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Financial Strategy Flashcards

1
Q

Constraints on financial strategy

A

1) Lack of funding
2) Need to keep investors happy
3) Economic factors
4) Regulatory bodies
5) Business strategy

Additional international constraints:

a) Foreign exchange risk
b) Political risk
c) Geographical seperation
d) Litigation

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2
Q

Ratio Analysis: Profitability and return

A

Return on Capital Employed:
Profit Margin:
Asset Turnover:

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3
Q

Ratio Analysis: Liquidity ratios

A 
Current ratio:
Inventory turnover:
Receivables days:
Acid test ratio:
Payables days:
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4
Q

Ratio Analysis: Debt and gearing

A

Debt ratio (Total debts: Assets)
Gearing (Proportion of debt in long-term capital)
Interest cover
Cash flow ratio (Cash inflow: Total debts)

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5
Q

Ratio Analysis: Stock market ratios

A 
Dividend yield
Earnings per share
Price/earnings ratio
Interest yield
Dividend cover
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6
Q

Ratio Analysis: Comparisons with previous years

A 
% growth in profit
Sales
Changes in gearing ratio
Changes in current/quick ratios
Changes in asset turnover
Changes in EPS, market price, dividend
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7
Q

Ratio Analysis: Comparisons with other companies in same industry

A

These can put improvements into perspective if other companies are going better, and provide evidence of general trends.

Growth rates
Retained profits
Non-current asset levels

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8
Q

Ratio Analysis: Comparisons with companies in different industries

A

Investors need to know differences between sectors.

Sales growth
Profit
ROCE
P/E ratios
Dividend yields
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9
Q

Information in accounts?

A

??

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10
Q

Cost of Capital

- Elements of cost of capital

A

Risk free rate of return:
- Return required from risk free investment (e.g. yield on gov’t securities)

Business risk premium
- Increase in required rate of return due to uncertainty about future and business prospects

Financial risk premium
- Danger of high debt levels, variability of equity returns

PRIVATE COMPANIES
No market values available.
- take risk free rate or cost of capital for similar public companies adding premiums for business and financial risk

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11
Q

Valuation models

- Cost of capital if constant dividends paid

A

.

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12
Q

Valuation models

- Dividend growth model

A

Current year dividend x (1+div growth rate) over price

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13
Q

Net assets valuation method

A

Value of shares in class = net assets attributable to class/no of shares in class

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14
Q

Price - earnings ratio

A

P/E ratio = Market value/EPS

Mkt value = EPS x P/E ratio

Consider:

  • industry
  • status
  • marketability
  • shareholders
  • asset backing and liquidity
  • nature of assets
  • gearing
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15
Q

Dividend valuation model

A

Price at time 0 = dividend (if constant) / cost of equity

OR

Price = dividend in year 1 / cost of equity less div growth rate

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16
Q

Dividend valuation models

- disadvantages

A

1) companies that don’t pay dividends don’t have zero value
2) need enough profitable projects to maintain value
3) dividend policy likely to change on take over time

17
Q

Discounted cash flow

A

Value investment using expected AFTER-TAX cash flows of investment and appropriate cost of capital

18
Q

Free cash flow

A 
Value of company is sum of future free cash flows.
   Revenue
- Operating costs
\+ Dep'n
\+ Interest (1 - tax rate)
- Taxes
- Debt repayment
- Working capital
- Investment expenditure
19
Q

Problems with cash flow methods

A
  • Difficult to select appropriate cost of capital
  • Unreliable estimates of future cash flows
  • Not best method for minority interests who lack influence on cash flows
20
Q

Equity finance

- Disadvantages of listing

A
  • loss of control
  • vulnerability to takeover
  • more scrutiny
  • greater restrictions on directors
  • compliance costs
  • pressure for short-term profits
21
Q

Equity finance

- Benefits of listing

A
  • access to wider pool of equity finance
  • higher public profile
  • higher investor confidence due to greater scrutiny
  • allows owners to realise some of their investment
  • allows use of share issues for incentive schemes and takeovers
22
Q

Initial public offer (IPO)

A

company sells shares to the public at large.

Offer for sale by tender allots shares at the highest price they will be taken up.

23
Q

Costs of share issues

A
  • underwriting costs
  • stock exchange listing fees
  • issuing house, solicitors, auditors, public relation fees
  • printing and distribution costs
  • advertising
24
Q

Pricing share issues

A
  • price of similar companies
  • current market conditions
  • future trading prospects
  • premium on launch
  • price growth after launch
  • higher price means fewer shares and less earnings dilution
25
Q

Information required by VCs

A
  • business plan
  • finance needs
  • recent trading capital
  • cash and profit forecasts
  • management and shareholders
  • current sources of finance

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