MN10311
Revision Session
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MN10311
Revision Session
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Objective of Financial Management
Agency
Time value of money
Investment decision
Risk, return and the cost of equity
Weighted average cost of capital
Capital structure
Funding
Dividends
Working Capital
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MN10311
Revision Session
• Objective of Financial Management
To maximise shareholders wealth
• Agency theory
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MN10311
Revision Session
• Time Value of Money
- Compounding/future values
- Discounting/present values
- Annuities
Sorts of questions
in NPV calcs, present values,
compounding, amounts for an annuity etc.
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MN10311
Revision Session
• Investment decision
- Payback, ARR (ROI), NPV, IRR
- Decision rules
• Which is best?
• Multiple IRRs, reinvestment rate, additivity,
scale, time etc
• Sort of questions
- Do an NPV calculation
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MN10311
Revision Session
• NPV calculations, what to watch out for
sunk costs, opportunity costs,
tax/depreciation
Other Qs, Interpolation, capital rationing
Conceptual Qs, e.g. NPV is better than Irr
because it ………
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MN10311
Revision Session
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The Cost of Equity – Risk and Return
Expected return, variance and standard
deviation. Probability tables
Portfolio theory
Diversifiable/unsystematic,
undiversifiable/systematic risk
Capital market line
Well diversified portfolio, market portfolio
Expected return, variance and standard
deviation.
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MN10311
Revision Session
• Equity/Risk
• Leads into CAPM, relationship between risk of
asset and market portfolio, relative risk,
measured by Beta. Securitymarket line
Questions
- Numbers, need to know how to work out
ER, Var and SD
Beta = Covariance of asset and market
Variance of market
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MN10311
Revision Session
• CAPM equation
ERj = RF + (ERM – RF) B
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MN10311
Revision Session
• Other models for working out cost of
Equity
- Gordon Dividend Growth Model
What is it?
- Arbitrage Pricing Theory
What is it?
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MN10311
Revision Session
• Weighted Average Cost of Capital
• Capital = Equity and Long Term Debt
• WACC =
Cost of Debt x
Debt
Debt plus Equity
+ Cost of Equity x
Equity
Debt plus Equity
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MN10311
Revision Session
• Weighted Average Cost of Capital
• Sorts of Questions
• Numbers
• Work out the WACC given numbers for
the
1. CAPM
- Know the equation, risk free, market
premium, return on the market, beta etc
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2. Gordon dividend growth
MN10311
Revision Session
• Capital Structure
Can we change the value of the company by
changing the proportions of debt and equity?
- Theoretical arguments
- Modigliani and Miller etc
- Tax shield
- Factors that may be important in deciding
- Tradeoff theory, Pecking Order theory
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MN10311
Revision Session
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Cap Structure
Sorts of Qs
Numbers. As per seminar
Conceptual e.g. What will adding debt do
to the required return on equity? A.
increase it, b decrease it, c have no effect
etc
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MN10311
Revision Session
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Funding or how to finance the company
Equity
Questions.
Numbers. Rights issues
Conceptual. What is it? Value e.g. market, par
value etc,
• Debt
- Sources
- Long, medium, short,
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MN10311
Revision Session
• Funding
• Short, the various instruments what are
their advantages and disadvantages and
sources of debt
• medium and long, bank debt, bonds
• Straight, floating rate, discounted,
convertibles, warrants
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MN10311
Revision Session
• Funding, sorts of Qs
- Numbers. Cost of borrowing i.e. simple interest
calc
• Principal x rate x time,
• Suppliers vs taking discount etc
• Accruals, discounting etc
- Conceptual
• What is a…..
• This feature is……
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MN10311
Revision Session
• Dividend decision
• Theory, can they affect value?
Taxes, signalling, behavioural
Types of policy including buybacks, bonus or scrip issues
Mechanics
Sorts of Qs.
Numbers. Div yield,
Conceptual what is……?
Who decides……..?
What sort of policy would…..?
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MN10311
Revision Session
• Working capital
• What is it?
• Ratios useful for analysis
Days payables, receivables, inventory
Operating cycle, cash conversion cycle
Cost of float
Cost of discounts
Sort of Qs.
Numerical. Any of the above
Conceptual. Working capital is …? Net working capital is..?
Liquidity is…..?
etc
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MN10311
Revision Session
• Any Questions?
Good Luck
aided by some study
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