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Transcript of KC-02 Corporate Finance & Risk Management
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C A S R I L A N K A C U R R I C U L U M 2 0 1 5
S T U D Y T E X T
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ii
First edition 2015
ISBN 9781 4727 1051 2
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the
British Library
Published by
BPP Learning Media Ltd
BPP House, Aldine Place
142–144 Uxbridge Road
London W12 8AA
www.bpp.com/learningmedia
The copyright in this publication is owned by
BPP Learning Media Ltd.
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system or transmitted in
any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the priorwritten permission of the copyright holder.
The contents of this book are intended as a guide and not
professional advice and every effort has been made to
ensure that the contents of this book are correct at the time
of going to press by CA Sri Lanka, BPP Learning Media, the
Editor and the Author.
Every effort has been made to contact the copyright holders
of any material reproduced within this publication. If any
have been inadvertently overlooked, CA Sri Lanka and BPP
Learning Media will be pleased to make the appropriate
credits in any subsequent reprints or editions.
We are grateful to CA Sri Lanka for permission to reproducethe Learning Outcomes and past examination questions, the
copyright of which is owned by CA Sri Lanka.
©
BPP Learning Media Ltd
2015
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Introduction iii
Contents
Page
Introduction v
Chapter features vii
Learning outcomes viii
Action verbs checklist xviii
KC2 Corporate Finance and Risk Management
Part A Corporate Financial Objectives and their Measurement
1 Objectives of Organisations 3
2 Financial Strategy 293 Forecasting and Analysis 61
Part B Corporate Financing Strategies
4 Short-term Financial Strategy 101
5 Equity Finance 143
6 Debt Finance 171
7 Lease Finance 195
8 The Cost of Capital 221
9 Capital Structure 259
Part C Dividend Policy and Capital Gains
10 Dividend Policy 291
11 Market Efficiency 305
Part D Corporate Investment Appraisal
12 Investment Appraisal Techniques 319
13 International Investment Appraisal 373
14 Specific Investment Appraisal Scenarios 399
Part E Corporate Growth Strategy
15 Business Valuation 435
16 Amalgamations and Restructuring 485
17 Corporate Failure & Reconstruction 535
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KC2 Corporate Finance and Risk Managementiv
Part F Corporate Risk Identification and Management
18 Introduction to Risk 583
19 Managing Foreign Exchange Risk 619
20 Managing Interest Rate Risk 685
Appendix 727
Index 731
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Introduction v
Introduction
KC2 Corporate Finance and Risk Management
The corporate level course module KC2 includes aspects such as setting financial objectives, financing,investments and dividends. Fundamentals of risk management is also covered to ensure future CAs
will be equipped to consult the right parties in an informed manner in complicated risk management
scenarios.
Syllabus structure
Main syllabus areas Weightings
1. Corporate Finance Objectives and Measurement 10%
2. Corporate Financing Strategies 30%
3. Dividend Policy & Capital Gains 5%
4. Corporate Investment Appraisal 20%
5. Corporate Growth Strategy 20%
6. Corporate Risk Identification & Management 15%
One of the key elements in examination success is practice. It is important that not only you fully
understand the topics by reading carefully the information contained in this Study Text, but it is also
vital that you practise the techniques and apply the principles that you have learned.
In order to do this, you should:
Work through all the examples provided within the chapters and review the solutions, ensuring
that you understand them;
Complete the progress test for each chapter.
In addition, you should use the Practice and Revision Kit. These questions will provide you with
excellent examination practice when you are in the revision phase of your studies.
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KC2 Corporate Finance and Risk Managementvi
Pillar structure
The Curriculum 2015 is structured around three pillars, namely, Knowledge, Skills and Personal.
The Pillars are subdivided into specific subject areas or sub pillars and content is delivered to meet the
requirements of three progressively ascending levels of competency, namely, Executive, Business and
Corporate.
The Executive Level provides the fundamentals of accounting and harnesses the skills and professionalvalues needed to mould a Business Accountant.
