Financial analysis for finance managers

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FINANCIAL ANALYSIS
FOR FINANCE MANAGERS
Dr. Anup Chowdhury
a.chowdhury@leedsbeckett.ac.uk
Financial analysis for Finance managers
Uses of Capital
Sources of Capital
Return on investment > Cost of capital
(NPV, IRR, Payback) (Ke, Kd, WACC)
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Financial analysis for finance managers
Uses of Capital
Sources of Capital
Analysing the long-term objective of
the firm……………….???
Return on investment > Cost of capital
(NPV, IRR, Payback) (Ke, Kd, WACC)
A Latin word ‘Finis’ – dealing with the money.
Finance is concerned with the financing, investing and
management of financial resources with the aim of
achieving organizational goals.
Functions of Corporate Finance:
Financing decision
Investment decision
Management of financial resources
Corporate governance
Risk-management function
Definition of Finance
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Contributions of the Finance Function
1. Strategic Level (Long term plans)
Long term availability of funds
Long term financial plan to ensure viability of the company
Vital role in the achievement of the overall objectives for the
business
2. Operational Level (short term plans)
Availability of funds to meet short term needs
Financial control of projects and operation
Management of risk exposure (e.g. interest rate risk,
exchange rate risk etc.)
• What should be the long-term
objective/objectives of a firm?
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Analyzing the Long-run Objectives
 Organisations have many objectives: Profit vs Wealth maximization
 Organisations also have many stakeholders.
 The general assumption is that Financial Management assumes:
 Investment and Financing decisions are made primarily on the basis of:
◼ Maximising the long term wealth of owners (shareholders)
◼ Whilst minimising, as far as possible the level of risk involved.
 This is achieved by:
◼ Share price growth (or increasing the value of the
company)
◼ Payment of suitable dividends
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FINDING THE FINANCE
(SOURCES OF FINANCE)
Forms of Equity
 Retained earnings/profits
 Ordinary shares (stocks) – pay variable dividends
 Preference shares – pay fixed dividends
 Reserve
 Premium
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If its Equity –
what are the
alternatives?
• Ordinary shares – pay variable
dividends
• Unquoted (private company)
• Quoted (listed/public company)
• Full stock exchange listing?
• Listing on the secondary
market (AIM)
• Listing on a foreign exchange
• Preference shares
• pay fixed dividends
• often redeemable
• often non voting
Raising Equity
OFFER FOR SALE –
OFFERED TO GENERAL
PUBLIC
PLACING – OFFERED TO
INSTITUTIONS/PRIVATE
INDIVIDUALS
RIGHTS ISSUE – OFFERED
TO EXISTING
SHAREHOLDERS
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Forms of Debt
 Long/short term
 Bank Debt
 Private Debt
 Tradable Debt (Bonds)
Raising Tradable
Debt
Generally referred to as Bonds
Many different types of bonds:
• Debentures – bonds secured on
company’s assets
• Unsecured Loan Stock – bonds
that are unsecured
• Bonds with a floating charge
• Hybrid Bonds
• Convertible bonds (to equity
or new debt)
• Deep discount bonds
• Zero coupon bonds
• Others
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How do you decide between debt or
equity?
 Cheap – debt cheaper
 Quantities – depends on circumstances
 Time – debt often quicker to organise
 Period – equity tends to be forever
 Security – required for debt only
 Risk
 Debt – risk with company
 Equity – risk with investor
 Conditions
 Debt – security plus covenants
 Equity – part ownership of business
 Flexible
 Debts – bonds tradable for lender
 Equity – tradable for shareholder
Alternative forms of Finance
 Sales of assets
 Leasing
 Hire purchase
 Grants
 Tax holidays
 Trade Finance
 Venture Capital (private capital)
 Business Angels
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Venture Capital
• Venture capital (VC) funds provide finance for
unquoted firms with high growth potential
• Medium- to long-term investment
• Package of debt and equity finance
• Invest other peoples’ money.
• Want ownership.
• Decision making power.
Business Angels
• Individual investors with own money to invest.
• Start-up, early stage or expanding firms
• Majority of investments are in the form of equity
finance but they do purchase debt instruments and
preference shares
• Usually do not have a controlling shareholding
• Play a significant role in strategy and management
• Many angels take a seat on the board
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Thanks and
See you in the seminar!
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