part 2 book “corporate finance and financial strategy” has contents: financial planning, management of working capital, international operations and investment, financial risk management, financial strategies from growth to maturity to decline, financial strategies in m&as,… and other contents.
www.downloadslide.net Financial planning Chapter contents Learning objectives 444 Introduction 444 The strategic view 445 The purpose of financial planning 449 The financial planning process 450 Financial modelling 452 The role of forecasting 459 Cash flow forecasting and planning 460 Planning for growth 462 Financing growth 464 Strategic performance assessment 465 Summary of key points 471 Glossary of key terms 471 Questions 472 Discussion points 473 Exercises 473 www.downloadslide.net 444 Chapter Financial planning Learning objectives Completion of this chapter will enable you to: ■ Explain financial planning as part of the strategic management process ■ Outline the purpose of financial planning ■ Describe the financial planning process ■ Use financial modelling to plan the long-term activities of a business ■ Identify the ways in which a company may use alternative forecasting methods ■ Prepare a cash flow forecast as part of the financial planning process to determine a company’s funding requirements ■ Explain the ways in which a business may plan for its future growth ■ Consider the financing options that a company may use to fund its future growth ■ Outline the ways in which a company’s performance may be measured against its plans ■ Explain the ways in which the balanced scorecard may be used to translate a company’s strategic plans into operational terms Introduction Many companies have started up with very good ideas and good intentions with regard to their development and future sales growth However, the corporate graveyard is full of companies that have been unsuccessful in these endeavours because they have failed to plan for such growth in terms of its impact on costs and planned levels of investment and funding This chapter considers financial planning, which is an important part of the strategic management process, concerned not with the absolute detail but taking a look at the big picture of the company as a whole Strategic financial planning is not short term, but is concerned with periods of more than one year, and looks at expected levels of a company’s sales growth and how it may be financed In order to produce forecast long-term financial statements, financial plans are prepared based on the company’s planned growth rate, and its financial ratios relating to costs, working capital, tax, dividends, and gearing Forecasts are not plans or budgets but are predictions of what may happen in the future There are a variety of techniques, both qualitative and quantitative, which are used to forecast growth rates Quantitative methods include use of the statistical techniques of exponential smoothing and regression analysis Cash flow forecasting is one part of the financial planning process and is used to determine a company’s future funding requirements on a monthly and yearly basis The company may use its own resources of retained earnings to support its plans for future sales growth In some circumstances, additional external funding is necessary for a company planning future growth www.downloadslide.net The strategic view This chapter looks at how this additional funding may be acquired using debt and equity Two of the most widely used measures to compare companies’ actual against planned performance are return on capital employed (ROCE) and earnings per share (eps) However, companies are now increasingly using non-financial measures in addition to financial measures to measure performance This chapter closes with a look at such a technique, the balanced scorecard, which is a method used to link companies’ long-term strategies into operational targets using key performance indicators (KPIs) The strategic view The whole area of financial planning was questioned in an article printed in Accountancy Age in June 2004 (Schlesinger, L ‘How realistic are financial plans?’) which emphasised the time spans over which financial plans may be realistic and therefore useful This article, based on a survey of 258 finance directors, considered whether plans for large projects like the Olympics can be realistic when they are prepared so many years ahead of the events Indeed, 79% of the finance directors interviewed believed it was unrealistic for the 2012 London Olympics finance team to draw up budget plans eight years in advance of the event taking place There are clearly different views as to whether or not the plans and budgets are effective and essential business tools However, the majority of the world’s most successful companies have attributed a large part of their success to their reliance on traditional formal planning systems The strategic (long-term) and budget (short-term) planning processes are core management tasks that are critically important to the future survival and success of the business The strategic plan and the budget prepared for planning purposes, as part of the strategic management process, are the quantitative plans of management’s belief of what the business’s costs and revenues will be over a specific future period The budget prepared for control purposes, even though it may have been based on standards that may not be reached, is used for motivational purposes to influence improved business unit and departmental performance Monitoring of actual performance against plans is used to provide feedback in order to take the appropriate action necessary to reach planned performance, and to revise plans in the light of changes The role of financial planning is crucial to any