory
PV
CAPM
used to calculate a risk adjusted required rate of return
Capital asset pricing model
focus is on risk that can't be diversified away i.e. market risk
theme of diversification
and without bias
to all publicly available info
hypothesis asserts that securities markets react immediately
expected return of an asset is determined by its level of risk
risk is measure ito risk of loss and variability of cash flows
value of any investment is determined by:
timing of cash flows
use of a risk adjusted discount rate
size of future cash flows
value today of expected future cash flows
FV
value that an investment will grow over a stated period at a specified interest rate
Future Value
single sum
annuity
Important
Present Value
perpetuity
growing perpetuity
annuity
uneven cash flow stream
single sum
Nominal vs real interest rate
Apply compounding and discounting to complex cash flow streams
Define and calculate an effective rate
Apply TVOM principles to real world problems
Effective rate
Nominal rate vs Real interest rate
FV=PV(1+r)
FV=PV(1+r)^n
PV=FV/(1+r)^n
Effective rate=[1+(Rn/m)]^m-1
PV= CF/r
PV= pmt(1+g)/r-g