The document discusses key aspects of the capital budgeting process, including:
1) The main steps such as brainstorming ideas, analyzing cash flows, integrating projects, and post-auditing.
2) Types of capital projects like replacement, expansion, new products, and regulatory projects.
3) Methods for evaluating projects like NPV, IRR, payback period, and profitability index.
4) Estimating cash flows, costs of capital including WACC, and dealing with conflicts between methods.
So in summary, it provides an overview of the capital budgeting process, types of projects, evaluation methods, and considerations for costs and cash flows.
Cfa l1 exam formula & concepts sheet 2013analystbuddy
AnalystBuddy is an online CFA exam preparation provider that offers comprehensive study materials including study notes, practice questions, flash cards, mock exams, and more for $69 per exam. Users can also try the materials for free by visiting their website at www.AnalystBuddy.com. The provider aims to help users save time and money in preparing for the CFA exam.
Keynes argued that if demand falls, both supply and employment will fall as prices are sticky in the short-run. Real GDP is determined by consumer spending, private investment, government spending, and net exports. If actual expenditures are less than planned expenditures, inventory will rise and layoffs will occur, reducing output and employment. Fiscal policy like tax cuts can increase aggregate demand and output.
Commercial banks create money through fractional-reserve banking by lending out deposits, multiplied by the reserve ratio. Monetary policy works by changing interest rates, affecting investment and aggregate demand. Both fiscal and monetary policies have implementation lags.
Relative valuation involves comparing the price of a company's assets to similar companies in the same industry. It has some disadvantages, such as peers may not be valued correctly and historical averages may not indicate future performance. Relative valuation methods include price multiples like price-to-earnings and enterprise value multiples using both trailing and forward figures. Adjustments may need to be made for items like non-recurring earnings, low or negative EPS, and cyclical earnings patterns. Justified P/E ratios can be calculated using the Gordon Growth Model to incorporate growth rates. Enterprise value multiples control for effects of depreciation and amortization but not working capital or capex changes.
This presentation is aimed to answer the one of the most fundamental question of Trading: "How much to trade?" You might have decided what to trade but the question how much to trade raises a critical issue which needs to be handled using Statistics. This presentation take its audience through the various money management techniques and position sizing algorithms which come handy for every trader.
Relative valuation and private company valuationBabasab Patil
Relative valuation involves comparing the value of an asset to similar assets using standardized valuation multiples like the price-to-earnings ratio. Most valuations on Wall Street use relative valuation by comparing multiples. While discounted cash flow valuations are also used, they often rely on relative multiples to estimate terminal values. Relative valuation is useful because it allows for comparison to similar firms and identifies under or overvalued assets, though differences between firms must be controlled for.
This document discusses concepts related to portfolio optimization and the capital asset pricing model (CAPM). It provides information on calculating expected portfolio returns and volatility based on the returns and correlations of individual stocks. It also discusses how adding risk-free assets such as Treasury bills affects the efficient frontier and introduces the capital allocation line. The Sharpe ratio is presented as a measure of portfolio return relative to risk. The separation theorem and using the tangent portfolio to maximize returns for a given risk level are also summarized.
I have covered the following topics and which Financial instruments should be applied in what situations:
1. Present Value Approach
2. Dividend Discounting model
3. P/E - Profit to Equity Ratio
I hope it should be helpful to all students,professionals who work in capital markets
The document discusses ratio analysis and various types of financial ratios used to analyze the financial performance and position of a company. It defines key liquidity ratios like current ratio and quick ratio. It also explains leverage ratios such as debt-equity ratio and total debt ratio that measure the use of debt financing. Further, it covers activity ratios including inventory turnover ratio and debtors' turnover ratio that assess efficiency of inventory and receivables management. The document emphasizes the importance of ratio analysis and interpretation of ratios with industry benchmarks.
Cfa l1 exam formula & concepts sheet 2013analystbuddy
AnalystBuddy is an online CFA exam preparation provider that offers comprehensive study materials including study notes, practice questions, flash cards, mock exams, and more for $69 per exam. Users can also try the materials for free by visiting their website at www.AnalystBuddy.com. The provider aims to help users save time and money in preparing for the CFA exam.
Keynes argued that if demand falls, both supply and employment will fall as prices are sticky in the short-run. Real GDP is determined by consumer spending, private investment, government spending, and net exports. If actual expenditures are less than planned expenditures, inventory will rise and layoffs will occur, reducing output and employment. Fiscal policy like tax cuts can increase aggregate demand and output.
Commercial banks create money through fractional-reserve banking by lending out deposits, multiplied by the reserve ratio. Monetary policy works by changing interest rates, affecting investment and aggregate demand. Both fiscal and monetary policies have implementation lags.
Relative valuation involves comparing the price of a company's assets to similar companies in the same industry. It has some disadvantages, such as peers may not be valued correctly and historical averages may not indicate future performance. Relative valuation methods include price multiples like price-to-earnings and enterprise value multiples using both trailing and forward figures. Adjustments may need to be made for items like non-recurring earnings, low or negative EPS, and cyclical earnings patterns. Justified P/E ratios can be calculated using the Gordon Growth Model to incorporate growth rates. Enterprise value multiples control for effects of depreciation and amortization but not working capital or capex changes.
This presentation is aimed to answer the one of the most fundamental question of Trading: "How much to trade?" You might have decided what to trade but the question how much to trade raises a critical issue which needs to be handled using Statistics. This presentation take its audience through the various money management techniques and position sizing algorithms which come handy for every trader.
Relative valuation and private company valuationBabasab Patil
Relative valuation involves comparing the value of an asset to similar assets using standardized valuation multiples like the price-to-earnings ratio. Most valuations on Wall Street use relative valuation by comparing multiples. While discounted cash flow valuations are also used, they often rely on relative multiples to estimate terminal values. Relative valuation is useful because it allows for comparison to similar firms and identifies under or overvalued assets, though differences between firms must be controlled for.
This document discusses concepts related to portfolio optimization and the capital asset pricing model (CAPM). It provides information on calculating expected portfolio returns and volatility based on the returns and correlations of individual stocks. It also discusses how adding risk-free assets such as Treasury bills affects the efficient frontier and introduces the capital allocation line. The Sharpe ratio is presented as a measure of portfolio return relative to risk. The separation theorem and using the tangent portfolio to maximize returns for a given risk level are also summarized.
I have covered the following topics and which Financial instruments should be applied in what situations:
1. Present Value Approach
2. Dividend Discounting model
3. P/E - Profit to Equity Ratio
I hope it should be helpful to all students,professionals who work in capital markets
The document discusses ratio analysis and various types of financial ratios used to analyze the financial performance and position of a company. It defines key liquidity ratios like current ratio and quick ratio. It also explains leverage ratios such as debt-equity ratio and total debt ratio that measure the use of debt financing. Further, it covers activity ratios including inventory turnover ratio and debtors' turnover ratio that assess efficiency of inventory and receivables management. The document emphasizes the importance of ratio analysis and interpretation of ratios with industry benchmarks.
The document discusses factors that influence company earnings and forecasts. It covers topics like earnings before interest and taxes (EBIT), return on assets, earnings per share, leverage, tax rates, fixed and variable costs, and break-even point analysis. Management efficiency, sales, capacity utilization, debt financing, asset value, and tax planning can all impact EBIT. Forecasting individual revenue and expense items provides the most scientific way to estimate earnings, which are used along with the price-earnings ratio to deduce expected market price. Companies with large capital investments have high break-even points and longer periods to generate profits and dividends.
The document discusses two main approaches to company valuation: relative valuation and fundamental valuation. Relative valuation uses multiples like P/E ratios to value companies relative to competitors, while fundamental valuation uses discounted cash flow models. It then focuses on relative valuation, explaining various multiples used like P/E, EV/EBITDA, P/B, and P/S. It discusses how to interpret these multiples based on factors like growth and risk. Overall, the document provides an overview of relative versus fundamental valuation and describes several commonly used relative valuation multiples.
Wright Investors' Service uses a systematic investment process combining quantitative and qualitative analysis to identify stocks with above average return potential for their international equity portfolios. The quantitative analysis ranks stocks based on a proprietary quality rating across 32 factors and measures of earnings momentum and valuation. Qualitative analysis includes examining industry dynamics using Porter's Five Forces and considering economic, political and regulatory conditions in each sector and country. The portfolio is optimized and constantly monitored, with periodic rebalancing, to minimize benchmark variance while incorporating investment themes.
Security analysis and portfolio managementHimanshu Jain
Live Project was all about studying the company’s financial health through the movement of their stock price. This live project deals with the basic concepts of investment in securities such as bonds and stocks, and management of such assets. It discusses various aspects of portfolio management, ranging from analysis, selection, and revision to evaluation of portfolio, securities market and risk evaluation that help in understanding the trading system better and making quality investment decisions.
