MAC3702
EXAM
NOTES
EXAM REVISION
STUDY NOTES –
COMPREHENSIVE
ALL STUDY UNITS
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TABLE OF CONTENTS
TOPIC 1 – ADVA NCE D ANALYS IS OF INFORMA TION ................................................................................... 5
LEARNING OUTCOMES ............................................................................................................................. 5
STUDY UNIT 1 ADVA NCE D ANA LYSIS OF INFORMA TION ............................................................................ 6
Financial management ............................................................................................................................. 6
Goal of an entity ...................................................................................................................................... 6
Business model or value creation model of an entity .................................................................................. 6
Stakeholders of an entity.......................................................................................................................... 7
Risk and ret urn of investors ...................................................................................................................... 8
Key aspects of financial management ..................................................................................................... 11
Strategy and Risk .................................................................................................................................. 12
Strategy and the business environment................................................................................................... 12
Financial analysis .................................................................................................................................. 13
Users of financial and non-financial ........................................................................................................ 14
Tools or techniques of financial statement analysis .................................................................................. 15
Financial analysis .................................................................................................................................. 16
TOPIC 2 – RE QUIRED RE TURNS ................................................................................................................ 23
LEARNING OUTCOMES ........................................................................................................................... 23
STUDY UNIT 2 RISK AND RE TURN ............................................................................................................. 24
Return: ................................................................................................................................................. 24
Debt and financial leverage .................................................................................................................... 24
Capit al structure theory .......................................................................................................................... 28
The arbitrage process ............................................................................................................................ 33
Portfolio management ............................................................................................................................ 39
Diversific ation........................................................................................................................................ 45
STUDY UNIT 3 SOURCES AND FORMS OF LONG -TERM FINANCE ............................................................ 48
Deciding on the form of finance .............................................................................................................. 48
Classification of different forms of finance ............................................................................................... 48
Sources of finance ................................................................................................................................. 48
Forms of finance.................................................................................................................................... 48
Criteria applied by providers of finance/investors ..................................................................................... 51
Deciding on the best financing option ...................................................................................................... 52
Cost-effective form of finance ................................................................................................................. 53
Leases .................................................................................................................................................. 53
TOPIC 3 – WEIGHTE D AVERAGE COS T OF CAP ITAL ................................................................................. 58
LEARNING OUTCOMES ........................................................................................................................... 58
STUDY UNIT 4 WEIGHTE D AVERAGE COS T OF CAP ITAL (WA CC) ............................................................. 59
The cost of capital ................................................................................................................................. 59
WACC .................................................................................................................................................. 59
Capit al structure components ................................................................................................................. 60
The Weighted A verage Cost of Capital ................................................................................................... 63
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Calculating the growth rate..................................................................................................................... 67
TOPIC 4 – ORGA NIC GROW TH (CAP ITAL BUDGE TING) ............................................................................. 69
LEARNING OUTCOMES ........................................................................................................................... 69
STUDY UNIT 5 ADVA NCE D CAP ITAL B UDGE TING ...................................................................................... 70
Capit al budgeting .................................................................................................................................. 70
Advanced techniques in capital budgeting ............................................................................................... 73
Advanced investment evaluation techniques ........................................................................................... 76
Inflation, taxation, relevant/opportunity costs and revenues ...................................................................... 79
TOPIC 5 – MERGERS AND ACQUIS ITIONS ................................................................................................. 81
LEARNING OUTCOMES ........................................................................................................................... 81
STUDY UNIT 6 BUS INESS AND LE GAL ASPECTS ....................................................................................... 82
Forms of mergers and acquisitions ......................................................................................................... 82
Three types of acquisitions ..................................................................................................................... 82
Reas ons for takeovers and mergers ....................................................................................................... 83
Reas ons why mergers fail ...................................................................................................................... 83
Legal implications .................................................................................................................................. 83
STUDY UNIT 7 ELEME NTARY P RICING (VALUA TION) AND FINANCING ISS UES ........................................ 85
Valuation model based on free cash flow ................................................................................................ 85
Models based on Free Cas h Flow........................................................................................................... 87
Exit multiples......................................................................................................................................... 90
The McKinsey Convergenc e Value -Driver Formula .................................................................................. 91
M&A valuation considerations ................................................................................................................ 91
Maximum share valuation ...................................................................................................................... 92
Fair share valuation ............................................................................................................................... 92
Operational synergies ............................................................................................................................ 93
Financial effects of acquisition ................................................................................................................ 93
Earnings growth .................................................................................................................................... 94
Funding for mergers and acquisitions...................................................................................................... 96
TOPIC 6 – CAS H MANAGEME NT ................................................................................................................101
LEARNING OUTCOMES ..........................................................................................................................101
STUDY UNIT 8 TREASURY FUNCTION.......................................................................................................102
The role of the treasury function ............................................................................................................102
Treas ury policy .....................................................................................................................................103
Decision to centralise the treasury function or department .......................................................................103
Working capital management policy and financing ..................................................................................105
Levels of working capital .......................................................................................................................106
Cash management ...............................................................................................................................107
Functions of Cas h Management ............................................................................................................107
Cash operating cycle ............................................................................................................................108
The Baumol model for cash management ..............................................................................................110
The Miller-Orr model .............................................................................................................................112
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Debt ors' management ...........................................................................................................................114
Credit policies ......................................................................................................................................114
Collection policy ...................................................................................................................................115
Debt or factoring....................................................................................................................................118
The dividend decision ...........................................................................................................................119
TOPIC 7 – CURRE NCY A ND INTE RES T RA TE RISK MANA GEMENT ..........................................................120
LEARNING OUTCOMES ..........................................................................................................................120
STUDY UNIT 9 MA NAGING CURRENCY AND INTERES T RA TE RISKS .......................................................121
Currency risk defined ............................................................................................................................121
Categories of currency risk....................................................................................................................121
Different currency quotes in the currency market ....................................................................................123
Theories and factors determining exchange rates ...................................................................................127
Factors influencing exchange rates ........................................................................................................131
Hedging currency risk ...........................................................................................................................132
Interest Rate Risk .................................................................................................................................135
Treas ury Bills .......................................................................................................................................138
Bankers’ Acceptances ..........................................................................................................................138
Negotiable Certificat es of Deposit ..........................................................................................................138
Forward rat e agreements ......................................................................................................................138
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EXAM
NOTES
EXAM REVISION
STUDY NOTES –
COMPREHENSIVE
ALL STUDY UNITS
, Stuvia.com - The study-notes marketplace
TABLE OF CONTENTS
TOPIC 1 – ADVA NCE D ANALYS IS OF INFORMA TION ................................................................................... 5
LEARNING OUTCOMES ............................................................................................................................. 5
STUDY UNIT 1 ADVA NCE D ANA LYSIS OF INFORMA TION ............................................................................ 6
Financial management ............................................................................................................................. 6
Goal of an entity ...................................................................................................................................... 6
Business model or value creation model of an entity .................................................................................. 6
Stakeholders of an entity.......................................................................................................................... 7
Risk and ret urn of investors ...................................................................................................................... 8
Key aspects of financial management ..................................................................................................... 11
Strategy and Risk .................................................................................................................................. 12
Strategy and the business environment................................................................................................... 12
Financial analysis .................................................................................................................................. 13
Users of financial and non-financial ........................................................................................................ 14
Tools or techniques of financial statement analysis .................................................................................. 15
Financial analysis .................................................................................................................................. 16
TOPIC 2 – RE QUIRED RE TURNS ................................................................................................................ 23
LEARNING OUTCOMES ........................................................................................................................... 23
STUDY UNIT 2 RISK AND RE TURN ............................................................................................................. 24
Return: ................................................................................................................................................. 24
Debt and financial leverage .................................................................................................................... 24
Capit al structure theory .......................................................................................................................... 28
The arbitrage process ............................................................................................................................ 33
Portfolio management ............................................................................................................................ 39
Diversific ation........................................................................................................................................ 45
STUDY UNIT 3 SOURCES AND FORMS OF LONG -TERM FINANCE ............................................................ 48
Deciding on the form of finance .............................................................................................................. 48
Classification of different forms of finance ............................................................................................... 48
Sources of finance ................................................................................................................................. 48
Forms of finance.................................................................................................................................... 48
Criteria applied by providers of finance/investors ..................................................................................... 51
Deciding on the best financing option ...................................................................................................... 52
Cost-effective form of finance ................................................................................................................. 53
Leases .................................................................................................................................................. 53
TOPIC 3 – WEIGHTE D AVERAGE COS T OF CAP ITAL ................................................................................. 58
LEARNING OUTCOMES ........................................................................................................................... 58
STUDY UNIT 4 WEIGHTE D AVERAGE COS T OF CAP ITAL (WA CC) ............................................................. 59
The cost of capital ................................................................................................................................. 59
WACC .................................................................................................................................................. 59
Capit al structure components ................................................................................................................. 60
The Weighted A verage Cost of Capital ................................................................................................... 63
© CTM Tutoring All rights reserved
Downloaded by: jaime-leegovender |
Distribution of this document is illegal
, Stuvia.com - The study-notes marketplace
Calculating the growth rate..................................................................................................................... 67
TOPIC 4 – ORGA NIC GROW TH (CAP ITAL BUDGE TING) ............................................................................. 69
LEARNING OUTCOMES ........................................................................................................................... 69
STUDY UNIT 5 ADVA NCE D CAP ITAL B UDGE TING ...................................................................................... 70
Capit al budgeting .................................................................................................................................. 70
Advanced techniques in capital budgeting ............................................................................................... 73
Advanced investment evaluation techniques ........................................................................................... 76
Inflation, taxation, relevant/opportunity costs and revenues ...................................................................... 79
TOPIC 5 – MERGERS AND ACQUIS ITIONS ................................................................................................. 81
LEARNING OUTCOMES ........................................................................................................................... 81
STUDY UNIT 6 BUS INESS AND LE GAL ASPECTS ....................................................................................... 82
Forms of mergers and acquisitions ......................................................................................................... 82
Three types of acquisitions ..................................................................................................................... 82
Reas ons for takeovers and mergers ....................................................................................................... 83
Reas ons why mergers fail ...................................................................................................................... 83
Legal implications .................................................................................................................................. 83
STUDY UNIT 7 ELEME NTARY P RICING (VALUA TION) AND FINANCING ISS UES ........................................ 85
Valuation model based on free cash flow ................................................................................................ 85
Models based on Free Cas h Flow........................................................................................................... 87
Exit multiples......................................................................................................................................... 90
The McKinsey Convergenc e Value -Driver Formula .................................................................................. 91
M&A valuation considerations ................................................................................................................ 91
Maximum share valuation ...................................................................................................................... 92
Fair share valuation ............................................................................................................................... 92
Operational synergies ............................................................................................................................ 93
Financial effects of acquisition ................................................................................................................ 93
Earnings growth .................................................................................................................................... 94
Funding for mergers and acquisitions...................................................................................................... 96
TOPIC 6 – CAS H MANAGEME NT ................................................................................................................101
LEARNING OUTCOMES ..........................................................................................................................101
STUDY UNIT 8 TREASURY FUNCTION.......................................................................................................102
The role of the treasury function ............................................................................................................102
Treas ury policy .....................................................................................................................................103
Decision to centralise the treasury function or department .......................................................................103
Working capital management policy and financing ..................................................................................105
Levels of working capital .......................................................................................................................106
Cash management ...............................................................................................................................107
Functions of Cas h Management ............................................................................................................107
Cash operating cycle ............................................................................................................................108
The Baumol model for cash management ..............................................................................................110
The Miller-Orr model .............................................................................................................................112
© CTM Tutoring All rights reserved
Downloaded by: jaime-leegovender |
Distribution of this document is illegal
, Stuvia.com - The study-notes marketplace
Debt ors' management ...........................................................................................................................114
Credit policies ......................................................................................................................................114
Collection policy ...................................................................................................................................115
Debt or factoring....................................................................................................................................118
The dividend decision ...........................................................................................................................119
TOPIC 7 – CURRE NCY A ND INTE RES T RA TE RISK MANA GEMENT ..........................................................120
LEARNING OUTCOMES ..........................................................................................................................120
STUDY UNIT 9 MA NAGING CURRENCY AND INTERES T RA TE RISKS .......................................................121
Currency risk defined ............................................................................................................................121
Categories of currency risk....................................................................................................................121
Different currency quotes in the currency market ....................................................................................123
Theories and factors determining exchange rates ...................................................................................127
Factors influencing exchange rates ........................................................................................................131
Hedging currency risk ...........................................................................................................................132
Interest Rate Risk .................................................................................................................................135
Treas ury Bills .......................................................................................................................................138
Bankers’ Acceptances ..........................................................................................................................138
Negotiable Certificat es of Deposit ..........................................................................................................138
Forward rat e agreements ......................................................................................................................138
© CTM Tutoring All rights reserved
Downloaded by: jaime-leegovender |
Distribution of this document is illegal
