Contents
Learning Guide
Rationale
This
course is designed to give the student an understanding of the management
of finance within a business organization. Students will look at
the sources of finance and learn how to interpret and use financial
information for decision-making purposes. They will learn basic
financial techniques used for making decisions in relation to costing
and budgeting, pricing and investments.
Managerial
Finance is that branch of finance that provide tools for a company's financial managers. It encompasses corporate
finance and management
accounting also known as cost
accounting.
Financial
analysts provide analysis in the corporate finance field. And, cost
analysts provide analysis in the cost
accounting field. Therefore, the finanical-cost analyst provides
analysis in the managerial finance arena. These analysts require
skills of both the internal corporate financial
analyst and cost
analyst.
See
also
Learning
Outcomes
After
completion of this course students will understand:
Sources
of finance
-
Sources
of finance: major sources of finance for all types of businesses
– retained profits, loans, investment by outside parties,
shares, hire purchase and lease schemes, creditors, debt factoring,
working capital
-
Choosing
a source of finance: the advantages and disadvantages to a business
of different sources of finance; suitability of different sources
of finance for different purposes, importance of matching of
long-/short-term funds with long-/short-term projects
- Implications:
the implications of different types of finance for a business,
legal and financial concern, ownership of assets purchased, implications
of failing to repay borrowed money or paying interest
Finance
as a resource
-
Cost
of finance: the costs of different types of finance to the business,
opportunity costs of investing money in specific projects, tax
implications of different types of finance
-
Flow
of finance: importance of finance flow within a business, matching
appropriate funds to projects/investments, implications of interruptions
in funding/finance flow
-
Decision-making:
the importance of finance and financial information to decision-making
within the business, the type of information required by different
decision makers
- Assets
and liabilities: different types of asset and liability owned
by the business, how assets and liabilities arise for the business,
how finance appears on the balance sheet
Financial
performance
-
Financial
statements: the basic structure of main financial statements
of a business, purpose of different financial statement, the
interpretation of financial statements of different types of
business, (note: students are not required here to be able to
construct the financial statements), main financial statements
- profit and loss account, balance sheet, notes to the accounts,
cash flow statements
-
Analyzing
performance using accounting ratios: profitability ratios, liquidity
ratios, working capital/efficiency ratios, investment ratios
- Comparisons
between financial statements: to market, other companies, industry
standards
Control
and Security
-
Costing
and budgeting decisions: analysis of costs, monitoring budgets
and cash flow
-
Pricing
decisions: optimum selling price, cost-plus pricing, sensitivity
analysis
- Investment
and project appraisal: basic understanding of appraisal techniques,
cost benefit analysis, net present value, payback, internal rate
of return, accounting rate of return
Today's
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Teaching
and Learning Resources
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The
Role of Financial Management.
Tutorials
Readings
Shareholder
Value is a term used in many ways:
- To
refer to the market
capitalization of a company (rarely used)
- To
refer to the concept that the primary goal for a company
is to enrich its shareholders (owners) by paying dividends
and/or causing the stock price to increase
- To
refer to the more specific concept that planned actions
by management and the returns to shareholders should outperform
certain bench-marks such as the cost
of capital concept. In essence, the idea that shareholders
money should be used to earn a higher return then they could
earn themselves by investing in risk free bonds for example.
The term in this sense was introduced by Alfred
Rappaport in his 1986 book Creating Shareholder Value (ISBN
0684844109)
|
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- Definition. For
a publicly traded company, SV is the part of its capitalization
that is equity as opposed to long-term debt.
In the case of only one type of stock,
this would roughly be the number of outstanding shares times
current shareprice. Things like dividends augment shareholder value while issuing of shares (stock
options) lower it. This Shareholder value added should
be compared to average/required increase in value, aka cost
of capital.
For
a privately held company, the value of the firm after debt
must be estimated using one of several valuation methods, s.a. discounted
cash flow or others.
-
Shareholder
Value Maximization. This
management principle, also known under value based management,
states that management should first and foremost consider
the interests of shareholders in its business decisions. Although
this is built into the legal premise of a publicly traded
company, this concept is usually highlighted in opposition
to alleged examples of CEO's and other management actions
which enrich themselves at the expense of shareholders. Examples
of this include acquisitions which are dilutive to shareholders,
that is, they may cause the combined company to have twice
the profits for example but these might have to be split amongst
three times the shareholders.
- Criticism
- Alternative
Definition based upon Criticism: Stakeholder Analysis
 |
Dividends are payments made by a company to its shareholders. Typically,
when a company is making a profit, it distributes those profits
to its owners (the shareholders) by way of a dividend. The
frequency of these varies by country. In the United states
dividends are usually declared quarterly by the board of directors.
In other countries dividends are paid biannualy, as an interim
dividend shortly after the company announces its interim results
and a final dividend typically following its annual
general meeting. In other countires, the board of directors
will propose the payment of a dividend to shareholders at
the annual meeting who will then vote on the proposal.