business and it is important to be as accurate as possible As the Thomas Cook press extract below indicates, the impact of a failure to accurately forecast the costs of long-term projects can have serious consequences for a company’s financial stability Currently, many companies are taking the view that the traditional planning and annual budgeting systems are unsuitable and irrelevant in rapidly changing markets Further, they believe that budgets fail to deal with the most important drivers of shareholder value such as intangible assets like brands and knowledge Some of these companies, like Volvo, Ikea, and Ericsson, have already revised their need for annual budgets as being an inefficient tool in an increasingly changing business environment Volvo abandoned the annual budget 10 years ago Instead, they provide three-month forecasts and monthly board reports, which include financial and non-financial indicators These forecasts and reports are supplemented with a twoyear rolling forecast, updated quarterly, and four- and 10-year strategic plans updated yearly It should also be noted that many of the dot.com companies that failed during the 1990s and early 2000s also felt that traditional budget methods were a little old-fashioned and irrelevant 445 www.downloadslide.net 446 Chapter Financial planning ncial plans? How realistic are fina ed in 2006 under project that was launch res sto 200 to up se Manny Fontenlahomas Cook is to clo former chief executive tles bat it as s job 00 1,0 and cut up to voa ing UK business No ended to modto turn around its struggl e new IT system was int Th fell ich wh in res sha – y ation system pan erv res com s y ok’ ida The hol ise Thomas Co nth after admitting ern been abanmo t has las but , day rm a tfo in c pla 75p the on to a single ed rm fi is – ll rtfa r sho is running ove budget, to a £100m cash loss doned because it -tax pre pual pro ann ng an rki wo ted pos not closures as it delayed and is profit last time heavily gramme of £398m against a £41.7m spiralling costs of the pro e Th erly , res sto 125 se clo y have been behind the Thomas Cook will initiall to are understood to ng nni pla y is but s, job hnology group BlueSk putting at risk 660 l over collapse of tec tota a in d res rke sto spa ng aki ich wh s-m close 200 los Technologies in 2009, r me expire for ses y’s lea as pan rs com yea the two t the nex legal row between as om Th of t par l ok The cuts are a pivota ployees and Thomas Co 0m per year from em chief executive, rim inte , gen Cook’s plan to save £11 iha We Sam ucing its red ide ngs alo ging year’ for ss, llen ine cha its UK bus been a ‘very However, it said it has 35 to a strategic 41 m ted fro tiga ft ins cra air has fleet of Thomas Cook He , ets stre h hig ry ’s tain consider the sale of eve is another setback for Bri pty review that will em is ps y sho pan 10 com in the one business as where more than year to Thomas Cook the by in ain ok unt Co mo as t om deb Th The loss for to reduce its £891m from £573m of seeks September 30 emerged 0m £50 to up because of reduced es and slash write-downs, primarily mas Cook to close stor and Tho Source: tish, Canadian and Alistair dick Rud ham future prospects for Bri Gra by this also jobs to cut losses, , ver we Ho 2011 er s emb sse Dec ine French bus e © The Telegraph, 19 down on an IT Osborn itewr 3m £86 an es includ T The broad purposes of budgeting include: ■ planning and control, through exception reporting of financial and non-financial indicators, which ■ economises on managerial time, and ■ maximises efficiency co-ordination, which ■ assists goal congruence communication, through ■ the feedback process, which should ■ reduce or prevent sub-optimal performance motivation and alignment of individual and corporate goals, through ■ participation of many people in the budget-setting process evaluation of performance, to facilitate control ■ ■ ■ ■ ■ As a planning tool the budget is used to reflect the short-term outcomes from the use of a company’s resources in line with its strategy Planning is the establishment of objectives and the formulation, evaluation, and selection of the policies, strategies, tactics, and actions required to achieve them Planning comprises long-term strategic planning and short-term operational planning The latter usually refers to a period of one year With regard to a new retail product, the strategic (long-term) plan of the business, for example, may include the aim to become profitable, and to www.downloadslide.net The strategic view Figure 9.1 The strategic planning process opportunities and threats environmental analysis position analysis strengths and weaknesses and organisation strategy formulation strategy achievement programmes matching opportunities and strengths and formulation of corporate and business strategies developing tactical and operating programmes to transfer strategies into action become a market leader within three years The short-term operational plan may be, for example, to get the product stocked by at least one leading supermarket group within 12 months Strategic planning is the process of deciding on: ■ ■ ■ ■ the objectives of the organisation changes in these objectives the resources used to attain these objectives the policies that are to govern the acquisition, use, and disposition of these resources The way in which a typical strategic planning process may be carried out in an organisation is illustrated in the flow charts in Figures 9.1 and 9.2 Strategic planning involves many ideas and options and lots of ‘what-if ’ analysis Its purpose is to try and provide a ‘fit’ between the company and its environment, and a focus on its main goals, and to assist in reaching those goals The chart in Figure 9.1 shows how analysis is linked to the