Taking a concise approach to the key concepts of finance, this textbook clearly focuses on the most relevant issues around financial management, which will be of interest to business managers, students and anyone who wishes to understand the basics of finance. Covering cash and working capital, capital project appraisal, risk and uncertainty, financial markets, the cost of capital, mergers and acquisitions and valuation, financial concepts are applied to the business world using real life examples. This text is both international and contemporary in outlook, reflecting the financial environment in which all businesses operate.
Author(s): Ronny Manos, Keith Parker, D. R. Myddelton
Edition: 2
Publisher: Palgrave Macmillan
Year: 2023
Language: English
Pages: 279
City: Cham
Contents
List of Figures
List of Tables
Part IIntroduction
1 Cash and Working Capital
1.1 Introduction
1.2 Cash
1.2.1 Why Do Firms Need Cash?
1.2.2 Flows of Cash in Business
1.2.3 Free Cash Flow
1.3 Cash and Profit
1.3.1 Cash and Profit are Different
1.3.2 Cash Flow and Depreciation
1.3.3 Cash or Profit: Which Matters More?
1.4 Cash Flow Forecasting
1.4.1 Two Methods of Cash Flow Forecasting
1.4.2 ‘Receipts and Disbursements’ Method of Cash Flow Forecasting
1.4.3 Pro Forma Balance Sheets Method of Cash Flow Forecasting
1.5 Working Capital
1.5.1 Liquidity
1.5.2 The Working Capital Cycle
1.5.3 Financing Current Assets
1.6 Inventory
1.6.1 Types of Inventory
1.6.2 Managing Inventory
1.7 Receivables
1.7.1 Components of ‘Receivables’
1.7.2 Individual Customer Credit
1.7.3 Overall Credit Control
1.7.4 Risk and Return from Receivables
1.7.5 Factoring
1.8 Payables
1.8.1 Components of Payables
1.9 A Concluding Note
1.9.1 Problems
2 Basic Capital Project Appraisal
2.1 Introduction
2.2 Shareholder Wealth Maximization
2.3 The Capital Investment Process
2.3.1 An Overview of the Capital Investment Process
2.3.2 Estimating Net Benefits
2.3.3 Another Look at Cash Flow Forecasting
2.3.4 A Word About Layout
2.4 Simple Appraisal Methods
2.4.1 Average Accounting Return on Investment
2.4.2 Payback
2.5 The ‘Time Value’ of Money
2.5.1 A Note on the Discount Rate
2.6 Net Present Value and Variants
2.6.1 Net Present Value (NPV)
2.7 Annuities and Perpetuities
2.7.1 Annuities
2.7.2 Profitability Index
2.7.3 Discounted Payback
2.8 The Internal Rate of Return
2.8.1 A Note on Using Excel®
2.9 A Concluding Note
2.9.1 Problems
References
3 More on Capital Projects
3.1 Introduction
3.2 Working Capital
3.2.1 Receivables
3.2.2 Inventory Less Payables
3.2.3 Overall Position
3.3 Taxation
3.4 Comparing Projects of Unequal Length
3.5 Capital Disinvestment
3.5.1 Why Projects End
3.5.2 Capital Recovery
3.6 Inflation
3.6.1 What Inflation Means
3.6.2 Inflation and Capital Projects
3.7 Capital Planning
3.7.1 Capital Spending
3.7.2 Evaluation Before and After
3.7.3 Post-Project Audits
3.7.4 International Aspects
3.8 A Concluding Note
3.8.1 Problems
4 Risk and Uncertainty
4.1 Introduction
4.2 Risk-Adjusted Net Present Value (NPV)
4.2.1 Expected Values
4.2.2 Risk-Adjusted Discount Rate
4.3 Risk Assessing Techniques in Capital Budgeting
4.3.1 Decision Trees
4.3.2 Sensitivity Analysis
4.3.3 Scenario Analysis
4.4 Managing Risk with Derivatives
4.4.1 Forward Contracts and Futures
4.4.2 Options
4.5 Real Options
4.6 Foreign Exchange Risk
4.6.1 Transaction Exposure
4.6.2 Accounting Exposure
4.6.3 Economic Exposure
4.7 A Concluding Note
4.7.1 Problems
References
Part IIAn Introduction to the Financing Decision
5 Corporate Borrowing
5.1 Introduction
5.2 Classification of Corporate Borrowing
5.2.1 Classification Based on Loans Versus Debt Securities
