A comprehensive document containing all of the relevant information pertaining to the weekly SBS on Demand videos, weekly seminar questions, weekly seminars, weekly lectures and exam insight.
Module Lecturer
Dr Bouchra Benzennou
b.bezennou@surrey.ac.uk
Textbooks
Corporate Finance EMEA (4th Edition) by Hillier, D. et aal.
Corporate Finance and Investment (9th Edition) by Pike & Nile, et al.
Examinations
Mid-Term:
• Date:
o Week 7.
• Type:
o 20 MCQs.
o Mix of numerical and theoretical questions.
▪ 1/3 Calculations.
▪ 2/3 Theory/ Application of the Theory.
o Closed Book.
• Duration:
o 50 Minute.
• Where:
o On Campus.
• Content:
o Weeks 1-5.
• Weighting:
o 30%
Final Examination:
• Date:
o January Examination period (Date TBC).
• Duration:
o 2 Hours.
• Content:
o Weeks 1-11.
• Weighting:
o 70%.
• Where:
o Campus.
• Type:
o Closed Book.
o Section A: One Compulsory Question (50 Marks).
o Section B Choose Two of Three Questions (25 Marks Each).
Week 1
,Strategic Role of Financial Management
Introduction to Financial Management and Financial Markets
SBS on Demand
The Role of Financial Management in Businesses
What is Finance?
• Finance is a set of tools that people use to understand decision-making and make
good decision with financial implications.
• Applied to corporations, finance is the study of how corporations should make
decisions, e.g., financing, investment, labour, marketing, operations, advertising, etc.
Question: how is finance relevant to upgrade an information technology system?
• It provides the framework for quantifying the costs and benefits of such a decision
and the tools for analysing them.
• The principles underlying personal and corporate decision-making are the same.
o Example: the decision of whether to end your current tenancy to rent a
cheaper flat can be reformulated using financial terminology.
o Are the costs associated with changing tenancies (e.g., new deposit, agency
fees) outweighed by the benefits of renting cheaper?
• The same tools are used by corporations in every significant decision (merger,
acquisition, initial public offering…).
o It all comes down to the comparison between inflows and outflows.
Financial Management
In any form of business:
• Financial Management is related to the acquisition and deplopyment of financial
resources to achieve key objectives.
• Financial Managers make strategic financial decisions and are accountable to the
owners.
Their main objective is to generate cash flows higher than cash the company uses.
When Cash Generated by the business’ operations > Cash Invested in the business’
operations, then Value is created (Value Creation).
The key functions of financial management are:
• Financial Management Decisions:
o Investment Decision:
▪ Invest in projects which earn high returns.
▪ Return should correspond to the risk level of the project.
o Financing Decision:
▪ Find the right long-term financing mix: equity or debt.
▪ The financing type should match the project cash flows.
o Liquidity/ Dividend Decision:
▪ Manage short-term capital to cover short-term liabilities.
▪ Effectively handle excess cash.
,Create/ make decisions to maximise the value to the firm. Maximise Shareholders’ wealth.
Profit Maximisation vs Value Maximisation
In accounting, profits are yearly figures calculated as:
Profit = Revenue – Cost
To maximise profits, one could either:
• Maximise Revenue:
o Selling at lower prices to invade the market.
o Allow customers longer deadlines to pay for the products.
• Minimise Cost:
o Buying cheaper raw materials.
o Delaying maintenance and trainings.
o Paying lower wages and cutting down employee benefits.
o Cutting down after-sale customer services.
These measures seem reasonable in the short-run, but are they going to increase the Firm
Value in the long-run?
• Although profit matters, they are not the best measure of a company’s achievement:
o Accounting profits can be manipulated by choices of accounting policies.
▪ Decreasing provisions for depreciation, adding overhead costs to
inventory valuations.
o Profits do not take risk into account:
▪ Financial managers might be tempted to invest in Project 1 to achieve
the possible 200 high profit, although it is riskier.
, o Profits do not take into account the volume of investment needed to earn the
profit:
▪ Although Project 1 has higher profits, it must be related to the initial
investment to have any real meaning.
o Profits are generally reported on an annual basis.
▪ Profits measure short-term performance, whereas performance
should be evaluated over the longer-term.
Financial Managers, will therefore need to make key financial decisions:
• Capital Budgeting: Which long-term investments should I take?
o Finance provides the tools to identify profitable projects.
o Principle: Acquire Assets that earn more cash than they cost.
• Capital Structure: Which long-term financing will the company use for its
investments?
o Finance provides the tools to identify the appropriate financing.
o Principle: Raise cheap capital.
• Working Capital Management: How should the company manage its day-to-day
financial activities?
o Finance provides the tools to identify the appropriate level of cash to keep or
to distribute to shareholders.
Measuring Firm Value and Shareholder Wealth
Financial Management
• The key functions of financial management are:
Question: How are the firm’s value and shareholders’ wealth measured?
Shareholder’s Wealth
Maximising the value of a firm:
• Value of the Firm:
o Asset Based Value:
▪ Maximise the value of assets by:
• Acquiring assets (buildings, cash, inventory, etc).
• Increasing equity.
• Increasing liabilities (bank loans).
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