In
the United States, decisions regarding the amount and frequency
of dividends is solely at the discretion of the board of directors.
Shareholders are explictly forbidden from introducing shareholder
resolutions involving specific amounts of dividends.
Where
a company makes a loss during a year, it may opt to continue
paying dividends from the retained
earnings from previous years or to suspend the dividend.
Where a company receives a one-off gain, e.g. from the sale
of some assets, and has no plans to reinvest the proceeds,
the money is often returned to shareholders in the form of
a special dividend. |
See
also
Pricing is one of the four
p's of the marketing
mix. The other three aspects are product
management, promotion,
and place.
It is also a key variable in microeconomic price allocation theory.
Pricing is the manual or automatic process of applying prices to purchase
and sales orders, based on factors such as: a fixed amount,
quantity break, promotion or sales campaign, specific vendor
quote, price prevailing on entry, shipment or invoice date,
combination of multiple orders or lines, and many others.
Automated systems require more setup and maintenance but may
prevent pricing errors. |
 |
Break-even
Analysis
The break
even point for a product is the point where total revenue received equals total costs
associated with the sale of the product (TR=TC). A break even
point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed
product, as opposed to attempting to modify an existing product
instead so it can be made lucrative. Break-Even Analysis can
also be used to analyze the potential profitability of an
expenditure in a sales-based business.
Limitations
- This
is only a supply side (ie.: costs only) analysis.
- It
tells you nothing about what sales are actually likely to
be for the product at these various prices.
- It
assumes that fixed costs (FC) are constant
- It
assumes average variable costs are constant per unit of
output, at least in the range of sales (both prices and
likely quantities) of interest.
See also : cost-plus
pricing, pricing, production,
costs, and pricing
|
Pricing
involves asking questions like
- How
much to charge for a product or service?
While this is the way most businesses think about pricing,
since it focuses on what the business sells, the real question
is how much do customers value what they are buying?
- What
are the pricing
objectives?
- Do
we use profit
maximization pricing?
- How
to set the price?: (cost-plus
pricing, demand based or value-based pricing, rate
of return pricing, or competitor
indexing)
- Should
there be a single price or multiple pricing?
- Should
prices change in various geographical areas, referred to
as zone
pricing?
- Should
there be quantity
discounts?
- What
prices are competitors charging?
- Do
you use a price
skimming strategy or a penetration
pricing strategy?
- What
image do you want the price to convey?
- Do
you use psychological
pricing?
- How
important are customer price sensitivity and elasticity issues?
- Can real-time
pricing be used?
- Is price
discrimination or yield management appropriate?
- Are
there legal restrictions on retail price maintenance, price
collusion, or price discrimination?
- Do price
points already exist for the product category?
- How
flexible can we be in pricing? : The more competitive
the industry, the less flexibility we have.
- The
price floor is determined by production
factors like costs (often only variable costs are
taken into account), economies of scale, marginal cost,
and degree of operating leverage
- The
price ceiling is determined by demand factors like price
elasticity and price points
- Are
there transfer
pricing considerations?
- What
is the chance of getting involved in a price
war?
- How
visible should the price be? - Should the price be neutral?
(ie.: not an important differentiating factor), should it
be highly visible? (to help promote a low priced economy
product, or to reinforce the prestige image of a quality
product), or should it be hidden? (so as to allow marketers
to generate interest in the product unhindered by price
considerations).
- Are
there joint
product pricing considerations?
- What
are the non-price costs of purchasing the product? (eg.:
travel time to the store, wait time in the store, dissagreeable
elements associated with the product purchase - dentist
-> pain, fishmarket -> smells)
- What
sort of payments should be accepted? (cash, cheque, credit
card, barter)
|
A
well chosen price should do three things:
- achieve
the financial goals of the firm (eg.: profitability)
- fit
the realities of the marketplace (will customers buy at that price?)
- support
a product's positioning and be consistent with the other variables in the marketing
mix
- price
is influenced by the type of distribution channel used, the
type of promotions used, and the quality of the product
- price
will usually need to be relatively high if manufacturing
is expensive, distribution is exclusive, and the product
is supported by extensive advertising and promotional
campaigns
- a
low price can be a viable substitute for product quality,
effective promotions, or an energetic selling effort by
distributors
From
the marketers point of view, an efficient price is a price
that is very close to the maximum that customers are prepared to
pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer.
The effective price is the price the company receives after accounting
for discounts, promotions, and other incentives.
Price
lining is the use of a limited number of prices for all your
product offerings. This is a tradition started in the old five
and dime stores in which everything cost either 5 or 10 cents.
Its underlying rationale is that these amounts are seen as suitable price
points for a whole range of products by perspective customers.
It has the advantage of ease of administering, but the disadvantage
of inflexibility, particularly in times of inflation or unstable
prices.
A loss leader is a product that has a price set below the operating
margin. This results in a loss to the enterprise on that particular
item, but this is done in the hope that it will draw customers into
the store and that some of those customers will buy other, higher
margin items.