This live project helped to understand how the stock prices vary. It also helped to know and calculate several technical terms. In this project, I was given 5 stocks wherein I need to update opening price, closing price, % change, total shares traded etc. every day. Then it is required to find out the beta, average return etc. of these stocks separately and construct a portfolio with Rs. 50, 00,000 keeping in mind optimum return for the investment. We need to keep in mind beta, standard deviation, risk and return of these stocks and invest to get the optimum returns.
This project helps in knowing the expected return and risk for each stock. Under this project I got to know about portfolio management as well as expected return & risk associate with each company. Through this project my future investment will be better as it helps in knowing the inside depth of companies by analysis the financial details.
The document discusses various types of risks associated with bonds, including default risk, credit spread risk, and downgrade risk. It then provides information on analyzing bonds and issuers, including sources of default risk information, the four Cs of credit analysis (character, covenants, collateral, capacity), factors for evaluating capacity and financial position, using ratios in credit analysis, and cash flow and leverage ratios used by ratings agencies. The document also discusses analyzing specific types of bonds and issuers.
This document discusses discounted cash flow (DCF) valuation and provides examples of equity versus firm valuation using DCF. It covers key inputs needed for DCF such as cash flows, discount rates, terminal values and growth rates. It emphasizes the importance of matching cash flows and discount rates and discusses errors that can occur from mismatching them.
This document summarizes key concepts from a financial management lecture, including:
1) Diversification reduces non-systematic risk but not market risk. Beta measures a stock's systematic risk relative to the market.
2) While individual stock volatility does not predict return, the market return premium compensates for systematic risk.
3) The capital asset pricing model uses beta to estimate a stock's expected return based on the risk-free rate and market risk premium.
Chap 18 risk management & capital budgetingArindam Khan
The document discusses key concepts related to risk and capital budgeting. It defines risk as the range of possible outcomes of a decision where the probabilities are known. Strategies are plans to achieve goals, while states of nature are future conditions that impact strategy success. Outcomes are gains/losses from strategy-state combinations. Capital budgeting refers to planning, raising funds, and allocating capital to projects expected to generate returns over multiple years. Projects are evaluated using techniques like payback period, IRR, and NPV to determine if they increase firm value.
The document discusses various valuation multiples used to value companies based on their industry. It provides the best valuation multiples to use for different industries such as price to earnings for auto companies, price to book value for banks, and enterprise value to EBITDA for cement companies. It also outlines key factors that impact valuation for each industry, such as volume growth and margins for auto companies, and loan growth and non-performing assets for banks.
A Business Valuation Article: Relative Valuation uses the valuation ratios of Comparable publicly traded companies and applies that ratios to the comapny being valued subject to necessary adjustments.
Key Issues in Relative Valuations- a) Peer Selection, b) Current Multiples or Forward Multiples, c) Adjustments to the Value...
There are two main approaches to valuing common stock:
1) The present value or discounted cash flow approach values stock based on the discounted value of expected future cash flows such as dividends. It requires estimating the discount rate and cash flow stream.
2) The multiples approach values stock relative to financial metrics like earnings or book value using ratios like the P/E ratio. The appropriate P/E depends on growth rate, payout ratio, and required return.
Both approaches have limitations in estimating uncertain future variables but can provide reasonable valuations when used together.
This document discusses relative valuation, which values an asset based on comparable assets currently priced in the market. It outlines the steps in relative valuation, including analyzing the subject company, selecting comparable companies, choosing valuation multiples, calculating multiples for comparables, and valuing the subject company. It also discusses various valuation multiples used in relative valuation like P/E, P/B, P/S, EV/EBITDA, and their fundamental determinants. Best practices for using multiples are also presented.
Investment appraisal techniques are used to evaluate investment options and determine their financial feasibility. The main techniques include payback period, average rate of return (ARR), and discounted cash flow analysis using net present value (NPV). Payback period calculates how long it will take to recoup the initial costs while ARR determines profitability. NPV discounts future cash flows to determine the present value of an investment while accounting for factors like risk, inflation, and opportunity costs. Both financial and qualitative factors must be considered in investment decision making.
The document outlines an overview of the Stock Analyst Program for winter 2010. It includes the schedule of upcoming meetings and topics to be covered, such as valuation, stock screening, risk management, and technical analysis. Evaluation criteria for research reports are also mentioned, focusing on choice of industry and identification of growth potential and catalysts. Various resources for company and industry analysis are listed, including screening tools, industry reports, and the Bloomberg terminal.
This chapter discusses risk and return, including:
- Risk and return of individual assets is measured using probability distributions and expected return and standard deviation.
- Portfolio risk is lower than holding individual assets due to diversification. Beta measures the sensitivity of an asset's return to market movements.
- The Security Market Line shows the expected return of an asset based on its beta and the risk-free rate. The Capital Asset Pricing Model suggests assets should be priced based on their systematic risk.
This document discusses financial statement analysis and long-term planning. It covers calculating common-size financial statements to facilitate comparison, different types of ratio analysis including liquidity, leverage, asset management and profitability ratios, and using the Du Pont identity to examine a company's return on equity. Ratios need context and should be compared over time or to peer companies to be meaningful. Potential issues include a lack of theory on relevant ratios and difficulties benchmarking due to accounting differences.
The document discusses portfolio management and modern portfolio theory. It defines key concepts like investment, speculation, asset allocation, risk, return, diversification, efficient frontier. Portfolio management aims to balance risk and return through diversification across different asset classes based on an investor's goals, risk tolerance and constraints. Modern portfolio theory provides a framework for optimizing risk-adjusted returns through careful selection of a combination of assets.
The document discusses various aspects of budgets, forecasts, and planning. It provides definitions of key terms like budget, forecast, and plan. It also describes different forecasting techniques and the requirements for a budgeting expert. Overall, the document emphasizes that budgets and forecasts are dynamic management tools that require input from various sources to aid in planning, monitoring, and decision making.
This document discusses key concepts related to risk and return including:
1. Definitions of actual, expected, and required returns. Expected return should equal required return for fair pricing.
2. Sources of total risk including systematic and unsystematic risk. Unsystematic risk is diversifiable while systematic risk requires compensation.
3. Measures of return such as holding period return and arithmetic/geometric means. Measures of risk include variance, standard deviation, and downside risk.
4. The relationship between risk and return showing that higher risk investments require higher expected returns. Investor indifference curves illustrate risk preferences.
5. Models relating return and risk including the CAPM and multifactor models. Security pricing relates
This document provides an overview of an investment banking technical interview workshop. It discusses the interview format, common valuation methods like discounted cash flow (DCF), public comparables, and precedent transactions. Sample technical questions are provided on these topics as well as accounting questions. General interview tips are offered such as thinking through questions logically and having follow up questions prepared.
The document discusses portfolio management concepts including diversification, types of investors, the portfolio management process, developing an investment policy statement, mutual funds, and measures of investment returns. It provides definitions and formulas for key concepts such as holding period return, money weighted return, annualizing returns, portfolio return, variance, standard deviation, beta, the capital asset pricing model, and the Sharpe ratio.
The document discusses various financial derivatives including synthetic instruments, options, interest rate derivatives, currency and equity swaps, credit default swaps, and credit derivative trading strategies. It provides formulas for pricing these instruments and outlines how their values are affected by various risk factors.
The document discusses factors that influence company earnings and forecasts. It covers topics like earnings before interest and taxes (EBIT), return on assets, earnings per share, leverage, tax rates, fixed and variable costs, and break-even point analysis. Management efficiency, sales, capacity utilization, debt financing, asset value, and tax planning can all impact EBIT. Forecasting individual revenue and expense items provides the most scientific way to estimate earnings, which are used along with the price-earnings ratio to deduce expected market price. Companies with large capital investments have high break-even points and longer periods to generate profits and dividends.
The document discusses two main approaches to company valuation: relative valuation and fundamental valuation. Relative valuation uses multiples like P/E ratios to value companies relative to competitors, while fundamental valuation uses discounted cash flow models. It then focuses on relative valuation, explaining various multiples used like P/E, EV/EBITDA, P/B, and P/S. It discusses how to interpret these multiples based on factors like growth and risk. Overall, the document provides an overview of relative versus fundamental valuation and describes several commonly used relative valuation multiples.
Wright Investors' Service uses a systematic investment process combining quantitative and qualitative analysis to identify stocks with above average return potential for their international equity portfolios. The quantitative analysis ranks stocks based on a proprietary quality rating across 32 factors and measures of earnings momentum and valuation. Qualitative analysis includes examining industry dynamics using Porter's Five Forces and considering economic, political and regulatory conditions in each sector and country. The portfolio is optimized and constantly monitored, with periodic rebalancing, to minimize benchmark variance while incorporating investment themes.
Security analysis and portfolio managementHimanshu Jain
Live Project was all about studying the company’s financial health through the movement of their stock price. This live project deals with the basic concepts of investment in securities such as bonds and stocks, and management of such assets. It discusses various aspects of portfolio management, ranging from analysis, selection, and revision to evaluation of portfolio, securities market and risk evaluation that help in understanding the trading system better and making quality investment decisions.
