Introduction
Welcome to Financial Strategy
Financial Strategy
Unit 1 Fundamentals of Finance
Unit 2 Understanding Accounts
Unit 3 Cash flow and Forecasting
Unit 4 Fi...
Efficient Market Hypothesis
In academic research we need to decide what is meant
by an “efficient market”
There are three ...
EMH - Weak
The market ignores matters that have yet to happen
Prices only reflect previous events
EMH – Semi Strong
The market is assumed to price all information that is in
the public arena
This may seem obvious, but to...
EMH - Strong
All knowledge, whether in the public domain or not, is
priced into shares by the market
In other words, insid...
Agency Theory
The problem:
How do shareholders ensure that directors and
managers act for shareholders’ benefit rather tha...
Agency Theory: A question
“Executive share options don’t align shareholders’ and
senior management’s interests. In fact th...
Agency Theory: A question
Three possible reasons
1 Directors may take a short term view of profit making
2 Might distort t...
Risk in finance
Unit One lists a number of sources of financial risk
There are two key points:
1 In finance risk is not se...
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Unit one

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B821 Unit One

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Unit one

  1. 1. Introduction Welcome to Financial Strategy
  2. 2. Financial Strategy Unit 1 Fundamentals of Finance Unit 2 Understanding Accounts Unit 3 Cash flow and Forecasting Unit 4 Finance Tools Unit 5 Project Appraisal Unit 6 Company Valuations Unit 7 Risk Assessment and Interest Rate Risk Unit 8 Foreign Exchange and Contingency Risk Unit 9 Credit, Liquidity and Operational Risk Unit 10 Measuring Performance
  3. 3. Efficient Market Hypothesis In academic research we need to decide what is meant by an “efficient market” There are three levels of efficient market Weak Semi strong Strong
  4. 4. EMH - Weak The market ignores matters that have yet to happen Prices only reflect previous events
  5. 5. EMH – Semi Strong The market is assumed to price all information that is in the public arena This may seem obvious, but to what extent do African civil wars affect the price of mobile phones? [the phone equivalent of “blood diamonds” surrounds a rare element “coltan” mined in Central Africa, an essential component of mobile phones]
  6. 6. EMH - Strong All knowledge, whether in the public domain or not, is priced into shares by the market In other words, insider dealing will occur and thus will affect prices
  7. 7. Agency Theory The problem: How do shareholders ensure that directors and managers act for shareholders’ benefit rather than their own? Is it possible to align directors’ interests with shareholders?
  8. 8. Agency Theory: A question “Executive share options don’t align shareholders’ and senior management’s interests. In fact they often do exactly the opposite”. (Q1 Financial Strategy Exam October 2006) Give some reasons why the above statement might be true.
  9. 9. Agency Theory: A question Three possible reasons 1 Directors may take a short term view of profit making 2 Might distort their view of risk taking 3 Might affect timings of dividends
  10. 10. Risk in finance Unit One lists a number of sources of financial risk There are two key points: 1 In finance risk is not seen as a “bad” thing – it is by taking risk that returns are generated 2 Risk is measured by considering volatility: share price risk is linked to the standard deviation of the price around the average
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