development of strategies and actions The environmental analysis includes the opportunities and threats elements of a SWOT analysis of the business It provides an audit of the company’s external environment by considering political, economic, social, technological, environmental, and legal factors It also considers the nature of the organisation’s environment and its level of complexity Environmental analysis provides a structural analysis of the competitive environment, and the company’s competitive position and its market position Resources analysis looks within the organisation by considering the strengths and weaknesses elements of a SWOT analysis of the business It uses value stream analysis, and an audit of its resources of people, materials, machinery and equipment, cash flow, and markets Resources analysis includes financial analysis, and a comparative analysis of historical performance, industry norms, and the company’s experience curve It also includes an analysis of the company’s levels of skills and flexibility, and an analysis of its various products and the stages in their product life cycles It is not correct to assume that planning is just an extension of budgeting, but there is a close relationship between these processes A strategic plan is a long-term plan, which spans more than one year and is normally three, five years, or 10 years or more The chart in Figure 9.2 shows the sequence of each step in the process and the relationship between strategic planning and budgeting 447 www.downloadslide.net 448 Chapter Financial planning Figure 9.2 The strategic planning relationship with budgeting revision/modification of strategic plans strategic planning operational planning reporting, analysing and feedback operational plans revised budget revision budgeting action controlling and measuring A budget is a quantified statement for a defined period of time of no more than one year, based on operational plans, which may include planned revenues, expenses, assets, liabilities, and cash flows Strategy is expressed in broad conceptual terms, and for budgeting purposes it needs to be operationalised or translated into more detailed tactical and operational plans that can be understood at the functional level within the company It must be translated into specific plans for functional areas such as: ■ ■ ■ ■ ■ ■ ■ marketing research and development purchasing sales production human resources information systems Important aspects of this operationalisation are: ■ ■ ■ ■ identification of required resources development of appropriate performance criteria implementation of appropriate control systems development of relevant operational budgets A budget provides a focus for the organisation, aids the co-ordination of activities, and facilitates control To enable control of operations, actual performance may be compared with the budget Differences between actual and budget are reported, and analysed, and then feedback is used: www.downloadslide.net The purpose of financial planning ■ ■ ■ to provide information for appropriate remedial action to rectify ‘out of control’ operations to enable necessary revisions of future short-term operational plans to revise or modify long-term strategic plans, if necessary Financial planning is a part of the strategic planning process and includes: ■ ■ ■ ■ ■ assessment of investment opportunities that will add value to the business consideration of the various alternative methods of financing new investment identification of the risks associated with alternative investment options ranking of alternative investment and financing options to optimise decisions measurement of performance of the financial planning process Although new capital investments may be proposed by a company’s operational and administrative managers, the co-ordination of the total investment by the company is made by the directors of the business in line with their strategic objectives In order to create corporate value it is essential that investments are made which return positive net present values (NPVs) Investments that the company must ensure return positive NPVs include new projects or profit improvement projects within the business, or they may include acquisitions of other companies The performance of subsidiary companies not meeting this criterion should be critically reviewed and, where appropriate, sold off or liquidated Financial planning at the company level is effectively capital budgeting at the top level dealing with each business sector rather than the detail of cost centre and revenue centre capital budgeting It will include the five- or 10-year proposed financial plans submitted at departmental level consolidated to consider the growth expectations of the business as a whole and a consideration of the financial implications should the company not meet its growth expectations Such plans will include proposed capital expenditure and its alternative methods of financing It will also consider working capital requirements, and the impacts of inflation and taxation The purpose of financial planning There are a number of reasons why companies devote considerable resources to the development of financial plans They would not this unless they anticipate that the benefits may be equally considerable Mini case 9.1 It is standard practice for listed companies to issue interim management statements that forecast performance for the following quarter and to extrapolate to the year end On May 2012, Next plc issued their quarterly management statement forecasting their expected full year profit Part of their statement is reproduced below and it clearly indicates the basis upon which the company made their predictions First half outlook to July 2012 The second quarter’s retail comparatives