FREDERICK OWUSU PREMPEH

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1 EXCEL PROFESSIONAL INSTITUTE 3.3 ADVANCED FINANCIAL MANAGEMENT LECTURES SLIDES FREDERICK OWUSU PREMPEH

2 EXCEL PROFESSIONAL INSTITUTE Role & Responsibility towards stakeholders LECTURE 1

3 Senior financial executives have responsibilities towards setting and achieving financial and non financial goals for organizations. Shareholders wealth maximization is the principal role of senior managers when setting financial objectives. Shareholders wealth are measured from two sources; Dividends received Market value of shares held Ways of Valuing a company 1. Statement of financial position valuation 2. Break-up basis 3. Market Value Earning per share (EPS) growth EPS = Net profit (loss) attributable to ordinary shareholders / Weighted average no. of ordinary shares

4 Other financial targets may include but not limited to; Restrictions on gearing Profit from operations Profit retentions Cash generation Value added

5 Non-financial objectives is on the assumption that aside shareholders wealth maximization the company should have other compelling objectives to achieve. Examples; Growth Increased market share Acquiring new nitch Retaining best staff etc

6 There are 3 fundamental decisions made by finance managers towards achieving shareholders value maximization; Investment decisions Financing decisions Dividend decisions 1. Investment decision: Identifying investment opportunities, evaluating them an deciding on the optimum allocation of scarce resources for available investments. Investment decisions may be in the form; Undertaking new projects within existing project or growth outside existing projects Takeover Merger Selling off Carving out Set off etc.

7 1. Organic growth: Expanding within existing operations internally. 2. Growth by acquisition: Companies may expand or diversify Growing through mergers, acquisitions and entering into new markets 3. Organic growth versus acquisition

8 Capital rationing is the restriction on an organization s ability to invest capital funds, caused by an internal budget ceiling being imposed on such expenditure by management (soft capital rationing), or by external limitations being applied to the company as and when additional borrowed funds cannot be obtained (hard capital rationing). Divisible projects: Projects that can be done in bits Indivisible projects: Projects that must be undertaken completely or not at all. It is not possible to invest in a fraction of the project. Single period rationing with divisible projects: Occurs when investment funds are a limiting factor in the current period. Return maximization is done through the use of profitability index (PI). Where; PI = NPV of project / Initial cash outflow Single period rationing with non-divisible projects: Occurs where within a particular period investment funds are limited but project cannot be divided to be undertaken.

9 Practical ways of dealing with capital rationing; 1.Seek joint venture partners with which to share the project 2.Consider alternative direct investment e.g. licensing or franchising agreements 3.Contracting parts of the project to third parties 4.Seek new alternative sources of capital 1.Venture capital 2.Debt finance secured on projects assets 3.Sale and leaseback of property or equipment 4.Grant aid 5.More effective capital management 6.Delaying a project to later period

10 Financing decisions considers the source, cost and effect on risk of the possible long-term finance. FD comprises both long-term decisions (capital structure) and short-term decisions (working capital management). Short term sources of funds; Overdrafts Short-term loans Trade credit Leasing Long-term sources of funds; Debt Bond Equity

11 Dividend decision is mainly a reflection of the investment decision and the financing decision. Dividend policy vary depending on the stage of the company s life cycle. Share repurchase scheme: The buy back of shares from shareholders who are willing to sell. Benefits of share repurchase scheme Finding use for surplus cash Increase in earnings per share Increase in gearing Readjustment of the company s equity base Possibly preventing a takeover bid or enabling a quoted company to withdraw from the stock market Drawbacks of a share repurchase scheme Hard to arrive at a price Can misconstrue that the company cannot make better use of the funds than the shareholders Tax on capital gains affects capital gain

12 Financial planning covers the monitoring of the company s financial position, the evaluation of its productive capacity needs and the financing requirements of the company. Strategic cash flow planning: Businesses should plan for positive net cash to survive but at the same time it is unwise to hold too much cash. Where a company is holding too much cash, they may plan to do any or a combination of the following; Plan to use the cash for investment projects or take over another company Pay out cash to shareholders as dividends Re-purchase its own shares (shares buyback) Strategic fund management: this is an extension of cash flow planning, which takes into consideration the ability of a business to overcome unforeseen problems with cash flows.

13 Financial Controls; FC is carried out at three levels

14 Investors can only be persuaded to take on extra risk when they are assured to be compensated with higher returns. In a risk free investment, investors are only compensated for deferring consumption. For an investor to take up an additional risk, they will want a premium to cover the additional risk. The risk/return relationship:

15 Risk preferences: Shareholders tend to invest in companies whose risk profile fits into their own portfolio. Managing risk: Risk can be managed in several different ways; Hedging Diversifying Risk mitigation

16 For financial objectives to be successful, it needs to be communicated and supported by the stakeholder groups Stakeholders are groups or individuals having legitimate interest in the activities of an organization. Various stakeholders are categorized below; Internal >>> Managers, employees Connected >>> Shareholders, banks, customers, suppliers External >>> Government, pressure groups, local communities, Objectives of stakeholder groups Shareholders Suppliers Long-term lenders Customers Employees Management Government Pressure groups

17 Strategy is a course of action to achieve an objective. Characteristics of strategic decisions >>>> Levels of strategy >>> There are three main levels Corporate strategy : concerned with broader issues such as what business we are in Business strategy or competitive strategy: Covers strategies for various business units within the larger operations. Operational strategies: Strategy at various functional levels of business

18 Thank you

Paper 3 June 2012 Financial strategy

Paper 3 June 2012 Financial strategy AIM To develop an understanding of the role of financial strategy in the investing, financing and resource allocation decisions within an organisation. OBJECTIVES On