The Knowledge Pillar focuses on imparting sound technical knowledge required of a competent CA,
and comprises five sub pillars that focus on the following subject areas:
Sub pillar 1: Financial Accounting and Reporting (FA&R)
Sub pillar 2: Management Accounting and Finance (MA&F)
Sub pillar 3: Taxation and Law (T&L)
Sub pillar 4: Assurance and Ethics (A&E)
Sub pillar 5: Management and Contemporary Issues (M&C)
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Introduction vii
Chapter features
Each chapter contains a number of helpful features to guide you through each topic.
Topic list This tells you what you will be studying in the chapter. The topic items form
the numbered headings within the chapter.
Chapter
introduction
The introduction puts the chapter topic into perspective and explains why it is
important, both within your studies and within your practical working life.
Learning
Outcomes
The learning outcomes issued for the module by CA Sri Lanka are listed at the
beginning of the chapter, with reference to the chapter section within which
coverage will be found.
Key terms These are definitions of important concepts that you really need to know and
understand before the exam.
Examples These are illustrations of particular techniques or concepts with a worked
solution or explanation provided immediately afterwards.
Case study Often based on real world scenarios and contemporary issues, these examples
or illustrations are designed to enrich your understanding of a topic and add
practical emphasis.
Questions These are questions that enable you to practise a technique or test your
understanding. You will find the answer underneath the question.
Formula to
learn
These are the formula that you are required to learn for the exam.
Section
introduction
This summarises the key points to remember from each section.
Chapter
roundup
This provides a recap of the key areas covered in the chapter.
Progress
Test
Progress tests at the end of each chapter are designed to test your memory.
Bold text Throughout the Study Text you will see that some of the text is in bold type.
This is to add emphasis and to help you to grasp the key elements within a
sentence or paragraph.
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K C 2 C o r p o r a t e F i n a n c e a n d R i s k M a n a g e m e n t
v i i i
L e a r n i n g o u t c o m e s
C A S r
i L a n k a ’ s L e a r n i n g o u t c o m e s f o r t h e M o d u l e a r e s e t o u t o n t h e f o l l o w i n g p a g e s . T h e y a r e c r o s s - r e f e r e n c e d
t o t h e c h a p t e r i n t h e S t u d y T e x t w
h e r e t h e y a r e
c o v e r
e d .
1 . C o r p o r a t e F i n a n c i a l O b j e c t i v
e s a n d M e a s u r e m e n t
( S
y l l a b u s W e i g h t i n g : 1 0 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
1 . 1
C o r p o r a t e f i n a n c i a l
m a n a g e m e n t a n d
s t r a t e g i c f i n a n c i a l
o b j e c t i v e s
C o n c e p t u a l
C o m p r e h e n s i o n
1 . 1 . 1
D i s c u s s a p p r o p r i a t e s t r a t e g i c o b j e c t i v e s , b o t h f i n a n c i a l a n d n o n -
f i n a n c i a l , f o r d i f f e r e n t t y p e s o f o r g a n i s a t i o n s ( p r o f i t m a x i m i s a t i o n ,
w e a l t h m a x i m i s a t i o n , v a l u e f o r m
o n e y , b a l a n c e d s c o r e c a r d ) a n d h o w
t h e s e o b j e c t i v e s c a n a s s i s t i n m e e
t i n g t h e c o r p o r a t e g o a l s o f s u c h
o r g a n i s a t i o n s .
1 . 1 . 2
D i s c u s s t h e r o l e s o f f i n a n c i a l m a n
a g e m e n t ( f i n a n c i n g , i n v e s t m e n t ,
d i v i d e n d s ) , t
h e i r i n t e r c o n n e c t i o n
s a n d c o n f l i c t i n g s t a k e h o l d e r i n t e r e
s t s
i n c l u d i n g a g e n c y t h e o r y .
1 . 1 . 3
D i s c u s s i n t e r n a l r e s o u r c e s a n d b u s i n e s s s t r a t e g y d i f f e r e n c e s ( e x t e r n
a l
l e g i s l a t i o n s , r e g u l a t i o n s , c o r p o r a t e g o v e r n a n c e , i n t e r e s t r a t e s / y i e l d
c u r v e , i n f l a t i o n r a t e s , e x c h a n g e r a t e s , c a p i t a l m a r k e t a c t i v i t i e s ,
c o n s t r a i n t s t o f i n a n c i a l m a n a g e m
e n t ) .