This live project helped to understand how the stock prices vary. It also helped to know and calculate several technical terms. In this project, I was given 5 stocks wherein I need to update opening price, closing price, % change, total shares traded etc. every day. Then it is required to find out the beta, average return etc. of these stocks separately and construct a portfolio with Rs. 50, 00,000 keeping in mind optimum return for the investment. We need to keep in mind beta, standard deviation, risk and return of these stocks and invest to get the optimum returns.
This project helps in knowing the expected return and risk for each stock. Under this project I got to know about portfolio management as well as expected return & risk associate with each company. Through this project my future investment will be better as it helps in knowing the inside depth of companies by analysis the financial details.
The document discusses various types of risks associated with bonds, including default risk, credit spread risk, and downgrade risk. It then provides information on analyzing bonds and issuers, including sources of default risk information, the four Cs of credit analysis (character, covenants, collateral, capacity), factors for evaluating capacity and financial position, using ratios in credit analysis, and cash flow and leverage ratios used by ratings agencies. The document also discusses analyzing specific types of bonds and issuers.
This document discusses discounted cash flow (DCF) valuation and provides examples of equity versus firm valuation using DCF. It covers key inputs needed for DCF such as cash flows, discount rates, terminal values and growth rates. It emphasizes the importance of matching cash flows and discount rates and discusses errors that can occur from mismatching them.
This document summarizes key concepts from a financial management lecture, including:
1) Diversification reduces non-systematic risk but not market risk. Beta measures a stock's systematic risk relative to the market.
2) While individual stock volatility does not predict return, the market return premium compensates for systematic risk.
3) The capital asset pricing model uses beta to estimate a stock's expected return based on the risk-free rate and market risk premium.
Chap 18 risk management & capital budgetingArindam Khan
The document discusses key concepts related to risk and capital budgeting. It defines risk as the range of possible outcomes of a decision where the probabilities are known. Strategies are plans to achieve goals, while states of nature are future conditions that impact strategy success. Outcomes are gains/losses from strategy-state combinations. Capital budgeting refers to planning, raising funds, and allocating capital to projects expected to generate returns over multiple years. Projects are evaluated using techniques like payback period, IRR, and NPV to determine if they increase firm value.
The document discusses various valuation multiples used to value companies based on their industry. It provides the best valuation multiples to use for different industries such as price to earnings for auto companies, price to book value for banks, and enterprise value to EBITDA for cement companies. It also outlines key factors that impact valuation for each industry, such as volume growth and margins for auto companies, and loan growth and non-performing assets for banks.
A Business Valuation Article: Relative Valuation uses the valuation ratios of Comparable publicly traded companies and applies that ratios to the comapny being valued subject to necessary adjustments.
Key Issues in Relative Valuations- a) Peer Selection, b) Current Multiples or Forward Multiples, c) Adjustments to the Value...
There are two main approaches to valuing common stock:
1) The present value or discounted cash flow approach values stock based on the discounted value of expected future cash flows such as dividends. It requires estimating the discount rate and cash flow stream.
2) The multiples approach values stock relative to financial metrics like earnings or book value using ratios like the P/E ratio. The appropriate P/E depends on growth rate, payout ratio, and required return.
Both approaches have limitations in estimating uncertain future variables but can provide reasonable valuations when used together.
This document discusses relative valuation, which values an asset based on comparable assets currently priced in the market. It outlines the steps in relative valuation, including analyzing the subject company, selecting comparable companies, choosing valuation multiples, calculating multiples for comparables, and valuing the subject company. It also discusses various valuation multiples used in relative valuation like P/E, P/B, P/S, EV/EBITDA, and their fundamental determinants. Best practices for using multiples are also presented.
Investment appraisal techniques are used to evaluate investment options and determine their financial feasibility. The main techniques include payback period, average rate of return (ARR), and discounted cash flow analysis using net present value (NPV). Payback period calculates how long it will take to recoup the initial costs while ARR determines profitability. NPV discounts future cash flows to determine the present value of an investment while accounting for factors like risk, inflation, and opportunity costs. Both financial and qualitative factors must be considered in investment decision making.
The document outlines an overview of the Stock Analyst Program for winter 2010. It includes the schedule of upcoming meetings and topics to be covered, such as valuation, stock screening, risk management, and technical analysis. Evaluation criteria for research reports are also mentioned, focusing on choice of industry and identification of growth potential and catalysts. Various resources for company and industry analysis are listed, including screening tools, industry reports, and the Bloomberg terminal.
This chapter discusses risk and return, including:
- Risk and return of individual assets is measured using probability distributions and expected return and standard deviation.
- Portfolio risk is lower than holding individual assets due to diversification. Beta measures the sensitivity of an asset's return to market movements.
- The Security Market Line shows the expected return of an asset based on its beta and the risk-free rate. The Capital Asset Pricing Model suggests assets should be priced based on their systematic risk.
This document discusses financial statement analysis and long-term planning. It covers calculating common-size financial statements to facilitate comparison, different types of ratio analysis including liquidity, leverage, asset management and profitability ratios, and using the Du Pont identity to examine a company's return on equity. Ratios need context and should be compared over time or to peer companies to be meaningful. Potential issues include a lack of theory on relevant ratios and difficulties benchmarking due to accounting differences.
The document discusses portfolio management and modern portfolio theory. It defines key concepts like investment, speculation, asset allocation, risk, return, diversification, efficient frontier. Portfolio management aims to balance risk and return through diversification across different asset classes based on an investor's goals, risk tolerance and constraints. Modern portfolio theory provides a framework for optimizing risk-adjusted returns through careful selection of a combination of assets.
The document discusses various aspects of budgets, forecasts, and planning. It provides definitions of key terms like budget, forecast, and plan. It also describes different forecasting techniques and the requirements for a budgeting expert. Overall, the document emphasizes that budgets and forecasts are dynamic management tools that require input from various sources to aid in planning, monitoring, and decision making.
This document discusses key concepts related to risk and return including:
1. Definitions of actual, expected, and required returns. Expected return should equal required return for fair pricing.
2. Sources of total risk including systematic and unsystematic risk. Unsystematic risk is diversifiable while systematic risk requires compensation.
3. Measures of return such as holding period return and arithmetic/geometric means. Measures of risk include variance, standard deviation, and downside risk.
4. The relationship between risk and return showing that higher risk investments require higher expected returns. Investor indifference curves illustrate risk preferences.
5. Models relating return and risk including the CAPM and multifactor models. Security pricing relates
This document provides an overview of an investment banking technical interview workshop. It discusses the interview format, common valuation methods like discounted cash flow (DCF), public comparables, and precedent transactions. Sample technical questions are provided on these topics as well as accounting questions. General interview tips are offered such as thinking through questions logically and having follow up questions prepared.
The document discusses portfolio management concepts including diversification, types of investors, the portfolio management process, developing an investment policy statement, mutual funds, and measures of investment returns. It provides definitions and formulas for key concepts such as holding period return, money weighted return, annualizing returns, portfolio return, variance, standard deviation, beta, the capital asset pricing model, and the Sharpe ratio.
The document discusses various financial derivatives including synthetic instruments, options, interest rate derivatives, currency and equity swaps, credit default swaps, and credit derivative trading strategies. It provides formulas for pricing these instruments and outlines how their values are affected by various risk factors.
This document provides an overview of asset-liability management (ALM) systems for banks and financial institutions. It discusses why ALM is important due to factors like globalization, deregulation, and integration of markets. The key objectives of ALM are to manage liquidity risk, interest rate risk, currency risk, and to aid in profit planning and growth projections. Specific risks like credit, market and operational risks are also discussed. The document outlines the ALM process, including generating statements to measure liquidity mismatches and interest rate sensitivity over different time periods. Tools for analyzing liquidity and interest rate risk are also presented. Overall organizational structure for effective ALM implementation is emphasized.
The document discusses several topics related to economic growth including:
1. Factors that affect economic growth such as physical capital, human capital, and technological advancement.
2. Preconditions for growth including incentive systems, markets, property rights, and monetary exchange.
3. Sources of faster growth including saving and investment in new capital, investment in human capital, and new technologies.
4. Theories of economic growth such as classical, neoclassical, and new growth theories.
L2 flash cards portfolio management - SS 18analystbuddy
Mean-variance analysis is used to identify optimal portfolios based on expected returns, variances, and covariances of asset returns. The minimum-variance frontier shows the efficient combinations of expected return and risk. The efficient frontier begins with the global minimum-variance portfolio and provides the maximum expected return for a given level of variance. The capital market line describes combinations of the risk-free asset and market portfolio. The capital asset pricing model expresses expected returns as a linear function of systematic risk measured by beta.
Our accounting professor permitted us to use one 8x11 sheet of paper during our comprehensive final exam. Within a short amount of time I laid out all the major concepts we covered along with my own notes/examples. I also recruited Pac Man to help out with making room for our final chapter topics.
Edit: Full res version here --> http://www.joejan6.com/scratch/GuideSheet13.pdf
The document discusses various types of risks associated with bonds, including default risk, credit spread risk, and downgrade risk. It then provides information on analyzing bonds and issuers, including sources of default risk information, the four Cs of credit analysis (character, covenants, collateral, capacity), factors for evaluating capacity and financial position, using ratios in credit analysis, and cash flow and leverage ratios used by ratings agencies. The document also discusses analyzing specific types of bonds and issuers.
