Focus On Financial Management

Contents......Page 12
Preface......Page 8
Acknowledgements......Page 10
1. Introducing Finance......Page 18
1.1 The Stuff of Finance......Page 19
1.2.1 What is a firm?......Page 21
1.2.2 The objective of the firm......Page 22
1.1.2.1 Profit maximisation or wealth maximisation?......Page 23
1.3.1 Sole proprietorship......Page 24
1.3.2 Partnership......Page 25
1.3.3 Limited companies......Page 26
Public Limited Company (plc)......Page 28
1.4 The Finance Function......Page 29
1.5 Principals and Agents......Page 30
1.5.1 Maximising versus satisficing......Page 32
1.5.2 Management goals......Page 33
1.5.4 Bondholders’ goals......Page 34
1.5.5 Other stakeholders’ goals......Page 35
1.5.6 In summary......Page 36
1.6 Finance versus Accounting......Page 37
2.1 Macroeconomics and Finance......Page 40
2.2 The Financial System: Markets and Institutions......Page 41
2.2.1 Types of financial market......Page 43
2.2.2 Efficient markets......Page 46
Strong-form efficiency......Page 47
2.3 Investment and Finance......Page 48
2.4 Accounting for Finance......Page 49
2.4.1 The balance sheet......Page 50
2.4.2 The income statement......Page 51
2.4.3 The cash flow statement......Page 52
2.5.1 Personal taxation......Page 54
2.5.3 Corporation tax......Page 56
2.5.5 Inflation......Page 57
Real values and nominal values......Page 58
Traditional “print” media......Page 60
America Online, the Motley Fool and more......Page 61
3.1 What Is Value?......Page 64
3.2 The Time Value of Money I: Simple Interest......Page 65
3.3.1 Term loans......Page 67
3.3.2 Discount claims......Page 68
3.3.3 Yield-quoted instruments......Page 69
3.4.1 The mechanics of compound interest......Page 71
3.4.2 Comparing simple and compound interest......Page 73
3.4.3 Annuities......Page 74
3.5.1 Net Present Value......Page 76
3.5.2 “Special” cashflow streams......Page 79
Perpetuities......Page 80
3.5.3 The Internal Rate of Return (IRR)......Page 83
IRR “by hand”......Page 84
IRR “by computer”......Page 86
Bank-originated debt......Page 88
Asset financing......Page 89
Bonds......Page 90
Bonds of finite maturity......Page 92
Bonds of infinite maturity......Page 93
Convertibles......Page 94
4.4 Interest rate determination......Page 95
4.5 The Term Structure of Interest Rates......Page 98
4.5.1 The Expectations Hypothesis......Page 99
4.5.2 Liquidity Preference......Page 101
4.5.3 Hedging pressure/Preferred habitat/Market segmentation......Page 102
4.5.5 Afterthoughts......Page 104
Short- and Medium-Term Debt 1.......Page 106
Long-Term Debt......Page 109
5.1.1 Types of share capital......Page 110
5.2 Ordinary Shares (or Stock)......Page 111
5.3 Preference Shares......Page 112
5.4 Other Points of Note......Page 113
5.5 Raising Equity Capital......Page 114
5.6 Equity Valuation......Page 118
5.6.1 Share price valuation I: The basic model......Page 119
5.6.2 Share price valuation II: The Gordon growth model......Page 121
5.7 Dividends......Page 124
5.8 Not-quite-equity: Options......Page 126
6. Investment Appraisal: Capital Budgeting......Page 132
6.1 Investment Projects......Page 133
6.2 Cashflows......Page 135
6.3 Investment Appraisal: Basic (Non-DCF) Methods......Page 137
6.3.1 The payback period......Page 138
6.3.3 Accounting Rate of Return......Page 140
6.4.1 Net Present Value......Page 141
6.4.2 Internal Rate of Return (IRR)......Page 145
6.4.3 Capital rationing......Page 149
6.5.1 Number of solutions......Page 150
6.5.2 Scale and duration......Page 153
6.6 In Summary: Some General Guidelines for Capital Budgeting......Page 155
6.7 Real and nominal values......Page 156
6.8.1 Sensitivity analysis......Page 159
6.8.2 Scenario analysis......Page 160
6.9 Newer Approaches to Capital Budgeting......Page 161
7. Investment Appraisal: Risk......Page 162
7.1.1 Yield (or expected return)......Page 163
7.1.2 Risk and uncertainty......Page 166
7.1.2 Risk and probability......Page 167
7.2 Portfolio theory: The Markowitz Approach......Page 170
7.2.1 Portfolio returns......Page 171
7.2.2 Portfolio risk......Page 172
7.3 Market Risk......Page 179
7.3.1 The beta coefficient ( )......Page 180
7.4 The Capital Asset Pricing Model (CAPM)......Page 183
7.4.1 Value additivity......Page 188
7.5 Arbitrage Pricing Theory......Page 189
8.2 Sources of Capital......Page 192
8.3 The Cost of Debt......Page 193
8.4 The Cost of Equity......Page 194
8.5.1 The cost of retained earnings......Page 196
8.5.2 The cost of preference shares......Page 197
8.6 The Total Cost of Capital......Page 198
9.1 Value maximisation......Page 202
9.2 The “Traditional” View......Page 203
9.3 Modigliani and Miller (1958)......Page 205
9.3.2 MM Modifications......Page 208
9.4 A Final Thought......Page 211
10.1 Valuation of the Firm......Page 212
10.1.2 EVA and MVA......Page 213
10.2 Corporate Restructuring: Mergers and Acquisitions......Page 214
10.2.2.1 Merger Waves......Page 217
10.2.3 Merger evaluation......Page 218
10.2.3.2 Tactics......Page 219
10.3 Pensions......Page 220
10.3.1 FRS 17......Page 221
10.4 Finance in the International Arena......Page 222
10.4.1.1 Spot Markets......Page 223
10.4.1.2 Derivatives......Page 225
10.4.1.2A Forward Markets and Hedging......Page 226
10.4.1.2C In Summary......Page 227
10.4.1.4A Purchasing Power Parity (PPP)......Page 228
10.4.1.4B Interest Rates and Exchange Rates......Page 229
10.4.1.4C Inflation and Exchange Rates......Page 230
10.4.2 International capital budgeting......Page 232
10.5 The Limitations of Finance......Page 234
Bibliography......Page 236
Index......Page 240