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