1
1
2
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L e a r n i n g o u t c o m e s
i x
1 . C o r p o r a t e F i n a n c i a l O b j e c t i v
e s a n d M e a s u r e m e n t
( S
y l l a b u s W e i g h t i n g : 1 0 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a r n i n g O u t c o m e
C h a p t e r
1 . 2
P e r f o r m a n c e a n a l y s i s a n d
f i n a n c i a l m o d e l l i n g
P r o c e d
u r a l
A p p l i c a t i o n /
A n a l y s i s
1 . 2 . 1
A s s e s s t h e a c h i e v e m e n t o f d e s i g n
a t e d f i n a n c i a l o b j e c t i v e s u s i n g :
–
R e t u r n s p r o v i d e d t o s h a r e h o l d
e r s
–
F i n a n c i a l s t a t e m e n t f o r e c a s t s /
f i n a n c i a l m o d e l l i n g
–
O u t c o m e s o f f i n a n c i a l s t a t e m e
n t a n a l y s i s ( p r o f i t a b i l i t y , l i q u i d i t y ,
g e a r i n g , a s s e t , i n v e s t o r r a t i o s )
.
1 . 2 . 2
A n a l y s e f i n a n c i a l r e s u l t s b y u s i n g
t r e n d s a n d r a t i o s [ i n c l u d i n g t h e
D u P o n t a n a l y s i s i n f i n a n c i a l s t a t e
m e n t s a c r o s s t i m e / d i f f e r e n t
c o m p a n i e s / d i f f e r e n t a c c o u n t i n g p o l i c i e s i n a p p r a i s i n g t h e s h o r t a n d
l o n g - t e r m v i a b i l i t y o f t h e o r g a n i s a t i o n ( w o r k i n g c a p i t a l i s s u e s s u c h a s
o v e r t r a d i n g a n d s o l u t i o n s t o o v e r t r a d i n g i s e x p e c t e d t o b e d i s c u s s e d
h e r e ) ] .
1 . 2 . 3
A n a l y s e o p e r a t i o n a l l e v e r a g e , f i n a n c i a l l e v e r a g e , t o t a l l e v e r a g e , a n d
h o w t h e i m p a c t o f b u s i n e s s r i s k ( v o l a t i l i t y o f t u r n o v e r ) c a n b e
a u g m e n t e d o n p r o f i t s , E
P S a n d R O E d u e t o l e v e r a g e .
3 3 9
1 . 3
T r e a s u r e r ' s r o l e i n
f i n a n c i a l m a n a g e m e n t
P r o c e d
u r a l
A p p l i c a t i o n
1 . 3 . 1
A s s e s s t h e t r e a s u r e r ’ s r o l e s i n f i n
a n c i a l m a n a g e m e n t a n d o r g a n i s i n g
t h e t r e a s u r y f u n c t i o n ( c e n t r a l i s e d
o r d e c e n t r a l i s e d / c o s t c e n t r e o r p r
o f i t
c e n t r e ) .
2
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K C 2 C o r p o r a t e F i n a n c e a n d R i s k M a n a g e m e n t
x
2 . C o r p o r a t e F i n a n c i n g S t r a t e g i e s
( S
y l l a b u s W e i g h t i n g : 3 0 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a
r n i n g O u t c o m e
C h a p t e r
2 . 1
C o r p o r a t e f i n a n c i a l n e e d s
a n d f i n a n c i n g m e t h o d s
P r o c e d
u r a l
C o m p r e h e n s i o n
2 . 1 . 1
A s s e s s t h e s h o r t - t e r m ( w o r k i n g
c a p i t a l r e q u i r e m e n t s ) a n d l o n g - t e r m
( l o n g - t e r m i n v e s t m e n t p r o j e c t s )
f i n a n c i a l r e q u i r e m e n t s o f a n
o r g a n i s a t i o n a n d d i f f e r e n t f i n a n c i n g o p t i o n s .
