CIMA F3 Financial Strategy by Dr. Lijuan Xiao Sep, 2017 @ JXUFE

Staff Profile Mini Biography Joined JXUFE as Lecturer in Sep, 2016 Graduated from Durham University (UK) PhD in Accounting CIMA Membership UK Higher Education Association--Associate Fellow Research Area & Interest Earnings Quality Earnings Management Corporate Governance Email : 11992574@qq.com Office: Room 709, The Northern Building

1. Strategic Financial Management Concept It is a framework of financial plans that aim to ensure that the entity’s strategic financial objectives are met. Maximization of the wealth of its ordinary shareholders.

1. Strategic Financial Management Concept-continued The allocation of scarce capital resources among the competing opportunities Monitoring of the chosen strategy so as to achieve stated objectives.

2. Financial Management Decisions Maximization of shareholder wealth Investment Decision Financing Decision Dividend Decision

2.1 Investment Decisions Identify investment opportunities The optimum allocation of scarce funds between different investments New projects/takeover/merger & acquisition

2.2 Financing Decisions Capital Structure  Long term Working Capital Management  Short term Short-term hedging strategies for the financing of international investments (e.g. foreign currency)

2.3 Dividend Decisions Share Dividends Cash Dividends Stable Dividends High Dividends Zero Dividend

2.4 Interrelationships between the three key decisions Investment Decisions Financing Decisions Dividend Decisions High Growth Companies High levels of capital investment Low levels of debt finance Low or zero dividend Mature Companies Moderate to low levels of capital investment High levels of debt finance High dividend payout

3. Influences on Financial Strategy Funding Constraints lender’s assessment of creditworthiness Investor Relations Agency Theory Business Strategy

4. Regulatory Bodies The Impact of Legislation Compliance with Legislation Corporate Governance UK Corporate Governance Code 2016 Competition Regulation

5. Economic Influences Inflation Interest Rates Exchange Rates Forecasting Exchange Rates

5.1 Nominal Rates and Real Rates of Interest Nominal rates of interest are the actual rates of interest paid. Real rates of interest are rates of interest adjusted for the rate of inflation.

5.1 Nominal Rates and Real Rates of Interest Fisher Equation (1+nominal rate of interest)=(1+real rate of interest)*(1+inflation rate) Real rate of interest=(1+nominal rate of interest)/(1+inflation rate)-1

5.2 Interest Rates and Financing Decisions When interest rates are low to borrow more to borrow for long periods When interest rates are higher to pay back loans asap. to reduce the debt finance

5.3 Exchange Rates Floating Exchange Rates Fixed Exchange Rates

5.3 Exchange Rates

5.3 Exchange Rates

5.4 Forecasting Exchange Rates

Try Question 2.1 on p.36 & Check the example

6. International Influences Why invest overseas? Company Country Customer Competition Currency

6. International Influences Any risks ?

7. Impact of Taxation on Financial Strategy Domestic tax considerations International tax considerations

7. Impact of Taxation on Financial Strategy Thin Capitalization Excess tax relief on interest payments is a result of thin capitalization. In many tax jurisdictions, they limit the amount of interest that can be claimed for tax relief.

7. Impact of Taxation on Financial Strategy Taxation Issues Profits of an overseas branch or agency Income from foreign securities, for example debentures in overseas companies Dividends from overseas subsidiaries Gains made on disposal of foreign assets

7.1 Double Taxation Relief (DTR) It is an agreement between two countries whereby tax payable on profits made by an overseas subsidiary, including withholding tax, may be deductible against tax on the same profits in another country.

7.1 Double Taxation Relief (DTR) DTR is given to taxpayers in their country of residence by way of a credit for tax suffered in the country where income arises. Total exemption from tax; Taxation will have an impact on strategy.

8. Performance Analysis Ratio Analysis Comparison Evaluation of financial objectives Different stakeholders focus on different ratios

8. Performance Analysis Limitations of Ratio Analysis Availability of comparable information Use of historical/out-of-date information Ratios are not definitive Need for careful interpretation Manipulation Other Information (same accounting standards or accounting policies ???)

8. Performance Analysis Categorization of Ratios Profitability and Return Debt and Gearing Liquidity: control of cash and other working capital items Shareholders’ investment ratios (stock market ratios)

Try Question 2.2 on p.48

8.4 Other Information Non-financial Information The revaluation of non-current assets Share capital and reserves Loans and other liabilities Contingencies Events after the statement of financial position date

9. Forecasts Cash budgets: A detailed budget of estimated cash inflows and outflows incorporating both revenues and capital items. It provides an early warning of liquidity problems.

9. Forecasts Cash budgets: A company needs to produce a cash budget in order to ensure that there is enough cash within the business to achieve the operational levels set by the functional budgets.

9. Forecasts Estimating a future statement of financial position Inventory Receivables Payables

Q & A