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    Accounting & Finance (Session-8)

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    Ibrahim Qari
    The document discusses key concepts in corporate finance and capital investment appraisal techniques. It explains that corporate finance focuses on maximizing business value through investing, financing, and dividend decisions. It also outlines capital investment, the major capital market players, and techniques to evaluate capital investments such as accounting rate of return, payback period, net present value, and internal rate of return.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Accounting & Finance (Session-8)

    Uploaded by

    Ibrahim Qari
    15 views37 pages
    The document discusses key concepts in corporate finance and capital investment appraisal techniques. It explains that corporate finance focuses on maximizing business value through investing, financing, and dividend decisions. It also outlines capital investment, the major capital market players, and techniques to evaluate capital investments such as accounting rate of return, payback period, net present value, and internal rate of return.

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    The document discusses key concepts in corporate finance and capital investment appraisal techniques. It explains that corporate finance focuses on maximizing business value through investing, financing, and dividend decisions. It also outlines capital investment, the major capital market players, and techniques to evaluate capital investments such as accounting rate of return, payback period, net present value, and internal rate of return.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    15 views37 pages

    Accounting & Finance (Session-8)

    Uploaded by

    Ibrahim Qari
    The document discusses key concepts in corporate finance and capital investment appraisal techniques. It explains that corporate finance focuses on maximizing business value through investing, financing, and dividend decisions. It also outlines capital investment, the major capital market players, and techniques to evaluate capital investments such as accounting rate of return, payback period, net present value, and internal rate of return.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 37

    ACCOUNTING

    & FINANCE
    Course Learning Objectives
    MODULES
    • Get familiarized with the principles and concepts of accounting. Understating the
    components of financial statements. How to read a company’s financial
    Financial statements.
    Accounting

    • Get to know the components of a master budget and the classifications of costs.
    Managerial Understand the break-even point and the cost-volume-profit analysis.
    Accounting

    • Learn how to perform a comprehensive financial analysis using a variety of ratios.


    Be introduced to various tools and approaches used in corporate finance, the
    capital investment, the capital financing, and the dividends and return of capital.
    Finance

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    MODULE 3:
    FINANCE

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Session Objectives

    You should be able to:


    1. Explain what is corporate finance, and what are the three major decisions.
    2. Determine the key players in capital markets.
    3. Explain what is capital investment andwhat are the different investment
    appraisal techniques.
    4. Compare debt financing with equity financing and the optimal capital structure.
    5. Understand the difference between Dividends and return of capital, and how to
    take the decision.

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Corporate Finance:
    What is?

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Corporate Finance

    • Corporate finance deals with the capital structure of a


    corporation, including its funding and the actions that
    management takes to maximize the value of the
    company.
    • Corporate finance also includes the tools and analysis
    utilized to prioritize and distribute financial resources.

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    The ThreeMajor Decisions in Corporate Finance

    • The corporate finance focuseson how to maximize the value of a


    business through its investing, financing, and dividend decisions.
    Capital Investments

    Capital Financin

    Dividends
    Decide what projects Determine how to Decide how and
    to invest in fund capital when to return
    investments capital to investors
    Earn the highest
    Optimize the
    possible risk-adjusted
    firm’s capital
    return
    structure

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Key Players in the Capital Markets:
    Who are the?

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Key Players in the Capital Market

    Primary vs Secondary Markets


    • In the primary market, there are four key players:
    corporations, institutions, investment banks, and public
    accounting firms.
    • While the issuance of new bonds and new shares in
    exchange for capital occurs in the primary market, the
    secondary market is for the sale and trade of previously
    issued bonds and shares

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Key Players in the Capital Market

    Players in primary market

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Key Players in the Capital Market

    Players in secondary market

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Capital Investment:
    What is a?

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    The ThreeMajor Decisions in Corporate Finance

    • The corporate finance focuseson how to maximize the value of a


    business through its investing, financing, and dividend decisions.
    Capital Investments

    Capital Financin

    Dividends
    Decide what projects Determine how to Decide how and
    to invest in fund capital when to return
    investments capital to investors
    Earn the highest
    Optimize the
    possible risk-adjusted
    firm’s capital
    return
    structure

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Capital Investment

    • Any investment for which the economic benefit is


    greater than one year.
    • Opening a new factory
    • Entering a new market
    • Acquiring another business
    • Research and development of new products

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Capital Investment

    • Capital investments will increase the assets of a company

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    • Whether such investments are worthwhile depends on the approach
    that the company uses to evaluate them.
    • A company may value the projects based on:
    o Accounting rate of return (ARR)
    o Payback period
    o Net present value (NPV)
    o Internal rate of return (IRR)

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    Accounting rate of return (ARR)
    • The ARR takes into account the incremental accounting income rather than cash
    flows and us calculated as: ARR = Average EBIT
    Example: Investment

    Year Investment EBIT Scrap


    0 (150,000) Average annual EBIT 55,000
    1 60,000
    ARR (Intial 37
    2 50,000
    3 80,000
    Investment) ARR %
    4 30,000 50,000 Average Investment) 55
    %

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    Accounting rate of return (ARR)

    Advantages Disadvantages
    • Quick and easy • Uses profits, not cash flows
    • Whole life of project considered • Ignores time value of money
    • Relative measure % • % can be misleading

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    Payback Period
    • Time taken to pay back the initial capital invested.
    Project A Project B
    Year
    Cash flows Cash flows
    0 (150,000) (150,000)
    1 10,000 20,000
    2 20,000 50,000
    3 50,000 80,000
    4 70,000 100,000
    5 50,000 150,000

    Project A repays its capital expenditure of $ 150,000 in Year 4, while Project B does so in Year 3.
    Other things being equal, Project B would be selected

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    Payback Period

    Advantages Disadvantages
    • Uses cash flow, not profits • Doesn’t consider whole project
    • Easy to explain • Ignores time value of money
    • Links to liquidity • Not a clear decision

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    Net Present Value (NPV)
    • NPV is the difference between the present value of cash inflows and the present
    value of cash outflows over a period of time.
    NPV = PV (cash inflows) – PV (cash outflows)
    Discou
    Year Investmen FV PV NPV = $74,625
    t nt
    Accept project as positive NPV
    (10%)
    0 (650,000 1.000 (650,000 will increase shareholder wealth
    ) )
    1 200,000 0.909 181,800
    2 250,000 0.826 206,500
    3 175,000 0.751 131,425
    74,625
    4 300,000 0.683 204,900

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    Net Present Value (NPV)

    Advantages Disadvantages
    • Absolute measure • Reliant on cost of capital
    • Consider whole life of project • Complex to explain
    • Clear accept/ reject decision • Relies on forecasts

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    Interna Rate of Return (IRR)
    • The expected compound annual rate of return that will be earned on a project or
    investment.
    IRR = Discount rate at which NPV is 0

    Year Cash flows


    0 (650,000) IRR = 15.0%
    1 200,000 (using = IRR function)
    2 250,000
    3 175,000
    4 300,000
    15%

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Investment Appraisal
    Techniques
    Interna Rate of Return (IRR)

    Advantages Disadvantages
    • Uses cash flows, not profits • Can produce 0 or multiple IRRs
    • Consider whole life of project • Not a real “rate of return”
    • Doesn’t need a cost of capital • Relative measure

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Capital Financing:
    What is a?

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    The ThreeMajor Decisions in Corporate Finance

    • The corporate finance focuseson how to maximize the value of a


    business through its investing, financing, and dividend decisions.
    Capital Investments

    Capital Financin

    Dividends
    Decide what projects Determine how to Decide how and
    to invest in fund capital when to return
    investments capital to investors
    Earn the highest
    Optimize the
    possible risk-adjusted
    firm’s capital
    return
    structure

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Capital Financing

    • Any type of funding that is used to finance the purchase


    of an asset/project (an investment).
    • Equity
    • Debt

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Capital Financing

    • Capital financing will increase the liabilities and/or equity of a


    company.

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Capital Structure

    • Capital structure: the amount of debt and/or equity employed by a firm to fund
    its operations and finance its assets.
    • In order to optimize the structure, a firm will decide if it needs more debt or equity
    and can issue whichever it requires.

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Weighted Average Cost of Capital
    (WACC)
    • WACC is the proportion of debt andequity a firm has, multiplied
    by their respective costs.

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Weighted Average Cost of Capital
    (WACC)
    WACC formula

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Capital Stack

    • How to optimally financethe capital investments through the business’


    equity, debt, or a mix of both?

    Most secure/ safe, lowest expected return

    Less risk than equity, less return

    Shareholder loan: higher liquidation, no dividends but pay interest


    Preferred shares: higher liquidation, higher dividends priority
    Common shares: last liquidation, last dividends

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Dividends and Return of Capital:
    What are?

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    The ThreeMajor Decisions in Corporate Finance

    • The corporate finance focuseson how to maximize the value of a


    business through its investing, financing, and dividend decisions.
    Capital Investments

    Capital Financin

    Dividends
    Decide what projects Determine how to Decide how and
    to invest in fund capital when to return
    investments capital to investors
    Earn the highest
    Optimize the
    possible risk-adjusted
    firm’s capital
    return
    structure

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Dividends and return of capital

    • Managers need to decide to:


    o Distribute the earnings to shareholders in the form
    of dividends or share buybacks, OR
    o Retain the excess earnings for future
    investments and operational requirements.

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Decision

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO


    Thank
    ForYou
    Your Attention!
    Any Questions

    Ahmed Abdul Hameed, DBA, MBA, FMVA, CICA, CCGO

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