4
2 . 2
W o r k i n g c a p i t a l
m a n a g e m e n t
P r o c e d
u r a l
E v a l u a t e
2 . 2 . 1
E v a l u a t e w o r k i n g c a p i t a l r e q u i r e m e n t s a n d i n v e s t m e n t d e c i s i o n s
u s i n g w o r k i n g c a p i t a l c y c l e a n d p e r m a n e n t a n d t e m p o r a r y w o r k i n g
c a p i t a l e s t i m a t i o n s .
2 . 2 . 2
E v a l u a t e t h e a p p r o p r i a t e n e s s o f
d i f f e r e n t w o r k i n g c a p i t a l f i n a n c i n g
p o l i c i e s .
4
4
2 . 3
E q u i t y f i n a n c i n g
C o n c e p t u a l /
P r o c e d
u r a l
R e m e m b e r /
C o m p r e h e n s i o n /
A p p l i c a t i o n /
A n a l y s i s /
E v a l u a t i o n
2 . 3 . 1
I d e n t i f y d i f f e r e n t t y p e s o f c a p i t a
l m a r k e t s ( s t o c k m a r k e t , b o n d m a r k e t
a n d m o n e y m a r k e t ) , a
d v a n t a g e s
a n d d i s a d v a n t a g e s o f s t o c k m a r k e t
l i s t i n g , a n d m a i n s t a k e h o l d e r s i n
t h e c a p i t a l m a r k e t a n d t h e i r
f u n c t i o n s ( i n c l u d i n g v i z . ,
C o l o m b o S t o c k E x c h a n g e , S e c u r i t i e s a n d
E x c h a n g e C o m m i s s i o n , i s s u i n g h
o u s e , b r o k e r s , p r i m a r y d e a l e r s ,
m o n e y b r o k e r s , C e n t r a l D e p o s i t a r y S y s t e m , u n d e r w r i t e r s ) .
2 . 3 . 2
A n a l y s e v a r i o u s m e t h o d s ( I P O , i n t r o d u c t i o n , p r i v a t e p l a c e m e n t , r i g h t
i s s u e s ) o f i s s u i n g i n s t r u m e n t s t o
c a p i t a l m a r k e t s .
2 . 3 . 3
C a l c u l a t e c o s t o f e q u i t y u s i n g D i v i d e n d V a l u a t i o n M e t h o d s
( D V M / D G M ) a n d C a p i t a l A s s e t P
r i c i n g M o d e l ( C A P M ) .
5
5
8
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L e a r n i n g o u t c o m e s
x i
2 . C o r p o r a t e F i n a n c i n g S t r a t e g i e s
( S
y l l a b u s W e i g h t i n g : 3 0 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a
r n i n g O u t c o m e
C h a p t e r
2 . 3 . 4
A s s e s s s y s t e m a t i c ( m a r k e t - w i d e
/ n o n - d i v e r s i f i a b l e ) a n d u n s y s t e m a
t i c
r i s k ( f i r m s p e c i f i c / d i v e r s i f i a b l e )
a n d t h e i r i m p l i c a t i o n s o n e q u i t y
f i n a n c i n g , f r o m a c o m p a n y ’ s v i e w p o i n t ( b e t a f a c t o r a n d e x p e c t e d
r e t u r n ) a n d a n i n v e s t o r ’ s v i e w p
o i n t ( b a s i c f u n d a m e n t a l s o f a
d i v e r s i f i e d p o r t f o l i o ) .
2 . 3 . 5
E v a l u a t e t h e i m p a c t o n f i n a n c i a l
p e r f o r m a n c e ( i n c l u d i n g r a t i o s o f a n
e n t i t y f r o m s h a r e r e p u r c h a s e s , r
i g h t s i s s u e s , s c r i p d i v i d e n d s , s c r i p
i s s u e / c a p i t a l i s a t i o n s ) .
8
5
2 . 4
D e b t f i n a n c i n g
C o n c e p t u a l /
P r o c e d
u r a l
C o m p r e h e n s i o n /
A p p l i c a t i o n
2 . 4 . 1
D i s c u s s d e b t f i n a n c i n g m e t h o d s
a v a i l a b l e ( i n c l u d i n g b a n k l o a n s ,
b o n d s , d e b e n t u r e s , s e c u r i t i s a t i o n s , c o m m e r c i a l p a p e r s , d e b t
s w e e t e n e r s ( c o n v e r t i b l e s a n d w a r r a n t s ) , s e n i o r v s j u n i o r d e b t a n d
i n t e r n a t i o n a l b o n d s .
