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In a world of geo-political, social and economic uncertainty, strategic financial management is in a process of change. However, modern finance theory reduces future uncertainty to quantifiable risk so that savvy analysts and financial managers can estimate an investment’s prospective yield using classical probability theory. Part 1 of the Strategic Financial Management e-book looked at the normative objective of strategic management preferred by analysts in the twentieth century, as well as the material investment decision. Part 2 expands on this discussion to examine the impact of the finance decisions on investment decisions for all-equity firms, and models an alternative to Net Present Value (NPV), or wealth maximisation concept, through the application of the “value added” concept. Both part 1 and part 2 of this comprehensive text are available to download for free on bookboon.com
Strategic Financial Management: Part 2 begins with a discussion of the Finance Decision, examining equity valuation, the capitalistion concept, dividend valuation, dividend yield, equity cost, growth estimates, capital leverage, issue costs, and the Weighted Average Cost of Capital (WACC). It continues its analysis by introducing the concepts of Economic Value Added (EVA) and Market Value Added (MVA), and NPV maximisation.
All explanations in the text are accompanied by example equations and practice activities to ensure comprehension. The equations have been simplified wherever possible for ready understanding. Selected references are also included at the end of the text for further reading.
Download Strategic Financial Management Parts 1 and 2 for free on bookboon.com
Chapter Two, Three and Four (Strategic Financial Management: Part I) provided a detailed explanation of the investment decision with only oblique reference to the finance decision, which determines a company’s cost of capital (discount rate) designed to maximise shareholder wealth. But if wealth is to be maximised, management must determine what return their shareholders require from an investment and then only accept projects that have a positive NPV when discounted at that rate.
There is also the question as to what cut-off rate should apply to investment proposals if corporate finance were obtained from a variety of sources, other than ordinary shares? Each stakeholder requires a rate of return that may differ from the equity market and may be unique. In this newly leveraged situation, the company’s overall cost of capital (rather than its cost of equity) measured by its weighted, average cost of capital (WACC) would seem to be the appropriate investment acceptance criterion.
PART ONE: THE FINANCE DECISION
1. Equity Valuation and the Cost of Capital
1.1 The Capitalisation Concept
1.2 Single-Period Dividend Valuation
1.3 Finite Dividend Valuation
1.4 General Dividend Valuation
1.5 Constant Dividend Valuation
1.6 The Dividend Yield and Corporate Cost of Equity
1.7 Dividend Growth and the Cost of Equity
1.8 Capital Growth and the Cost of Equity
1.9 Growth Estimates and the Cut-Off Rate
1.10 Earnings Valuation and the Cut-Off Rate
1.11 Summary and Conclusions
1.12 Selected References
2. Debt Valuation and the Cost of Capital
2.1 Capital Gearing (Leverage): An Introduction
2.2 The Value of Debt Capital and Capital Cost
2.3 The Tax-Deductibility of Debt
2.4 The Impact of Issue Costs
2.5 Summary and Conclusions
3. Capital Gearing and the Cost of Capital
3.1 The Weighted Average Cost of Capital (WACC)
3.2 WACC Assumptions
3.3 The Real-World Problems of WACC Estimation
3.4 Summary and Conclusions
3.5 Selected Reference
PART TWO: THE WEALTH DECISION
4. Shareholder Wealth and Value Added
4.1 The Concept of Economic Value Added (EVA)
4.2 The Concept of Market Value Added (MVA)
4.3 Profit and Cash Flow
4.4 EVA and Periodic MVA
4.5 NPV Maximisation, Value Added and Wealth
4.6 Summary and Conclusions
4.7 Selected References
With an eclectic record of University teaching, research, publication, consultancy and curricula development, underpinned by running a successful business, Alan has been a member of national academic validation bodies and held senior external examinerships and lectureships at both undergraduate and postgraduate level in the UK and abroad.
With increasing demand for global e-learning, his attention is now focussed on the free provision of a financial textbook series, underpinned by a critique of contemporary capital market theory in volatile markets, published by bookboon.com.
To contact Alan, please visit Robert Alan Hill at www.linkedin.com.
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