are much less demanding than the first’s, as exceptionally warm weather and the Royal Wedding boosted last year’s first quarter sales We remain confident that Next brand sales for the first half will remain within our + 1% to + 4% guidance range and we are forecasting that profit for the first half will be ahead of last year 449 www.downloadslide.net 450 Chapter Financial planning Full year guidance to January 2013 We now believe that the profit scenarios given in March represent a reasonable guidance range for the full year To reiterate, we believe that if sales were up between + 1% and + 4% for the full year, then profits would be between £560m and £610m This is in line with market expectations and the majority of analyst forecasts fall within this range There are differences between forecasts, budgets, and long-term financial plans Forecasts look at what is likely to happen, and that information is used in budget preparation Strategic financial plans consider what events may occur, but also look at potential problems that may arise, and their reasons and impact Sensitivities may be looked at using scenario analysis and simulations to determine the impact on financial plans of various ‘what-if ’ questions For example, what would be the impact on a financial plan if costs were 10% higher, or if sales revenues were 10% lower? Having determined the impact of possible deviations from the plan, the company may then include appropriate contingencies in the plan Financial plans should consider not only opportunities that the company may have which add value by providing a positive NPV, but also include other opportunities presented to the company which are of more strategic interest These include opportunities for developing new products or new markets in ways that provide options for the company to make appropriate capital investments or not at some time in the future A company’s financial plan should reflect its expected growth and how this may be financed Growth may be financed internally through reinvestment of retained earnings Alternatively, its capital investment for growth may require further external funding through either additional equity or additional debt The plan itself will provide consistency in ensuring that growth is matched by whatever level of additional finance is required by the company The financial plan also provides consistency between the various corporate objectives For example, a company may be planning levels of profit, sales revenue, and costs; it is only by looking at the big picture of a financial plan that embraces all these objectives that it can be seen if these are consistent and mutually achievable This applies to any corporate objectives that are in terms that relate to accounting ratios like, for example, return on capital employed and return on sales Such ratios that are stated as objectives must also consider the strategic decisions that need to be made to achieve them – for example, levels of investment, sales volumes, selling prices, and costs – and must be reflected in the financial plan Progress check 9.1 Explain the overall strategic planning process and the relationships between forecasting, budgeting, and planning The financial planning process A company may have a number of alternative strategies, and these need to be translated into financial plans in order that they may be realistically compared A simple model includes an income statement plan of sales revenues and costs, and a balance sheet plan of assets, debt, www.downloadslide.net The financial planning process Figure 9.3 Financial planning income statement flow diagram Input factors growth rate cost of sales ratio sales revenue – cost of sales interest rate and level of long-term debt sales revenue cost of sales PBIT interest PBIT – interest PBT corporation tax rate and PBT tax PBT – tax PAT dividend ratio dividends PAT – dividends retained earnings and equity More sophisticated models include a far greater number of variables and the relationships between them These models are necessarily computerised, using spreadsheets such as Excel There are three main elements in the financial planning process: ■ ■ ■ input factors the financial model output factors The inputs are the company’s financial statements and assumptions made about the future period to which the financial plan relates The assumptions relate to, for example, estimated sales revenues and levels of sales growth, costs to sales relationships, investment levels, and working capital ratios The financial statements include the income statement, balance sheet, and statement of cash flows Figure 9.3 shows a financial planning income statement flow diagram and the input factors that the financial model may include Figure 9.4 shows a financial planning balance sheet flow diagram and the input factors that the financial model may include The financial model comprises the relationships between each of the input factors, and the ways in which outputs are calculated and the consequences of changes to any of the inputs The outputs are the planned future financial statements based on the inputs and assumptions, and calculated by the financial model These are referred to as pro forma financial statements 451 www.downloadslide.net 452 Chapter Financial planning Figure 9.4 Financial planning balance sheet flow diagram Input factors non-current assets ratio non-current assets net current assets / sales revenue ratio working capital non-current assets plus working capital total assets increase in financing requirement long-term debt equity plus retained earnings shareholders’ equity long-term debt plus shareholders’ equity increase in long-term debt or shareholders’ equity capital employed financing requirement Outputs may also include a