Financial Strategy Formulation

Financial Strategy FormulationLecture # 3Jamil AhmedAssistant ProfessorFinancial Strategy FormulationAssessing Corporate PerformanceRatios: DuPont, Profitability Ratios, Liquidity Ratio, Shareholders Investment Ratios (Dividend Yield, EPS, Dividend Cover, Dividend Payout) Gearing Ratios (Financial Gearing, Operational Gearing) Trends Analysis: Ratios and FSEVA : NOPAT (Cost of Capital x Capital Employed)MVA: Market Value of Capital Employed Book Value of Capital EmployedOptimal Capital StructureSources of Finance: RE, New Issue of Shares, Floatation of Company, Preference Shares, DebtChoice on the basis of Advantages and Disadvantages of DebtDebt: Debentures, Unsecured Loan Stock, Deep Discount Bond, Zero Coupon, Convertible Unsecured, Mezzanine Debt, Leasing, Eurobonds, Trust deedsEquity: Preference Shares, Common Shares, RECost of Equity: CAPM, Arbitrage Pricing Theory, Fama Factor (Two Factor Model) Financial Strategy FormulationCAPM:

Financial Strategy Formulation

Arbitrage Pricing Theory:

Risk Premium = r - rf = b(1) x (r factor(1) - rf) + b(2) x (r factor(2) - rf)... + b(n) x (r factor(n) - rf)

Inflation GNPInvestor ConfidenceShift in Yield CurveFinancial Strategy FormulationFinancial Strategy FormulationFama French Three Factor Model:

Ri,t is the utility stock return during period tRf,t if the return on the risk-free asset should be zeros are the betas for each factori,m is the CAPM betai,t is the regression error term

Financial Strategy FormulationBond Yield Plus Premium ApproachMarket Model or Gordon Growth Model

Dividend PolicyRisk Management: Theoretical and Practical explainationAssess exposure to business and financial risk including operational, reputational, political, economic, regulatory and fiscal risk

Developing a framework for risk managementEstablishing Capital Investment and Risk Management Monitoring Systems