INTERNATIONAL FINANCE MANAGEMENT
CHAPTER 1 – THE FINANCE FUNCTION
TWO KEY CONCEPTS
- First of all that money is dependent on time. During, the inflation will sink and rise. Inflation will
decide how much money is worth, therefore you should predict the right timing.
- Second the relationship between risk and return: if there is a higher risk in a company than it will
have higher chance that the actual return will be different from the expected return. You can
measure risk by standard deviation. Investors need this method, so that they will know what is smart
to invest in and what is not.
EXAM Q:
Shareholder return = annual dividend (D1) + share price increase (P1 – P0)
Relative return (in percentage terms) = 100 * ((P1 – P0) + D1)/ P0
= TOTAL SHAREHOLDER RETURN
FUTURE VALUES
- compounding:
* you add 1 because you want to know what it will be like in 1 year from now (future values)
Example: invest € 100 now at 5% interest per year:
1st year = € 105 = 100 * 1.05 (+ 1 year + 5% interest)
2nd year = € 110,25 = 105 (outcome from 1 st year) * 1.05 (+ 1 year + 5 % interest)
PRESENT VALUES
- discounting:
,* this is the opposite calculation of the one about future values
Example: what sum of money invested now at 5% will give € 120 in 2 years time?
€ .05² (because 2 years have passed) = € 108.84
> if your required rate of return would be 5% than this would be your present value, another word for
calculating your present value is DISCOUNTING.
DECISION-MAKING AREAS
The tasks of a financial manager’s is divided into three areas and the key point is to understand the
interrelationship of these three decision areas:
1. financing decisions
2. dividend decisions
3. investment decisions
,Example:
> investment = company decides to take on a number of attractive new investment projects.
> finance = company will need to raise finance to take up these investment projects.
> dividends = if the finance is not available from external sources, the dividends may need to be cut
to increase the internal financing for the investment projects.
* They do not need to work in this order, it can also start with dividends or finance and then get
followed up. This is called the interrelationship.
* The financial manager in reality is the finance director (for strategic decision-making) & the
corporate treasurer (for day-to-day cash management).
POSSIBLE CORPORATE OBJECTIVES
- maximisation of profit = could be important for the shareholder
- maximisation of sales
- social responsibility = this one is important but most of the companies do it because it is mandatory
and otherwise they will loose their good picture
- shareholder wealth maximisation (SHWM) = this is about looking at the values of companies, the
shareholder wants to have both dividends (current) and capital gains (these reflect future dividends
which are expected by the market). The company both need current and future dividends for their
future cash flows (magnitude or size, timing and associated risk).
- survival
, * Linking the NPV (net present value) and SHWM (shareholder wealth maximisation). The biggest
difference is that the NPV will stay the same and the SHWM will always change.
THE AGENCY PROBLEM
How does this problem arise?
1. because of the divergence of ownership of control: the managers’ goals (agents) differ from the
shareholders’ goals (principals). The manager wants a good team, job security, … but the shareholder
always wants to have more and more money, maximising their wealth.
2. because of the asymmetry of information
CHAPTER 1 – THE FINANCE FUNCTION
TWO KEY CONCEPTS
- First of all that money is dependent on time. During, the inflation will sink and rise. Inflation will
decide how much money is worth, therefore you should predict the right timing.
- Second the relationship between risk and return: if there is a higher risk in a company than it will
have higher chance that the actual return will be different from the expected return. You can
measure risk by standard deviation. Investors need this method, so that they will know what is smart
to invest in and what is not.
EXAM Q:
Shareholder return = annual dividend (D1) + share price increase (P1 – P0)
Relative return (in percentage terms) = 100 * ((P1 – P0) + D1)/ P0
= TOTAL SHAREHOLDER RETURN
FUTURE VALUES
- compounding:
* you add 1 because you want to know what it will be like in 1 year from now (future values)
Example: invest € 100 now at 5% interest per year:
1st year = € 105 = 100 * 1.05 (+ 1 year + 5% interest)
2nd year = € 110,25 = 105 (outcome from 1 st year) * 1.05 (+ 1 year + 5 % interest)
PRESENT VALUES
- discounting:
,* this is the opposite calculation of the one about future values
Example: what sum of money invested now at 5% will give € 120 in 2 years time?
€ .05² (because 2 years have passed) = € 108.84
> if your required rate of return would be 5% than this would be your present value, another word for
calculating your present value is DISCOUNTING.
DECISION-MAKING AREAS
The tasks of a financial manager’s is divided into three areas and the key point is to understand the
interrelationship of these three decision areas:
1. financing decisions
2. dividend decisions
3. investment decisions
,Example:
> investment = company decides to take on a number of attractive new investment projects.
> finance = company will need to raise finance to take up these investment projects.
> dividends = if the finance is not available from external sources, the dividends may need to be cut
to increase the internal financing for the investment projects.
* They do not need to work in this order, it can also start with dividends or finance and then get
followed up. This is called the interrelationship.
* The financial manager in reality is the finance director (for strategic decision-making) & the
corporate treasurer (for day-to-day cash management).
POSSIBLE CORPORATE OBJECTIVES
- maximisation of profit = could be important for the shareholder
- maximisation of sales
- social responsibility = this one is important but most of the companies do it because it is mandatory
and otherwise they will loose their good picture
- shareholder wealth maximisation (SHWM) = this is about looking at the values of companies, the
shareholder wants to have both dividends (current) and capital gains (these reflect future dividends
which are expected by the market). The company both need current and future dividends for their
future cash flows (magnitude or size, timing and associated risk).
- survival
, * Linking the NPV (net present value) and SHWM (shareholder wealth maximisation). The biggest
difference is that the NPV will stay the same and the SHWM will always change.
THE AGENCY PROBLEM
How does this problem arise?
1. because of the divergence of ownership of control: the managers’ goals (agents) differ from the
shareholders’ goals (principals). The manager wants a good team, job security, … but the shareholder
always wants to have more and more money, maximising their wealth.
2. because of the asymmetry of information