The document discusses various methods for valuing companies and estimating required returns. It covers sum-of-the-parts valuation, conglomerate discounts, characteristics of good valuation models, different return concepts such as holding period return and required returns, methods to estimate required returns including CAPM and multifactor models, and discount rates. It also discusses Porter's five forces framework and factors that influence industry competition and profitability.
L2 flash cards corporate finance - SS 8analystbuddy
The document discusses various concepts related to capital budgeting and corporate finance. It provides formulas for calculating the investment needed for expansion and replacement projects. It also discusses factors that affect a firm's capital structure, dividend policy, and methods of valuation. Key terms defined include economic profit, residual income, and real options. The document is a study guide that references various readings related to capital budgeting, capital structure, and corporate governance.
The document discusses the CFA Institute's Professional Conduct Program which establishes rules of conduct for CFA members and candidates through a Code of Ethics and Standards of Professional Conduct. The CFA Institute enforces these rules through a Professional Conduct Program that investigates potential violations and issues disciplinary sanctions if needed. The Code outlines six principles of ethical conduct while the Standards describe rules in more detail across seven areas including professionalism, duties to clients and employers, and conflicts of interest. Adherence to these rules is meant to maintain the integrity of the investment profession.
There are two main types of derivatives - exchange-traded and over-the-counter. Exchange-traded derivatives are traded on a centralized exchange, have standard terms, involve a clearing house and have low default risk. Over-the-counter derivatives are privately negotiated between two parties, have no central exchange and higher counterparty risk. Common derivatives include forwards, futures, options, and swaps. Forwards and futures are agreements to buy/sell an asset at a future date, while options provide the right but not obligation to do so. Swaps involve exchanging payments over time based on an underlying asset.
The document discusses general fiduciary standards and the prudent man rule vs the prudent investor rule for trustees. It provides 3 key points:
1) Trustees have a duty of care, skill, caution, loyalty and impartiality. This includes seeking advice if lacking relevant investment knowledge.
2) The prudent man rule focuses on diversification to reduce risk, while the prudent investor rule emphasizes investing in the best interest of beneficiaries.
3) When investing and managing trust assets, trustees must consider economic conditions, inflation, tax impacts, risk/return of individual investments and the portfolio overall, and the needs of beneficiaries.
L1 flash cards alternative investments (ss18)analystbuddy
The document discusses various types of investment funds including open-end funds, closed-end funds, exchange traded funds (ETFs), real estate investment funds, private equity funds, hedge funds, and fund of funds. It provides details on key characteristics such as legal structure, fees, investment strategies, risks, and performance measurement challenges for each type of fund. The document also covers topics such as net asset value calculation, types of fees for mutual funds, real estate valuation approaches, stages of private equity investments, and challenges of investing in venture capital.
Asset Liability Management (ALM) is concerned with strategic balance sheet management involving risks caused by changes in interest rates, exchange rates, and liquidity position. ALM aims to match assets and liabilities in terms of maturities and interest rate sensitivities to minimize interest rate risk and liquidity risk. It involves identifying, measuring, monitoring, and controlling risks like interest rate risk, liquidity risk, credit risk, and contingency risk through techniques like gap analysis and duration gap analysis. Effective ALM requires strong organizational framework, information systems, and regular monitoring and reporting to manage risks.
This presentations chalks out in detail information about ALM in Indian Bank. It starts with the basics of Balance sheet; applicability of ALM in real life; Evolution and then starts with main topics of ALM like structured statement; Liquidity risk, its management; currency risk and finally ends with Interest Risk management.
Links to Video’s in the ppt
Balance Sheet
http://www.investopedia.com/terms/b/balancesheet.asp
NII/NIM
http://www.investopedia.com/terms/n/netinterestmargin.asp
www.abhijeetdeshmukh.com
Alpha Manufacturing sells shipping containers and is operating near capacity. It has been approached by a new customer wanting to order 1,000 units at $65 per unit, which would require giving up sales of 600 current units at $75 per unit. Accepting the new order would increase Alpha's profits by $6,000. If the special order price was $50 per unit instead, Alpha's profits would decrease by $9,000.
Asset liability management (ALM) aims to match assets and liabilities to control sensitivity to interest rate changes and limit losses. Key concepts discussed include liquidity risk, interest rate risk, gap analysis, duration gap analysis, and the role of the ALCO in managing risks. Liquidity and interest rate risks can arise from mismatches between asset and liability cash flows and interest rate sensitivities. ALM techniques assess risks and seek to balance risks from both sides of the balance sheet.
1. The payback period of a project is the number of years it takes for the cumulative cash flows of the project to equal the initial investment. The payback rule states that projects with payback periods below a specified cutoff, such as 3 years, should be accepted.
2. While payback period is an easy metric to calculate, it ignores the timing of cash flows and does not consider the project's full cash flow stream or the opportunity cost of capital. As a result, projects with higher NPVs may be rejected in favor of those with shorter payback periods.
3. The example shows three projects, two of which have a 2-year payback but different NPVs when discounted at
The document discusses various capital budgeting techniques for evaluating investment projects. It describes discounted cash flow methods like net present value (NPV) and internal rate of return (IRR), as well as non-discounted methods like payback period and accounting rate of return. NPV is outlined as the preferred method as it considers the time value of money and maximizes shareholder wealth. Limitations of other methods like payback period and IRR are also highlighted.
This document discusses various capital budgeting techniques used to evaluate business investment projects, including net present value (NPV), internal rate of return (IRR), profitability index (PI), payback period, and average rate of return (ARR). It provides examples of how to calculate each metric and explains the appropriate decision rules and limitations of each approach.
Chapter18 International Finance ManagementPiyush Gaur
Dorchester Ltd is considering building a new manufacturing plant in the US to expand its candy production and sales in North America. The initial cost of the plant would be $7 million. Local debt financing of $1.5 million at 7.75% interest would be provided. Dorchester must decide whether to issue additional debt in pounds sterling at 10.75% or US dollars at 9.5%.
Building the new plant would allow Dorchester to serve the entire North American market and realize higher profits of $4.40 per pound sold. However, the analysis of costs, revenues, tax rates, debt financing, and exchange rates is complex given the international dimensions. A full capital budgeting analysis is required to
Dorchester Ltd is considering building a new manufacturing plant in the US to expand its candy production and sales in North America. The initial cost of the plant would be $7 million. Local debt financing of $1.5 million at 7.75% interest would be provided. Dorchester must decide whether to issue additional debt in pounds sterling at 10.75% or US dollars at 9.5%.
Building the new plant would allow Dorchester to serve the entire North American market and realize higher profits of $4.40 per pound sold. However, the analysis of costs, revenues, tax rates, debt financing, and exchange rates is complex given the international dimensions. A full capital budgeting analysis is required to
Capital budgeting is the process of evaluating long-term investments and projects. It involves analyzing potential additions to fixed assets that require large expenditures and have long-term impacts on the firm's future. Key techniques for evaluating projects include net present value (NPV), internal rate of return (IRR), payback period, and accounting rate of return. These methods discount future cash flows to determine a project's true profitability while accounting for risk and the time value of money. Capital budgeting analysis helps firms select projects that maximize shareholder wealth.
This document discusses various capital budgeting techniques used to evaluate investment projects. It begins by defining capital budgeting and explaining that there are discounted and non-discounted methods. Some of the key methods discussed include net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). Formulas for calculating each method are provided along with examples to illustrate how they are applied. The document compares the various techniques and discusses their advantages and limitations.
This document provides an overview and summary of Chapter 10 from the textbook "Principles of Managerial Finance" by Lawrence J. Gitman. Chapter 10 expands on capital budgeting techniques by considering risk factors such as sensitivity analysis, scenario analysis, and simulation. It also examines evaluating international projects and risk adjustment methods like certainty equivalents and risk-adjusted discount rates. The document provides learning resources for students on these topics, including a problem solver, study guide examples, and answers to chapter review questions to help students understand the concepts covered in the chapter.
Chapter 10: Risk and Refinements In Capital BudgetingFiaz Ahmad
This document provides an overview and summary of Chapter 10 from the textbook "Principles of Managerial Finance" by Lawrence J. Gitman. Chapter 10 expands on capital budgeting techniques by considering risk factors such as sensitivity analysis, scenario analysis, and simulation. It also examines evaluating international projects and risk adjustment methods like certainty equivalents and risk-adjusted discount rates. The document provides learning resources for students on these topics, including a problem solver, study guide examples, and answers to review questions from the chapter.
Here are the steps to calculate the IRR:
1) Construct a cash flow timeline showing the initial investment of $52,125 and the annual cash inflows of $12,000 for 8 years.
2) Guess a discount rate and calculate the NPV (e.g. 10% gives a negative NPV)
3) Adjust the discount rate until the NPV is as close to zero as possible (the IRR)
4) The IRR for this project is approximately 13.5%
Since the IRR of 13.5% is greater than the cost of capital of 12%, this project should be accepted according to the IRR method.