2 . 4 . 2
A s s e s s t h e v a l u e ( i n t e r e s t y i e l d )
o f u n d a t e d b o n d / i r r e d e e m a b l e d e b t
a n d t h e v a l u e ( y i e l d t o m a t u r i t y ) o f d a t e d b o n d / r e d e e m a b l e d e b t .
6
6
2 . 5
L e a s e f i n a n c i n g
P r o c e d
u r a l
C o m p r e h e n s i o n /
A p p l i c a t i o n
2 . 5 . 1
D i s c u s s d i f f e r e n t t y p e s o f l e a s e o
p t i o n s a n d t h e i r i m p l i c a t i o n s o n t a
x
b e n e f i t s , c o n t r o l l a b i l i t y , r i s k o f o
b s o l e s c e n c e a n d g e a r i n g .
2 . 5 . 2
A s s e s s p u r c h a s e o r l e a s e d e c i s i o
n u s i n g N P V c a l c u l a t i o n s .
7
7
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K C 2 C o r p o r a t e F i n a n c e a n d R i s k M a n a g e m e n t
x i i
2 . C o r p o r a t e F i n a n c i n g S t r a t e g i e s
( S
y l l a b u s W e i g h t i n g : 3 0 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a
r n i n g O u t c o m e
C h a p t e r
2 . 6
C a p i t a l s t r u c t u r e d e c i s i o n
m a k i n g
P r o c e d
u r a l
C o m p r e h e n s i o n /
A p p l i c a t i o n
2 . 6 . 1
D i s c u s s a l t e r n a t i v e c a p i t a l s t r u c t u r e s ( t r a d i t i o n a l t h e o r y , M o d i g l i a n
i
a n d M i l l e r t h e o r i e s w i t h o u t a n d
w i t h t a x ) .
2 . 6 . 2
C a l c u l a t e “ W e i g h t e d A v e r a g e C o
s t o f C a p i t a l ” ( W A C C ) .
2 . 6 . 3
A s s e s s t h e i m p a c t o n W A C C f r o m
d i f f e r e n t c a p i t a l s t r u c t u r e s
( u n g e a r e d t o g e a r e d ; i m p a c t o n W A C C a n d v a l u e o f t h e b u s i n e s s u s i n g
t h e a b o v e c a p i t a l s t r u c t u r e t h e o r y a r g u m e n t s ) .
2 . 6 . 4
D e m o n s t r a t e h o w t o d e r i v e p r o j e c t s p e c i f i c c o s t o f c a p i t a l i n m a k i n g
i n v e s t m e n t s w i t h d i f f e r e n t b u s i n
e s s a n d f i n a n c i a l r i s k ( p r o x y
c o m p a n y - b a s e d b e t a u n g e a r s f o r b u s i n e s s r i s k a n d r e - g e a r s b a s e d o n
p r o p o s e d c a p i t a l s t r u c t u r e f o r f i n a n c i a l r i s k i s e x p e c t e d ) .
9
8 9
9
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L e a r n i n g o u t c o m e s
x i i i
3 . D
i v i d e n d P o l i c y a n d C a p i t a l G
a i n s
( S
y l l a b u s W e i g h t i n g : 5 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a
r n i n g O u t c o m e
C h a p t e r
3 . 1
D i v i d e n d p o l i c y
P r o c e d
u r a l
C o m p r e h e n s i o n /
E v a l u a t e
3 . 1 .
1
D i s c u s s d i f f e r e n t d i v i d e n d p o l i
c i e s , t a k i n g i n t o a c c o u n t f a c t o r s s u c
h
a s c l i e n t e l e e f f e c t , l e v e r a g e a n d
c a p i t a l r e q u i r e m e n t s , s o l v e n c y r a t
i o s ,
t a x c o n s i d e r a t i o n s a n d C o m p a n y A c t p r e - r e q u i r e m e n t s .
3 . 1 .
