Advanced Financial Management (FINC 601)

Advanced Financial Management & Objectives

1. Describe the course learning outcomes and assessment
2. Explain the main objective of advanced financial management (CK1).

• Lecture
• Demonstration of advanced financial management

Reading:

The role and responsibility of senior financial adviser in multinational organisation (MNC)

1. Describe role and responsibility of financial adviser
2. Setting the financial goals of the business and it’s financial policy development (CK2).

• Lecture
• Recommend strategies for management of financial resources.
• Group exercise on allocation of resources for the achievement of organizational goals in line with agreed policy framework.

Reading:

Financial Strategy formulation

1. Assess organisational performance through ratios and trends (CK2).
2. Assess organisation’s exposure to business and financial risk including operational, reputational, political, economic, regulatory and fiscal risk. (CK2).

• Lecture
• Demonstrate relevant ratios and trend analysis.
• Develop a framework for risk management, comparing and contrasting risk mitigation, hedging and diversification strategies.
• Explain the theoretical and practical rationale for the management of risk.
• Explain capital investment monitoring and risk management systems.

Reading:

Financial Strategy Formulation

1. Describe optimum capital mix and structure within a specified business context and capital asset structure (CK1).
2. Describe appropriate distribution and retention policy. (CK1).

• Lecture
• Demonstrate on how to recommend an optimum capital structure in a practical business and how distribution of profits are decided.

Reading:

Ethical and governance issues

1. Assess the ethical dimension within business issues and decisions and advise on best practice in the financial management of the organisation. (CK1).

• Lecture
• Demonstrate on the interconnectedness of the ethics of good business practice between all functional areas of the organisation.

Reading:

Ethics and governance issues

1. Describe an ethical framework for the development of an organisation’s financial policies and a system for the assessment of it’s ethical impact upon the financial management of the organisation (CK1).

• Lecture
• Demonstrate the establishment of an ethical financial policy for the financial management of the organisation grounded in good governance, the highest standards of probity and is fully aligned with the ethical principles of the association.

Reading:

Investment decisions using non-discounted cash flow methods

1. Understand the concept of time value of money
2. Calculate, interpret, and make investment decisions based on the basic and discounted payback period
3. Calculate return on capital employed (accounting rate of return) and discuss its usefulness as an investment appraisal method

• Lecture
• Demonstration of concept time value of money and investment appraisal method with non-discounted cash flow
• Solving exam question on determining the proposed investment based on ROCE and ARR

Reading:

Investment appraisal using discounted cash flow methods

1. Calculate net present value of cash flows using relevant cash flows
2. Decide whether to invest in a project based on the net present value method and link to IRR method.
3. Calculating NPV and IRR using real terms and nominal terms approaches.

• Lecture
• Demonstration of discount cash flow
• Group drill and practice on new project NPV and IRR using real terms and nominal terms approaches.

Reading:

Investment appraisal using discounted cash flow methods (continued)

1. Identify taxation effects and tax allowable depreciation effect on cash flow
2. Describe usage of annuity and perpetuity on long term projects and discounting of annuity and perpetuity cash flows.

• Lecture
• Discussion on concept of annuity and perpetuity and effects of tax on cash flow.
• Group Exercise – Calculate NPV on a long term project taken to perpetuity with tax effects included.

Reading:

Capital budgeting under capital constraints.

1. Single period rationing with divisible projects and indivisible projects. (CK1).

• Lecture
• Discussion on hard and soft capital rationing and solving exam questions on single period rationing with divisible projects using profitability index and indivisible projects using trial and error combination of projects.

Reading:

Capital budgeting under capital constraints (continued)

1. Multiperiod rationing with divisible and indivisible projects

• Lecture
• Demonstration of setting of linear programming models for divisible projects and integer programming models for indivisible projects.
• Interpretation of the output from these models.

Reading:

New developments in Investment appraisal techniques

1. Conflict between NPV and IRR decisions and the development of MIRR.
2. Replacement of payback method with project recovery and project duration.

• Lecture
• Solving problems highlighting the conflict between NPV and IRR and how MIRR resolves the conflict.
• Demonstrate project recovery and project duration.

Reading:

Project appraisal under risk

1. Adjusting for risk and uncertainty in investment appraisal method
2. Calculate the sensitivity of NPV to changes in inputs, with sensitivity being the change required to reduce NPV to zero

• Lecture
• Demonstration of risk and uncertainty analysis

Reading:

Project appraisal under risk (continued)

1. Demonstrate new development in risk by application of Monte Carlo simulation to risk – using output and standard deviation to measure Value At Risk

• Lecture
• Illustrate calculation of value at risk and show how much of NPV calculated is at risk using confidence levels.

