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MN10311Corporate Finance and Investment Appraisal

or

Finance

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The Course Tutor

• Mr A N Birts, ACT Cert ICM, BSc, MBA

• WH 8.56

• mnsanb@management.bath.ac.uk

• To obtain course outline, copies of overheads and seminar questions go to my personal website

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Finance

• What is the objective of the organisation?

- Make a profit?

- Supply goods and or services?

- Provide employment?

- Growth?

- Customer care?

- Environmental care?

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Finance

• All of these but for finance there is one objective and that is :-

To Maximise Shareholder Wealth

or

Where no shareholders, an equivalent in terms of use of resources.

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Finance

• Maximising Shareholders Wealth means Maximising Share Price.

• Current Share Price Should Reflect All Future Cash Flows Discounted At The Appropriate Discount Rate

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Finance

• Obstacles to maximising shareholders wealth.

- Stakeholders

* Directors

* Managers

* Workers

* Customers

* Suppliers

What are their objectives?

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Finance

• How may these be controlled?

- Non Executive Directors?

- AGM?

- Published Accounts?

- Audit?

- The Market?

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Finance

• Generalised Organisation

Finance Director (the city!)

Controller Accountant Treasurer

Internal External Funding

Management Reporting Risk

Accounts, costing Bank relations

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Finance

• Simple Model of Value

Cash Flow

Cost of Capital = Current Value

(Required Return)

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Finance

• Example

Assume constant cash flow forever of

100,000 pa

and required return of 10% (.10), then

investor would be willing to pay today

100,000 = 1,000,000

.10

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Finance

• We may add value by increasing cash flow

e.g. 120,000 = 1,200,000

.10

How would we do this:-

as a company?

as financial managers?

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Finance

• Or by reducing the required rate of return

E.g. 100,000 = 1,250,000

.08

As financial managers how may we do this?

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Finance

copyright anbirts

Variability

P & L

Seasonality

Cash Flow

Discount Rate

Cost of Capital

Equity/Debt

CM

Effect

FX

Liquidity

Payables/

Receivables

Better

Rated

Lower

CostTrade Credit

Tighter Ratios