2
D i s c u s s d i v i d e n d t h e o r i e s s u c h
a s d i v i d e n d i r r e l e v a n c y t h e o r y , b i r d -
i n - h a n d t h e o r y , t a x p r e f e r e n c e
t h e o r y , r e s i d u a l t h e o r y a n d p e c k i n g
o r d e r t h e o r y .
3 . 1 .
3
E v a l u a t e a p p r o p r i a t e d i v i d e n d
p o l i c i e s f o r d i f f e r e n t o r g a n i s a t i o n s
( p r i v a t e / l i s t e d i n m a i n o r s m a l l e r m a r k e t s ) a n d t h e i m p o r t a n c e o f
d i v i d e n d y i e l d , d i v i d e n d c o v e r
a n d d i v i d e n d p e r s h a r e a s i m p o r t a n t
i n v e s t o r r a t i o s .
1 0
1 0
1 0
3 . 2
C a p i t a l g a i n s / l o s s
C o n c e p t u a l /
P r o c e d
u r a l
C o m p r e h e n s i o n /
E v a l u a t e
3 . 2 .
1
D i s c u s s c a p i t a l v a l u e ( s h a r e p r i c e ) m o v e m e n t t h e o r i e s s u c h a s
f u n d a m e n t a l / t e c h n i c a l o r c h a r
t i n g / r a n d o m w o r k t h e o r i e s a n d t h e i r
r e l e v a n c y t o c a p i t a l m a r k e t s .
3 . 2 .
2
E x p l a i n “ E f f i c i e n t M a r k e t H y p o
t h e s i s ” ( E M H ) a n d i t s d i f f e r e n t
v a r i a n t s .
3 . 2 .
3
E v a l u a t e t h e i m p l i c a t i o n s o f E M
H t o f i n a n c i n g , i n v e s t i n g a n d
d i v i d e n d p o l i c i e s .
1 1
1 1
1 1
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K C 2 C o r p o r a t e F i n a n c e a n d R i s k M a n a g e m e n t
x i v
4 . C o r p o r a t e I n v e s t m e n t A p p r a
i s a l
( S
y l l a b u s W e i g h t i n g : 2 0 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a
r n i n g O u t c o m e
C h a p t e r
4 . 1
P r o j e c t s a p p r a i s a l
P r o c e d
u r a l
A n a l y s i s /
E v a l u a t e
4 . 1 . 1
A n a l y s e t h e c a p i t a l b u d g e t i n g p r o c e s s ( i n c l u d i n g s e a r c h i n g f o r
i n v e s t m e n t s , s t r a t e g i c p r i o r i t i s
a t i o n , i
d e n t i f y i n g i n v e s t m e n t ,
i n v e s t m e n t a p p r a i s a l , a u t h o r i s
a t i o n , c a p i t a l b u d g e t , m o n i t o r i n g a n d
r e v i e w ) .
4 . 1 . 2
E v a l u a t e i n v e s t m e n t p r o j e c t s u
s i n g d i s c o u n t i n g f a c t o r / n o n -
d i s c o u n t i n g f a c t o r t e c h n i q u e s w i t h :
–
T a x
–
I n f l a t i o n ( m o n e t a r y a n d r e a l m e t h o d )
–
U n e q u a l l i f e p r o j e c t s ( a n n u
a l e q u i v a l e n t m e t h o d o n l y )
–
A s s e t r e p l a c e m e n t
–
C a p i t a l r a t i o n i n g ( i n c l u d i n g m u l t i p e r i o d c a p i t a l r a t i o n i n g )
–
U n d e r u n c e r t a i n t y ( c e r t a i n
t y e q u i v a l e n t , a d j u s t i n g d i s c o u n t i n g
f a c t o r s / p a y b a c k , u s i n g p r o
b a b i l i t y a n d s e n s i t i v i t y a n a l y s i s )
–
F o r e i g n i n v e s t m e n t s ( u s i n g f o r w a r d e x c h a n g e r a t e s o r c o u n t r y -
s p e c i f i c d i s c o u n t i n g f a c t o r s ) .