Brad Simon - Finance Lecture - Project Valuationbradhapa
This lecture discusses project valuation and capital budgeting. It introduces estimating a company's weighted average cost of capital (WACC) as the hurdle rate for projects. It also covers estimating incremental free cash flows from projects and using time-weighted tools like net present value (NPV) and internal rate of return (IRR) to evaluate whether projects will create or destroy shareholder value based on exceeding the WACC. The key steps are determining the WACC, estimating cash flows, and using tools like NPV and IRR to analyze project value.
This lecture discusses project valuation and capital budgeting. It introduces estimating a company's weighted average cost of capital (WACC) as the hurdle rate for projects. It also covers estimating incremental free cash flows from projects and using time-weighted tools like net present value (NPV) and internal rate of return (IRR) to evaluate whether projects will create or destroy shareholder value based on exceeding the WACC. The key steps are determining the WACC, estimating cash flows, and using tools like NPV and IRR to analyze project value.
OL_06-07_IPE 4111_ Capital Budgeting.pptxSajibDas40
The document discusses capital budgeting, which is the process of planning and evaluating long-term investments. It covers key concepts like net present value (NPV), internal rate of return (IRR), payback period, and profitability index. The steps to capital budgeting are outlined as estimating cash flows, assessing risk, determining the cost of capital, and using methods like NPV and IRR to evaluate whether projects should be accepted. Examples are provided to illustrate how to calculate these metrics and address issues that can arise like mutually exclusive projects.
Investment Analysis for private and Public sector projectsjimsd
The document discusses various concepts related to investment analysis for private and public sector projects. It covers timing of investments, discounting future cash flows, net present value (NPV) analysis, and internal rate of return (IRR). The key questions investment analysis aims to answer are whether to incur costs now for future benefits or use funds for immediate consumption. Private firms seek to maximize shareholder returns while public sectors aim to maximize community welfare.
Capital budgeting involves committing large funds initially for long-term projects with returns expected over many years. It is a continuous process involving multiple departments. Capital budgeting decisions have long-term implications, require substantial funds, are irreversible, and impact future growth. The decision process involves estimating costs/benefits, the required rate of return, and selecting an evaluation method. Common methods are payback period, accounting rate of return, net present value, profitability index, and internal rate of return. Cash flows, risks/uncertainties, and sensitivity must be considered carefully.
Capital budgeting involves planning long-term capital expenditures and investments. There are various techniques used to evaluate capital budgeting proposals, including non-discounting methods like payback period and accounting rate of return, as well as discounted cash flow methods like net present value, internal rate of return, and profitability index. Each method has benefits but also limitations, such as not accounting for the time value of money. Cost of capital refers to the minimum return required to undertake an investment and involves calculating the specific costs of different sources of financing like debt, equity, and retained earnings, as well as weighing them to determine an overall cost.
The value of a forward contract at initiation is zero. Over time, the value depends on the relationship between the forward price and the expected future spot price. Futures prices also converge to the spot price at expiration. Like forwards, futures have value of zero at initiation but are marked to market daily. Factors like storage costs, convenience yields, and interest rates can cause the futures price to be in contango or backwardation relative to the expected future spot price.
L2 flash cards alternative investments - SS 13analystbuddy
The document discusses six main types of real estate investments: 1) Raw land, 2) Residential rentals (apartments), 3) Office buildings, 4) Warehouses, 5) Community shopping centers, and 6) Hotels and motels. For each type, it outlines the main value determinants, investment characteristics, principal risks, and most likely investors. It also provides guidance on testing real estate investments, focusing on understanding the logic rather than memorizing details. Real estate valuation approaches include income approach, cost approach, and sales comparison approach.
L2 flash cards financial reporting - SS 7analystbuddy
The document discusses various definitions of earnings metrics like EBITDA, operating income, and net income. It also discusses the reliability of cash flow trends compared to earnings trends, noting that sustainable earnings growth requires growth in operating cash flows over the long run. Finally, it discusses accounting treatments for different types of hedges, as well as cash versus accrual basis accounting and how management can intervene in the external financial reporting process.
L2 flash cards financial reporting - SS 6analystbuddy
The document discusses various topics related to accounting for inter-corporate investments and post-employment benefits under IFRS. It covers classification of investments, effects of different accounting methods, components of pension obligations and expenses, assumptions used in valuations, and impact on financial statements. Translation of foreign subsidiary financial statements using current and temporal methods is also summarized, along with effects of translation on parent company ratios and treatment of hyperinflationary economies.
L2 flash cards financial reporting - SS 5analystbuddy
The document discusses various inventory costing methods and their effects on financial ratios. It also covers LIFO reserves, converting financial statements between LIFO and FIFO, implications of using net realizable value for inventory valuation, and differences in financial reporting between companies using LIFO versus FIFO. Additional topics covered include capitalization versus expensing costs, various depreciation methods, impairment and revaluation of assets, leasing versus purchasing assets, and classifications of finance versus operating leases.
The document provides information on various statistical and econometric concepts related to correlation, regression, and time series analysis. It defines key terms like scatter plots, correlation coefficients, covariance, standard deviation, outliers, hypothesis testing, dependent and independent variables, assumptions of linear regression, F-tests, R-squared, dummy variables, heteroskedasticity, serial correlation, and trend models. It also provides the formulas and explanations for calculating these various concepts.
The document discusses several topics related to international finance including exchange rates, currency markets, balance of payments, and current and capital accounts. It defines key terms like spot rates, forward rates, currency strength, and covered interest arbitrage. It also summarizes the components of the balance of payments account including the current, capital, and official reserve accounts. Current account deficits are typically offset by financial account surpluses as foreign capital flows finance trade deficits.
Reasons companies may over-report earnings include:
- To meet analysts' earnings expectations or debt covenants.
- To obtain additional financing or higher pay and commissions tied to performance.
- To negotiate concessions from unions, creditors or vendors.
- To save on income taxes through aggressive accounting techniques.
The document discusses various topics related to accounting for inventory, property, plant and equipment, intangible assets, bonds payable, leases, and income taxes. It covers the different costs included in inventory, methods for valuing inventory, calculating depreciation and amortization expense, accounting for bonds payable including premiums and discounts, classification of leases, and temporary versus permanent differences between accounting and taxable income.
The document discusses key components of the income statement, balance sheet, and cash flow statement. It provides definitions and formulas for items such as net income, revenue, expenses, assets, liabilities, equity, operating activities, investing activities, financing activities, and common liquidity and profitability ratios. Calculation of items like net cash from operating activities using both the direct and indirect method is also covered.
The document discusses key aspects of financial statements and financial reporting standards. It provides information on the four basic financial statements, accounting equations, notes to financial statements, auditing standards, and frameworks for setting accounting standards. The purpose of financial reporting is to provide transparent and useful information to investors and other stakeholders, though there are ongoing challenges in achieving global convergence due to differences in business and regulatory environments.
The document discusses several topics related to international trade and foreign exchange markets:
- International trade can provide benefits like increased economies of scale and product variety, but may also result in costs like job losses and income inequality. Countries benefit most from trading goods they have a comparative advantage in.
- Foreign exchange markets allow currencies to be exchanged and determine exchange rates. The value of currencies is influenced by interest rates and supply and demand. Forward rates are calculated based on spot rates and interest rate differentials between countries.
- Institutions like the IMF and World Bank were formed to encourage international cooperation on monetary and trade issues and provide financing to support economic development.
The document discusses various methods for calculating GDP, including the expenditure, income, and production approaches. It also discusses nominal and real GDP, as well as the GDP deflator. Additionally, it covers related topics such as national income, personal income, the business cycle, unemployment, inflation, and factors that can affect price levels.
- Market interactions take place voluntarily between firms and households in the market. Demand and supply curves show the relationship between price and quantity demanded/supplied. The intersection of the curves indicates the market equilibrium price and quantity.
- Firms aim to maximize profits by producing at the quantity where marginal revenue equals marginal cost. They can earn economic profits in the short run but competition drives profits to zero in long run equilibrium under perfect competition. Monopolies can earn economic profits through product differentiation and control of supply.
- Governments sometimes interfere in markets through price floors, ceilings, and taxes which typically result in deadweight losses. Firms minimize costs and maximize profits subject to various market structures and conditions like economies/
There are two types of random variables: discrete and continuous. A probability distribution can be viewed as a probability function or cumulative distribution function (CDF). Properties of these include being between 0 and 1 and the CDF non-decreasing. Binomial and Bernoulli distributions relate to binary outcomes. The normal distribution is widely used in portfolio theory and risk management. Monte Carlo simulation uses probability distributions to generate random samples for modeling complex financial systems.
The document discusses key concepts related to interest rates, time value of money, and financial calculations. It covers topics like discount rates, future and present value calculations, compound interest, yield curves, and bond pricing. Various formulas are presented for NPV, IRR, returns, and other common financial metrics. Descriptive statistics such as distributions, measures of central tendency, variance, and other concepts are also summarized.
The document discusses the CFA Institute Professional Conduct Program which requires all CFA members and candidates to comply with the Code of Ethics and Standards of Professional Conduct. It describes the enforcement process for violations which is overseen by the Disciplinary Review Committee and based on fair process and confidentiality. Potential sanctions for members found in breach of the Code or Standards include public censure, suspension or revocation of CFA charter. It then provides examples of conduct that conforms to and violates each of the seven Standards of Professional Conduct.
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
STREETONOMICS: Exploring the Uncharted Territories of Informal Markets throug...sameer shah
Delve into the world of STREETONOMICS, where a team of 7 enthusiasts embarks on a journey to understand unorganized markets. By engaging with a coffee street vendor and crafting questionnaires, this project uncovers valuable insights into consumer behavior and market dynamics in informal settings."
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
5 Tips for Creating Standard Financial ReportsEasyReports
Well-crafted financial reports serve as vital tools for decision-making and transparency within an organization. By following the undermentioned tips, you can create standardized financial reports that effectively communicate your company's financial health and performance to stakeholders.
1. Capital Budgeting Process:
Steps of the Capital Budgeting Process
Brainstorming potential investment ideas
Gathering and analysing information relating to potential future
cash-flows that different projects can generate.
Capital Budget Planning involves integrating new profitable projects
into the firm’s overall investment strategy.
Post auditing and monitoring helps determine why there is a gap
between the predicted and realized values of sales, net
profit, expenses and cash flows.
Post-Auditing tracks systematic errors
Business operations can be improved
Post-auditing will help the company make better capital
budgeting decisions in the future.
Study Session 11, Reading 36
2. Categories of Capital Budgeting
Types of Projects
Replacement Projects: When the company needs to
replace old equipment in order to continue operations.
Expansion Projects: When the size of the business is
increased and therefore, more uncertainties arise.
New Products and Services: Determining whether the
company should expand its product range into new
markets. The uncertainty (ie risk) is higher for new products
and services than expansion projects.
Safety, Regulatory and Environment Projects: Are normally
forced by government agencies and are high in cost, and
may generate negative returns.
Study Session 11, Reading 36
3. Basic Principle of Capital Budgeting
Capital budgeting considers after tax cash flows (not
earnings), the timing of cash flows, the opportunity cost of
capital, it ignores financing costs, and also sunk costs.
Study Session 11, Reading 36
4. Cash Flow Estimation
Cash flows are used rather than earnings.
Only incremental cash flows are considered
The timing of cash flows is crucial
Opportunity cost of incremental cash flows is considered.
Cash flows on an after tax basis are considered.
Ignores financing cost as after tax cash flows are discounted
at the investor’s cost of capital to derive the ‘Net Present
Value’.
Incremental cash flow –cash flow after decision minus cash
flow without decision
Externalities are considered.
Study Session 11, Reading 36
5. Selection of Capital Projects
Mutually exclusive projects
Project sequencing
Capital rationing
Study Session 11, Reading 36
6. Methods to Evaluate a Single Capital Project
Net Present Value (NPV)
NPV can be calculated as:
CF = Cash flow after tax
r = required rate of return
Outlay = cash flow investment in the beginning
Net Present Value (NPV) is the present value of the after tax
net cash flows that the company will receive in the future from
a given project
If the NPV is >0, the company should invest in the project.
If the NPV is <0, the company should not invest in the project.
Study Session 11, Reading 36
7. Methods to Evaluate a Single Capital Project
Internal Rate of Return (IRR)
The IRR is the discount rate which makes the NPV of the
project = 0. That is, it is the discount rate required to make the
present value of all future cash flows = 0.
IRR can be back solved, using the following formula:
If the IRR of the project is > r (required rate of return), then
the company should invest.
If the IRR of the project is < r (required rate of return), then
the company should not invest.
Study Session 11, Reading 36
8. Methods to Evaluate a Single Capital Project
Payback Period
The Payback Period is the number of years that a projects
takes to fully recover the invested capital in a given project.
The drawbacks of the payback period method are that it does
not consider the riskiness of the expected future cash flows,
the time value of money is ignored, and this it ignores all cash
flows after the payback amount is achieved.
An advantage of the payback period is that it provides an
indicator of the likely liquidity of the project.
Study Session 11, Reading 36
9. Methods to Evaluate a Single Capital Project
Discounted Payback Period
The Discounted Payback Period is the number of years a
project takes to generate its initial invested capital, while
considering the time value of money and the risk profile of the
future cash flows.
However cash flows after the discounted payback period are
ignored.
Study Session 11, Reading 36
10. Methods to Evaluate a Single Capital Project
Average Accounting Rate of Return (AARR)
The Average Accounting Rate of Return is calculated as:
Unlike the other capital budgeting tools, it uses Net Income
(earnings) rather than cash flows.
Advantages of AAR are that it is easily understandable and
simple to calculable.
Disadvantages are that it is not based on cash flows, no time
value of money is captured and AAR does not tell us if it is a
good or a bad investment
Study Session 11, Reading 36
11. Methods to Evaluate a Single Capital Project
Profitability Index
The Profitability Index (PI) is the ratio of the present value of
future cash flows to the investment made initially. It is
calculated as:
For independent projects, a company should invest in a project
if PI > 1.0, and should not invest if PI is < 1.0.
Although PI is not used as frequently as NPV and IRR, it is used
for guiding purposes under capital rationing constraints
Study Session 11, Reading 36
12. NPV and IRR Conflict Due to Different
Cash Flow Patterns
Supply Project A and B have similar initial investment, but
different cash flow:
If the two projects are mutually exclusive and there is a
conflict between the decision suggested by NPV and IRR, an
investor should make the investment decision suggested by
the NPV method.
The reinvestment assumption is basically assuming that the
cash flow will be reinvested at the same discount rate used in
the NPV calculation.
Study Session 11, Reading 36
13. NPV and IRR Conflict Due to
Project Scale
Another issue arises when the scale of the projects is different.
For example, should an investor invest in a smaller project
with a higher return, or a larger project with lower returns (but
still greater than its cost of capital).
An example of conflict between NPV and IRR due to difference
in project scale is exemplified below.
Study Session 11, Reading 36
14. NPV and IRR Conflict Due to Multiple
IRRs
Study Session 11, Reading 36
Multiple IRR problems ‘might’ arise when the sign of cash
flows change twice and the project is non-conventional.
Multiple IRR - IRR satisfy these equations, when IRR was
between 100% and 200% the NPV was positive and at the
peak when IRR = 140%.
15. NPV and IRR Conflict Due to No IRR
It is possible that a project has no IRR at all.
Having no IRR does not mean the project is unacceptable.
Study Session 11, Reading 36
16. Most Common Capital Budgeting
Methods
NPV and IRR are the most taught capital budgeting techniques.
Larger companies prefer NPV and IRR.
Private corporations consider the payback period as access to
capital is more limited.
Study Session 11, Reading 36
17. Relationship between NPV, Company
Value and Stock Prices
Stock Prices and NPV
If listed corporations invest in a positive NPV project, it
increases the wealth of its shareholders.
For example, assume XYZ Corporation invests in a $600m
project which has an after tax cash flow of $850m. XYZ has
200m shares outstanding with a market price of $32 per share.
The value of any company is basically the sum of its current
investments, plus the NPV of its future investments.
Study Session 11, Reading 36
18. Weighted Average Cost of Capital
The cost of capital is directly proportionate to the riskiness of
the expected cash flows .
The cost of capital is the amount of money (compensation)
paid for the supply capital. It compensates owners of the
capital.
An investor will only invest, if the returns meet or exceed its
cost of capital.
The Marginal Cost of Capital is the cost of additional capital
needed for a potential project investment
Study Session 11, Reading 37
19. Weighted Average Cost of Capital
The WACC can be calculated as:
t = marginal tax rate company
= proportion of debt taken by company
= before –tax marginal cost of debt
= marginal cost of preferred stock
= proportion of preferred stock the company uses
= marginal cost of equity
= proportion of equity the company uses.
Study Session 11, Reading 37
20. Impact of Tax on the Cost of Debt
If debt is included in the capital structure of the company, tax
reduces the cost of capital because interest on debt is typically
tax deductible.-
The Cost of Debt finance is therefore typically expressed as
r-d(1-t)
Study Session 11, Reading 37
21. Estimating the Cost of Equity
Estimating the cost of common equity is more difficult than
estimating the cost of debt.
That being said, several methods can be used to estimate the
cost of equity, based on equity market values
In the case of preferred stock, calculating the cost of capital is
easier as the dividends are typically fixed.
Study Session 11, Reading 37
22. Weighted Average Cost of Capital
Analysts can use three approaches to estimate the capital
structure of a company for the purpose of calculating the
WACC:
Assume the current capital structure is ongoing.
Examine the past trend and management statements
regarding the capital structure
Use industry average as the target capital structure
Study Session 11, Reading 37
23. Marginal Cost of Capital
An optimal capital budget occurs when capital is invested to
the point that the marginal cost of capital is equal to the
marginal return of the investment.
