Corporate finance and financial strategy

Cover......Page 1
Title Page......Page 4
Copyright......Page 5
Contents......Page 8
 Press extracts......Page 18
 Figures......Page 19
Preface......Page 24
Guided Tour......Page 28
Acknowledgements......Page 32
Part 1 Corporate finance......Page 36
 Introduction to Part I......Page 37
 Chapter 1 The financial environment......Page 40
  Introduction......Page 41
  Corporate finance and financial strategy......Page 42
  Types of business entity......Page 45
  Business organisational structures......Page 51
  Financial statements......Page 57
  Accountability and financial reporting......Page 69
  Managing corporate finance......Page 73
  Underlying principles of corporate finance......Page 74
  Summary of key points......Page 77
  Glossary of key terms......Page 78
  Discussion points......Page 82
  Exercises......Page 83
 Chapter 2 Corporate objectives......Page 86
  Strategic management......Page 87
  Corporate objectives......Page 89
  Financial strategy......Page 94
  Efficient market hypothesis......Page 98
  Shareholder value......Page 102
  Strategic financial decisions......Page 108
  The agency problem......Page 109
  Summary of key points......Page 114
  Glossary of key terms......Page 115
  Discussion points......Page 118
  Exercises......Page 119
 Chapter 3 Corporate governance......Page 122
  Extracts from Johnson Matthey Plc’s report and accounts 2012......Page 123
  Introduction......Page 168
  Corporate governance codes of practice......Page 169
  The audit and the role of auditors......Page 181
  Directors’ responsibilities......Page 185
  Insolvency......Page 193
  Wrongful trading......Page 194
  Disqualification of directors......Page 195
  Summary of directors’ obligations and responsibilities......Page 197
  Actions to ensure compliance......Page 198
  Summary of key points......Page 199
  Glossary of key terms......Page 200
  Exercises......Page 202
 Chapter 4 Risk, return, and portfolio theory......Page 206
  Introduction......Page 207
  The relationship between risk and return......Page 208
  Investor attitudes to risk......Page 211
  Business risk and financial risk......Page 212
  The impact of risk on financing......Page 213
  Systematic and unsystematic risk......Page 214
  Diversification......Page 215
  Risk measurement......Page 216
  Portfolio risks and returns......Page 221
  Markowitz’s portfolio theory......Page 228
  Risk-free investments......Page 232
  Capital market line (CML)......Page 233
  Investors’ preferences......Page 234
  The return on the market portfolio......Page 239
  Glossary of key terms......Page 242
  Exercises......Page 244
 Chapter 5 Capital structure and the cost of capital......Page 248
  Capital asset pricing model (CAPM)......Page 249
  Cost of equity......Page 254
  Simple dividend growth model......Page 255
  Cost of debt......Page 256
  Weighted average cost of capital (WACC)......Page 258
  Capital structure......Page 262
  Gearing – debt and equity......Page 263
  Optimal capital structure......Page 269
  Traditional approach to capital structure (or financial structure)......Page 270
  Miller and Modigliani (I) net income approach to capital structure......Page 271
  Miller and Modigliani (II) market imperfections approach to capital structure......Page 272
  Further approaches to capital structure......Page 273
  Summary of key points......Page 276
  Glossary of key terms......Page 277
  Exercises......Page 278
 Chapter 6 Capital investment decisions......Page 286
  Introduction......Page 287
  What is an investment?......Page 288
  Future values, present values, perpetuities, and annuities......Page 289
  Investment appraisal methods......Page 294
  Advantages and disadvantages of the five investment appraisal methods......Page 309
  Other factors affecting investment decisions......Page 311
  Risk and uncertainty and decision-making – sensitivity analysis......Page 319
  Equivalent annual cost (EAC)......Page 329
  Capital budgeting......Page 330
  Control of capital investment projects......Page 334
  Summary of key points......Page 335
  Glossary of key terms......Page 336
  Exercises......Page 337
 Chapter 7 Sources of finance and the capital markets......Page 342
  Introduction......Page 343
  Sources of finance internal to the business......Page 344
  Short-term external sources of finance......Page 347
  Long-term external sources of finance......Page 349
  The capital markets......Page 373
  Financial institutions......Page 380
  Islamic banking and Islamic finance......Page 383
  The global financial crisis......Page 392
  Summary of key points......Page 398
  Glossary of key terms......Page 399
  Questions......Page 401
  Exercises......Page 402
 Chapter 8 Financial analysis......Page 408
  Extracts from Johnson Matthey Plc report and accounts 2012......Page 409
  Introduction......Page 413
  The performance review process......Page 414
  Limitations of the performance review process......Page 418
  Economic performance measurement......Page 419
  Ratio analysis......Page 420
  Return on equity (ROE), return on assets (ROA), and the Du Pont system......Page 441
  Horizontal analysis......Page 446
  Vertical analysis......Page 448
  Segmental reporting......Page 449
  Cash versus profit, and EBITDA, EVA™, and MVA......Page 454
  Predicting corporate financial failure......Page 463
  Summary of key points......Page 467
  Glossary of key terms......Page 468
  Discussion points......Page 470
  Exercises......Page 471
 Chapter 9 Financial planning......Page 478
  Introduction......Page 479
  The strategic view......Page 480
  The purpose of financial planning......Page 484
  The financial planning process......Page 485
  Financial modelling......Page 487
  The role of forecasting......Page 494
  Cash flow forecasting and planning......Page 495
  Planning for growth......Page 497
  Financing growth......Page 499
  Strategic performance assessment......Page 500
  Glossary of key terms......Page 506
  Questions......Page 507
  Exercises......Page 508
