ACCA Financial Management

primary internal source: Retained Earnings

BUT if substantial RE but not enough cash, the company will not be able to finance an investment. Therefore retained cash is the source of finance

Retained cash has no issue costs & flexible in terms of amount used/repayment patterns

Other internal finance can be generated by increasing working capital efficiency

..

Companies should follow an established pecking order to raise finance simply & efficiently

1.  minimize cost
   1. cheapest: internal finance - Retained earnings
   2. bonds/bank loans
   3. equity issue
2. minimize time & expenses involved in persuading external investors
   1. if RE available, no need for external investors
   2. debt requires less time & cost than equity issue
3. asymmetrical information
   1. Mgmt knows more about the company than investors, and therefore their actions are interpreted by the market as insider info
      1. Equity issue interpreted as bad because mgmt with favourable inside info would like to avoid issuing shares because they would be undervalued
         1. A share issue impacts a company's value by diluting existing ownership, potentially lowering earnings per share (EPS), and changing the debt-to-equity ratio.
4. available sources
   1. new start ups dont have any RE and cannot borrow, so they are typically equity financed
   2. for growing companies, debt is preferred over equity (cheaper quicker easier)
   3. well-established companies can finance expansion with Retained Earnings. they will become heavily equity financed since RE is component of equity

Operating CF - Interest - Taxes: Interest & Taxes are committed cost, therefore focus is on maximising Operating CF

Operating CF = Operating Profit before depreciation & amortisation + Working Capital

Inventory +/- = Cash -/+

Receivables +/- = cash -/+

Payables +/- = cash +/-

A direct sale to the general public (most expensive method of raising equity)

An indirect sale to the public by selling shares directly to an issuing house (investment bank) which sells them to the public

the sponsor (investment bank) places the shares with its clients (pension funds etc) rather than offering shares to the general public (least expensive method of issuing new shares)

an offer to existing shareholders to buy new shares in proportion to their existing holdings

auction: public is invited to bid for share (useful if setting shareprice is difficult)

ordinary shareholder take more risk than any other investor

• ordinary dividends are discretionary -> company has no legal obligation to pay, shareholders could become nothing
• ordinary shareholder rank last in the event of bancrupcy/liquidation

Shareholders therefore require high returns to compensate for this risk

the expected share price after the rights issue.

(Pre-existing value of equity + proceeds of rights issue + project NPV) / nr of shares after right issue

• proceeds of rights issues are NET of issue cost
• if project was already anounced and market has semi-strong level of efficiency, the NPV is already included in the existing share price and does not need to be added

An issue of new shares or debentures to existing members, generally in the same proportions as their existing holdings. No payment is required from members as the bonus shares or debentures are paid up using the company's profits or reserves.

• investing
• financing
• dividend poliy

Dividend + = retained cash- = need for external financing +

Asset expenditure + = need for finance + = dividend -

• Venture Capital
  • a form of investment in startups and young companies with high growth potential, providing them with funding, expertise, and connections in exchange for a minority equity stake in the company.
• Private Equity Funds
  • Private Equity (PE) invests in established, mature companies to improve their operations and profitability, often taking majority stakes or full ownership, while Venture Capital (VC) focuses on early-stage startups with high growth potential, investing smaller amounts for minority stakes and accepting higher risks
• Business Angels
  • wealthy private individuals, often former entrepreneurs or executives, who invest their own capital into promising, newly-founded companies with high growth potential, usually in exchange for a minority stake (equity) in the business.
• Government Assistance
• Crowdfunding

• negotiable security evidencing a debt governed by a contract which specifies coupon rate, repayment schedule etc
• = loan note
• fixed harge over specified asset that cannot be sold unless debt is repayed
• floating charge over class of assets. on default, floating turns fixed and the asset class can no longer be traded until debt is repayed
• redeemable & unredeemable
• IR = fixed coupon in % of NV

• loan notes issued at substantial discount to NV and redeemable at NV on maturity
• low coupon rate but large capital gain on redemption
• cash flow advantage to borrower

Operating Profit (EBIT) / Sales * 100

Operating Profit (EBIT) / Capital Employed * 100

Capital Employed = Total assets - ST liabilities

Operating profit margin × asset turnover

Net Income - preference div / Shareholder funds * 100

If preference div. are classified as liabilities, they do not need to be deducted since it is already included in finance costs

Current Assets / Current Liabilities

Current Assets - Inventory / Current Liabilities

= Av. accounts receivable / Credit sales * 365

average acc. payable / credit purchases * 365

Average Inventory / Cost of Sales * 365

= Inventory holding Period + Receivables collection period - Payables payment period

Sales / Capital Employed

Sales / Working Capital

Non-current Liabilities / Equity + Reserves

>100% = highly geared

non-current liabilities / Capital employed

Capital employed = total capital -> >50% = highly geared

Fixed Operating Costs / Variable Operating Costs

Fixed Operating Costs / Total Costs

Contribution / Operating Profit

-> Contribution = Revenue - VK

• In cases where a business has high fixed costs as a proportion of its total costs, the business is deemed to have a high level of operational gearing.

  Potentially this could cause the business problems in as it relies on continuing demand to stay afloat.

• If there is a fall in demand, the proportion of fixed costs to revenue becomes even greater. It may turn profits into serious losses.

  Normally, businesses cannot themselves do a great deal about the operational gearing, as it may be typical and necessary in the industry, such as the airline business