range of financial ratios that indicate the projected financial performance and financial position of the business, which may be used to determine whether the plan is financially viable and acceptable to the company Financial modelling Using the flow diagrams shown in Figures 9.3 and 9.4 as the basis, we will illustrate the development of a company’s financial planning model in the worked examples that follow Worked example 9.1 Supportex Ltd’s income statement for year one and its balance sheet at the end of year one are shown in Figure 9.5 Supportex has assumed that its total costs will vary directly in line with changes in its levels of sales revenue It has also planned to maintain its debt/equity ratio at 10% Let’s consider what will happen if in year two sales revenue is increased by 20% Because costs vary with sales revenue then costs will also increase by 20% If we assume that Supportex has no spare capacity then for year two then total assets also need to be increased by 20% to support the increased sales revenue We may also assume that the increased assets level is financed by a similar 20% increase in www.downloadslide.net 926 Index inventories (continued) purchase 499 ratio 500 recording 499 turnover 430 unnecessary 497 valuation 24–5 VIN analysis 501 investment 8, annuity 258 appraisal see investment appraisal control of project 299 correlation 187–93 decision see investment decision future value (FV) 255, 259 international see international investment meaning 253–4, 301 performance review process 380, 383 perpetuity 257–8 present value (PV) 256–9 return on see return on investment risk-free see risk-free investment total 487 value-enhancing new project 807, 809 investment account Islamic banking 356 investment analysts users of financial information 33 investment appraisal international investment 553–4 key principles 263–6 methods 259–74 advantages and disadvantages 274–6 see also accounting rate of return; discounted cash flow; discounted payback; internal rate of return; modified internal rate of return; net present value; payback investment banker global financial crisis 358–61 investment decisions 251–4, 489 appraisal see investment appraisal capital budgeting 295–8 equivalent annual cost 294–5 financing decision and 335–8 inflation 276–8 international corporation 282–3 Monte Carlo simulation 290 real options 290–3 risk and uncertainty 284–93 scenario analysis 289 sensitivity analysis 284–93 simulation analysis 288–9 taxation 279–82 working capital 278–9 investment project 62 investment ratio 401–4 investment trust 347 investor as stakeholder 54 attitudes to risk 176–7 communication, pre-bid takeover defence 789 institutional see institutional investor preference, portfolio 199–204 profile change, growth businesses 675–6 rational 198–204 risk-averse see risk-averse investor risk-neutral 176 risk-taking 176, 198 users of financial information 33 invoice purchase 516–17 sales 507–8 IoD (Institute of Directors) 35 IPO see initial public offering Iris Capital Management 667 IRR see internal rate of return irredeemable bond 326–7 irrelevancy argument, dividend 712 irrevocable letter of credit 513–14 ISAs (International Standards on Auditing) 36, 45 Islamic banking 348, 363, 365 accounting standards 356 audit committee 352 bai al salam (contract for purchase of goods) 352–3 bai bithaman ajil (sale of goods on deferred payment basis) 353 current account 356 goods, dealing with 355 investment account 356 istisna’a (manufacturing) 352 ljara (leasing) 354 ljara wa-iqtina (lease/hire purchase) 354 mudaraba (trust financing) 352, 356 murabaha (mark-up or costplus financing) 353 musharaka (partnership financing) 352 objectives 351 qard ul hasan (benevolent or good loan) 354 religious board 352 savings account 356 Shari’a board 352, 356 special investment account 356 Islamic finance 348–9, 365 banking see Islamic banking financial instruments 352–5 foundation 350 Islamic economics 349–51 requirements 350 sukuk 348–9, 354–5 issued share capital 14, 316 issues bond 342 by tender 339, 341, 365 ordinary share see ordinary share issuing house 346, 347 istisna’a (Islamic banking manufacturing) 352 IT director 16–17 ITV plc 733 JD Wetherspoon 657–8 Jensen, MC 151–2 JIT see just in time John Lewis Partnership 363 Johnson Matthey Plc annual general meeting (AGM) 111–2 Articles of Association 115 auditor disclosure of information 116 independence 119 report 131, 149 board of directors 94–5 appointment to 104 attendance 103 audit committee 101–2, 109, 118–19, 143, 145 balance 105 www.downloadslide.net Index Johnson Matthey Plc board of directors (continued) chief executive’s committee 103 committees 100–4, 108–9 composition 103 diversity 104–5, 117 evaluation 108–9 independent professional advice 106 information and support 106 management development and remuneration committee 102, 143 meetings 99 nomination committee 101, 117, 143 role 97–8 succession planning 104 business reporting 109 chairman 151 independence 105 letter 90–3 performance review 109 role 98 time commitment 106 change of control 115 charitable donations 116 chief executive 151 committee 103, 143, 145 role 98 commercial debt, policy on payment of 116 company secretary 151 role 99 consolidated income statement 374 consolidated statement of total comprehensive income 374 corporate governance report 96–111 corporate social responsibility 91, 143–4, 145 director annual re-election 106 appointment 115 conflict of interest 107–8 contract, interest in 115 evaluation 108–9 familiarisation 107 indemnification 107 induction 106–7 insurance 107 interest 128–9 power 115 remuneration report 120–9 replacement 115 responsibility 130, 150 senior independent 99 shares, interests in 115 statutory information 114–15 training and development 107 see