Strategic Business Management
Summary Notes
Investment Appraisal 3
IRR & MIRR 3
Foreign Investment Appraisal 3
Remittance Restrictions 4
Non-financial considerations 4
Strategic Analysis 4
Internal analysis models 4
External analysis models 4
Strategic choice and generic ideas 5
Financial issues 5
Operational issues 5
Strategic issues 5
Digital issues 5
Strategic implementation 5
Organic growth, acquisition 5
Change management 5
Organisational structures 6
Marketing strategy 6
Supply Chain management 6
Customer relationship management 6
Risk management 7
Human Resource management 7
Information 7
Evaluating information 7
Information strategy 7
Costing methods 8
Breakeven analysis 8
Performance measurement and management 8
Red flags 8
Balanced scorecard 8
Beyond budgeting approach 8
Business valuation 9
Loss making company 9
Start-up 9
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, Price earnings method (P/E) 9
Dividend valuation model 9
Discounted Earnings 10
Free cash flow 10
Adjusted Present value 10
Value Based Methods 11
Net asset approach 11
Brand valuation 12
Valuation of debt 12
Finance 12
Considerations 12
Equity sources 12
Debt sources 13
Overseas finance 13
Dividend policy 14
Financial reconstruction 14
Financial Distress 14
Financing options for SMEs 14
Divestment 15
Financial Risk Management 16
Foreign exchange rate risk 16
Traded caps, collars and floors 16
Mitigating credit and liquidity risk 16
Dividend management for overseas subsidiaries 16
Treasury and working capital management 17
Global treasury management 17
Multilateral Netting off 17
Due Diligence 17
Objectives - Benefits 17
Assurance on business plans and forecasts 18
Assurance of service providers 18
Corporate Governance 19
Executive remuneration 19
Board structures 20
Technology 20
Financial Statement analysis 21
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, Investment Appraisal
• Accounting rate of return
• Payback period
IRR & MIRR
The IRR is the discount rate which gives an NPV = 0. Projects are accepted if the IRR is more than the cost of
capital because that means that the cost of capital will give a positive NPV when discounted. The IRR formula is as follows:
𝑁𝑃𝑉𝑎
𝐼𝑅𝑅 = 𝑟𝑎 + [ × (𝑟𝑎 − 𝑟𝑏 )]
𝑁𝑃𝑉𝑎 − 𝑁𝑃𝑉𝑏
For perpetuity projects (i.e. projects where an initial investment is followed by a simple perpetuity of returns) the IRR is
calculated as:
𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠
𝐼𝑅𝑅 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Problems with IRR
● A project can have no IRR or multiple IRRs
● Ranking projects according to their IRR can give different rankings than NPV and thus create an inconsistency.
NPV shall always be chosen over IRR in terms of ranking projects.
● The IRR represents the return from a project if the funds can be reinvested at the IRR. This problem is avoided by
applying the Modified Internal Rate of Return (MIRR) by applying the below formula:
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑛𝑒𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝐼𝑁𝐹𝐿𝑂𝑊𝑆 1
𝑀𝐼𝑅𝑅 = ( )𝑛 − 1
𝑃𝑉 𝑜𝑓 𝑛𝑒𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑂𝑈𝑇𝐹𝐿𝑂𝑊𝑆
Compare to the target return required and if MIRR > discount rate higher, accept the project.
Foreign Investment Appraisal
1. Convert foreign cash flows into the home currency, then discount using the firm’s normal cost of capital; To do
this, we will need to calculate FX rates for each year and translate each year’s cash flows into the home
currency.
2. Leave in foreign currency and discount at adjusted cost of capital using
𝐹𝑋 𝑟𝑎𝑡𝑒𝑡1
1 + 𝑟𝑎𝑑𝑗 = 𝑥 (1 + 𝑟)
𝐹𝑋 𝑟𝑎𝑡𝑒𝑡0
Then adjust PVs are translated using the current spot rate
In foreign NPV calculations there could be double taxation adjustments:
• If the foreign tax rate > UK tax rate → No additional tax on that income will be payable in the UK
• If the UK tax rate > foreign tax rate → Foreign tax on the foreign income, plus extra tax will be payable in the
UK on the same income: Foreign income×(UK rate - foreign rate)
The benefit of any foreign subsidiaries should be included in the NPV calculation
Do NOT include any cash flows which can’t be repatriated into the UK.