Reading:

• Lecture
• Group problem on investment appraisal with linking to capital rationing and new developments illustrated.

Reading:

Sources of finance

1. Discuss possible sources of finance for a project, and their advantages and disadvantages
2. Value equity finance – methods used with focus on Free cash Flow method.

• Lecture
• Discussion on different sources of finance
• Group problem on equity valuation with focus on FCF and FCFE methods.

Reading:

Sources of finance (continued)

1. Cost of equity derivation using dividend valuation model and discuss CAPM method of deriving ke
2. Discuss valuation of debt – redeemable and irredeemable debt.

• Lecture
• Discussion on the 2 methods of deriving ke and basic debt valuation methods.

Reading:

Sources of finance (continued)

1. Valuation of debt with changing yield
2. Valuation of debt with coupon paid more than once a year.
3. Credit risk of organisation and valuation by estimating credit spread over risk free rate.

• Lecture
• Demonstrate advanced valuation techniques of debt and discuss question applying these techniques.

Reading:

Sources of finance (continued) & WACC(cost of capital)

1. Assess an organisation’s debt exposure to interest rate changes using Macaulay Duration and Modified Duration methods.
2. Derivation of WACC – basic co. WACC using valuation above

• Lecture
• Demonstrate measurement of sensitivity of debt using duration and illustrate cost of capital calculations for a company given the different sources of finance used.
• Group case study analysis

Reading:

Cost of capital

1. Calculate risk adjusted WACC – changing WACC with diversification into new businesses. Using asset beta formula to change beta – business risk & financial risk.

• Lecture
• Discussion of risk adjusted WACC and discuss question applying this WACC in project evaluation.

Reading:

Cost of capital (continued)

1. Discuss impact of capital structure/gearing on cost of capital – theories explaining capital structure:
   1. Traditional Theory vs. Modigliani & Miller Proposition before tax and after tax
   2. Pecking Order Theory
   3. Static Trade-Off Theory

• Lecture
• Demonstrate application of theories and discuss questions on approach to determining optimal WACC.

Reading:

Adjusted Present Value (APV) method of investment appraisal

1. Link APV method to M&M Theory application
2. Show financing side effects and why debt is ignored in calculating base case NPV

• Lecture
• Demonstrate application of APV with examples and Group exercise on APV calculation

Reading:

APV (continued)

1. Effect of tax shield on APV calculations &
2. Financing of project with loan that has equal installment repayment including capital repayment on interest.

• Lecture
• Calculate the loan repayment schedule and show integration into APV
• Group case study on the effect of APV method on shareholders wealth.

Reading:

Mergers And Acquisition (M&A)

1. Discussion of reasons for M&A and different sources of synergy.
2. Introduce different valuation methods of equity for target co.

• Lecture
• Demonstration of importance of external growth compared to organic growth discuss advantages and disadvantages of different methods of valuation including FCF and FCFE methods.

Reading:

M & A (continued)

1. Value creation in M&A and how this value created is shared by acquirer and acquiree.
2. Evaluate different payment modes on acquisition and how each payment mode contributes to gain/loss to acquiror and acquiree.
3. Pre-bid and post-bid defence strategies available to acquiree and code of takeover.

• Lecture
• Demonstration of value creation using relevant questions on different payment modes.
• Show how to calculate no. of shares in share for share exchange given premium/value creation required by acquiree to surrender shares – Case Study Analysis.

Reading:

M & A (continued)

1. Restructuring of business – explain maximising of shareholder value by unlocking shareholder value and preventing conglomerate discount on holding co. share price.
2. Evaluate restructuring strategies of sell offs, demerger

• Lecture
• Demonstration of different restructuring strategies and show with a question how demerger is carried out and how it contributes to maximising shareholder value

Reading:

M&A – Restructuring strategies (continued)

1. Unbundling parts of a business and impact of this strategy on Earnings, EPS, Statement of financial position and gearing.
2. Effect of company repurchasing their own shares on above.

• Lecture
• Demonstration with a case study on unbundling strategy and co. share repurchase on shareholder wealth.

Reading:

M&A – Restructuring strategies (continued)

1. MBO vs.MBI – advantages and disadvantages of each of these restructuring strategies
2. Financing issues in an MBO and how MBO team arranges for finance to undertake MBO.

