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BA205 - Financial Management by Mind Map: BA205 - Financial
Management
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BA205 - Financial Management

Class format

Preparation & Participation

Dialogues & Discussion

Addressing Focus Questions

Case Study Analysis

Grading Scheme

Topic Presentation 50%

Report is not long, 2000 words max

Report is consistent and effectively sells its recommendations

Presentation is professionally done

Class participation 30%

Contextual, Willingness to participate and attentive to discussion

Innovative, There is willingness to test new ideas and comments are not confrontational.

Insightful, Comments are appropriate and indicates insightful analysis of case data

Relevant, Comments are relevant to current discussion and linked to comments of others

Supported, Comments clarify important aspects of earlier ideas and lead to clearer statement of relevant concepts and issues

Final examination 20%

Bring exam admission slip

Last meeting

Use 50 leaves bound notebook

Coverage (all focus questions not covered in the discussions)

Case Study Analysis

Recommendations, Criteria for selecting alternative recommendations are given, Criteria are appropriate, Plan of action is logical linked to the analysis, Plan of action is specific, complete and practical, Recommendations are likely to achieve intended results

Quality analysis, Major issues are addressed, Relevant tools are used properly, Assumptions for analysis are stated clearly, Causes of the problems are identified in the analysis

Exhibits, Analyses in the exhibits are done correctly, Exhibits support and clarify key points, Not more than 7 exhibits

Coverage

1. Principles of Valuation

Time Value of Money

Focus questions, Is discount rate the same as discount factor? Opportunity cost of capital?, How is risk factored into the time value of money?, Why do capital markets ensure that all shareholders unanimously agree that NPV is a sensible criterion for evaluating projects?, Value maximization assumes a well-functioning capital markets. What does "well-functioning" mean? In what ways does maximizing value conflict with shareholders' interests?, Why is a reputation for honesty and fair business practice important to the financial value of the corporation?

2. Project & Firm Valuation

Evaluating Projects, Capital Budgeting Process, Project “ATIOCF”, Incremental Cash Flow, Focus questions, What are capital investments? What do the capital budgeting decision process involves?, Explain the process of generating project proposals within the firm., Determine initial, interim, and terminal period after-tax incremental operating cash flows associated with a capital investment project., Understand why cash, not income, flows are the most relevant., Explain why, when, and how sunk costs and opportunity costs should, or should not, be considered.

Firm Valuation, Dividend discount model, Cash flows, profitability, & growth, Free cash flows, Profitability, financial ratios, & terminal value, Focus questions, What is the general DCF formula for the value of a stock?, What is a two-stage DCF model? When would you want to use one?, What is the Dividend Discount Model?, Is free cash flow the same thing as earnings?, Is the earnings-price ratio a good measure of the cost of equity? Why or why not?, What is meant by PVGO? Why do the shares of companies with valuable PVGO trade at low earnings-price ratios?

3. Risk & Return

Introduction to Risk & Return, Measuring risk, The tradeoff between risk and return, Focus questions, If stock prices rise faster than dividends, one possible explanation is that the cost of capital has fallen. Explain why., Would an average of past returns over or under estimate the cost of capital?, Explain the difference between the arithmetic average and the compound annual return. Which one is higher?

Portfolio Theory, Portfolio risk & diversification, Optimal portfolios, Systematic vs. diversifiable risk, Focus Questions, What are the formulas for the variance and standard deviation of returns?, What are the two types of risk? Which one can be reduced by diversification?, What is the general formula for calculating the risk of a portfolio?, What is beta and what is its average value?, Explain why diversification makes sense for an investor, but not generally for the firm itself

CAPM, Using the CAPM, Estimating beta and the cost of capital, Focus questions:, If stock returns are normally distributed, the distribution can be completely defined by two numbers. What are they?, What is meant by "the set of efficient portfolios?", What is the Sharpe ratio? Why should investors attempt to maximize it?, Write down the capital asset pricing model, State the formula for the arbitrage pricing theory. What are the three steps involved in estimating expected returns using this formula?, State the Fama-French three-factor model

4. Market Efficiency

Brealey et al Chapter 14Keown et al Chapter 14

Debt, taxes, and the after-tax WACC, Tax effects of financings, Corporate taxes: Interest paid are treated as expense while dividends paid are not, Personal taxes: Interest paid are deductible from income, dividends received are taxable, Overall: debts have tax advantage, Effect of taxes on WACC, Advantages of Debt, Tax advantage, Signaling, Corporate control, Lower issue costs

Financial distress, Costs against debts, Direct costs, Managers' time & effort, Legal costs, Indirect costs, Foregone positive NPV projects, Loss of competitive position, Lost customers, Lost suppliers, Asset fire sales and liquidation, Loss of interest tax shields, Value - Distress, Optimal Firm Value with Distress

Focus questions, What is meant by a "random walk?", What are the forms of the efficient-market hypothesis? Give example and evidence of each, What is "prospect theory?" How does it differ from the assumptions used to develop the capital asset pricing model?, What are the six lessons of market efficiency? Give example of each

5. Raising Capital

Brealey etal Chapter 15

Overview of Corporate Financing

Financing patterns and the stock market's reaction

Focus questions, What is the main source of funds for most companies?, What is meant by the company's financial deficit?, What is meant by residual cash flow rights and residual control rights?, How do financial intermediaries contribute to the functioning of the economy? Give two examples, How are venture capital funds organized?, How is venture capital financing structures so as to ensure that the new business is a success?, How do rights issues work?