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Summary Notes
Investment Appraisal 3
IRR & MIRR 3
Foreign Investment Appraisal 3
Remittance Restrictions 4
Non-financial considerations 4
Strategic Analysis 4
Internal analysis models 4
External analysis models 4
Strategic choice and generic ideas 5
Financial issues 5
Operational issues 5
Strategic issues 5
Digital issues 5
Strategic implementation 5
Organic growth, acquisition 5
Change management 5
Organisational structures 6
Marketing strategy 6
Supply Chain management 6
Customer relationship management 6
Risk management 7
Human Resource management 7
Information 7
Evaluating information 7
Information strategy 7
Costing methods 8
Breakeven analysis 8
Performance measurement and management 8
Red flags 8
Balanced scorecard 8
Beyond budgeting approach 8
Business valuation 9
Loss making company 9
Start-up 9
P
a
g
1 | eP a g e
, Price earnings method (P/E) 9
Dividend valuation model 9
Discounted Earnings 10
Free cash flow 10
Adjusted Present value 10
Value Based Methods 11
Net asset approach 11
Brand valuation 12
Valuation of debt 12
Finance 12
Considerations 12
Equity sources 12
Debt sources 13
Overseas finance 13
Dividend policy 14
Financial reconstruction 14
Financial Distress 14
Financing options for SMEs 14
Divestment 15
Financial Risk Management 16
Foreign exchange rate risk 16
Traded caps, collars and floors 16
Mitigating credit and liquidity risk 16
Dividend management for overseas subsidiaries 16
Treasury and working capital management 17
Global treasury management 17
Multilateral Netting off 17
Due Diligence 17
Objectives - Benefits 17
Assurance on business plans and forecasts 18
Assurance of service providers 18
Corporate Governance 19
Executive remuneration 19
Board structures 20
Technology 20
Financial Statement analysis 21
P
a
g
2 | eP a g e
, Investment Appraisal
• Accounting rate of return
• Payback period
IRR & MIRR
The IRR is the discount rate which gives an NPV = 0. Projects are accepted if the IRR is more than the cost of
capital because that means that the cost of capital will give a positive NPV when discounted. The IRR formula is as follows:
𝑁𝑃𝑉𝑎
𝐼𝑅𝑅 = 𝑟𝑎 + [ × (𝑟𝑎 − 𝑟𝑏 )]
𝑁𝑃𝑉𝑎 − 𝑁𝑃𝑉𝑏
For perpetuity projects (i.e. projects where an initial investment is followed by a simple perpetuity of returns) the IRR is
calculated as:
𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠
𝐼𝑅𝑅 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Problems with IRR
● A project can have no IRR or multiple IRRs
● Ranking projects according to their IRR can give different rankings than NPV and thus create an inconsistency.
NPV shall always be chosen over IRR in terms of ranking projects.
● The IRR represents the return from a project if the funds can be reinvested at the IRR. This problem is avoided by
applying the Modified Internal Rate of Return (MIRR) by applying the below formula:
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑛𝑒𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝐼𝑁𝐹𝐿𝑂𝑊𝑆 1
𝑀𝐼𝑅𝑅 = ( )𝑛 − 1
𝑃𝑉 𝑜𝑓 𝑛𝑒𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑂𝑈𝑇𝐹𝐿𝑂𝑊𝑆
Compare to the target return required and if MIRR > discount rate higher, accept the project.
Foreign Investment Appraisal
1. Convert foreign cash flows into the home currency, then discount using the firm’s normal cost of capital; To do
this, we will need to calculate FX rates for each year and translate each year’s cash flows into the home
currency.
2. Leave in foreign currency and discount at adjusted cost of capital using
𝐹𝑋 𝑟𝑎𝑡𝑒𝑡1
1 + 𝑟𝑎𝑑𝑗 = 𝑥 (1 + 𝑟)
𝐹𝑋 𝑟𝑎𝑡𝑒𝑡0
Then adjust PVs are translated using the current spot rate
In foreign NPV calculations there could be double taxation adjustments:
• If the foreign tax rate > UK tax rate → No additional tax on that income will be payable in the UK
• If the UK tax rate > foreign tax rate → Foreign tax on the foreign income, plus extra tax will be payable in the
UK on the same income: Foreign income×(UK rate - foreign rate)
The benefit of any foreign subsidiaries should be included in the NPV calculation
Do NOT include any cash flows which can’t be repatriated into the UK.
P
a
g
3 | eP a g e