• Lecture
• Demonstration with relevant questions on how MBO/MBI is financed and preparing co. for listing after several years of successful operation.

Reading:

• Lecture
• Demonstration of value created in this situation and how maximisation of shareholder value is still pursued without keeping the entire business acquired. Discussion with a case study problem.

Reading:

M&A – Company reconstruction strategies

1. Strategies to turn around a loss making operation with cash flow problems.
2. Compare different proposals put forward with ceasing operations to convince stakeholders that long term survival of co. is better than closing down.
3. Carry out stakeholder analysis using each proposal.

• Lecture
• Case study analysis of company turn around strategies with stakeholder analysis.

Reading:

Review of M&A concepts and summary

1. Summarise key concepts on mergers and acquisition
2. Describe importance of restructuring and how company should continue pursuing this strategy to unlock shareholder value

• Lecture
• Solving case studies which comprehensively covers different aspects of M&A.

Reading:

Risk Management

1. Options valuation – share options
2. Usage of call options and employee share option schemes

• Lecture
• Demonstration of basic mechanics on option theory and how to value options using Black Scholes Model – valuing a call option and put option.

Reading:

Risk Management (continued)

1. Explain the GREEKS in option valuation theory
2. Demonstrate the use of delta and usefulness of put option in hedging co.investment portfolios.

• Lecture
• Discussion of protecting shareholders wealth by buying sufficient put options using delta to reduce Question on delta application will be used.

Reading:

Risk Management (continued)

1. Real options in investment appraisal – adding a time dimension to investment appraisal by valuing real options.
2. Delay option and expansion option valuation using Black Scholes Model

• Lecture
• Demonstrate the usefulness of real options in making investment appraisal decisions and show questions on application by calculating/valuing delay option and expansion option.

Reading:

Black Scholes Model (continued)

1. Valuation of abandonment option and how a negative NPV project should be evaluated using this option.
2. Limitations and assumptions of Black Scholes Model

• Lecture
• Discussion of abandonment option using BS model with relevant question.
• Case Study analysis of Black Scholes model issue linked to investment appraisal.

Reading:

Currency Risk Management

1. Determining exchange rates – future spot rate and forward rate using PPP theory and IRP theory.
2. Different types of currency risk
3. Internal Hedging Methods

• Lecture
• Discussion of currency risk management concepts and importance of hedging currency exposure to protect shareholder wealth. Illustrate internal hedging methods – multilateral netting to minimise transaction costs and risk.

Reading: BPP Text Chapter 13 293-327

Currency Risk Management (continued)

1. External Hedging Methods
   • Forward Contracts
   • Money Market Hedge
   • Currency Futures
   • Currency Options
2. Direct Quotes vs. Indirect Quotes
3. Cross Rates and cross hedges

• Lecture
• Discussion on methods of external hedging.
• Solving exam questions on the application of different hedging methods.
• Illustrate different types of currency quotations and how to derive cross rates and implement cross hedges.

Reading:

• Lecture
• Case studies discussion on currency hedging and application of methods into different scenarios.

Reading:

Interest Rate Risk management

1. Basic concepts on interest rate hedging
2. Internal hedging – smoothing
3. External Hedging Methods
   • Forward Rate Agreement (FRA)
   • Interest Rate Futures
   • Interest rate options

• Lecture
• Demonstrate the different interest rate hedging methods using exam questions
• Illustrate basis risk and margin requirements in markets to undertake interest rate hedging.

Reading:

Interest Rate Risk Management (Continued)

1. Using collar strategy to minimise premium on interest rate options.
2. Devising a collar strategy for both borrower and depositor

• Lecture
• Discussion of collar as a variation of interest rate options to minimise premium using exam questions.

Reading:

Long Term Hedging strategies

1. Interest rate swaps and currency swaps
2. Demonstrate swaps are the best instruments for L/T hedging by comparing with options and swaptions

• Lecture
• Discussion of techniques in arranging a swap and the effective interest rate paid after the swap
• Illustrate how shareholders wealth is affected by swap arrangement using case study analysis.

Reading:

• Lecture
• Demonstrate how MNC’s can manipulate transfer prices across borders to achieve tax savings with relevant questions.

Reading:

• Lecture
• Demonstrate how FDI’s are evaluated using case studies on overseas NPV and how local cash flows get affected by shifting overseas. Deriving WACC for overseas projects will also be shown.

Reading:

• Lecture
• Illustrate derivation of maximum dividend capacity and dividend ratios to analyse dividend policy of company using relevant questions and case study.

Reading: