Financial Management Revised and Updated notes

FINANCIAL MANAGEMENT

GENERAL OBJECTIVE

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply financial management principles in practice.

8.0     LEARNING OUTCOMES

A candidate who passes this paper should be able to:

• Analyse the sources of finance for an organisation and evaluate various financing options
• Evaluate various investment decision scenarios available to an organisation
• Evaluate the performance of a firm using financial tools
• Make appropriate capital structure decisions for a firm
• Value financial assets and firms
• Make appropriate liquidity and dividend decisions for a firm
• Evaluate current developments in business financing strategies.

 Here is a sample of the notes for you to download – Financial Management notes as the new KASNEB Syllabus

CONTENT

 8.1     Overview of financial management

• Nature and scope of finance
• Finance functions
• Goals of a firm; financial and non-financial objectives, overlaps and conflicts among the objectives
• Agency theory, stakeholder’s theory and corporate governance
• Measuring managerial performance, compensation and incentives
• Ethical issues in financial management
• Corporate social responsibility (CSR) and financial management

 8.2     The financing decision

• Nature and objectives of the financing decision
• Factors to consider when making financing decisions
• Sources of finances for enterprises; internally generated funds and the externally generated funds, long term sources, medium term and short term sources of finance
• Evaluation of financing options
• Methods of issuing ordinary shares – public issue, private placement, bonus issue, employee stock option plans (ESOPS) and rights issues

 8.3     Financial institutions and markets

• Nature and role of financial markets
• Classification of financial markets: primary and secondary securities market, money and the capital markets, over-the counter and organised market, derivatives market, mortgage market, forex market
• The security exchange listing and cross border listing
• Market efficiency – efficient market hypothesis
• Stock market indices
• The financial institutions and intermediaries: commercial banks, savings and loans associations and co-operative societies, foreign exchange bureaus, Unit trusts and mutual funds, insurance companies and pension firms, insurance agencies and brokerage firms, investment companies, investment banks and stock brokerage firms, micro-finance institutions and small and medium enterprises (SMEs)
• The role of regulators in financial markets
• Central depository system and automated trading system
• Timing of investment at the securities exchange – Dow theory and Hatch system of timing

8.4     Time-value of money

• Concept of time value of money
• Relevance of the concept of time value of money
• Time value of money versus time preference of money
• Compounding techniques
• Discounting techniques

8.5     Valuation models

• Concept of value; book value, going concern value, substitution value, replacement value, conversion value, liquidation value, intrinsic value and market value
• Reasons for valuing financial assets/business
• Theories on valuation of financial assets; fundamental theory, technical theory, random walk theory and the efficient market hypothesis
• Valuation of redeemable, irredeemable and convertible debentures and corporate bonds
• Valuation of redeemable, Irredeemable and convertible preference shares
• Valuation of ordinary shares; net asset basis, price earnings ratio basis, capitalisation of earnings basis, Gordon’s model, finite earnings growth model, Super-profit model, Marakon model, Walter’s model, Discounted free cash flow, residual income model
• Use of relative measures such as Economic Value added (EVA) and Market Value Added (MVA)
• Valuation of unit trusts and mutual funds
• Valuation of private companies: income and market based approaches

8.6     Cost of capital

• Firms capital structure and factors influencing capital structure decisions
• Factors influencing firms cost of capital
• Relevance of cost of capital
• Component costs of capital
• The firm’s overall cost of capital
• Weighted average cost of capital (WACC)
• Weighted marginal cost of capital (WMCC)
• Introduction to break-points in weighted marginal cost of capital schedule
• Operating and financial leverage – degree of operating leverage and operating risk; degree of financial leverage and financial risk
• Combined leverage – degree of combined leverage and total risk

 8.7     Capital budgeting decisions

• The nature and importance of capital investment decisions
• Capital investment’s cash flows – initial cash outlay, terminal cash flows and annual net operating cash flows, incremental approach to cash flow estimation
• Capital investment appraisal techniques
• Non-discounted cash flow methods – payback period and accounting rate of return
• Discounted cash flow methods – net-present value, internal rate of return, profitability index, discounted payback period and modified internal rate of return (MIRR)
• Strengths and weaknesses of the investment appraisal techniques
• Expected relations among an investment’s NPV, company value and share price
• Capital rationing – evaluation of capital projects and determination of optimal capital budget in situations of capital rationing for a single period rationing
• Capital investment options – timing option, strategic investment option, replacement option and abandonment option
• Problems/difficulties encountered when making capital investment decisions in reality

8.8     Financial analysis and forecasting

• Users of financial statements and their information needs
• Ratio analysis; nature of financial ratios, classification and calculation of financial ratios and limitation of financial ratios
• Common size statements – Vertical and horizontal analysis
• Financial forecasting; cash budgeting and percentage of sales method of forecasting

8.9     Working capital management

• Introduction and concepts of working capital
• Working capital versus working capital management
• Factors influencing working capital requirements of a firm
• Importance and objectives of working capital management
• Working capital operating cycle; the importance and computation of the working capital operating cycle
• Working capital financing policies aggressive, conservative and matching financing policy
• Management of stock, cash, debtors and creditors

8.10    Dividend decision

• Forms of dividend
• How to pay dividends and when to pay dividends
• How much dividend to pay
• Firms dividend policy and factors influencing dividend decision
• Why pay dividends
• Dividend relevance theories; Bird in hand, Clientele effect, Information signaling theory, Walter’s model, Tax differential theory, Modigliani and Miller dividend irrelevance theory

8.11    Introduction to risk and return

• Risk-return trade off/relationship
• Distinction between risk free and risky assets
• Expected return of an asset
• Total risk of an asset
• Relative risk of an asset
• Expected return of a 2 asset-portfolio
• The actual total risk of a 2-asset portfolio

8.12    Islamic finance

• Justification for Islamic Finance; history of Islamic finance; capitalism; halal; haram; riba; gharar; usury
• Principles underlying Islamic finance: principle of not paying or charging interest, principle of not investing in forbidden items such as alcohol, pork, gambling or pornography; ethical investing; moral purchases
• The concept of interest (riba) and how returns are made by Islamic financial securities
• Sources of finance in Islamic financing: muhabaha, sukuk, musharaka, mudaraba
• Types of Islamic financial products:- sharia-compliant products: Islamic investment funds; takaful the Islamic version of insurance Islamic mortgage, murabahah,; Leasing – ijara; safekeeping – Wadiah; sukuk – islamic bonds and securitisation; sovereign – sukuk; Islamic investment funds; Joint venture – Musharaka, Islamic banking, Islamic contracts, Islamic treasury products and hedging products, Islamic equity funds; Islamic derivatives
• International standardisation/regulations of Islamic Finance: case for standardisation using religious and prudential guidance, National regulators, Islamic Financial Services Board

8.13    Emerging issues and trends

Here is a sample of the notes for you to download – Financial Management notes as the new KASNEB Syllabus