If the systematic risk of a certain project is higher or lower
than the average of the current project portfolio, a respective
adjustment is made to the WACC of the company
Study Session 11, Reading 37
24. Debt Rating Approach
If the current market price of debt issued by a company is not
available, then the debt-rating approach is used to estimate
the before-tax cost of debt.
The debt rating approach considers the cost of debt of other
observable companies, with a similar credit rating and other
characteristics.
Study Session 11, Reading 37
25. Cost of Preferred Stock
If the current market price of debt issued by a company is not
available, then the debt-rating approach is used to estimate
the before-tax cost of debt.
The debt rating approach considers the cost of debt of other
observable companies, with a similar credit rating and other
characteristics.
Study Session 11, Reading 37
26. Capital Asset Pricing Model
Under the capital asset pricing model (CAPM) approach, we
use the basic CAPM theory to come to the conclusion
expected return on a stock, as highlighted in the following
formula:
The equity risk premium (ERP) of the CAPM is
Study Session 11, Reading 37
27. Capital Asset Pricing Model
A multifactor model incorporates factors like priced
risk, macro-economic factor and factors specific to company
types. It is an alternative to the CAPM (which only considers
systematic risk as its sole factor). A typical factor risk premium
is:
Study Session 11, Reading 37
28. The Historical Equity Risk Premium
Approach
The historical equity risk premium approach assumes that the
equity risk premium calculated over a long period of time is a
good indicator of the expected equity risk premium.
Study Session 11, Reading 37
29. The Survey Approach
Under the survey approach, a panel of experts are asked to
estimate an equity risk premium. The average of those results
is taken.
Study Session 11, Reading 37
30. Dividend Discount Model Approach
The dividend discount model approach uses the following
formula:
where the expected dividend is divided by current share price
plus the expected dividend growth rate.
We use this formula to find out the required rate of
return, from which we subtract the risk free rate to arrive at an
estimate of the risk premium.
Study Session 11, Reading 37
31. The Gordon Growth Model
The Gordon Growth Model can be defined as:
where:
V = the intrinsic value of a share
D = dividend per share
r= cost of equity
Study Session 11, Reading 37
32. Bond-Yield-Plus Risk-Premium
The bond yield plus risk premium (BYPRP) approach suggests
that the cost of capital for equity capital (the riskier cash flows)
is higher than the cost of debt (the less risky cash flows).
re=rd + Risk Premium
Here, the risk premium is compensation for the additional risk
of equity capital relative to debt capital.
Study Session 11, Reading 37
33. Estimating Beta
Beta estimates are sensitive to estimation methods such as:
Estimation period
Periodicity of the return interval
Selected of appropriate market index
Smoothing technique
Adjustment for small-cap stocks
Study Session 11, Reading 37
34. Country Risk Premium for a
Developing Country
Investors need to be compensated for bearing country risk.
A country spread estimate is also the sovereign yield spread. It
is also the difference between the government bond yield of
the country and a similar Treasury Bond Yield with same
maturity in the home country. Equity premium of country can
be calculated as follows:
Study Session 11, Reading 37
35. Marginal Cost of Capital Rises as
Additional Capital is Raised
As companies raise more funds, the cost of capital changes for
two reasons:
The company may be unable to issue additional debt at the
same seniority level as its existing debt. Hence has to offer
additional debt at higher rates.
The deviation from the target capital structure due to
‘lumpiness’ of security issuance.
Study Session 11, Reading 37
36. Breaking Points of Capital Structure
A breaking point in capital structure occurs when the cost of
capital changes due to a change in source.
Raising capital is not typically smooth. Therefore, raising new
capital may result in a step up in the capital cost schedule.
Study Session 11, Reading 37
37. Flotation Costs
Flotation Costs are a fee that investment banks charge
companies for assistance in raising capital. The size of the fee
depends on the size and type of capital that a company raises.
There are two methods to treat flotation costs:
Add flotation costs into the cost of capital.
Flotation costs should be added into a project’s
evaluation, and not in the cost of capital.
Study Session 11, Reading 37
38. Leverage
A highly leveraged company has volatile earnings and cash
flows which in turn increases the risk of lending.
Highly leveraged companies have a higher probability of
bankruptcy in downturns of the economic cycle.
Study Session 11, Reading 38
39. Fixed Cost Leverage
The cost structure of a company consists of two components:
variable costs and fixed costs.
Variable costs fluctuate with the number of goods produced.
Fixed costs stay constant, regardless of output levels.
A company with a greater portion of fixed costs vs. variable
costs has greater variation in net income, because small
changes in revenue can have a greater impact on earnings.
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40. Business Risk
Business risk is possibility that a company will achieve lower
than expected profits.
Business risk is a combination of sales and operating risk.
Sales Risk
Operating risk
Financial risk relates to how a company finances its operating
assets.
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41. Degree of Operating Leverage
The Degree of Operating Leverage is the ratio of fixed to
variable costs. The level of operating risk largely relates to the
industry that the business operates in.
It calculates the operating income elasticity to a change in
revenue (ie how sensitive operating income is to changes in
revenue). .
DOL = (% change in operating income)/(% change in units sold)
Operating Income = (# of units sold) [(Price/ unit)-(Variable
cost / unit)] - [Fixed operating costs]
Study Session 11, Reading 38
42. Degree of Financial Leverage
The Degree of Financial Leverage (DFL) tells us how sensitive
net income is to a change in operating income.
Degree of Financial Leverage = (% change in net income)/(%
change in operating income)
The Degree of Total Leverage is the sum of the Degree of
Operating Leverage and the Degree of Financing Leverage.
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43. Effect of Financial Leverage on A
Company’s Net Income
Financial leverage can improve the ability of a company to
earn a greater return on shareholder capital.
Financial leverage magnifies increases in earnings per share
during periods of rising operating income, but adds to the risks
for stockholders and creditors because of added interest
obligation.
A firm that has a higher amount of debt also has additional
fixed financial costs in the form of interest payments.
Financial leverage (or gearing) can be calculated as:
Financial Leverage (Debt on Equity Ratio) = Debt / Equity
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44. Return on Equity
Higher financial leverage is riskier than a firm with low
financial leverage, the return on equity (ROE) may be higher
since the highly leveraged firm is using borrowed money to
invest in profitable (positive NPV) projects.
Return on Equity can be calculated as:
Return on Equity = Return on Assets Financial Leverage
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45. The Break-Even Point
Breakeven analysis indicates the relationship between cost,
production, volume and returns.
The business owner or manager usually considers several
factors when studying break-even analysis:
The capital structure of the company.
Variable expenses.
Fixed expenses such as rent, insurance, heat, and light.
The inventory, personnel, and space required to operate
properly.
Setup of the organization.
Study Session 11, Reading 38
46. The Break-Even Point
The Breakeven Point can be calculated as:
Breakeven Point =
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47. The Break-Even Point
Study Session 11, Reading 38
Variable costs
Break Even Point
Profit
Output Volume
Sales
$
100
0
100
Fixed Costs
Total Costs
Revenue
48. Margin of Safety
The Margin of Safety enables a business to know the amount it
has gained or lost for each quantity of sales. It helps a business
easily determine whether they are over or below the
breakeven point.
It can be calculated as:
Margin of Safety = Total budgeted or actual sales − Break even sales
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49. Dividends
A payment made out of a firm’s earnings to its owners, in the
form of either cash or stock.
If a payment is made from other sources than current or
accumulated retained earnings, the term distribution is used.
A distribution from earnings is a dividend, while a distribution
from capital is a liquidating dividend.
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50. Stock Splits
A stock split is usually undertaken by companies that have
seen their share price increase to levels that are either too
high or are beyond the price levels of similar companies in
their sector.
A Reverse stock split or reverse split occurs when a company
issues a smaller number of new shares to each shareholder, in
proportion to that shareholder's original shares.
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51. Dividend Payment Chronology
Dividend is the payment declared by a company’s board of
directors and given to its shareholders out of the company's
current or retained earnings.
The key dates relating to the payment of a dividends are:
Declaration Date
Ex-dividend Date
Record Date
Payment Date
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52. Methods of Share Repurchases
On-market share repurchases occur when a company buys
back its own shares in the marketplace, reducing the number
of outstanding shares.
Off-market share repurchase is any purchase of shares directly
from the shareholders.
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53. Reasons for Share Repurchases
Repurchase announcements are viewed as positive signals by
investors because the repurchase is often motivated by
management's belief that the firm's shares are undervalued.
It can remove a large block of stock that is overhanging the
market and keeping the price of per share down.
Companies can use the residual model to set a target cash
distribution level, then divide the distribution into a dividend
component and a repurchase component.
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54. Earnings Per Share (EPS)
Earnings Per Share (EPS) represents the portion of a
company's earnings, net of taxes and preferred stock
dividends, that is allocated to each share of common stock.
EPS can be calculated by dividing net income earned in a given
reporting period by the total number of shares outstanding
during the same period.