Promotional
pricing refers to an instance where pricing is the key element
of the marketing
mix.
The price/quality relationship refers to the perception by most
consumers that a relatively high price is a sign of good quality.
The belief in this relationship is most important with complex products
that are hard to test, and experiential products that cannot be
tested until used (such as most services). The greater the uncertainty
surrounding a product, the more consumers depend on the price/quality
hypothesis and the more of a premium they are prepared to pay. The
classic example of this is the pricing of the snack cake Twinkies,
which were perceived as low quality when the price was lowered.
Note, however, that excessive reliance on the price/quantity relationship
by consumers may lead to the raising of prices on all products and
services, even those of low quality, which in turn causes the price/quality
relationship to no longer apply.
Premium
pricing (also called prestige pricing) is the strategy of pricing
at, or near, the high end of the possible price range. People will
buy a premium priced product because:
- They
believe the high price is an indication of good quality;
- they
believe it to be a sign of self worth - "They are worth it" -
It authenticates their success and status - It is a signal to
others that they are a member of an exclusive group; and
- They
require flawless performance in this application - The cost of
product malfunction is too high to buy anything but the best -
example : heart pacemaker
Demand-based
pricing is any pricing method that uses consumer demand - based
on perceived value - as the central element. These include : price
skimming, price
discrimination and yield management, price
points, psychological
pricing, bundle
pricing, penetration
pricing, price lining, geo and premium pricing.
Case
Study
Long-term
Financing
Tutorials
Readings
Finance (pronounced /fɪˈnænts/) is the science of funds management.[1] The general areas of finance are business finance, personal finance, and public finance.[2] Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted.
One facet of finance is through individuals and business organizations, which deposit money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment and charges interest on the loans.
Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt instruments sold to investors for organizations such as companies, governments or charities.[3] The investor can then hold the debt and collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. |
 |
Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly traded corporations.
Central banks, such as the Federal Reserve System banks in the United States and Bank of England in the United Kingdom, are strong players in public finance, acting as lenders of last resort as well as strong influences on monetary and credit conditions in the economy.[4]
The
Financing Decision
 |
Longer
term Corporate finance decisions - generally relating to fixed
assets and capital
structure - are referred to as Capital investment decisions.
The decision here will be based on several inter-related criteria.
In general, management must "maximize the value of the firm" by
investing in projects which are NPV positive, when valued using an appropriate discount rate; these
projects must also be financed appropriately. If no such opportunites
exist, management should return excess cash to shareholders. Capital
investment decisions thus comprise an investment decision, a financing
decision, and a dividend decision.
Any
corporate investment must be financed appropriately. As above, since
both hurdle rate and cash flows (and hence the riskiness of the
firm) will be affected, the financing mix can impact the valuation.
Management must therefore identify the "optimal mix" of financing
– the capital structure that results in maximum value. (See Balance
sheet, WACC, Fisher
separation theorem; but, see also the Modigliani-Miller
theorem.) |
The
sources of financing will, generically, comprise some combination
of debt and equity.
Financing a project through debt results in a liability that must be serviced - and hence there are cash flow implications
regardless of the project's success. Equity financing is less risky
in the sense of cash flow commitments, but results in a dilution
of ownership and earnings. The cost of equity is also typically
higher than the cost of debt (see CAPM and WACC),
and so equity financing may result in an increased hurdle rate which
may offset any reduction in cash flow risk.
Management
must also attempt to match the financing mix to the asset being financed as closely as possible, in terms of both timing and
cash flows.
Capital
Structure refers to the way
a corporation finances itself through some combination of equity
sales, equity
options, bonds,
and loans. Optimal capital structure refers to the particular
combination that minimizes the cost of capital while maximizing
the stock price.
Is
there an optimal capital structure, one that allows a corporation
to get the most bang for its bucks? If so, what is that structure
and on what factors does it depend? These are important questions
for the discipline of financial
economics.
|
 |
Leverage (or gearing) is using given resources
in such a way that the potential positive or negative outcome is
magnified. In finance, this generally refers to borrowing. If the
firm's return
on assets (ROA) is higher than the interest on the loan, then
its return
on equity (ROE) will be higher than if it did not borrow. On
the other hand, if the firm's ROA is lower than the interest rate,
then its ROE will be lower than if it did not borrow.
Financial
Instruments package financial
capital in readily tradeable forms - they do not exist
outside the context of the financial
markets. Their diversity of forms mirrors the diversity
of risk that they manage.
Financial
instruments can be categorised according to whether they are cash instruments or derivatives of other instruments.
Alternatively
they can be categorised by 'asset class' depending on whether they
are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor
has made to the issuing entity). If it is debt, it can be further
categorised into short term (less than one year) or long term. Foreign
Exchange instruments and transactions are neither debt nor equity
based and belong in their own category.
