Financial Management 320 (FBS320)
Contents
LA 1: Cash flows .................................................................................................................. 3
1. INTRODUCTION ............................................................................................................ 3
2. Statement OF cash flows ............................................................................................ 3
3. Operating cash flow ................................................................................................... 4
4. Free cash flow ............................................................................................................. 4
LA 2: Capital budgeting cash flows .................................................................................. 7
1. Terminology ................................................................................................................. 7
2. Cash flows .................................................................................................................... 7
3. Techniques ................................................................................................................. 10
4. Risks............................................................................................................................. 10
5. Refinements ............................................................................................................... 11
LA 3: Cost of Capital......................................................................................................... 13
1. Long-term debt ......................................................................................................... 13
2. Preference shares ..................................................................................................... 13
3. Ordinary shares.......................................................................................................... 13
4. Retained earnings ..................................................................................................... 14
5. Weighted average cost of capital .......................................................................... 14
6. weighted marginal cost of capital .......................................................................... 15
LA 3: Leverage and Capital Structures ........................................................................... 17
1. Leverage .................................................................................................................... 17
2. Operating leverage .................................................................................................. 17
3. Financial leverage .................................................................................................... 17
4. Total leverage............................................................................................................ 17
5. Structures.................................................................................................................... 18
6. Types of capital structures ........................................................................................ 18
7. Determining optimal capital structure .................................................................... 18
8. Other aspects ............................................................................................................ 19
LA 4: Dividend policy ........................................................................................................ 21
1. Introduction ............................................................................................................... 21
2. Ratios .......................................................................................................................... 21
3. Corporate action timetables ................................................................................... 21
4. Journals ...................................................................................................................... 22
, 5. Residual theory .......................................................................................................... 22
6. Dividend relevance theory (to value of company) ............................................... 22
7. Factors affecting dividend policy ............................................................................ 22
8. types of dividend polices ......................................................................................... 23
9. Forms of dividends .................................................................................................... 23
LA 5: Hybrid and derivative securities ............................................................................. 25
1. Introduction ............................................................................................................... 25
2. leasing ........................................................................................................................ 25
3. Lease vs Purchase ..................................................................................................... 25
4. Advantages/ disadvantages of leasing ................................................................. 26
5. Options ....................................................................................................................... 27
LA 6: Mergers, LBOs, Divestitures ...................................................................................... 29
1. terminology ................................................................................................................ 29
2. Condiitions of mergers .............................................................................................. 29
3. types of mergers ........................................................................................................ 29
4. means of financing corporate restructuring ........................................................... 29
5. reasons for corporate restructuring ......................................................................... 30
LA 7: International Finance .............................................................................................. 31
1. Terminology ............................................................................................................... 31
2. exchange rate risk..................................................................................................... 31
3. political risk ................................................................................................................. 31
LA 8: Risk of a portfolio ..................................................................................................... 33
1. Terminology ............................................................................................................... 33
2. Example ..................................................................................................................... 33
,LA 1: Cash flows
1. INTRODUCTION
Primary → Create shareholders value
objective → Cash flows important
→ Financial manager’s decision influences cash flow
Focus → Operating cash flow – managerial
→ Free cash flow - investors
2. STATEMENT OF CASH FLOWS
Inflows → Sales of inventory/ machinery
→ Rent income
→ Dividends received
→ Receipt of long-term loan/ borrowings increase
→ Issue of shares
→ Trade receivables decrease
Outflows → Assets increase
→ Rent expense
→ Dividends paid
→ Re-payment of loan/ debt decreases/ interest paid
→ Buy-back of shares
→ Trade/ payables decrease
Sections
Operating → relate to principal activities of firm
cash flows → purchase of raw material/ manufacture/ sale of product
Investing → purchase/ sale of non-current assets/ equity investments in other
activities firms
Financing → changes in equity/ capital/ borrowings
activities → incurring/ repaying debt
→ sale/ buy-back of shares
, 3. OPERATING CASH FLOW
Financial Revenue X
manager - Cost of Sales (X)
Gross profit X
- Operating expenditure (depreciation included) (X)
Profit before tax (EBIT) X
- Tax (% of profit) (X)
Net profit after tax (NPAT) X
+ Depreciation X
Operating cash flow X
- Finance cost is not seen as operating activity
Accounting Revenue X
- Cost of Sales (X)
Gross profit X
- Operating expenditure (depreciation included) (X)
Earnings before interest and tax X
- Finance cost (X)
Profit before tax X
- Tax (% of profit) (X)
Net profit after tax X
+ Depreciation X
Operating cash flow X
NOPAT = EBIT x (1-T)
OCF = NOPAT + Depreciation
OCF = (EBIT x (1 – T) + depreciation
Example
OCF = (R370 x (1 – 0,3)) + R100 = R359
4. FREE CASH FLOW
Definition → cash flow available to debt/ equity holders after
− meeting operating needs
− paying for net non-current asset investments (NFAI)
Contents
LA 1: Cash flows .................................................................................................................. 3
1. INTRODUCTION ............................................................................................................ 3
2. Statement OF cash flows ............................................................................................ 3
3. Operating cash flow ................................................................................................... 4
4. Free cash flow ............................................................................................................. 4
LA 2: Capital budgeting cash flows .................................................................................. 7
1. Terminology ................................................................................................................. 7
2. Cash flows .................................................................................................................... 7
3. Techniques ................................................................................................................. 10
4. Risks............................................................................................................................. 10
5. Refinements ............................................................................................................... 11
LA 3: Cost of Capital......................................................................................................... 13
1. Long-term debt ......................................................................................................... 13
2. Preference shares ..................................................................................................... 13
3. Ordinary shares.......................................................................................................... 13
4. Retained earnings ..................................................................................................... 14
5. Weighted average cost of capital .......................................................................... 14
6. weighted marginal cost of capital .......................................................................... 15
LA 3: Leverage and Capital Structures ........................................................................... 17
1. Leverage .................................................................................................................... 17
2. Operating leverage .................................................................................................. 17
3. Financial leverage .................................................................................................... 17
4. Total leverage............................................................................................................ 17
5. Structures.................................................................................................................... 18
6. Types of capital structures ........................................................................................ 18
7. Determining optimal capital structure .................................................................... 18
8. Other aspects ............................................................................................................ 19
LA 4: Dividend policy ........................................................................................................ 21
1. Introduction ............................................................................................................... 21
2. Ratios .......................................................................................................................... 21
3. Corporate action timetables ................................................................................... 21
4. Journals ...................................................................................................................... 22
, 5. Residual theory .......................................................................................................... 22
6. Dividend relevance theory (to value of company) ............................................... 22
7. Factors affecting dividend policy ............................................................................ 22
8. types of dividend polices ......................................................................................... 23
9. Forms of dividends .................................................................................................... 23
LA 5: Hybrid and derivative securities ............................................................................. 25
1. Introduction ............................................................................................................... 25
2. leasing ........................................................................................................................ 25
3. Lease vs Purchase ..................................................................................................... 25
4. Advantages/ disadvantages of leasing ................................................................. 26
5. Options ....................................................................................................................... 27
LA 6: Mergers, LBOs, Divestitures ...................................................................................... 29
1. terminology ................................................................................................................ 29
2. Condiitions of mergers .............................................................................................. 29
3. types of mergers ........................................................................................................ 29
4. means of financing corporate restructuring ........................................................... 29
5. reasons for corporate restructuring ......................................................................... 30
LA 7: International Finance .............................................................................................. 31
1. Terminology ............................................................................................................... 31
2. exchange rate risk..................................................................................................... 31
3. political risk ................................................................................................................. 31
LA 8: Risk of a portfolio ..................................................................................................... 33
1. Terminology ............................................................................................................... 33
2. Example ..................................................................................................................... 33
,LA 1: Cash flows
1. INTRODUCTION
Primary → Create shareholders value
objective → Cash flows important
→ Financial manager’s decision influences cash flow
Focus → Operating cash flow – managerial
→ Free cash flow - investors
2. STATEMENT OF CASH FLOWS
Inflows → Sales of inventory/ machinery
→ Rent income
→ Dividends received
→ Receipt of long-term loan/ borrowings increase
→ Issue of shares
→ Trade receivables decrease
Outflows → Assets increase
→ Rent expense
→ Dividends paid
→ Re-payment of loan/ debt decreases/ interest paid
→ Buy-back of shares
→ Trade/ payables decrease
Sections
Operating → relate to principal activities of firm
cash flows → purchase of raw material/ manufacture/ sale of product
Investing → purchase/ sale of non-current assets/ equity investments in other
activities firms
Financing → changes in equity/ capital/ borrowings
activities → incurring/ repaying debt
→ sale/ buy-back of shares
, 3. OPERATING CASH FLOW
Financial Revenue X
manager - Cost of Sales (X)
Gross profit X
- Operating expenditure (depreciation included) (X)
Profit before tax (EBIT) X
- Tax (% of profit) (X)
Net profit after tax (NPAT) X
+ Depreciation X
Operating cash flow X
- Finance cost is not seen as operating activity
Accounting Revenue X
- Cost of Sales (X)
Gross profit X
- Operating expenditure (depreciation included) (X)
Earnings before interest and tax X
- Finance cost (X)
Profit before tax X
- Tax (% of profit) (X)
Net profit after tax X
+ Depreciation X
Operating cash flow X
NOPAT = EBIT x (1-T)
OCF = NOPAT + Depreciation
OCF = (EBIT x (1 – T) + depreciation
Example
OCF = (R370 x (1 – 0,3)) + R100 = R359
4. FREE CASH FLOW
Definition → cash flow available to debt/ equity holders after
− meeting operating needs
− paying for net non-current asset investments (NFAI)
