Verbs to Financial management

Analyse
Break into separate parts and discuss, examine, or interpret each part
Key tips: Give reasons for the current situation or what has happened.

Apply
To put into action pertinently and/or relevantly
Key tips: Properly apply the scenario/case.

Assess
To judge the worth, importance, evaluate or estimate the nature, quality, ability, extent, or significance
Key tips: Determine the strengths/weaknesses/importance/ significance/ability to contribute.

Calculate
To ascertain by computation, to make an estimate of; evaluate, to perform a mathematical process
Key tips: Provide description along with numerical calculations.

Comment
To remark or express an opinion
Key tips: Your answer should include an explanation, illustration or criticism.

Compare
Examine two or more things to identify similarities and differences 

Key tips: Clearly explain the resemblances or differences.

Conclusion
The result or outcome of an act or process or event, final arrangement or settlement 

Key tips: End your answer well, with a clear decision.

Criticise
Present the weaknesses/problems; evaluate comparative worth. Don’t explain the situation. Instead, analyse it
Key tips: Criticism often involves analysis.

Define
Give the meaning; usually a meaning specific to the course or subject
Key tips: Explain the exact meaning because usually definitions are short.

Describe
Give a detailed account or key features. List characteristics, qualities and parts
Key tips: Make a picture with words; identification is not sufficient.

Discuss
Consider and debate/argue about the pros and cons of an issue. Examine in detail by using arguments in favour or against
Key tips: Write about any conflict, compare and contrast.

Evaluate
Determine the scenario in the light of the arguments for and against
Key tips: Mention evidence/case/point/issue to support evaluation.

Explain
Make an idea clear. Show logically how a concept is developed. Give the reason for an event
Key tips:  Don’t just provide a list of points, add in some explanation of the points you’re discussing.

Illustrate
Give concrete examples. Explain clearly by using comparisons or examples
Key tips:  Add in some description.

Interpret
Comment on, give examples, describe relationships
Key tips: Include explanation and evaluation.

List
List several ideas, aspects, events, things, qualities, reasons, etc
Key tips: Don’t discuss, just make a list.

Outline
Describe main ideas, characteristics, or events
Key tips: Briefly explain the highlighted points.

Prepare 
Set out a response using an appropriate format 
Key tips: The format of your answer should suit the document you’re preparing.

Recommend
Advise the appropriate actions to pursue in terms the recipient will understand
Key tips: Give advice or counsel.

Relate
Show the connections between ideas or events
Key tips: Relate to real time examples.

State
Explain precisely
Key tips: Focus on the exact point.

Summarise
Give a brief, condensed account. Include conclusions. Avoid unnecessary details
Key tips: Remember to conclude your explanation.

Risk management strategy:  Business risk , finanical risk, risk mitigation and risk diversification

--Owners  SH accept that as it needs to engage in some risky activities in order to generate returns in excess of the risk free rate of return

--business risk depends on the decisions a business makes with respect to the services and products it offers and consists of variability in its profits

Financial risk relates to the volatility of earnings due to the financial structure. actions of competitors.

High business risk may not able to take excessive financial risk, and vice versa

Real option and NPV

Real optio are alternatives or choices that maybe availiable with a business investment opportunity. they usually related to tangible assets. A real option embodies flexibility in the development of a project.

Types of real option : Delay, expansion, redeploy and abandon

Delay option: When a firm has exclusive rights to a project for a specific period, it can delay taking this project at a later date.

Expansion option: When a firm invests in a project which allown them to make further investment in future or enter into new market.

Redeploy option:  When a firm can use its productive assets for activities other than the original one. This option is important for agricutural settings and unility industry.

A bankdon/withdraw option: The firm may have the chance to cease a project during its life instead of operate in each year of its lifetime. It is a special case of an option to redeploy.

Call option: buyer has right to BUYan asset currently selling at a certain price(called spot price); On a specific day or within specified time; At the agreed price (called exercise price); By paying a premium upfront

If Spot price bigger than exercise price, it is better to exercise

If Spot price less than exercise price, it is better to let it lapse

Intrinsic value of call= Maximum(S-E,0)

Put option: buyer has right to SELLan asset currently selling at a certain price(called spot price); On a specific day or within specified time; At the agreed price (called exercise price); By paying a premium upfront

Limitations of the black scholes model:

1. it was develoed for financial proucts and not physical products, on which real option applies.

2.

Real option takes into account the fact that in realitym most investment have within them certain amounts of flexibilitym such as whether or not to understake the iinvestment immidiately or delay the decision; to pursue follow on opportunitiesm and to cancel an investment opportunity after it has been undertakem

NPV assume tha an investment needs to be taken on now or never basis, and once taken without reversed. It just capture the intrinsic value of an invsetment opportunity, where an option captures both the intrinsic value and the time value, to give an overall value for an opportunity.

Basic cost of capital

Ke=cost of equty, DVM, CAPM, MM Proposition2

Kdat= Cost of debt after tax=Kd(1-T): 

YIeld curve: Kdat=(Rf+creidit spread)*(1-T). Rf is based on government debt's yield curve

CAPM: Kdat=Rf+Bd*(Rm-Rd)*(1-T)

Bank loan Kdate=annual interest rate*(1-T)

Iredeeable bnod Date=annual interest *(1-T)/MV of bond

Redeemabke bond : Kdat=IRR of past tax cash flowe

Convertible bond: Kdat=IRR of post-tax cash flows

Risk adjusted WACC : Be of proxy co---Ba---Be of own co---CAON---Ke---WACC risk adjusted WACC

Ungear based on Ba=Ve/（Ve+Vd(1-T))*Be

Regear based on Be=（Ve+Vd(1-T)) /Ve*Ba

APV

1. Calculating base case NPV: OPerating cash flow are dicounted at ungeared cost of equity. which representing the project's level of business risk.

Using MM2 to figure out Ke or by putting Ba in the CAPMformula

2. Calculating fiancing impact: relevant cash flows are discounted at Kd or the Rf, relevant cash flows includes: issue cost from external finance, tax shield of tax deductible expense from debt

3. APV= base cfinance, benefits of lwer interest from subsidiary loan.ase NPV+financing impact

Dividend theory and dividend policy

--MM-Irrelevance argument / Dividend relevance theory/ Residual theory

--constant dividends / Constant growth / Constant payouts / No dividends

--Share buyback / Special dividends / Scrip dividend

     Estmating the dividend capacity of a company- for a domestic or a multinational company

     Discussion of the existing dividend policy of company and commenting possible effects thereof on shareholder value

    Comparing the dividend policies of certain companies and advising on where to invest

** Dividend distibution decision contines to be a key areas of financial management strategy

**IN the real world, any change in the dividend policy may influence the shareholders decisions as it may affect their wealth

**Dividend may influennce the value of shares and hence could be used to estimate the value in the event of acquisitions

1. Divident policy: Stable growth pattern/Constant payout ratio / Residual dividend policy / Zero dividend policy

   Stable dividend: growth of dividend/ stable payout ratio /Residual dividend policy

2. Dividend capacity  FCFE

   OPerating cash flow   x

   Less: Net interest paid (x)

   Less: taxation              (x)

   Less:Capital expenditure (x)

   Add /less: new capital issue / redemption (x)

   Add dividend income from subsidiaries   x

   Additiona tax if parent tax is highere than Subsidiary (x)

   Net free cash flow to equity (dividend capacity)  X

   
   

3. Ethic issues related

   For high dividends policy : Whether the current dividend policy will be sustained, the dividend capacity may also call into quesiton whether the company baord is taking excessive risks. THe directors may be questioned by the auditors about whether this statement is true and fair. There is also the question of balancing the interests of different stakholders.

   Block on dividends amoing multinational companies: Dividends between group companies, facilitating the movement of profits and funds within the group. Block on the remittance of dividends

   How the parent company might try to aboid such a block on remittances: Loan interest/ transfer prices/ Royalties/ Management/ Charges or fee

Valuation :  

Real workld example

Basic of valuations :

Value of equity: 

cash flows based methods: Free casj f;pws based and dividedn valuation model

Market based mthods: Market capitalization, P/E ratio method; Earning yield method and market -to-book ratio

Asset based methods: Net book value (NBV）； Net realizable value (NRV); Replaement cost; Book value-Plus )CIV)

Exam practice

Practice method

Valuation of equity:

E= market price * no. of shares

E= net asset value + premium

E= P.E*PAT

E= Do/Ke      E=D1/(Ke-g)

E= FCFEO/Ke     E=  FECFE1/(Ke-g)

E= FCFFO/WACC - MV of D

E=FCFF1/(WACC-g)

Merger additional value total merger gain, max merger premium

Merger impacts on target and acquiring company shareholders' wealth under differrent payment methods

Risk adjusted WACC under merger

1. Combine Co Beta asset business risk: weighted average B

       Beta asset of combine = Basset of acquiring* % +Beta asset of target *%

       Weight: Percentage 

Regulatory framework:it could help corporate control well

It could protect equity of minority  shareholder  becasue it could help conrporate operate follow a certain regulaton, and prevent large shareholders drive aabove manage to hurt other shareholder benefit. For example, large shareholder would not prevent merget and acquistion which benefit overall corporate

It aims to ensure the investor know about sufficient information about merge and acquizition. Make the infromation more transparent and help them to evaluate the valie of the corporate

MM theory

It think that debt will he;lp company to save tax expense and tax swhichc mea tax saving , What more debt cheaper than finance. Thus the value of corporate will increase and the cost of debt also get lowest leve

MM2 theory,

Base on the MM traditional theorym The gearing will get optimall with the debt incrase. Howeven one exceed the optimal point, the cost of debt will increase and value of company will decrease. Because the infacial risk would increase with debt rise.Shareholder don't like to investm or they would like to get more returnm as compensate. They will ask ome resruction which disadvanges for corporate operate

Risk management

1. Foreign exchange

--BUyer or seller of foreign currency in the future

--Exposed to exchange rates rising or falling

2. Interest rates

--Borrower or save in the future

--Exposed to interest rates rising or falling