Combining
the above methods for categorisation, the main instruments can be
organized into a matrix as follows:
Some
instruments defy categorisation into the above matrix, for example repurchase
agreements.
In finance,
an Qption is a contract whereby one party (the holder or buyer) has the right
but not the obligation to exercise a feature of the contract
(the option) on or before a future date (the exercise date
or expiry). The other party (the writer or seller)
has the obligation to honor the specified feature of the contract.
Since the option gives the buyer a right and the seller an
obligation, the buyer has received something of value. The
amount the buyer pays the seller for the option is called
the option premium.
Most
often the term "option" refers to a type of derivative which gives the holder of the option the right but not the
obligation to purchase (a "call option") or sell (a "put option")
a specified amount of a security within a specified time span. (Specific features of options
on securities differ by the type of the underlying instrument involved.)
Options
are usually traded on a futures
exchange where they are identified by option
symbols. |
 |
- Types
of option
- The
option contract
- Option
frameworks
- Option
pricing models
- Option
uses
- See
also
- Related: Call
option, put
option, moneyness, option
time value, put-call
parity, Black-Scholes, Black
model, binomial
options model, volatility
smile, option
adjusted spread
Options: Stock
option, warrant, foreign
exchange option, bond
option, options
on futures, swaption, interest
rate cap and floor, credit
default option, binary
option, real
option, option
(films), Options
symbols
Finance
articles: Derivatives
market, financial
mathematics, financial
economics, finance, list
of finance topics, list
of finance topics (alphabetical), volatility
Index, CBOE
S&P 500 BuyWrite Index (BXM)
- External
links
In finance,
a Bond is a debt security,
in which the issuer owes the holders a debt and is obliged
to repay the principal and interest (the coupon).
Other stipulations may also be attached to the bond issue,
such as the obligation for the issuer to provide certain information
to the bond holder, or limitations on the behavior of the
issuer. Bonds are generally issued for a fixed term (the maturity)
longer than one year.
A
bond is just a loan,
but in the form of a security, although terminology used is
rather different. The issuer is equivalent to the borrower,
the bond holder to the lender and the coupon to the interest. Bonds enable the issuer to finance
long-term investments with external funds.
Debt
securities with a maturity shorter than one year are typically bills, Certificate
of deposit or commercial
paper, and considered money
market instruments.
Traditionally,
the U.S. Treasury uses the word bond only for their
issues with a maturity longer than ten years, and calls issues
between one and ten year notes.
Elsewhere
in the market this distinction has disappeared, and both bonds and notes are used irrespective of the maturity. Market
participants use bonds normally for large issues offered
to a wide public, and notes rather for smaller issues
originally sold to a limited number of investors. There are
no clear demarcations.
Bonds
and stocks are both securities, but the difference is that stock holders
own a part of the issuing company (have an equity stake), whereas bond holders are in essence lenders to the
issuer.
Also bonds usually have a defined term, or maturity, after
which the bond is redeemed whereas stocks may be outstanding
indefinitely. An exception is a consol bond, which is a perpetuity,
a bond with no maturity.
In finance, valuation is the process of estimating the market
value of a financial asset or liability.
Valuations can be done on assets (for example, investments
in marketable securities such as stocks, options, business enterprises, or intangible
assets such as patents and trademarks)
or on liabilities (e.g., Bonds issued by a company). Valuations are required in many contexts
including investment
analysis, capital budgeting, merger and acquisition transactions, financial
reporting, taxable events to determine the proper tax
liability, and in litigation. |
Valuation Workshop
Contents
|
A Loan is a
type of debt.
All material things can be lent but this article focuses exclusively
on monetary loans. Like all debt instruments, a loan entails the
redistribution of financial assets over time, between the lender and the borrower.
The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in
regular installments, to the lender. This service is generally provided
at a cost, referred to as interest on the debt.
Acting
as a provider of loans is one of the principal task for financial
institutions. For other institutions issuing of debt contracts, such as bonds is a typical source of funding. Bank loans and credit are one way
to increase the money
supply.
Other
types of debt include mortgages, credit card debt, bonds, and lines
of credit. A mortgage is a very common type of debt instrument, used by many individuals
to purchase housing.
In this arrangement, the money is used to purchase the property.
The bank, however, is given the title to the house until the mortgage
is paid off in full. If the borrower defaults on the loan, the bank can repossess the house and sell it, to get
their money back.
Abuse
in the granting of loans is known as predatory
lending. It usually involves granting a loan in order to put
the borrower in a position that one can gain advantage over him
or her.
Finacial
Markets
Tutorials
Readings
Financial
Markets
In economics,
a Financial
Market is a mechanism which allows people to trade money for securities or commodities such as gold or other precious metals. In general, any commodity
market might be considered to be a financial market, if the usual
purpose of traders is not the immediate consumption of the commodity,
but rather as a means of delaying or accelerating consumption over
time.
Financial
markets are affected by forces of supply
and demand, and allocate resources over time through a price
mechanism such as the interest
rate. Typically financial markets use a market
making or a bid
and ask process.
Both
general markets, where many commodities are traded and specialised
markets (where only one commodity is traded) exist. Markets work
by placing many interested sellers in one "place", thus making them
easier to find for prospective buyers. An economy which relies primarily
on interactions between buyers and sellers to allocate resources
is known as a market
economy in contrast either to a command
economy or to a non-market
economy that is based, such as a gift
economy.
In Finance,
Financial markets facilitate:
They
are used to match those who want capital to those who have it.
Typically
a borrower issues a receipt to the lender promising to pay back the capital. These receipts
are securities which may be freely bought or sold. In return for lending money
to the borrower, the lender will expect some compensation in the
form of interest or dividends.
The Capital
Market (securities markets) is the market for securities,
where companies and the government can raise long-term funds. The capital market includes the stock
market and the bond
market. Financial regulators, such as the U.S.
Securities and Exchange Commission, Securities
and Futures Commission, Hong Kong and the Financial
Services Authority in the UK, oversee the markets, to
ensure that investors are protected against misselling. The
capital markets consist of the primary
market, where new issues are distributed to investors,
and the secondary
market, where existing securities are traded.
The
capital market can be contrasted with other financial
markets such as the money
market which deals in short term liquid assets, and derivatives
markets which deals in derivative contracts.
Both
the private and the public sectors provide market
makers in the capital markets. |
 |
See
also
Working
Capital and Short-term Financing
Tutorials
Readings
In
addition, the current (payable within 12 months) portion of debt
is critical, because it represents a short-term claim to current
assets. Common types of short-term debt are bank loans and lines
of credit.
Working
Capital Management
Decisions
relating to working
capital and short term financing are referred to as working
capital management. These involve managing the relationship
between a firm's short-term
assets and its short-term
liabilities. The goal of Working capital management is to ensure
that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term
debt and upcoming operational expenses
Decision
criteria
By
definition, Working capital management entails short term decisions
- generally, relating to the next one year period - which are "reversible".
These decisions are therefore not taken on the same basis as Capital
Investment Decisions (NPV or related, as above) rather they will be based on cash flows and
/ or profitability.
- One
measure of cash flow is provided by the cash
conversion cycle - the net number of days from the outlay
of cash for raw
material to receiving payment from the customer. As a management
tool, this metric makes explicit the inter-relatedness of decisions
relating to inventories, accounts receivable and payable, and
cash. Because this number effectively corresponds to the time
that the firm's cash is tied up in operations and unavailable
for other activities, management generally aims at a low net count.
- In
this context, the most useful measure of profitability is Return
on capital (ROC). The result is shown as a percentage, determined
by dividing relevant income for the 12 months by capital employed; Return
on equity (ROE) shows this result for the firm's shareholders.
Firm value is enhanced when, and if, the return on capital, which
results from working capital management, exceeds the cost
of capital, which results from capital investment decisions
as above. ROC measures are therefore useful as a management tool,
in that they link short-term policy with long-term decision making.
See Economic
value added (EVA).
Management
of working capital
Guided
by the above criteria, management will use a combination of policies
and techniques for the management of working capital. These require
managing the current
assets - generally cash and cash
equivalents, inventories and debtors.
There are also a variety of short term financing options which are
considered.
- cash
management – identify the cash balance which allows
for the business to meet day to day expenses, but reduces cash
holding costs
- inventory
management - identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials
and hence increases cash flow; see Just
In Time (JIT) and Economic
order quantity (EOQ).
- debtors
management - identify the appropriate credit
policy, i.e. credit terms which will attract customers, such
that any impact on cash flows and the cash conversion cycle will
be offset by increased revenue and hence Return on Capital (or vice
versa); see Discounts
and allowances.
- short
term financing - inventory is ideally financed by credit granted
by the supplier; dependent on the cash conversion cycle, it may
be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
Current
assets are cash and other assets expected to be converted to cash,
sold, or consumed either in a year or in the operating cycle. These
assets are continually turned over in the course of a business during
normal business activity. There are 5 major items included into
current assets:
- Cash - it is the most liquid asset, which includes currency, deposit
accounts, and negotiable
instruments (e.g., money orders, checks, bank drafts).
- Short-term
investments - include securities bought and held for sale
in the near future to generate income on short-term price differences
(trading securities).
- Receivables - usually reported as net of allowance for uncollectible accounts.
- Inventory - trading these assets is a normal business of a company. The
inventory value reported on the balance
sheet is usually the historical cost or fair market value,
whichever is lower. This is known as the "lower of cost or market"
rule.
- Prepaid
expenses - these are expenses paid in cash and recorded as
assets before they are used or consumed (a common example is insurance).
See also adjusting
entries.
The
phrase net current assets (also called working
capital) is often used and refers to the total of current
assets less the total of current liabilities.
Current
liabilities
-
In accounting, current
liabilities are considered liabilities of the business that are due within the fiscal year.
For
example accounts payable for goods, services or supplies that
were purchased for use in the operation of the business and
payable within a normal period of time would be current liabilities.
Bonds, mortages and loans that are payable over a term exceeding one year would be fixed
liabilities. However the payments due in the current fiscal
year could be considered current liabilities if the amount were
material.
The
proper classification of liabilities is essential when considering
a true picture of an organization's fiscal health.
Liabilities
of uncertain value or timing are called provisions - see Provision
(Accounting).
Financial
Flows
Tutorials
Readings
Financial
Statements (or Financial Reports)
are a record of a business' financial flows and levels.
The
big four statements are :
- Balance
Sheet which describes a company's assets and liabilities.
- Income
statement which describes a company's income and expenses.
- Statement
of Cash Flows which describes how corporate operating,
investment, and financing activities have affected the company's cash position.
- Statement
of Retained Earnings which describes changes to shareholders
equity (for example a payment of dividend).
Because
these statements are often complex an extensive set of Notes
to the Financial Statements and management
discussion and analysis is usually included. The notes will
typically describe each item on the Balance
Sheet and Income
statement in further detail. In many cases the notes are much
longer than the financial statement they are elucidating.
If
a company has extraordinary items that affect the balance sheet
or the shareholders equity position it will usually include a Other
Comprehensive Income Statement, which describes the adjustments
to made. Examples of Other
Comprehensive Income include revaluation of corporate assets
away from their stated cost, as well as accrurals for liabilities.
Today
most governments require publicly-traded companies to issue, and issue in a certain way, annual financial statements.
Some governments, such as the United
Kingdom government, require all companies to publish annual
financial statements, although smaller companies only need publish
them in abbreviated form.
A Balance
Sheet, in formal
bookkeeping and accounting, is a statement of the book value
of a business or other organization or person at a particular date,
often at the end of its "fiscal
year," as distinct from an income
statement, also known as a profit
and loss account (P&L), which records revenue and expenses
over a specified period of time.
A
balance sheet is often described as a "snapshot" of the company's
financial condition on a given date. Of the four basic financial
statements, the balance sheet is the only statement which applies
to a single point in time, instead of a period of time.
A
simple business operating entirely in cash could measure its profits
by simply withdrawing the entire bank balance at the end of the
period, plus any cash in hand. However real businesses are not paid
immediately, they build up inventories of goods to sell and they
acquire buildings and equipment. In other words: businesses have assets and so they could not, even if they wanted to, immediately turn
these into cash at the end of each period. Real businesses also
owe money to suppliers and to tax authorities, and the proprietors
do not withdraw all their original capital and profits at the end
of each period. In other words businesses have liabilities.
A
modern balance sheet usually has three parts: assets, liabilities
and shareholders' equity. The main categories of assets are usually
listed first and are followed by the liabilities. The difference
between the assets and the liabilities is known as the 'net assets'
or the 'net worth' of the company.
The
net assets shown by the balance sheet equals the third part of the
balance sheet, which is known as the shareholders' equity. This
balance is not a coincidence. Records of the values of each account
in the balance sheet are maintained using a system of accounting
known as double-entry
bookkeeping.
Case
Study
Financial
Analysis
Tutorials
Readings
Financial
Analysis is the analysis of the accounts and the economic prospects of a firm.
A Financial
Ratio is a ratio of two numbers of reported levels or flows
of a company. It may be two financial flows categories divided by
each other (profit margin, profit/revenue). It may be a level divided
by a financial flow (price/earnings). It may be a flow divided by
a level (return on equity or earnings/equity). The numerator or denominator may itself be a ratio (PEG ratio).
Return
on Capital, also known as Return On Invested Capital
(ROIC) is defined as
NOPLAT / Invested Capital
NOPLAT
= Net Operating Profit Less Adjusted Tax - used to normalise
effects of company's capital structure. It's the net profit
with a few costs backed out, cost of interest and depreciation
(accrual accounting of capital
expenditures).
When
the ROIC is greater than the cost
of capital (usually measured as weighted
average cost of capital), the company is creating value.
When it is less than the cost of capital, value is destroyed.
The cost of capital is just one of many costs in a company,
so a company that has a profit on its income statement must
by definition be "creating value".
Mergers
and Other Forms of Corporate Restructuring
Tutorials
Readings
 |
Restructuring is the corporate
management term for the act of partially dismantling and
reorganizing a company for the purpose of making it more efficient and therefore
more profitable. It generally involves selling off portions
of the company and making severe staff reductions.
Restructuring
is often done as part of a bankruptcy or of a takeover by another firm, particularly a leveraged
buyout by a private
equity firm such as KKR.
It may also be done by a new CEO hired specifically to make the difficult and controversial
decisions required to save or reposition the company.