4 . 1 . 3
C r i t i c i s e I R R o n t h e b a s i s o f i t s
r e i n v e s t m e n t a s s u m p t i o n , l e a d i n g
t o
m o d i f i e d I R R ( c a l c u l a t i o n s a r e
e x p e c t e d ) .
4 . 1 . 4
E v a l u a t e t h e i m p a c t o n p r o j e c t
a p p r a i s a l f r o m s i d e e f f e c t s o f
f i n a n c i n g , u s i n g t h e A d j u s t e d P
r e s e n t V a l u e ( A P V ) .
4 . 1 . 5
A n a l y s e t h e i m p o r t a n c e o f p o s t c o m p l e t i o n a u d i t a n d r e a l o p t i o n s
i n
c a p i t a l b u d g e t i n g .
1 2
1 2 , 1
3 , 1
4
1 2
1 4
1 2 , 1
4
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L e a r n i n g o u t c o m e s
x v
5 . C o r p o r a t e G r o w t h S t r a t e g y
( S
y l l a b u s W e i g h t i n g : 2 0 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a
r n i n g O u t c o m e
C h a p t e r
5 . 1
C o r p o r a t e g r o w t h
s t r a t e g i e s
C o n c e p
t u a l
C o m p r e h e n s i o n
5 . 1 . 1
D i s c u s s m e r g e r s , a c q u i s i t i o n s a n
d d i v e s t m e n t a s b u s i n e s s s t r a t e g i e s
[ i n c l u d i n g r e a s o n s , c r i t i c a l s u c c e
s s f a c t o r s a n d e s p e c i a l l y d i f f e r e n t
t y p e s o f d i v e s t m e n t s s u c h a s t r a d e s a l e , s p i n o f f a n d m a n a g e m e n t b u y -
o u t s ( M B O s ) ] .
1 6
5 . 2
B u s i n e s s v a l u a t i o n ,
m e r g e r , a c q u i s i t i o n a n d
d i v e s t m e n t a n d o t h e r
c o r p o r a t e g r o w t h
s t r a t e g i e s
P r o c e d
u r a l /
M e t a c o
g n i t i v e
E v a l u a t e /
A n a l y s i s
5 . 2 . 1
E v a l u a t e b u s i n e s s v a l u a t i o n t e c h
n i q u e s ( a s s e t b a s e d , e a r n i n g s b a s e
d ,
p r o x y P E b a s e d , c a s h f l o w b a s e d
) f o r a s p e c i f i c m e r g e r o r a c q u i s i t i o
n
o r d i v e s t m e n t .
5 . 2 . 2
E v a l u a t e i n t a n g i b l e a s s e t v a l u a t i o n t e c h n i q u e s f o r i n d i v i d u a l
i n t e l l e c t u a l a s s e t s s u c h a s t r a d e m
a r k s , p a t e n t s , c o p y r i g h t s a n d o v e r a l l
i n t a n g i b l e a s s e t s M V t o B V , M
V t o R V , c a l c u l a t e d i n t a n g i b l e a s s e t v a
l u e .
5 . 2 . 3
R e c o m m e n d a p p r o p r i a t e v a l u a t i o n a n d t e r m s , t a k i n g i n t o a c c o u n t
f i n a n c i a l a n d s t r a t e g i c i m p l i c a t i o
n s f o r a s p e c i f i c m e r g e r o r a c q u i s i t
i o n
o r d i v e s t m e n t .
5 . 2 . 4
E v a l u a t e f i n a n c i n g m e t h o d s ( i n c
l u d i n g c a s h o f f e r , s h a r e e x c h a n g e a n d
u s e o f d e b t f i n a n c i n g a n d e a r n - o
u t a r r a n g e m e n t s , m e r g e r , a c q u i s i t i o n
o r d i v e s t m e n t ) .
5 . 2 . 5
E v a l u a t e p o s t - m e r g e r v a l u a t i o n a n d i m p l i c a t i o n s ( m a r k e t v a l u e s , n e t
a s s e t v a l u e s , E P S , P
/ E r a t i o b e f o r e a n d a f t e r a c q u i s i t i o n o r m e r g e r ) ,
i n c l u d i n g p o s t - a c q u i s i t i o n i n t e g r a t i o n , i n t e g r a t i o n p r o b l e m s w h i c h
c a u s e m e r g e r / a c q u i s i t i o n f a i l u r e .
