Lecture 1

Role of Senior Financial Manager / Advisor
Advanced investment appraisal

To evaluate potential investment decisions and assessing their financial and strategic consequences, both
domestically and internationally.
1.Discounted cash flow techniques

2.Application of option pricing theory in investment decisions
3.Impact of financing on investment decisions
4.Valuation and the use of free cash flows
5.International investment and financing decisions
Acquisitions and mergers

To assess and plan acquisitions and mergers as an alternative growth strategy.
1. Acquisitions and mergers versus other growth strategies

2. Valuation for acquisitions and mergers
3. Regulatory framework and processes
4. Financing acquisitions and mergers
Corporate reconstruction and reorganization

To evaluate and advise on alternative corporate re-organization strategies.
 Financial reconstruction
 Business re-organization
Treasury and advanced risk management

To apply and evaluate alternative advanced treasury and risk management techniques.
 The role of the treasury function in multinationals

 The use of financial derivatives to hedge against forex risk
 The use of financial derivatives to hedge against interest rate risk
Role of senior financial advisor in the multinational organization

 Financial strategy formulation
 Address corporate environmental, social, governance (ESG) and ethical issues
 Management of international trade and finance
 Strategic business and financial planning for multinational organizations
 Dividend policy in multinationals and transfer pricing
The Nature and Purpose of Financial Management

 The main purpose of financial management is to ensure that financial resources are available to the
organization in support of its overall corporate objectives, which include financial objectives.
 In pursuing its financial objectives, the firm must ensure that those objectives are congruent – i.e.
consistent – with its overall corporate strategy.
 Financial managers identify the areas where funds are required and allocate them efficiently in order to
ensure smooth functioning across various areas of an organization.
OBJECTIVES OF ORGANIZATIONS
The purpose of this topic is to introduce the framework within which financial managers operate, and to
identify the main areas where they have to make decisions.
Stakeholders
There are many types of organizations and many different groups that have a stake in the performance of
the organizations. These groups include:
 ๏ Shareholders
 ๏ The community at large (in particular, environmental considerations)
 ๏ Employees of the company
 ๏ Managers / directors of the company
 ๏ Customers
 ๏ Suppliers
 ๏ Finance providers (lenders)
 ๏ The government
The interests of all stakeholders need to be balanced
 In most of the organizations, the focus is on the shareholders, because it is the shareholders that have a
risk and return relationship with the company.
 The aim is to maximize shareholders’ wealth while at the same time satisfying the requirements of the
other stakeholders
Maximizing shareholders wealth

• Shareholders wealth is measured by the market value of their shares.
• It is important therefore for the financial manager to consider the likely impact on the share price
of alternative strategies, and to choose those that are likely to increase the share price.
Types of strategic decisions to be made by the financial manager

The main types of decisions that need to be made are:
 ๏ Investment decisions
 ๏ Sources of finance decisions
 ๏ Decisions regarding the level of dividend to be paid
 ๏ Decisions regarding the hedging of currency or interest rate risk
CONFLICTS OF INTEREST AND THEIR RESOLUTION

 The various stakeholders in a company are likely to have conflicting interests.
 In particular the interests of directors may not directly coincide with the interests of the
shareholders, even though they are working for the shareholders.
 The purpose of this topic is to consider these conflicts and look briefly at ways of attempting
to achieve goal congruence (i.e. to remove the conflicts of interest).
Directors’ behavior
• Directors are agents for the shareholders and are supposed to be acting in the best interests of the
shareholders of their company.
• However, in recent years they have been accused of having made decisions on the basis of their
own self-interest. Specific allegations include:
๏ Excessive remuneration levels
๏ Empire building
Chief executives may have the aim of building as large a group as possible by takeovers – not
always improving the return to shareholders.
Creative accounting
• Using creative techniques to improve the appearance of published accounts and artificially
boosting the share price. Such techniques include capitalizing intangibles on the balance sheet
(e.g. development expenditures), recognizing revenue on long-term contracts at the earliest
possible time.
• The Accounting Standards Board attempts to cut out creative accounting practices as much as
practically possible.
Off balance sheet finance

For example, leasing assets rather than purchasing them (although this is now dealt with by the
Accounting Standards).
Takeover bids
• There have been many instances of directors spending time and money defending their company
against takeover bids, even when the takeover would have been in the best interests of the
shareholders.
• One reason for this is suggested as being that the directors are frightened for their own jobs were
the takeover bid to succeed.
Unethical activities
• Such as trading with unethical companies, using ‘slave’ labor, spying on competitors, testing
products on animals.
Agency theory
Agency theory is the relationship between the various interested parties in the firm. An agency
relationship exists when one party, the principal, employs another party, the agent, to perform a task on
their behalf.
• For example, a manager is an agent of the shareholders. Similarly, an employee is an agent of the
managers.
• Conflicts of interests exist when the interests of the agent are different from the interests of the
principal.
• For example, an employee is likely to be interested in higher pay whereas the manager may want
to cut costs.
• It is therefore important for the principal to find ways of reducing the conflicts of interest. One
example is to introduce a method of remuneration for the agent that is dependent on the extent to
which the interests of the principal are fulfilled – e.g. a director may be given share options so
that he is encouraged to maximize the value of the shares of the company.
Goal congruence
• Goal congruence is where the conflict of interest is removed and the interests of the agent are
the same as the interests of the principal.
• The main approach to achieving this is through the remuneration scheme – example: giving
share options to the directors. However, no one scheme is likely to be ‘perfect’.
• For example, although share options encourage directors to maximize the value of shares in
the company, the directors are more likely to be concerned about the short term effect of
decision on the share price rather than worry about the long-term effect. The shareholders are
more likely to be concerned with long-term growth.
• An alternative approach is to introduce profit-related pay, for example by awarding a bonus
based on the level of profits. However, again this may not always achieve the desired goal
congruence – directors may be tempted to use creative accounting to boost the profit figure,
and additionally are perhaps more likely to be concerned more with short-term rather than
long-term profitability.

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Role of Senior Financial Manager / Advisor

Advanced investment appraisal

1.Discounted cash flow techniques

Acquisitions and mergers

1. Acquisitions and mergers versus other growth strategies

Corporate reconstruction and reorganization

Treasury and advanced risk management

 The role of the treasury function in multinationals

Role of senior financial advisor in the multinational organization

The Nature and Purpose of Financial Management

Maximizing shareholders wealth

Types of strategic decisions to be made by the financial manager

CONFLICTS OF INTEREST AND THEIR RESOLUTION

๏ Excessive remuneration levels

Off balance sheet finance

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