Characteristics
The
selling of portions of the company, such as a division that
is no longer profitable or which has distracted management
from its core business, can greatly improve the company's
balance sheet. Staff reductions are often accomplished partly
through the selling or closing of unprofitable portions of
the company and partly by consolidating or outsourcing parts of the company that perform redundant functions (such
as payroll, human resources, and training) left over from
old acquisitions that were never fully integrated into the
parent organization. |
Other
characteristics of restructuring can include:
- Changes
in corporate management (usually with golden
parachutes)
- Sale
of underutilized assets,
such as patents or brands
- Outsourcing
of operations such as payroll and technical support to a more
efficient third party
- Moving
of operations such as manufacturing to lower-cost locations
- Reorganization
of functions such as sales, marketing, and distribution
- Renegotiation
of labor contracts to reduce overhead
- Refinancing
of corporate debt to reduce interest payments
- A
major public
relations campaign to reposition the company with consumers
Results
A
company that has been restructured effectively will generally be
leaner, more efficient, better organized, and better focused on
its core business. If the restructured company was a leverage acquisition,
the parent company will likely resell it at a profit when the restructuring
has proven successful.
References
IIPM
- The phrase Mergers
and Acquisitions or M&A refers to the aspect
of corporate
finance strategy and management dealing with the merging and acquiring of different companies as well as other assets.
Usually mergers occur in a friendly setting where executives
from the respective companies participate in a due
diligence process to ensure a successful combination of
all parts.
On
other occasions, acquisitions can happen through a hostile
takeover by purchasing the majority of outstanding shares
of a company in the open market.
In the United States, business laws vary from state to state whereby some companies have limited protection against
hostile takeovers. One form of protection against a hostile
takeover is the shareholder rights plan, otherwise known as
the "poison
pill". See Delaware
corporations.
Historically,
mergers have often failed to add significantly to the value
of the acquiring firm's shares. Corporate mergers may be aimed
at reducing market
competition, cutting costs (for example, laying off employees),
reducing taxes, removing management, "empire building" by
the acquiring managers, or other purposes which may not be
consistent with public policy or public welfare. Thus they
can be heavily regulated, requiring, for example, approval
in the US by both the Federal
Trade Commission and the Department
of Justice. |
 |
International
Financial Management
Tutorials
Readings
International
Trade is the exchange of goods
and services across international boundaries or territories.
In most countries, it represents a significant share of GDP.
While international trade has been present throughout much
of history (see Silk
Road, Amber
Road), its economic, social, and political importance
has been on the rise in recent centuries. Industrialization,
advanced transportation, globalization, multinational
corporations, and outsourcing are all having a major impact. Increasing international trade
is the usually primary meaning of "globalization".
International
trade is also a branch of economics,
which, together with international
finance, forms the larger branch of international
economics. |
 |
A
country's International
Investment Position (IIP) is a financial statement setting
out the value and composition of that country's external financial
assets and liabilities. The IIP is one component of the country's balance
of payments, consisting of goods that are neither imports nor
exports. For example stock of companies, real estate, financial
instruments, and so on.
The
difference between a country's external financial assets and liabilities
is the net international investment position (NIIP).
External
Links
 |
In finance,
the Exchange
Rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other.
For example an exchange rate of 120 Japanese
yen (JPY, ¥) to the United
States dollar (USD, $) means that JPY 120 is worth the
same as USD 1. The foreign
exchange market is one of the largest markets in the world.
By some estimates, about 2 trillion USD worth of currency
changes hands every day.
The spot exchange rate refers to the current exchange rate.
The forward exchange rate refers to an exchange rate
that is quoted and traded today but for delivery and payment
on a specific future date. |
 |
In
finance, a Foreign
Exchange Option (commonly shortened to just FX
option) is a derivative where the owner has the right but not the obligation to exchange
money denominated in one currency into another currency at a pre-agreed exchange
rate on a specified date.
For
example a USD/GBP FX option might be specified by a contract
allowing the purchaser to exchange £1,000,000 into $2,000,000
on December 31st. In this case the pre-agreed exchange rate,
or strike price, is 2USD/GBP or 0.5GBP/USD and the notional
is £1,000,000. This type of contract may be called either
a dollar call or a sterling put depending on the market convention. If the dollar is stronger
than 0.5GBP/USD come December 31st (say at 0.55GBP/USD) then
the option will be exercised, making a profit of (2 - 1/0.55)*1,000,000
= $181,818 or £100,000.
See
also
|
Foreign
Direct Investment (FDI) is defined
as a long term investment by a foreign direct investor in an enterprise resident in an economy other than that in
which the foreign direct investor is based. The FDI relationship,
consists of a parent enterprise and a foreign affiliate which
together form a Transnational
Corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its
foreign affiliate. The UN defines control in this case as owning 10% or more of the
ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.
In
the years after the Second
World War global FDI was dominated by the United
States, as much of the world recovered from the destruction
wrought by the conflict. The U.S. accounted for around three-quarters
of new FDI (including reinvested profits) between 1945 and
1960. Since that time FDI has spread to become a truly global
phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy
with FDI
stocks now constituting over 20% of global GDP.