also board of directors above; chairman above; chief executive above; executive director below; non-executive director below disabled person 116 dividend 112–13 employees involvement 116 share scheme 114 environmental data, five-year record 132 executive director 151 role 98 financial and business reporting 109 financial assistance received from Government 116 health and safety data, five-year record 132 horizontal analysis 411–13 income statement, consolidated 374 internal audit 119 internal control 109–10 management report 116 non-executive director 151 appointment terms 106 independence 105 role 98–9 time commitment 106 non-financial data, five-year record 132 notes to accounts 375–7, 415, 417–18 political donations and expenditure 116 remuneration committee 110 directors’ report 120–9 reports audit committee 118–19 management 116 nomination committee 117 remuneration 120–9 risk management 109–10 segmental information 375–7, 415, 417–18 senior independent director’s role 99 shareholders controlling, contracts with 114 relations with 110–11 shares capital 113 directors’ interests in 115 employee share scheme 114 listing 113 own, purchase by company 113 social data, five-year record 132 statement of total comprehensive income, consolidated 374 sustainability 91–3, 144, 145 joint venture 573 international operations 547–8, 549–50 just in time (JIT) 398, 434, 503–4 Kahneman, Daniel 614 kaizen 497, 533, 717 Kalyebara, B 274 kanban 497, 503, 533 Kaplan, Robert S 468, 470 Kendall, M 64 KiFin 795 Kikukawa, Tsuyoshi 34 Kirby, Derek 691 Kite, Peter 156 knowledge 10 Kodak 698 Law Society 35 Lay, Kenneth 30–1 lean enterprise 496 learning and growth perspective, balanced scorecard 470 learning curve 57 leasing 313, 314, 347 finance lease 313, 334–5, 365 ljara (Islamic banking) 354 ljara wa-iqtina (Islamic banking) 354 long-term cash flow improvement 527 operating lease 334–7, 365 leave of the court 162, 166 Leeson, Nick 598, 611 legal constraints, international investment 554 legislation 10 927 www.downloadslide.net 928 Index lender as stakeholder 54 fixed or floating interest rate effect 590 shareholder and, conflict between 75–6 users of financial information 33 letter of credit 507, 533 irrevocable 513–14 leverage 404 financial 780 see also gearing leveraged buy-out 818 leveraged management buy-out 818, 828 leveraging 357, 362 liability 45 balance sheet 24, 313, 483 current see current liabilities total see total liabilities translation exposure 593 LIBOR (London Interbank Offer Rate) 325, 590, 611 licensing, trademark 547–9 life cycle business see business life cycle product 57, 634–7, 640, 659 LIFFE (London International Financial Futures and Options Exchange) 600, 603 limited company 13 see also private limited company; public limited company limited liability partnership (LLP) 11, 12 liquidation 230 liquid current assets/daily cash operating expenses ratio 430 liquidity 7, 430 performance review process 380, 382 ratio 398–400 risk 177, 208 listed securities 339 listing 340, 343–5 Listing Rules 146 ljara (Islamic banking leasing) 354 ljara wa-iqtina (Islamic banking lease/hire purchase) 354 Lloyds Banking Group 611 Lloyds TSB 361, 431 Lloyd Webber, Andrew 818 LLP (limited liability partnership) 11, 12 loan bank 347 benevolent see benevolent loan convertible see convertible bond good see good loan guarantee 347 long-term 323, 339 long-term cash flow improvement 526–7 short-term 313 takeover bid 775, 777 loan capital 222, 314 location of inventories 499 London Interbank Offer Rate (LIBOR) 325, 590, 611 London International Financial Futures and Options Exchange (LIFFE) 600, 603 London Stock Exchange (LSE) 14, 35, 340, 342–5, 680–1 long-term cash flow improvement 526–7 long-term debt 67, 483–4, 488 long-term external sources of finance 314–38 long-term financing long-term loan 323, 339 losses, income statement 26 LSE see London Stock Exchange Ltd see private limited company Lyme Bay canoeing disaster 156 M and A (Memorandum and Articles of Association) 13, 14, 115 M&A (mergers and acquisitions) see merger; takeover macroeconomic factors 219 Madoff, Bernie 150 MAM Funds 655 management control, derivatives 598 discount 738 favouring management buyout 819–21 frozen salaries 431 strategic 21, 52–4, 82 weaknesses 430–1 see also director; manager management accountant 16 management accounting 18–19, 20, 22, 45 management buy-in (MBI) 818, 826–8, 828–9 management buy-out (MBO) 322, 666, 687, 818–26, 827–8 management development and remuneration committee 102, 143 management fees, international operations 550, 564–5 management report 116 manager agency problem 74, 151–8 as stakeholder 54 behaviour monitoring by shareholders 152 motives in takeover 747 service contract 152 takeover, position in 798–9 users of financial information 33 see also director; management managing corporate finance 38–9 managing director 16 manslaughter, corporate 155–8, 162 manufacturing director 16 istisna’a (Islamic banking) 352 resource planning (MRPII) 504, 533 Marconi 744–5 margin, futures 603, 619 mark-up financing murabaha (Islamic banking) 353 market-based intervention 546 market capitalisation 762 market demand 10 market efficiency 63–7, 69, 339 market imperfections 735 approach to capital structure (Miller and Modigliani) 237–8, 239, 566 market portfolio see portfolio market power mergers and acquisitions justification 744 market premium 216 market price, debenture 323 market return 215 market risk 178, 180, 215–16 see also systematic risk market share falling 431 maximisation 7, 55 www.downloadslide.net Index market share (continued) merger and acquisition justification 744 market trader 31 market value 25, 225–7 convertible bond 330–1 measurement of shareholder value 70 warrant 333 market value added (MVA) 72, 427, 