Download Financial Reporting PDF notes

Click here to Purchase Financial Reporting notes
PAPER NO.8 FINANCIAL MANAGEMENT GENERAL OBJECTIVE

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply financial management principles in practice.

LEARNING OUTCOMES

A candidate who passes this paper should be able to:

• Analyse the sources of finance for an organisation and evaluate various financing options
• Evaluate various investment decision scenarios available to an organisation
• Evaluate the performance of a firm using financial tools
• Make appropriate capital structure decisions for a firm
• Value financial assets and firms
• Make appropriate liquidity and dividend decisions for a firm
• Evaluate current developments in business financing

CONTENT

Overview of financial management

• Nature and scope of finance
• Finance functions
• Goals of a firm; financial and non-financial objectives, overlaps and conflicts among the objectives
• Agency theory, stakeholder’s theory and corporate governance
• Measuring managerial performance, compensation and incentives
• Ethical issues in financial management
• Corporate social responsibility (CSR) and financial management

The financing decision

• Nature and objectives of the financing decision
• Factors to consider when making financing decisions
• Sources of finances for enterprises; internally generated funds and the externally generated funds, long term sources, medium term and short term sources of finance
• Evaluation of financing options
• Methods of issuing ordinary shares – pPublic issue, private placement, bonus issue, employee stock option plans (ESOPS) and rights issues

Financial institutions and markets

• Nature and role of financial markets
• Classification of financial markets: primary and secondary securities market, money and the capital markets, over-the counter and organised market, derivatives market, mortgage market, forex market
• The security exchange listing and cross border listing
• Market efficiency – efficient market hypothesis
• Stock market indices
• The financial institutions and intermediaries: commercial banks, savings and loans associations and co-operative societies, foreign exchange bureaus, uUnit trusts and mutual funds, insurance companies and pension firms, insurance agencies and brokerage firms, investment companies, investment banks and stock brokerage firms, micro-finance institutions and small and medium enterprises (SMEs)

• The role of regulators in financial markets
• Central depository system and automated trading system
• Timing of investment at the securities exchange – Dow theory and Hatch system of timing

Time-value of money

• Concept of time value of money
• Relevance of the concept of time value of money
• Time value of money versus time preference of money
• Compounding techniques
• Discounting techniques

Valuation models

• Concept of value; book value, going concern value, substitution value, replacement value, conversion value, liquidation value, intrinsic value and market value
• Reasons for valuing financial assets/business
• Theories on valuation of financial assets; fundamental theory, technical theory, random walk theory and the efficient market hypothesis
• Valuation of redeemable, irredeemable and convertible debentures and corporate bonds
• Valuation of redeemable, Irredeemable and convertible preference shares
• Valuation of ordinary shares; net asset basis, price earnings ratio basis, capitalisation of earnings basis, Gordon’s model, finite earnings growth model, Super-profit model, Marakon model, Walter’s model, Discounted free cash flow, residual income model
• Use of relative measures such as Economic Value added (EVA) and Market Value Added (MVA)
• Valuation of unit trusts and mutual funds
• Valuation of private companies: income and market based approaches

Cost of capital

• Firms capital structure and factors influencing capital structure decisions
• Factors influencing firms cost of capital
• Relevance of cost of capital
• Component costs of capital
• The firm’s overall cost of capital
• Weighted average cost of capital (WACC)
• Weighted marginal cost of capital (WMCC)
• Introduction to break-points in weighted marginal cost of capital schedule
• Operating and financial leverage – degree of operating leverage and operating risk; degree of financial leverage and financial risk
• Combined leverage – degree of combined leverage and total risk

Capital budgeting decisions

• The nature and importance of capital investment decisions
• Capital investment’s cash flows – initial cash outlay, terminal cash flows and annual net operating cash flows, incremental approach to cash flow estimation
• Capital investment appraisal techniques
• Non-discounted cash flow methods – payback period and accounting rate of return
• Discounted cash flow methods – net-present value, internal rate of return, profitability index, discounted payback period and modified internal rate of return (MIRR)
• Strengths and weaknesses of the investment appraisal techniques
• Expected relations among an investment’s NPV, company value and share price
• Capital rationing – evaluation of capital projects and determination of optimal capital budget in situations of capital rationing for a single period rationing
• Capital investment   options    –   timing   option,   strategic    investment option, replacement option and abandonment option
• Problems/difficulties encountered when making capital investment decisions in reality

Financial analysis and forecasting

• Users of financial statements and their information needs
• Ratio analysis; nature of financial ratios, classification and calculation of financial ratios and limitation of financial ratios
• Common size statements – vVertical and horizontal analysis
• Financial forecasting; cash budgeting and percentage of sales method of forecasting

Working capital management

• Introduction and concepts of working capital
• Working capital versus working capital management
• Factors influencing working capital requirements of a firm
• Importance and objectives of working capital management
• Working capital operating cycle; the importance and computation of the working capital operating cycle
• Working capital financing policies aggressive, conservative and matching financing policy
• Management of stock, cash, debtors and creditors

Dividend decision

• Forms of dividend
• How to pay dividends and when to pay dividends
• How much dividend to pay
• Firms dividend policy and factors influencing dividend decision
• Why pay dividends
• Dividend relevance theories; Bird in hand, Clientele effect, Information signaling theory, Walter’s model, Tax differential theory, Modigliani and Miller dividend irrelevance theory

Introduction to risk and return

• Risk-return trade off/relationship
• Distinction between risk free and risky assets
• Expected return of an asset
• Total risk of an asset
• Relative risk of an asset
• Expected return of a 2 asset-portfolio
• The actual total risk of a 2-asset portfolio

Islamic finance

• Justification for Islamic Finance; history of Islamic finance; capitalism; halal; haram; riba; gharar; usury
• Principles underlying Islamic finance: principle of not paying or charging interest, principle of not investing in forbidden items such as alcohol, pork, gambling or pornography; ethical investing; moral purchases
• The concept of interest (riba) and how returns are made Islamic financial securities
• Sources of finance in Islamic financing: muhabaha, sukuk, musharaka, mudaraba
• Types of Islamic financial products:- sharia-compliant products: Islamic investment funds; takaful the Islamic version of insurance Islamic mortgage, murabahah,; Leasing – ijara; safekeeping – Wadiah; sukuk – islamic bonds and securitisation; sovereign – sukuk; Islamic investment funds; Joint venture – Musharaka, Islamic banking, Islamic contracts, Islamic treasury products and hedging products, Islamic equity funds; Islamic derivatives
• International standardisation/regulations of Islamic Finance: case for standardisation using religious and prudential guidance, National regulators, Islamic Financial Services Board

Emerging issues and trends