1、Business FinanceFAE 2002/2003John SlevinIFTBusiness FinanceObjectives :To Develop an understanding ofPrinciples of financing Decisions and appropriate Capital structuresFinancial implications of a change in size or circumstancesPrinciples of risk managementEffective management of Foreign currency an

2、d related treasury transactionsSource of Capital and Capital ManagementWhat is Business Finance ?Financial Planning & Control toAchieve the Financial Objectives of the FirmBusiness FinanceBusiness FinanceFinancial Management is therefore all aboutResidual Cash FlowsWhich accrue to Ordinary Sharehold

3、ersHence the importance of theTime Value of MoneyOrPresent Value Business FinancePresent ValueFuture cash flows discounted back to todaysValue1/(1+R)nR = The appropriate Discount Rate(Weighted Average Cost of Capital)Most Important DecisionThe Investment Decision often viewed as the most important d

4、ecision.Decision made now affects future returns.Generally cant reverse decision without significant loss of initial investment.Financial Implications of a change in Firm SizeInternal Chapter 8 Capital BudgetingExternalChapter 11 Valuation of CompaniesChapter 12 Mergers & Take-oversInternal GrowthWh

5、at Constitutes Internal Growth ?ProductMarket Volume ServiceInternal GrowthLarge Capital Expenditure DecisionInvestmenti.e.Major Outlay At Start of ProjectInvestment in WCProjected Stream of InflowsTerminal ValuesInternal GrowthThe key Question:Is this Project Worth the InvestmentBusiness Finance se

6、eks to answer this throughComparative CostsAccounting Rate of Return (ARR)PaybackDiscounted Cash FlowsInternal GrowthAccounting Rate of ReturnPage 207Average Annual Profits* 100% Average InvestmentPluses:Easy to calculate & UnderstandMinus: Accounting Profit not Cash FlowExample Page 207Internal Gro

7、wthPaybackPage 209How Long to repayment of Initial InvestmentPluses: Easy/Liquidity Mgt/ Caution/Risk MgtMinuses:No Cash post PB/No TVOM/TimingPage 211Internal GrowthComparative CostPage 211Project with lowest cost winsIgnores Time Value of MoneyProject Cash FlowsInternal GrowthDiscounted Cash Flows

8、 (DCF)Page 212Internal Rate of ReturnDiscounts all CF at Rate for Zero NPVPluses:Cashflow/TVOMMinuses:Not unique/Magnitude of CF/Fails to select between Mutually ExclusiveInternal GrowthDiscounted Cash Flows (DCF)Page 217Net Present ValueDiscounts all CF at Cost of CapitalPluses:Cashflow;TVOM;Magnit

9、ude of CFMinuses: None!Page 218Internal GrowthExam TipBe able to perform these calculationsOrganise your answer State Assumptions ClearlyBe PracticalInternal GrowthCapital RationingFunds not sufficient to accept all +NPV ProjectsNo Leverage availableIssue cost too highBorrowing LimitsRank Via Profit

10、ability IndexInternal GrowthProfitability Index = NPV . Outlay in Year of Rationing NPV = Project NPVOutlay =Project Outlay Internal GrowthOther Issues / Factors to be ConsideredCapital AllowancesBusiness Risk (Operating Gearing)Timing of Cash FlowsRelevant Cash Flows (Ignore Sunk Costs)Risk Adjuste

11、d Cost Of CapitalSensitivity AnalysisInflation (?)Internal GrowthRisk and UncertaintyRisk Adjusted Cost of Capital = CAPMObjectivity an issueTime limit on Cash FlowsWeights short projectsSensitivity AnalysisInternal GrowthSensitivity AnalysisAbsolute sumA RateCertainty Equivalent ApproachProbability

12、 TheorySimulation ModelsInternal GrowthLease V BuyTraditional Method (Page 238)Acquisition DecisionIs Asset worth havingNPV assuming outright purchaseIf NPV= + Go to Financing DecisionFinancing DecisionLease or BuyUse cost of Borrowings as Discount RateInternal GrowthLease V BuyAlternative Method (P

13、age 241)Financing DecisionLeasing V Outright purchase using after tax cost of borrowings as COCInvestment DecisionOperating CF using WACC and incorporate PV of Best Financing DecisionInternal GrowthAsset Replacement DecisionsIdentical NewReplacement cycle to min PV operating CostsUse Equivalent Annu

14、al Cost (No Inflation)i.e. PV Cost * Annuity Factor for life of asset(See page 242)Otherwise Lowest Common Multiple or Finite method eg 15 yearsInternal GrowthAsset Replacement DecisionsDifferent AssetWhen to replace not how often to give the lowest total PV CostEquivalent Annual Cost of New Machine

15、 in perpetuity plus PV of Old MachineSee page 243Valuation of CompaniesReasons for ValuationQuoted and Unquoted companiesValuation MethodsShare Prices & Market EfficencyThe Valuation of Quoted & Unquoted Companies Valuation of Shares is necessary when Quoted CompanyTake-over BidStock Market price is

16、 not perceived as fair valuePart Sale Management BuyoutUnquoted Company(Private Company)TaxationMerger FlotationSecurity for LoanShare OptionUnquoted CompaniesDiscount the P/ELoss of Key EmployeesPremium for controlling interestGearingThe Valuation of Quoted & Unquoted CompaniesMethods of ValuationP

17、/E Earnings MethodAccounting Rate of ReturnNet assets methodDividend yield methodCAPM (plus Div yield method)Super Profits MethodDiscounted Future ProfitsChoice of method depends on size of shareholding being valued i.e. reason for valuationThe Valuation of Quoted & Unquoted CompaniesMethod of Valua

18、tion is dependent on decision criteriaThe Valuation of Quoted & Unquoted CompaniesP/E Ratio Earnings Method of ValuationP/E relates earnings per share to Share ValueP/E = Market Value per share Earnings per ShareMarket Value per share = P/E * EPSMarket Value = Earnings * P/EThe Valuation of Quoted &

19、 Unquoted CompaniesP/E Ratio Earnings Method of ValuationEPS can be historical of prospective (Exam)Higher the P/E the higher the PriceHigh P/E may indicate:Expectation of EPS future growthSecurity of EarningsStatusQuoted Company (P/E of Unquoted Co 50% of Quoted company)The Valuation of Quoted & Un

20、quoted CompaniesP/E Ratio Earnings Method of Valuation Guidelines:Unquoted Co P/E is ultimately negotiation : Look atGeneral economies and financial conditionsType of industry and its prospectsSize of Co within the industry & overall marketMarketabilityDiversity of ShareholdingsSustainability and re

21、liability of ProfitsAsset Backing and LiquidityNature of AssetsGearingKey Individual &/or Skill reliance The Valuation of Quoted & Unquoted CompaniesThe Accounting Rate of Return MethodValue = Estimated Future ProfitsReq. RoR on Cap EmpAdjust Profits for changes post acquisition in:Directors Remuner

22、ationInterest Charges (Debt Restructuring)Charge for notional Rent where existing properties will be soldProduct &/or management rationalisationThe Valuation of Quoted & Unquoted CompaniesThe Accounting Rate of Return MethodUsed to determine the maximum Price as it represents desired return post acq

23、uisitionThe Valuation of Quoted & Unquoted CompaniesNet Assets MethodValue of Shares in a particular class = The Net Tangible assets attributable to that class by the number of shares in that classExclude intangibles unless they have a market valueAsset values vary and this is the biggest difficulty

24、 with this methodThe Valuation of Quoted & Unquoted CompaniesNet Assets MethodProfessional ValuationAre all liabilities reflected in the Net AssetsAre Current assets valued properlyGoing concern V Break up valueCost of Rationalisation post acquisitionOff Balance Sheet issuesThe Valuation of Quoted &

25、 Unquoted CompaniesNet Assets Method use when:Security factor i.e. min value of companyMeasure of comparison in a mergerCo A low asset backingCo B high asset backingCo B would expect a premium for strong asset basePage 369The Valuation of Quoted & Unquoted CompaniesDividend Yield MethodValue = Divid

26、end in PenceExpected Dividend Yield %Minority interest valuationOne can use the growth model to reflect future dividendMV = Do(1+G)(R-G)Do = Current Div G = Growth R = Cost of CapitalThe Valuation of Quoted & Unquoted CompaniesCAPM MethodGood for pricing shares for Stock exchange listingUse it in co

27、njunction with Div Yield method Ke = Rf + B(Rm-Rf)Ke = cost of equity = cost of capital for Div YieldRf = Risk Free Rate (Treasury Bills)B = Companys BetaRm = Market ReturnThe Valuation of Quoted & Unquoted CompaniesCombination of Earnings & Net Asset BasisAcquisition on going concern basis but some

28、 assets will be soldUse Earnings methodadjust for NRV of assets soldThe Valuation of Quoted & Unquoted CompaniesSuper Profits (Out of Fashion)Excess of expected profits over fair return used to calculate goodwillGoodwill is then added to Net assetsDiscounted Future ProfitsDiscount the future cash fl

29、ows post acquisition investment at appropriate cost of CapitalThe Valuation of Quoted & Unquoted CompaniesShare Price & Market EfficiencyCharting & Technical Analysis to predict share priceEfficient Market Hypothesis The degree to which information is reflected in the share priceWeak FormSemi Strong

30、 FormStrong FormMergers & Take-oversProcessDue diligenceMgt Buy-outsListing RulesMergers and Take-oversTake-OverPurchase of a controlling interestMergerAn amalgamation of two companies to form a single companyThis distinction is not always clearMergers and Take-oversReason for M&A is synergisticOper

31、ating EconomiesManagement AcquisitionDiversificationAsset Backing Quality of earnings (portfolio impact)Finance and liquidityGrowthMarket Share / removal of CompetitionIncreases EPSEntry into new marketTaxDefensiveMergers and Take-oversTypes of M&AHorizontalVerticalConglomerateMergers and Take-overs

32、Purchase ConsiderationCash = Buy out the other shareholdersPaper = Issuing new shares (Paper) as considerationMergers and Take-oversFactors affecting the ChoiceAcquiring CompanyDilution of EPSCost to the CompanyGearingControlIncrease in Authorised share capitalIncrease in Borrowing LimitsMergers and

33、 Take-oversFactors affecting the ChoiceAcquired CompanyTaxation Cash immediate CGT/ Shares postponed CGTIncomeMaintenance V immediate capital GainFuture investmentsBe Aware of Mezzanine FinanceMergers and Take-oversDefence against a Take-OverDefence tactics are governed by city code on M&ADirectors

34、must at all times act in best interest of shareholdersPrepare a defending circularMk price of acquirer to high not sustainableMk price of acquirer to low not fair valueProfit ForecastsRevalue assetsHigher DividendsMergers and Take-oversDefence against a Take-OverManagement ChangesWhite Knight (Same

35、info to all parties)Sell crown jewels (Code doesnt allow this)Reverse take-over (Packman strategy)Golden Parachute (Code disclosure)Discredit offerRefer to monopolies & mergers commissionMergers and Take-oversDefence against a Take-OverCity code does not allowSelling or acquiring material amount of assetsNon normal contractsIssuing more shares or securitiesMergers and Take-oversAdvising the bidding and target companyRecommending a PriceVarious valuation techniquesEvaluating an existing offerMax and min valuesEvaluate the offerVarious valuation tech