5.2.2 Classification by Maturity: Short-, Medium- and Long-Term Borrowing
5.2.3 Risk, Classification Based on Creditworthiness, and the Role of Credit Rating Agencies
5.3 Key Features of Bonds
5.3.1 The Bond Indenture
5.3.2 Term to Maturity
5.3.3 Collateral
5.3.4 Par Value
5.3.5 Coupon Rate and the Frequency of Payments
5.3.6 Currency
5.4 Valuing Bonds
5.4.1 Yield to Maturity (YTM)
5.5 Further Consideration of Corporate Bonds
5.6 Other Types of Debt
5.6.1 Leases
5.6.2 Preference Share Capital
5.6.3 Convertible Loans
5.6.4 Income Bonds
5.6.5 Asset-Backed Securities
5.6.6 Catastrophe Bonds
5.6.7 Peer to Peer Lending
5.7 Government Debt Securities and the Risk-Free Asset
5.8 A Concluding Note
5.8.1 Problems
References
6 Ordinary Share Capital
6.1 Introduction
6.2 The Nature of Ordinary Shares
6.2.1 The Return on Shares
6.2.2 The Risk of Shares
6.2.3 Shareholders’ Action
6.3 Trading in Shares
6.3.1 The Stock Exchange
6.3.2 Short Selling
6.3.3 Stock Market Indices
6.4 Issuing Shares
6.4.1 Going Public via an Initial Public Offering (IPO)
6.4.2 Going Public via SPAC Merger
6.4.3 Going Public via Direct Listing
6.4.4 Seasoned Equity Offerings
6.4.5 Rights Issues
6.4.6 Bonus Issues and Share Splits
6.5 A Concluding Note
6.5.1 Problems
7 Cost of Capital
7.1 Introduction
7.2 The Proportions of Equity and Debt
7.2.1 Market Values
7.2.2 Book Values
7.2.3 Target Values
7.3 Cost of Debt
7.3.1 Direct Cost
7.3.2 Indirect Costs
7.4 Cost of Equity (CAPM)
7.4.1 Modern Portfolio Theory and CAPM
7.5 Cost of Equity (Dividend Growth Model)
7.5.1 The Growth Rate, g
7.5.2 Which Ke?
7.6 Weighted Average Cost of Capital (WACC)
7.6.1 Overall Cost of Capital
7.6.2 Adjusting WACC for Risk
7.7 A Concluding Note: The WACC and Value Creation
7.7.1 Problems
References
8 Capital Structure and Dividend Policy
8.1 Introduction
8.2 Debt Ratio (Gearing)
8.2.1 Gearing and the Volatility of Returns
8.2.2 Tax Relief on Interest
8.2.3 Distress Costs
8.3 Debt Versus Equity
8.3.1 Risk and Return
8.3.2 The Pecking Order Hypothesis
8.3.3 Other Relevant Factors
8.3.4 Adjusting Capital Structure
8.4 Dividend Policy, Share Buybacks and the Firm’s Capital Structure
8.4.1 Do Dividends Matter?
8.4.2 Taxes on Shareholders’ Returns
8.4.3 Choosing a Dividend Policy
8.4.4 Share Buybacks
8.5 Capital Structure and the Corporate Life Cycle
8.5.1 Start-up
8.5.2 Growth
8.5.3 Maturity
8.5.4 Decline
8.6 Overview of Selected Empirical Evidence on the Financing Decision
8.6.1 Pecking Order Hypothesis
8.6.2 Trade-Off Theory
8.6.3 Market Timing Hypothesis
8.6.4 Other Explanations for the Financing Decision
8.7 A Concluding Note
8.7.1 Problems
References
9 Valuing Companies
9.1 Introduction
9.2 The Three Main Techniques of Valuation
9.2.1 Assets Basis
9.2.2 Price/Earnings Multiples
9.2.3 Discounting Future Cash Flows
9.3 Mergers and Acquisitions
9.3.1 Reasons for Acquisitions
9.3.2 Management Versus Shareholders
9.3.3 Joint ventures and Minority Interests
9.3.4 The Process of Merging
9.3.5 Why Some Mergers Fail
9.4 A Concluding Note
9.4.1 Problems
10 Putting It All Together
10.1 Introduction
10.2 Estimating the Weighted Average Cost of Capital (WACC)
10.3 Project Appraisal Tools: Discounting Future Cash Flows
10.4 Concluding Example
10.5 Problems
10.5.1 Data for Problems 10.1–10.4
Appendix: Discount Tables
Solutions by Chapter
Chapter 1: Cash and Working Capital
Chapter 2: Basic Capital Project Appraisal
Chapter 3: More on Capital Projects
Chapter 4: Risk and Uncertainty
Chapter 5: Corporate Borrowing
Chapter 6: Ordinary Share Capital
Chapter 7: Cost of Capital
Chapter 8: Capital Structure
Chapter 9: Valuing Companies: Acquisitions and Mergers
Chapter 10: Putting It All Together
Index