  Case Study I: Gegin Ltd......Page 512
 Chapter 10 Management of working capital......Page 516
  Introduction......Page 517
  Working capital and working capital requirement......Page 518
  Working capital management as a strategic tool......Page 523
  Working capital policy......Page 529
  Inventories management......Page 531
  Just in time (JIT), materials requirement planning (MRP), and optimised production technology (OPT)......Page 538
  Trade receivables and credit management......Page 540
  Trade payables management......Page 545
  Operating cycle performance......Page 553
  Cash improvement techniques......Page 555
  Short-term cash flow improvement......Page 556
  Long-term cash flow improvement......Page 561
  Cash management......Page 562
  Summary of key points......Page 566
  Glossary of key terms......Page 567
  Questions......Page 569
  Exercises......Page 570
 Chapter 11 International operations and investment......Page 576
  Introduction......Page 577
  Internationalisation......Page 578
  Why companies undertake international operations......Page 581
  Types of international operation......Page 582
  International investment appraisal......Page 588
  International investment cost of capital......Page 601
  Financing international investment......Page 604
  Risk and international investment......Page 605
  Glossary of key terms......Page 607
  Discussion points......Page 608
  Exercises......Page 609
 Chapter 12 Financial risk management......Page 612
  Introduction......Page 613
  Risk and uncertainty......Page 614
  Types of financial risk......Page 617
  Exchange rate equivalency model......Page 620
  Interest rate risk......Page 624
  Exchange rate risk......Page 625
  Financial risk management......Page 629
  Hedging financial risks......Page 630
  The use of derivatives......Page 633
  Financial risk management strategy......Page 645
  Behavioural finance......Page 647
  Summary of key points......Page 651
  Glossary of key terms......Page 652
  Discussion points......Page 655
  Exercises......Page 656
  Case Study II: Millpot Ltd......Page 660
Part 2 Financial strategy......Page 666
 Introduction to Part II......Page 667
 Chapter 13 The business life cycle and financial strategy......Page 668
  Introduction......Page 669
  Product life cycle (PLC)......Page 670
  Boston Consulting Group (BCG) matrix......Page 672
  The business life cycle (BLC)......Page 674
  Business risk and the life cycle......Page 678
  Financial risk and its inverse correlation with business risk......Page 681
  eps and net cash flow and the life cycle......Page 683
  Sources of funding and the life cycle......Page 684
  Dividends and the life cycle......Page 686
  Shareholders’ returns and the life cycle......Page 687
  Price/earnings (P/E) ratio, the share price, and the life cycle......Page 691
  Summary of key points......Page 693
  Questions......Page 694
  Exercises......Page 695
 Chapter 14 Financial strategies from start-up to growth......Page 698
  Introduction......Page 699
  A profile of start-up businesses......Page 700
  Venture capitalists (VCs)......Page 701
  Risk and return in start-up......Page 704
  A profile of growth businesses......Page 707
  A change in the profile of investors......Page 710
  Risk and return in growth......Page 711
  Types of capital market......Page 715
  The flotation of a company – initial public offering (IPO)......Page 717
  Financing new projects......Page 719
  Rights issues......Page 720
  Glossary of key terms......Page 722
  Exercises......Page 723
  Case Study III: Derlex Ltd......Page 726
  Case Study IV: Bircom plc......Page 727
 Chapter 15 Financial strategies from growth to maturity to decline......Page 730
  The turbulence phase of the business life cycle......Page 731
  A profile of mature businesses......Page 732
  The transition from growth to maturity......Page 733
  Debt financing in maturity......Page 734
  Dividends – why are they paid?......Page 735
  Dividend policy and payment of dividends......Page 738
  Dividend policy – some practical issues......Page 746
  Takeover targets......Page 747
  A profile of declining businesses......Page 748
  Risk and return in decline......Page 749
  Strategies to delay decline......Page 751
  Reducing the debt ratio......Page 753
  Glossary of key terms......Page 756
  Discussion points......Page 757
  Exercises......Page 758
  Case Study V: Kite Ltd......Page 761
 Chapter 16 Mergers and acquisitions (M&As)......Page 764
  What are mergers, acquisitions, amalgamations, and takeovers?......Page 765
  Underlying principles of M&As......Page 766
  Types of M&A......Page 767
  Reasons and justifications for M&As......Page 772
  Financial motives in M&As......Page 780
  Target company valuation......Page 782
  Some further share valuation models......Page 793
  Summary of key points......Page 799
  Discussion points......Page 800
  Exercises......Page 801
 Chapter 17 Financial strategies in M&As......Page 808
  Financing acquisitions......Page 809
  Debt versus equity in financing acquisitions......Page 815
  Financial strategy in acquisitions......Page 816
  Takeover pre-bid defences......Page 823
  Takeover post-bid defences......Page 828
  The position of shareholders, managers, employees, and financial institutions in M&As......Page 833
  Summary of key points......Page 834
  Glossary of key terms......Page 835
  Exercises......Page 836
 Chapter 18 Reorganisations and restructuring......Page 840
  Introduction......Page 841
  Reorganisation – financial strategies in response to internal issues......Page 842
  Demergers......Page 849
  Privatisation – return to private ownership......Page 852
  Management buy-outs (MBOs)......Page 853
  Management buy-ins (MBIs)......Page 861
  Problems with MBOs and MBIs......Page 862
  Glossary of key terms......Page 863
  Exercises......Page 864
  Case Study VI: Chamberlain plc......Page 867
Appendices......Page 870
 Appendix 1 Present value tables......Page 872
 Appendix 2 Solutions to selected chapter-end exercises......Page 876
Index......Page 948