Dr. Keith M. Howe

Financial Management II

Summer 2005

10 Things you should about Financial Management

  1. Time value of money
  • Compounding and discounting
  • Present value and future value
  • The magic of time line
  • Annuity, growing annuity, perpetuity, and growing perpetuity
  • Non-annual compounding
  • APR and EAR
  1. Valuation of securities
  • Bonds (discount bonds as well as coupon bonds)
  • Yield to Maturity (YTM)
  • Preferred shares
  • Common stocks

General formula

Dividend Growth Model

(EPS/r) + PVGO

etc.

  1. NPV and Capital Budgeting
  • Cash Flows From Assets

Operating Cash Flow (EBIT + Depreciation – Taxes)

+ Changes in NWC

+ Capital Spending

  • The discount rate (real versus nominal)
  • Corporate Investment Strategy and NPV
  • Real Options (definition, key variables in option pricing)
  • Investment with different lives

Repeated Project and Equivalent Annuity Cost (EAC)

  1. Alternative Investment Rules
  • Payback, NPV, IRR, and PI
  1. Risk
  • Expected Return and Standard Deviation of a Security
  • Portfolio Risk
  • Expected Return and Standard Deviation of a Portfolio
  • Distinguishing Covariance from Correlation and Knowing how to use each
  • CAPM and BETA
  1. Risk, Return, and Capital Budgeting
  • WACC

How to calculate (market weights, cost of debt, cost of equity, etc.)

How to use it after calculation

  • When WACC would not be applicable to Project Evaluation?
  • What are the solutions to this problem?

The divisional cost of capital

Pure play approach

Subjective approach

  1. Capital Structure
  • Why Do Firms Borrow
  • Capital Structure in a Perfect Market

MM Proposition 1

MM Proposition 2

  • Capital Structure and Market Imperfections

Corporate taxes and revised MM Propositions

Cost of financial distress

Take on large risks

Under-investment

“Milk” the property

Personal taxes

  • Two alternatives for Valuation
  • A practical approach to capital structure
  1. Capital Structure and Capital Budgeting
  • The APV approach
  • The flows-to-equity
  • The WACC approach
  1. Dividend Policy
  • Dividend policy in a perfect market
  • The impact of market imperfection
  • Guidelines in choosing dividend policy
  1. Financial Planning
  • Short term and long term
  • The Operating Cycle and the Cash Cycle
  • Alternative Financing Policies for Current Assets
  • Cash Management