6. Capital Structure

Brealey et al Chapter 18

M&M theorem

Leverage, risk & WACC

Focus questions:, What is MM's proposition 1?, What is financial risk? How does it depend on the firm's capital structure?, What is the traditional position on the effects of debt financing on the weighted average cost of capital?, Financial innovation continues. Firms and financial institutions keep designing and issuing new types of debt, equity, or hybrid securities. Does financial innovation support or refute MM's propositions?

7. Dividend Policy

Payout policy

Focus questions:, Understand the dividend retention versus distribution dilemma faced by the firm., Explain the Modigliani and Miller (M&M) argument that dividends are irrelevant., Explain the counterarguments to M&M – that dividends do matter., Identify and discuss the factors affecting a firm’s dividend and retention of earnings policy., Define, compare, and justify cash dividends, stock dividends, stock splits, and reverse stock splits., Define “stock repurchase” and explain why (and how) a firm might repurchase stock., Summarize the standard cash dividend payment procedures and critical dates., Define and discuss dividend reinvestment plans (DRIPs).

Concepts

Managerial decisions have financial dimensions which includes one or a combination of the following areas of finance: assets or activity valuation, risk and return trade-offs, policy formulation for fund sourcing, investments and dividends. The course focuses on corporations and the capital markets thus the students must have adequate foundation on these concepts.

Financing decisions

Assets Management

Acquiring funds (Debt &/or Equity), Issue new stocks or not, Issue bonds or not

Using funds (Investment decisions), Pay dividends or not, Replace an asset or not, Where to invest its money

Core principles

Time value of money, The opportunity to earn a return on invested funds means that a dollar today is worth more than a dollar in the future

Compensation for risk, Investors expect compensation for bearing risk

Don't put all your eggs in one basket, Investors can achieve a more favorable trade-off between risk and return by diversifying their portfolios

Markets are smart, Competition for information tends to make markets efficient

Functions of Financial Manager

Daily

Credit management

Inventory control

Receipt & disbursement of funds

Occasional

Stock issue

Bond issue

Capital budgeting

Dividend decision

Tradeoffs

Profitability vs. Risk

Influences, Operational side, Capital vs. Labor, Product A vs. Product B, Financial mix, Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet), Stocks vs. Bonds vs. Retained earnings, Business form, Single proprietorship, Partnership, Corporation

Goals

Establish Right Valuation approach

Management & stockholder wealth

Maximize shareholders wealth, Maximize stock price, not profits or EPS, Why not profits or EPS?, Earnings per share are backward-looking, dependent on accounting principles, Do not fully consider cash flow timing, Ignores risk

Social responsibility, Attracts capital, Consequentially mandatory, Cost increasing activities, Initially voluntary, Offers benefits to society, Provides employment

Evolution

1900's

Separated from field of economics

1930's

Preservation of capital

Maintenance of liquidity

Rehabilitation of financially troubled firms

Bankruptcy

1950's

More analytical

Financial capital vs. Real capital

Cash & Inventory management

Capital structure theory

Dividend policy

1980's

Risk-return relationships

Maximization of returns for a given level of risk

Portfolio management

Capital structure theory

New financial products focused on hedging

Effects of inflation on financial forecasting

Required rate for capital budgeting

Cost of Capital

Internet era

Enabled e-commerce solutions, For "old economy" existing companies, B2C: buying with credit cards, B2B: ordering, inventory, supply bidding } all online

Spurt new business models & companies, Amazon.com, Ebay, Apple.com, Facebook

Financial Markets

Participants

Public, Government reserves, Interest rates, Regulations

Corporate, Banks, Insurance companies, Credit unions, Mutual funds

Indicators

Maximization of shareholder value

Ethical behavior as value

Types

According to maturity, <12 months, Money market, >12 months, Long-term securities, Stocks, Bonds

According to primacy, Primary, Raising funds through sale of corporate securities through new issue, Secondary, Performance of corporate securities in the markets is an indicator of corporate performance

Corporate Finance Functions (BM 207)

Financing (Capital-Raising)

Most financing are sourced from internal rather than external sources Most external financing is debt Primary vs. secondary market transactions or offerings Financial intermediaries declining as a source of capital for large firms Securities markets growing in importance

Externally, IPO, Primary market transactions, Secondary market transactions

Internally

Capital budgeting

Selecting the best projects for the firm to invest

Step 1. Identifying potential investments

Step 2. Analyzing those investments to identify which will create shareholder value

Step 3. Implementing and monitoring the investments selected in step 2

Financial management

Managing daily cash inflows and outflows

Forecasting cash balances

Building a long-term financial plan

Choosing the right mix of debt & equity

Corporate governance

Hires and promotes qualified, honest people, and structures employees’ financial incentives to motivate them to maximize firm value

In practice the incentives of stockholders, managers, and other stakeholders often conflict.

Dimensions of corporate governance, Board of Directors, Securities & Exchange Commission, Sarbanes-Oxley Act of 2002

Risk management

Identifying, measuring, and managing all types of risk exposures

Some risks are insurable, and some risks can be reduced through diversification.

Financial instruments like forwards, futures, options, and swaps may also be used to hedge market risks such as interest-rate, price, and currency fluctuations.