1 5
1 5
1 5
1 6
1 6
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K C 2 C o r p o r a t e F i n a n c e a n d R i s k M a n a g e m e n t
x v i
5 . C o r p o r a t e G r o w t h S t r a t e g y
( S
y l l a b u s W e i g h t i n g : 2 0 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a
r n i n g O u t c o m e
C h a p t e r
5 . 2 . 6
A d v i s e o n r e g u l a t o r y i m p l i c a t i o n
s a n d p r o c e d u r e s o n m e r g e r s a n d
a c q u i s i t i o n s ( C o m p a n i e s A c t , S e c u r i t i e s E x c h a n g e C o n t r o l r e g u l a t i o n s
a n d o t h e r r e g u l a t o r y b o d i e s ) .
5 . 2 . 7
A n a l y s e p r o b a b l e f u t u r e c o r p o r a
t e f a i l u r e u s i n g w e a k a r e a s o f a
c o r p o r a t e u s i n g f i n a n c i a l r a t i o s .
5 . 2 . 8
E v a l u a t e h o w f i n a n c i a l r e c o n s t r u c t i o n a n d b u s i n e s s r e - o r g a n i s a t i o n
c o u l d b e u s e d a s c o r p o r a t e g r o w
t h s t r a t e g y .
1 6
1 7
1 7
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L e a r n i n g o u t c o m e s
x v i i
6 . C o r p o r a t e R i s k I d e n t i f i c a t i o n
a n d M a n a g e m e n t
( S
y l l a b u s W e i g h t i n g : 1 5 % )
K n o w l e d g e C o m p o n e n t
K n o w
l e d g e
D i m e
n s i o n
K n o w l e d g e
P r o c e s s
L e a
r n i n g O u t c o m e
C h a p t e r
6 . 1
C o r p o r a t e r i s k
i d e n t i f i c a t i o n
C o n c e p
t u a l /
P r o c e d
u r a l
C o m p r e h e n s i o n
6 . 1 .
1
D i s c u s s v a r i o u s t y p e s o f r i s k s s
u c h a s c r e d i t r i s k , i n t e r e s t r a t e r i s k
,
l i q u i d i t y r i s k , f o r e i g n e x c h a n g e
r i s k , p r i c e r i s k , o p e r a t i o n a l r i s k a n
d
r e p u t a t i o n a l r i s k .
6 . 1 .
2
D i s c u s s f a c t o r s c o n t r i b u t i n g t o
w a r d s e a c h o f t h e a b o v e r i s k s .
6 . 1 .
3
D i s c u s s v a l u e a t r i s k a s a r i s k m
e a s u r e m e n t t o o l a n d c o n t r o l t o o l a
n d
i t s l i m i t a t i o n s .
6 . 1 .
4
D i s c u s s t h r e e d i f f e r e n t m e t h o d
s o f c a l c u l a t i n g V A R , n a m e l y
h i s t o r i c a l , c o v a r i a n c e a n d M o n
t i C a r l o s i m u l a t i o n m e t h o d .
1 8
1 8
1 8
1 8
6 . 2
C o r p o r a t e r i s k
m a n a g e m e n t
P r o c e d
u r a l /
M e t a c o
g n i t i v e
A p p l i c a t i o n /
E v a l u a t e
6 . 2 .
1
A s s e s s d i f f e r e n t t o o l s / s t r a t e g i e s t o m i t i g a t e e a c h o f t h e r i s k s
i d e n t i f i e d a b o v e .
6 . 2 .
2
A s s e s s v a r i o u s t y p e s o f f i n a n c i a l d e r i v a t i v e s ( i n c l u d i n g f o r w a r d
c o n t r a c t s , f u t u r e s , s w a p s a n d o
p t i o n s ) .
6 . 2 .
3
R e c o m m e n d a p p r o p r i a t e d e r i v
a t i v e s t o h e d g e f i n a n c i a l r i s k s
c o n s i d e r i n g o v e r a l l b u s i n e s s c o n t e x t .
6 . 2 .
4
E v a l u a t e p a y o f f �
