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Summary Strategic Financial Decision Making MBA
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Grade: 17/20 Summary Strategic Financial Decision Making MBA (Sekerci) Master of Business Administration
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Summary Strategic Financial Decision Making(Sekerci)
Financial Markets (Week 1) ..................................................................................................................... 3
1. Foreign Exchange Market ........................................................................................................ 3
2. (International) Money Market ................................................................................................ 5
3. (International) Credit Market .................................................................................................. 5
4. (International) Bond Market ................................................................................................... 5
5. (International) Stock Markets ................................................................................................. 6
Valuation of investments ....................................................................................................................... 7
Capital Budgeting ................................................................................................................................ 7
1. Net Present Value (NPV) analysis ............................................................................................ 7
2. Internal rate of return (IRR)..................................................................................................... 9
3. Payback period ...................................................................................................................... 13
4. Profitability index .................................................................................................................. 17
Corporate Valuation .............................................................................................................................. 22
Business valuation: ............................................................................................................................ 22
The Dividend-Discount Model Equation ....................................................................................... 22
Total Payout Valuation Models ..................................................................................................... 23
The Discounted Cash Flow Model ................................................................................................. 24
Valuation Multiples ....................................................................................................................... 25
Book value (BV) approach ............................................................................................................. 26
Advanced valuation (Week 2) ............................................................................................................... 27
Weighted Average Cost of Capital method ................................................................................. 27
The Adjusted Present Value method............................................................................................ 32
The Flow-to-Equity method .......................................................................................................... 37
Project-based Cost of Capital ....................................................................................................... 40
Valuation of international firms ................................................................................................... 42
Agency Conflicts in corporate finance (Week 4) ................................................................................... 43
1. Exploiting Debt Holders: The Agency Costs of Leverage ...................................................... 43
2. Motivating Managers: The Agency Benefits of Leverage ..................................................... 50
3. Agency Costs and the Tradeoff Theory ................................................................................. 52
4. Asymmetric Information and Capital Structure ................................................................... 53
Corporate Governance .......................................................................................................................... 59
Agency Conflicts ................................................................................................................................ 59
Corporate Governance ..................................................................................................................... 59
, Ownership ..................................................................................................................................... 61
Board of Directors ......................................................................................................................... 67
Executive Compensation .............................................................................................................. 69
Regulation (External Corporate Governance) .............................................................................. 70
Corporate Governance around the world & Other governance mechanisms ................................ 71
Risk Management as a Corporate Governance Mechanism ........................................................... 72
Enterprise Risk Management ........................................................................................................ 72
Strategic financial decision making (Week 7-8) ................................................................................... 74
Equity Financing for Private Companies The Initial Public Offering ................................................. 74
Sources of Funding ........................................................................................................................ 74
Venture Capital Investing .............................................................................................................. 80
The Initial Public Offering (IPO) ..................................................................................................... 84
Types of Offerings.......................................................................................................................... 86
The Mechanics of an IPO ............................................................................................................... 87
IPO Puzzles......................................................................................................................................... 92
Costs of an IPO............................................................................................................................... 92
The Seasoned Equity Offering (SEO) ................................................................................................. 94
The Mechanics of an SEO .............................................................................................................. 95
Merger and Acquisitions (Week 9) ........................................................................................................ 97
Background and Historical Trends..................................................................................................... 97
Types of Mergers ........................................................................................................................... 98
Market Reaction to a Takeover ......................................................................................................... 98
Reasons to Acquire ............................................................................................................................ 99
Economies of Scale and Scope: ..................................................................................................... 99
Monopoly Gains ............................................................................................................................ 99
Efficiency Gains............................................................................................................................ 100
Tax Savings from Operating Losses ............................................................................................. 100
Diversification .............................................................................................................................. 101
Earnings Growth .......................................................................................................................... 102
Managerial Motives to Merge ..................................................................................................... 103
Valuation and the Takeover Process ............................................................................................... 104
Takeover Defenses .......................................................................................................................... 106
Who Gets the Value Added from a Takeover? ................................................................................ 108
Sustainability & Ethics in Finance (Week 11) ...................................................................................... 111
,Financial Markets (Week 1)
Goal of a corporation:
Managers are expected to make decisions that will maximize the firm value for firm’s shareholders.
Modern view:
… maximize value for all stakeholders (e.g., employees, suppliers, community)
Example strategic financial decisions:
▪ Whether to discontinue operations in a particular
industry or country
▪ Whether to take up a new investment in a particular industry or country
▪ Whether to expand business in a particular product
segment
▪ How to finance an expansion
▪ Whether to go for an initial public offering
▪ Whether to acquire and merge with another company
▪ Finance decisions are influenced by other business discipline functions:
▪ Marketing
▪ Management
▪ Accounting and information systems
Financial markets available for managers’ financial decisions
1. Foreign exchange market
2. (International) money market (= short term)
3. (International) credit market (= medium term)
4. (International) bond market (= long term)
5. (International) stock markets (= long term)
1. Foreign Exchange Market
• Allows for the exchange of one currency for another.
• Exchange rate specifies the rate at which one currency can be exchanged for another.
• Facilitates financial transactions and international trade managers of MNCs conduct.
• Commercial banks serve as an intermediary.
Foreign Exchange Transactions (cont.)
▪ Use of the U.S. dollar in spot markets: The U.S. Dollar is the commonly accepted medium of
exchange in the spot market. (Around 40% of world transactions is in US Dollar)
▪ Spot market time zones - Foreign exchange trading is conducted only during normal
business hours in a given location.
, ▪ Thus, at any given time on a weekday, somewhere around the world a bank is open
and ready to accommodate foreign exchange requests.
Spot market liquidity: More buyers and sellers means more liquidity
Foreign Exchange Quotations
▪ At any given point in time, a bank’s bid (buy) quote for a foreign
currency will be less than its ask (sell) quote.
Bid/Ask spread of banks: The bid/ask spread covers the bank’s cost of conducting foreign exchange
transactions
Why it is a bid/ask a transaction cost?
▪ Investors always buy at the ask and sell at the bid.
▪ Since ask prices always exceed bid prices, investors “lose” this difference.
▪ Since the market makers take the other side of the trade, they make this difference.
Foreign Exchange Quotations (cont.)
▪ Factors That Affect the Spread
▪ Order costs: Costs of processing orders, including clearing costs and the costs of
recording transactions.
▪ Inventory costs: Costs of maintaining an inventory of a particular currency.
▪ Competition: The more intense the competition, the smaller the spread quoted by
intermediaries.
▪ Volume: Currencies that have a large trading volume are more liquid because there
are numerous buyers and sellers at any given time.
▪ Currency risk: Economic or political conditions that cause the demand for and
supply of the currency to change abruptly.
Interpreting Foreign Exchange Quotations
▪ Direct versus indirect quotations at one point in time
▪ Direct Quotation represents the value of a foreign currency in dollars (# of dollars
per foreign currency).
▪ Example: $1.40 per Euro
▪ Indirect quotation represents the number of units of a foreign currency per dollar.
▪ Example: €0.7143 per Dollar
▪ Indirect quotation = 1 / Direct quotation
▪ Direct versus indirect exchange rate over time
▪ When the euro is appreciating against the dollar (based on an upward movement of
the direct exchange rate of the euro), the indirect exchange rate of the euro is
declining.
▪ When the euro is depreciating (based on a downward movement of the direct
exchange rate) against the dollar, the indirect exchange rate is rising.
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