KAMAL MUSTAFA
ACCA (UK) MSC (UK) MBA (UK) DMS (UK) DEM (UK)
FINANCIAL DECISION MAKING
COURSE CONTENTS
1. THE FOUNDATIONS2. THE FIRM AND ITS OPERATIONS3. WORKING CAPITAL MANAGEMENT4. INVESTMENT POLICY5. FINANCING DECISIONS6. DIVIDEND POLICIES AND DECISIONS
FINANCIAL DECISION MAKING
COURSE CONTENTS1. THE FOUNDATIONS
OVERVIEW OF FINANCIAL MANAGEMENT ECONOMIC ENVIRONMENT FOR BUSINESS FINANCIAL SECURITIES AN MARKETS A REVIEW OF FINANCIAL ACCOUNTING
FINANCIAL DECISION MAKING
COURSE CONTENTS2. THE FIRM AND ITS OPERATIONS
FINANCIAL STATEMENTS FINANCIAL ANALYSIS PROFIT PLANNING LEVERAGE
FINANCIAL DECISION MAKING
COURSE CONTENTS3. WORKING CAPITAL MANAGEMENT
INTRODUCTION OF WORKING CAPITAL CASH MANAGEMENT MANAGEMENT OF RECEIVABLES (DEBTORS) MANAGEMENT OF STOCK
FINANCIAL DECISION MAKING
COURSE CONTENTS4. INVESTMENT POLICY
CAPITAL BUDGETING RISK AND REQUIRED RETURN VALUATION OF THE FIRM MERGERS AND ACQUISTIONS
FINANCIAL DECISION MAKING
COURSE CONTENTS5. FINANCING DECISIONS
SOURCE OF SHORT AND INTERMEDIATE-TERM FINANCING
LONG TERM FINANCING DECISIONS LEASE-BUY DECISIONS
FINANCIAL DECISION MAKING
COURSE CONTENTS6. DIVIDEND DECISIONS
DIVIDEND POLICIES AND DECISIONS
OVERVIEW OF FINANCIAL MANAGEMENT
DIAGRAM
OVERVIEW OF FINANCIAL MANAGEMENT
• EXAMPLE:AT THE END OF 2012 BRITISH AIRWAYS MADE AN ANNOUNCEMENT, AS PART OF A STOCK MARKET BRIEFING, THAT THEIR QUARTER 4 PROFITS HAD RISEN BY 30%. IMMEDIATELY AFTER THE ANNOUNCEMENT THE SHARE PRICE FELLREQUIRED:• A) DISCUSS WHY SHAREHOLDERS MIGHT BE
DISSATISFIED, DESPITE HIGHER PROFITS?
OVERVIEW OF FINANCIAL MANAGEMENT
ANSWERPROFITS ARE HISTORIC, SHAREHOLDERS CARE ABOUT THE FUTURE – PERHAPS THEY CONCERNED WHERE BA WERE PLANNING TO INVEST? THEREFORE INVESTMENT DECISIONS ARE VERY IMPORTANT TO INVESTORS
OVERVIEW OF FINANCIAL MANAGEMENT
ANSWER
• INVESTMENT DECISIONS REQUIRE NEW FINANCE, SHAREHOLDERS CARE ABOUT DEBT LEVELS
• PERHAPS THEY CONCERNED INVESTMENT INFORMATION THEREFORE FINANCING DECISIONS ARE VERY IMPORTANT TO INVESTORS
OVERVIEW OF FINANCIAL MANAGEMENT
ANSWERPROFITS ARE NOT CASH FLOWS, SHAREHOLDERS OFTEN WANT TO SEE RETURNS THEY WILL BE GETTING AS DIVIDENDS.
THEREFORE DIVIDEND DECISIONS ARE VERY IMPORTANT TO INVESTORS
OVERVIEW OF FINANCIAL MANAGEMENT
• ENCOURAGING SHAREHOLDER WEALTH MAXIMISATION
• PROBLEMS?