434 market value of equity/total liabilities ratio 428–9 Markowitz’s portfolio theory 193–7 Marks & Spencer plc 335, 731–2, 810 Marshalls plc 229–30 master production schedule 504, 533 materials 10 bill of (BOM) 504 requirement planning (MRP) 504, 533 Mattel 146 mature businesses 315–16, 695–6 debt financing 699–700 dividend 697–8, 700–12 profile 697–8 re-privatisation 818 risk and return 699 takeover target 712–13 transition from growth 698 maturity phase business life cycle see business life cycle product life cycle 635–6, 640 maximax decision rule 579–81 maximin decision rule 579–81 maximisation market share 7, 55 profit see profit sales 55 shareholder wealth see shareholder Mayfly 726 MBI (management buy-in) 818, 826–8, 828–9 MBO see management buy-out McDonald’s 698 MDA (multivariate discriminant analysis (MDA) 428–32, 434 measurement economic performance 384–5 risk 181–5 Meckling, WH 151–2 media pressures from 10 meetings, board of directors 99 Memorandum and Articles of Association (M and A) 13, 14, 115 mental accounting 614 merchant bank 346, 347 Merck 667 merger 61, 347, 729–30, 765 complementary resources 733, 734 cost 731–2 horizontal integration 732–3 justifications for 742–5 merger accounting 777, 800 reasons for 730–1, 737–45 share valuation 758 types of 732–7 underlying principles 731–2 vendor placing 774, 775, 777 vertical integration 733–4 see also takeover merger accounting 777, 800 mergers and acquisitions (M&A) see merger; takeover mezzanine debt 314, 333–4, 365 Micromet 790 Miller and Modigliani dividend irrelevancy theory 652, 712 market imperfections approach 237–8, 239, 566 net income approach 236, 239 Miller and Orr model, cash management 528–30 Miller approach to capital structure 238, 239 Miller, MH 236–8, 712 Miller, MM 528 Minchington, C 265 Minerva 795 minimax regret decision rule 579, 581 MIRA 551–2 MIRR (modified internal rate of return) 272–3, 301 mission 53, 82 mistake-proofing (poka yoke) 497, 504, 533 mixed bid 779, 800 MM see Miller and Modigliani modelling, financial 452–8, 462 modified internal rate of return (MIRR) 272–3, 301 Modigliani, F 236–8, 712 see also Miller and Modigliani money discount rate 277 interest rate 277 Islamic economics 350 properties of 350 time value of 41, 263 money market hedging 594, 596–7, 619 Monitoring Committee 35 monitoring system, derivatives 598 monopolies 817 Monte Carlo simulation 290 Moody’s 325 Morrison Supermarkets plc 495–6, 733 mortgage 347 global financial crisis 358–61 sub-prime 359 Moss, Ken 826–7 motion, unnecessary 498 MRP (materials requirement planning) 504, 533 MRPI (materials requirement planning) 504, 533 MRPII (manufacturing resource planning) 504, 533 mudaraba (Islamic banking trust financing) 352, 356 multinational company 563, 569 multi-skilling 504 multivariate discriminant analysis (MDA) 428–32, 434 murabaha (Islamic banking mark-up or cost-plus financing) 353 musharaka (Islamic banking partnership financing) 352 mutual shareholdings pre-bid takeover defences 792 MVA (market value added) 72, 427, 434 Myers, SC 238, 566 NatWest Bank 738–9 negative correlation 187, 190, 192 negligence, gross 155 Nestlé 415–16 net cash flow business life cycle 648–9 declining businesses 714 growth businesses 673 929 www.downloadslide.net 930 Index net cash flow (continued) inflow from operations 231 mature businesses 697 share buy-back 707–9 start-up businesses 665 net income approach to capital structure (Miller and Modigliani) 236, 239 net present value (NPV) 72, 254, 259–60, 301 advantages and disadvantages 274, 275 base case 566–7 cost of capital 254 expected 671 financial analysis 423–6 internal rate of return compared 267–72 international investment 566–9 start-ups 671 taxation 280–2 working capital 278–9 net realisable value (NRV) 25, 45 new employees 57 new market entry 10 mergers and acquisitions justification 743 new process 57 new product 57 new share issues see ordinary share; share New York Board of Trade (NYBOT) 600 Next plc 808 Nike 698 NMC Health 683–4 Nohria, N 738 nominal value debenture 323 ordinary share 316, 320 nomination committee Higgs Review 138–9 Johnson Matthey Plc 101, 117, 143 report 117 non-current assets 20, 228 capital expenditure to gross non-current assets ratio 383, 402, 403 purchase, long-term cash flow improvement 527 sales, long-term cash flow improvement 527 valuation 24–5 non-executive director 151, 154, 166 appointment terms 106 Higgs Review 77, 138–9 independence 105 roles 98–9 time commitment 106 non-financial data, five-year record 132 non-financial factors 276 non-market risk see unsystematic risk non-voting shares 316 Northern Rock 361 Norton, David P 468, 470 not-for-profit organisation 11 notes to accounts 375–7 NPV see net present value NRV (net realisable value) 25, 45 NYBOT (New York Board of Trade) 600 O2 816 objectives 54, 82 alternative 55 corporate see corporate objectives Islamic banking 351 surrogate 55–6 obligations of directors 153–4, 162–3 Odean, Terrance 615 OECD (Organisation for Economic Co-operation and Development) 562–3 off balance sheet financing 30–1, 45, 382 offer for sale 339, 341, 365 Official List 680 offset 514 Ohno, Taiichi 496, 503 oil price 583 OLL Ltd 156 Olympus 34 OPEC (Organization of Petroleum Exporting Countries) 583 open account payment 514–15 openness 137–8 operating cash flow 460 operating cycle 381, 484–6 days 395, 396, 397–8, 518–19 performance 518–20 operating expense 505 liquid current assets/daily cash operating expenses ratio 430 operating lease 334–7, 365 operating profit ratio 389, 390 operating segments 416 operational cash flow 310 operational efficiency 63 improvement, pre-bid takeover defences 789, 790 operational gearing 381, 659 business life cycle 644–6 operationalisation 448 operational planning 446–7, 448 operational