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Financial Management: Maximizing Shareholders' Wealth

This revision session covers the objective of financial management, agency theory, time value of money, investment decision, risk and return, weighted average cost of capital, capital structure, funding, dividends, and working capital.

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Financial Management: Maximizing Shareholders' Wealth

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  1. MN10311 Revision Session

  2. MN10311 Revision Session • Objective of Financial Management • Agency • Time value of money • Investment decision • Risk, return and the cost of equity • Weighted average cost of capital • Capital structure • Funding • Dividends • Working Capital

  3. MN10311 Revision Session • Objective of Financial Management To maximise shareholders wealth • Agency theory

  4. MN10311 Revision Session • Time Value of Money - Compounding/future values - Discounting/present values - Annuities Sorts of questions in NPV calcs, present values, compounding, amounts for an annuity etc.

  5. MN10311 Revision Session • Investment decision - Payback, ARR (ROI), NPV, IRR - Decision rules • Which is best? • Multiple IRRs, reinvestment rate, additivity, scale, time etc • Sort of questions - Do an NPV calculation

  6. MN10311 Revision Session • NPV calculations, what to watch out for sunk costs, opportunity costs, tax/depreciation Other Qs, Interpolation, capital rationing Conceptual Qs, e.g. NPV is better than Irr because it ………

  7. MN10311 Revision Session • The Cost of Equity – Risk and Return • Expected return, variance and standard deviation. Probability tables * Portfolio theory • Diversifiable/unsystematic, undiversifiable/systematic risk • Capital market line • Well diversified portfolio, market portfolio • Expected return, variance and standard deviation.

  8. MN10311 Revision Session • Equity/Risk • Leads into CAPM, relationship between risk of asset and market portfolio, relative risk, measured by Beta. Securitymarket line Questions - Numbers, need to know how to work out ER, Var and SD Beta = Covariance of asset and market Variance of market

  9. MN10311 Revision Session • CAPM equation ERj = RF + (ERM – RF) B

  10. MN10311 Revision Session • Other models for working out cost of Equity - Gordon Dividend Growth Model What is it? - Arbitrage Pricing Theory What is it?

  11. MN10311 Revision Session • Weighted Average Cost of Capital • Capital = Equity and Long Term Debt • WACC = Cost of Debt x Debt + Cost of Equity x Equity Debt plus Equity Debt plus Equity

  12. MN10311 Revision Session • Weighted Average Cost of Capital • Sorts of Questions • Numbers • Work out the WACC given numbers for the • CAPM - Know the equation, risk free, market premium, return on the market, beta etc 2. Gordon dividend growth

  13. MN10311 Revision Session • Capital Structure Can we change the value of the company by changing the proportions of debt and equity? • Theoretical arguments • Modigliani and Miller etc • Tax shield • Factors that may be important in deciding • Tradeoff theory, Pecking Order theory

  14. MN10311 Revision Session • Cap Structure • Sorts of Qs • Numbers. As per seminar • Conceptual e.g. What will adding debt do to the required return on equity? A. increase it, b decrease it, c have no effect etc

  15. MN10311 Revision Session • Funding or how to finance the company • Equity • Questions. • Numbers. Rights issues • Conceptual. What is it? Value e.g. market, par value etc, • Debt - Sources - Long, medium, short,

  16. MN10311 Revision Session • Funding • Short, the various instruments what are their advantages and disadvantages and sources of debt • medium and long, bank debt, bonds • Straight, floating rate, discounted, convertibles, warrants

  17. MN10311 Revision Session • Funding, sorts of Qs - Numbers. Cost of borrowing i.e. simple interest calc • Principal x rate x time, • Suppliers vs taking discount etc • Accruals, discounting etc - Conceptual • What is a….. • This feature is……

  18. MN10311 Revision Session • Dividend decision • Theory, can they affect value? Taxes, signalling, behavioural Types of policy including buybacks, bonus or scrip issues Mechanics Sorts of Qs. Numbers. Div yield, Conceptual what is……? Who decides……..? What sort of policy would…..?

  19. MN10311 Revision Session • Working capital • What is it? • Ratios useful for analysis Days payables, receivables, inventory Operating cycle, cash conversion cycle Cost of float Cost of discounts Sort of Qs. Numerical. Any of the above Conceptual. Working capital is …? Net working capital is..? Liquidity is…..? etc

  20. MN10311 Revision Session • Any Questions? Good Luck aided by some study

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