1 MN10311 Corporate Finance and Investment Appraisal or Finance

2 The Course Tutor Mr A N Birts, ACT Cert ICM, BSc, MBA WH 8.56 To obtain course outline, copies of overheads and seminar questions go to my personal website

3 Finance What is the objective of the organisation? - Make a profit? - Supply goods and or services? - Provide employment? - Growth? - Customer care? - Environmental care?

4 Finance All of these but for finance there is one objective and that is :- To Maximise Shareholder Wealth or Where no shareholders, an equivalent in terms of use of resources.

5 Finance Maximising Shareholders Wealth means Maximising Share Price. Current Share Price Should Reflect All Future Cash Flows Discounted At The Appropriate Discount Rate

6 Finance Obstacles to maximising shareholders wealth. - Stakeholders * Directors * Managers * Workers * Customers * Suppliers What are their objectives?

7 Finance How may these be controlled? - Non Executive Directors? - AGM? - Published Accounts? - Audit? - The Market?

8 Finance Generalised Organisation Finance Director (the city!) Controller Accountant Treasurer Internal External Funding Management Reporting Risk Accounts, costing Bank relations

9 Finance Simple Model of Value Cash Flow Cost of Capital = Current Value (Required Return)

10 Finance Example Assume constant cash flow forever of 100,000 pa and required return of 10% (.10), then investor would be willing to pay today 100,000 = 1,000,000.10

11 Finance We may add value by increasing cash flow e.g. 120,000 = 1,200, How would we do this:- as a company? as financial managers?

12 Finance Or by reducing the required rate of return E.g. 100,000 = 1,250, As financial managers how may we do this?

13 Finance