In the last few years, the emerging market countries such
as China and India have become the most favoured destinations for FDI and investor
confidence in these countries has soared. As per the FDI
Confidence Index compiled by A.T.
Kearney for 2005,
China and India hold the first and second position respectively,
whereas United States has slipped to the third position. |
Check
the availability and buy your books
from our Book Shop. |
Financial
Instruments
A
guide to understanding the new Canadian financial instruments
accounting framework
Does
your company have any of the following?:
- Accounts
Receivables or Trade Payables
- Portfolio
investments in T-bills, bonds or equities
- Loans
to a third party
- Warrants
to acquire stock of third parties
- Fixed
price commodity purchase or sale contracts
- Derivatives
- Other
financial instruments
|
|
| This
publication provides a comprehensive review of IAS 32 and
IAS 39 to address the accounting for financial instruments with
an emphasis on practical application issues in Russia. |
 |
Recommended
Texts
 |
Fundamentals
of Financial Management,
12/E
James
C. Van Horne
John M Wachowicz
ISBN:
0-273-68598-8
Publisher: Financial Times Prentice Hall
Copyright: 2005
Format: Paper; 736 pp
Published: 05 Oct 2004
Check
the availability and buy your books from our Bookshop.
|
 |
Check
the availability and buy your books from our Bookshop. |
- Estimating
Earnings and Cash Flows on Projects
- Project
Interactions, Side Benefits and Side Costs
- Dividend
Policy
- Analyzing
Cash Returned to Stockholders
- Beyond
Cash Dividends: Buybacks, Spin Offs and Divestitures
- Acquisitions
and Takeovers
- Option
Applications in Corporate Finance
Resources
Written
by Professor Carrasco and his students, the E-Book provides basic and accessible
discussion of key concepts relating to international finance and
development.
Coverage includes the roles of the IMF and the World Bank in a globalized
economy as well as the Mexican and Asian financial crises.
Bibliographies are included.
Case
Studies
The
China National Tobacco Co is by
sales the largest single manufacturer of tobacco products in the world.
It boasts a virtual monopoly in the People's
Republic of China, which accounts for roughly 30% of the world’s
total consumption of cigarettes.
It is worthy of note that within the Chinese guanxi network, tobacco is a ubiquitous gift acceptable for virtually
any occasion, though particularly in rural areas.
Questions
- The
US Surgeon General has long since declared that cigarettes are
hazardous to people's health. Since this is common knowledge,
is it unethical for the tobacco industry to increase the level
of nicotine in their cigarettes without informing consumers?
- Is
it unethical for the tobacco industry to increase the level
of nicotine in their cigarettes if they do inform consumers?
- If
the tobacco industry decided voluntarily or otherwise to convey
to consumers that nicotine levels are higher in a particular
brand of cigarette, how should the message be conveyed? That
is, is a fine print warning on the side of a pack of cigarettes
ample warning?
- Do
you feel that the ban on smoking in all work places, such as
those listed in the case, violates the civil rights of smokers?
Does smoking in the work place violate the civil rights of non-smokers?
- What
can the government do to protect or help defray the costs of
establishing smoke rooms in the work place for small businesses
that cannot afford to install ventilation systems?
- It
can be argued that if the ban is implemented, businesses will
find the costs associated with hiring smokers (due to having
to establish smoke rooms) outweigh the benefits. What can the
government do to prevent or mitigate the discrimination law
suits that might result from a firm's hesitation to hire a smoker
after the ban is implemented
Thr China Development Bank (CDB) (Simplified: 国家开发银行)
is a financial institution in the People's
Republic of China (PRC) under the direct jurisdiction of the
State Council. It is the only bank in China whose governor is
a full minister. It is one of the three policy banks of the PRC,
primarily responsible for raising funding for large infrastructure
projects, including most of the funding for the Three
Gorges Dam and Shanghai
Pudong International Airport. The bank was established by
the Policy Banks Law of 1994.
Debts
issued by CDB are fully guaranteed by the central government of
the People's Republic of China. CDB is one of the biggest issuers
of bonds in the PRC.
The
bank had RMB 1.5 trillion in loans outstanding as of the end of 2004.
During 2004, the bank made a profit of about US $2billion. The
bank is the most profitable bank in China, and the second most
profitable bank in Asia.
After governor Chen
Yuan, who was the executive deputy governor of The People's
Bank of China (China's Central Bank), took over the bank in 1998,
CDB has experienced tremendous growth in profit and reduction
in bad loan rate. Currently, it is the most healthy bank in China
with a bad loan rate of about 1% at the end of 2004. This is an
extrodinary achievement for a Chinese bank considering that the
four major state owned commercial banks all have high double digit
bad loan rates.
CDB
has about 3500 employees at the end of 2004, about 1000 of them
work at the Beijing Headquarters and the rest are spread out in 32 branches throughout
the country. The bank does not take private savings, and hence
does not have thousands of local branches like other major banks
in China do.
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