Earnings Per Share (EPS) =
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55. Price Effect of a Stock Repurchase
A stock repurchase typically has the effect of increasing the
price of a stock as it signals to the market that management
believe the stock is undervalued.
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56. Book Per Value Share
Book value per share indicates the book value of each share of
stock. Book value is a company's net asset value, which is
calculated by total assets minus total liabilities.
Its formula is:
Book value per share =
Study Session 11, Reading 39
57. Impact of Share Repurchases on
Book Value Per Share
A share repurchase can be either positive or negative for book
value per share, depending on the share repurchase price
relative to book value.
If the share repurchase is undertaken at a price less than book
value, then the repurchase will be BVPS accretive. If it is
undertaken at a price greater than book value, then it is BVPS
decretive.
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58. Shareholder’s Wealth
A share repurchase can be either positive or negative for book
value per share, depending on the share repurchase price
relative to book value.
If the share repurchase is undertaken at a price less than book
value, then the repurchase will be BVPS accretive. If it is
undertaken at a price greater than book value, then it is BVPS
decretive.
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59. Liquidity Position
Sources of Liquidity
The liquidity of an asset is its ease of convertibility into cash or
a cash equivalent asset.
The investment portfolio represents a smaller portion of
assets, and serves as the primary source of liquidity.
Secondary sources include negotiating debt
contracts, liquidating assets, and filing for bankruptcy and
reorganization.
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60. Factors Influencing Liquidity Position
Liquidity risk can arise through the inability to access, at
economically viable conditions, the financial resources needed
to guarantee the firm’s ability to operate.
The two main factors influencing the firm’s liquidity position
are the resources generated or used by operating and
investing activities, and the maturity and renewal profiles of
debt or liquidity profile of financial investments.
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61. Working Capital
Working Capital it the relationship between a firm's short-term
assets and its short-term liabilities.
It indicates the ability to satisfy both maturing short-term debt
and upcoming operational expense.
Formula of working capital:
Working Capital = Current Assets - Current Liabilities
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62. Measuring Liquidity
The Cash Ratio is a formula for measuring the liquidity of a
company by calculating the ratio between all cash and cash
equivalent assets and all current liabilities.
The Cash Ratio is measured as:
Cash ratio =
=
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63. Operating Cycles
An operating time cycle is the average time period between
the acquisition of inventory and the receipt of cash from the
inventory's sale.
A short operating cycle means a more prompt return on
investment for the firm's inventory.
Operating cycle calculations are completed with this formula:
Operating cycle = DIO + DSO – DPO
DIO represents day’s inventory outstanding
DSO represents day sales outstanding
DPO represents day’s payable outstanding.
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64. Cash Conversion Cycles
The cash conversion cycle is the duration of time it takes a firm
to convert its activities requiring cash back into cash returns.
The cycle is composed of the three main working capital
components:
Accounts receivables outstanding in days (ARO)
Accounts payable outstanding in days (APO)
Inventory in days (IOD).
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65. Cash Position Management
Managing short-term cash flows may result in reducing costs.
Carrying costs indicates the return forgone by investing too
heavily in short-term assets.
Shortage cost is the cost of running out of short-term assets.
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66. Forecasting
Predict minimum cash balances during the specific period.
Measuring the typical cash inflows and outflows of the
company in a period.
Prepare cash forecasts for shorter periods of time if cash flows
are tight.
Cash flow forecasting is extremely difficult in periods of rapid
growth.
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67. Net Cash Position
Net Cash Position can be calculated as:
NCP = WC –WCR
Where,
NCP = Net Cash Position
WC = Working Capital
WCR = Working Capital Requirement
If WC > WCR : we have a positive net cash position
If WC < WCR : we have a negative net cash position
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68. Daily Cash Flows Monitoring
It is important to collect cash flow information on a timely
basis.
Use short-term investments and borrowings to help with cash
position management.
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69. What is Yield?
Yield is one component of the total return of holding a
security.
A high yield on one security may be offset by a decline in
market value of the capital over the period. Higher return
often means higher risk .
Yield levels are impacted by inflation expectations.
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70. Yield To Maturity
Yield to Maturity (YTM) is the rate of return anticipated on a
bond if it is held until the maturity date.
YTM is calculated as:
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71. Short Term Investments
Money market funds can be used as short-term investment
vehicles.
They provide flexibility to a company’s liquidity position as
they can be sold at any time at the current share price.
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72. Management of Inventory
Inventory management is the process of efficiently overseeing
the constant flow of units into and out of an existing inventory.
Inventory turnover can be used to measure how efficiently a
company is using its inventory. It can be calculated as:
revenue/average inventory
Buffer stock is additional units above and beyond the
minimum number required to maintain production levels.
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73. Accounts Receivable
Accounts receivable represents money owed by entities to the
firm on the sale of products or services on credit.
The process commences with a receipt of a customer order
and ends with the collection of the cash from the customer
Receivables turnover is calculated as:
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74. Accounts Payable
Accounts payable are debts that must be paid off within a
given period of time in order to avoid default. They are usually
debts owed to suppliers of the business.
The accounts payable turnover ratio indicates how many times
a company pays off its suppliers during an accounting period.
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75. Short Term Funding
Short-term financing programs are designed to be repaid
within a one-year period and are designed to meet the various
needs of companies.
Short-term Financing Methods facilitate the smooth running of
business operations by meeting day to day financial
requirements.
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76. Modes of Financing
Unsecured Loans
If the company`s credit rating is deficient, the bank may lend
money only on a secured basis
Under a revolving line of credit, the bank agrees to lend
money up to a specified amount on a recurring basis.
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77. Calculating the Cost of Finance
In order to compare the costs of various sources of short term
finance, an analyst may use:
Annual Rate of Interest=
When credit is unavailable from a bank, the company may
have to go to a commercial finance company, which typically
charges a higher interest rate than the bank and requires
collateral.
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80. Proforma Statements
Performa statements are made on last year’s results with a
bold assumption that the company will grow similar to its last
year’s results.
Proforma analysis incorporates:
Relationship between revenues and sales are estimated
Revenues forecasting
Financial burdens estimation
Income statement and balance sheet construction on the
basis of predictions
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81. Corporate Governance
Corporate governance can be defined as the system by which
companies are directed and controlled.
Corporate governance structure specifies the distribution of
rights and responsibilities among different participants in the
corporation
It also provides the structure through which the company
objectives are set, and the means of attaining those objectives
and monitoring performance.
There are no formal penalties for non-compliance
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82. The OECD and Corporate Governance
The Organisation for Economic Co-operation and Development
(OECD) has set out principles of corporate governance that
countries may use to develop their own standards of corporate
governance. These principles are as follows.
The corporate governance framework should promote
transparent and efficient markets
The corporate governance framework should protect and
facilitate the exercise of shareholder’s rights.
The corporate governance framework should ensure the
equitable treatment of all shareholders
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83. Shareholder Protection
When investors finance firms, they typically obtain certain
rights or powers that are generally protected through the
enforcement of regulations and laws.
Rules protecting investors include
company, security, bankruptcy, takeover, and competition
laws, but also from stock exchange regulations and accounting
standards.
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84. The Role of the Board of Directors
The primary responsibility of the Board is to foster the long-
term success of the corporation, consistent with its fiduciary
responsibility to shareowners.
To carry out this responsibility, the Board must ensure that it is
independent and accountable to shareowners and must exert
authority for the continuity of executive leadership with
proper vision and values.
The Board is singularly responsible for the selection and
evaluation of the corporation's CEO and included in that
evaluation is assurance as to the quality of senior
management.
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85. Benefits of Independent Board
Members
Counterbalance management weaknesses.
Ensure legal and ethical behaviour at the company, while
strengthening accounting controls.
Extend the “reach” of a company through
contacts, expertise, and access to debt and equity capital.
Help a company survive, grow and prosper over time
through improved succession planning
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86. Qualifications of Board Members
Leadership Experience
Industry-specific experience
Area of expertise
Relationships
Diversity
Time
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87. The Audit Committee
An audit committee is an operating committee of the Board of
Directors that the responsibility of providing oversight of
financial reporting and disclosure.
Committee members are drawn from members of the
company's board of directors.
A qualifying audit committee is sometimes required for a
company to be listed on a stock exchange.
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88. The Compensation Committee
The Compensation Committee has primary responsibility for
reviewing and approving the compensation of the Company's
CEO and other executive officers; overseeing the Company's
benefit plans; and reviewing and making recommendations to
the full Board regarding Board compensation.
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89. The Nomination Committee
The Nomination Committee has role of evaluating the board of
directors and examining the skills and characteristics that are
needed in board candidates.
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90. Corporate Code of Ethics
A code of business ethics often focuses on social issues.
A Corporate Code of Ethics may set out general principles
about an organization's beliefs on matters such as
mission, quality, privacy or the environment.
It should dictate procedures to determine whether a violation
of the code of ethics has occurred and, if so, what remedies
should be imposed.
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91. Areas of Shareholder Rights
Voting Rules
Shareholder Sponsored Proposals
Common Stock Classes
Takeover Defenses
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