OVERVIEW OF FINANCIAL MANAGEMENT
AGENCY THEORY
• THE DANGER THAT MANAGERS MAY NOT ACT IN THE BEST INTEREST OF SHAREHOLDERS IS REFERRED TO AS THE AGENCY PROBLEM
OVERVIEW OF FINANCIAL MANAGEMENT
AGENCY THEORY
• Q: WHY DO MANAGERS AND OTHERS AGENTS OF THE SHAREHOLDERS, SUCH AS EMPLOYEES SOMETIMES HAVE DIFFERENT OBJECTIVES?
OVERVIEW OF FINANCIAL MANAGEMENT
UNLESS THEY ARE ALSO OWNERS OF THE BUSINESS, MANAGER MAY PREFER TO :
1. MAXIMISE SHORT-TERM PROFITS2. MINIMISE DIVIDENDS3. REDUCE RISK BY DIVERSIFYING4. BOOST THEIR OWN PAY & PERKS5. AVOID DEBT FINANCE
OVERVIEW OF FINANCIAL MANAGEMENT
• THE DANGER THAT MANAGERS MAY NOT ACT IN THE BEST INTEREST OF SHAREHOLDERS IS REFERRED TO AS THE AGENCY PROBLEM
• IT CAN BE DEALT BY MONITORING THE ACTIONS OF MANAGEMENT PERFORMANCE OR BY THE USE OF INCENTIVE SCHEMES
OVERVIEW OF FINANCIAL MANAGEMENT
• HOW TO DEAL WITH AGENCY PROBLEM?
OVERVIEW OF FINANCIAL MANAGEMENT
CORPORATE GOVERNANCE
WHAT IS CORPORATE GOVERNANCE?
OVERVIEW OF FINANCIAL MANAGEMENT
• IN THE UK CORPORATE GOVERNANCE REGULATIONS HAVE BEEN DESIGNED TO MONITOR THE ACTIONS OF MANAGEMENT
OVERVIEW OF FINANCIAL MANAGEMENT
HERE SOME OF THE MAIN REQUIRMENTS:
1. BOARD OF DIRECTORS
2. KEY COMMITTEES
OVERVIEW OF FINANCIAL MANAGEMENT
BOARD OF DIRECTORS
1. SEPARATE MD & CHAIRMAN2. MINIMUM 50% NON-EXECUTIVE DIRECTORS3. CHAIRMAN INDEPENDENT4. MAX 1 YEAR NOTICE PERIOD5. NEDS SHOULD BE INDEPENDENT (3 YEARS
CONTRACT, NO SHARE OPTION)
OVERVIEW OF FINANCIAL MANAGEMENT
KEY COMMITTEES1. REMUNERATION COMMITTEE
PAY & INCENTIVES OF EXECUTIVE DIRECTORS NEDs ONLY
OVERVIEW OF FINANCIAL MANAGEMENT
KEY COMMITTEES
2. AUDIT COMMITTEE
RISK MANAGEMENT
NEDs ONLY
OVERVIEW OF FINANCIAL MANAGEMENT
KEY COMMITTEES 3. NOMINATION COMMITTEE
CHOICE OF NEW DIRECTORS
NEDs ONLY
OVERVIEW OF FINANCIAL MANAGEMENT
INCENTIVE SCHEMES – TWO MAIN TYPES
1. PERFORMANCE RELATED PAY :• EITHER AGAINST PROFIT OR A STRATEGIC
PERFORMANCE MEASURE2. SHARE OPTIONS:• OPTIONS TO BUY SHARES IN SAY 3 YEARS TIME
AT TODAY’S SHARE PRICE
SUMMARY OF TODAY CLASS
• MAXIMISATION OF SH WEALTH
• ENCOURAGED BY CORPORATE GOVERNANCE
• COMMITTEES
• MAIN DECISIONS
• INVESTMENT, FINANCING & DIVIDEND