risk 147 opportunities see SWOT analysis OpSec Security 345 OPT (optimised production technology) 504–5, 533 optimal capital structure 234, 239–41 optimisation, inventory levels 499, 521–2 optimised production technology (OPT) 504–5, 533 options 594, 619 abandonment 291 American 600, 617 at the money 600, 617 call 600, 617 currency 599–600, 601 European 600, 618 expansion 290 foreign currency exchange rate cap, floor and collar 601 in the money 601 interest rate cap 599, 601, 618 collar 599, 601, 618 floor 599, 601 intrinsic value 601, 618 out of the money 600, 619 over-the-counter (OTC) 594, 601–3, 619 premium 599–600, 603, 619 put 600, 619 real 290–3, 301 Shari’a compliant financing and 350 strategic production 291 strike rate 599, 600–1, 619 time value 601, 620 timing 291 traded 594, 600–1, 603, 620 value 601 www.downloadslide.net Index ordinary share 314, 365 balance sheet 316 bonus (scrip) issue 317, 320, 366 buy-back 321, 366, 707–10, 722 capital markets 339 dividend 316, 317–18 growth businesses 682 issue additional shares 317 at a premium 316 initial public offering (IPO) 339, 340, 365 intermediary offer 339, 341, 365 introduction 339, 341–2, 365 issue by tender 339, 341, 365 offer for sale 339, 341, 365 placing 339, 341, 366 underwriter 347 listing 340 nominal (par) value 316, 320 price cum dividend 318 cum rights 318 dividend declaration effect on 318 ex dividend 318 ex rights 318 striking 341, 365 receivership and 316–17 repurchase see buy-back above rights issue see rights issue sales 316 scrip issue 317, 320, 366 split 320 start-up 682 treasury share 707 value 220 voting right 316 warrant see warrant organic growth 58 organisational structure business 16–22 directors in 16–17 Organisation for Economic Co-operation and Development (OECD) 562–3 Organization of Petroleum Exporting Countries (OPEC) 583 Orr, D’A 528 Osborne, P 274 OTC (over-the-counter) option 594, 601–3, 619 out of the money option 600, 619 outputs, financial planning 451–2 overcapacity 696 overconfidence 615 overdraft 312–13, 347, 494, 523–4 overdue account 509 overproduction 497, 498 overseas government policies 571 over-the-counter (OTC) option 594, 601–3, 619 overtrading 431, 519–20 Pac-Man defence 796, 800 Paddington rail crash 156 P&O European Ferries 155 P&O Princess Cruises plc 791 par value, ordinary share 316, 320 Pareto analysis 500, 533 Parsons Brinckerhoff 781 participating preference share 322 partnership financing musharaka (Islamic banking) 352 partnership 11, 12 PAT (profit after tax) 72, 423–5, 489–90 pay directors’ remuneration see director performance related 78, 152 payables days 381, 395, 397–8, 434 valuation 24–5 see also trade payables payback 58, 259–60, 261–2, 274, 275, 301, 715 see also discounted payback payments in advance 513 deferred 353 methods, trade payables 512–15 on consignment 515 policies, trade payables 517–18 payout ratio, dividend 703 payroll 20 PBIT see profit before interest and tax PBT see profit before tax pecking order theory 238–9 P/E see price/earnings ratio PeerTV 344 Pendragon 811-12 pension fund 346 perceived risk 174 perfect information 183–4 perfectly competitive market 61 perfect market 63, 69 perfect negative correlation 190, 192 perfect positive correlation 187, 189, 190, 192 performance assessment, strategic 465–71 historical 57 operating cycle 518–20 related pay 78, 152 review 379–80 conclusions of 380, 383 economic performance measurement 384–5 efficiency 380, 381–2 financial risk management 380, 382 financial structure 380, 382 growth 380, 382 investment 380, 383 limitations 383–4, 419 liquidity 380, 382 major features, consideration of 380, 381 profitability 380, 381 ratio analysis 385–406 SWOT analysis 380–1 period, accounting 19, 43 perpetuity 257–8, 301 PESTEL (political, economic, social, technological change, environmental, and legislative environment) 11, 57 Pfizer 815–16 PI (profitability index) 295–8 placing 339, 341, 342, 366 plain vanilla swap 608–10, 619 planning 7, 472 budget as tool for 446 capacity 504 cash flow 460–2 financial see financial planning for growth 462–4 manufacturing resource (MRPII) 504, 533 materials requirement (MRPI) 504, 533 operational 446–7, 448 931 www.downloadslide.net 932 Index planning (continued) strategic 445–9, 472 succession, board of directors 104 plc see public limited company PLC (product life cycle) 57, 634–7, 640, 659 poison pill 732, 789, 790–2, 800 poka yoke 497, 504, 533 policy 54 accounting 29, 36, 43 collection of trade receivables 508–10 dividend 700, 703–11 payment of trade payables 517–18 working capital 494–503 political, economic, social, technological change, environmental, and legislative environment (PESTEL) 11, 57 political factors, internationalisation 544 political pressure 10 political risk see country or political risk Ponzi scheme 150 Porterfield, JTS 711 Porter’s generic strategy 57 portfolio analysis 57 product 636–9 capital market line (CML) 198–9, 200–7 international investment 551 investors’ preferences 199–204 market 202–3 return 204–7 Markowitz’s portfolio theory 193–7 product see product return 215 risk-free investment 197–8, 201–2, 204–7 risk and return 186–93, 206 venture capitalist 666 portfolio theory 193–7, 208 position analysis 447 positive correlation 187, 189, 192 post-bid defences see takeover Powdthavee, Nattavudh 612–13 power directors 115 market 744 PowerHouse Energy 345 pre-bid defences to takeover see takeover preference share 314, 321–3, 366 capital markets 339 convertible 322 cumulative 322 participating 322 redeemable 322 takeover bid 775, 778–9 variable dividend rate 322 zero dividend rate 322 premium business risk 178 financial risk 178 forward exchange rate 591–2, 619 market 216 option 599–600, 603, 619 ordinary share issues 316 risk see risk swaption 610 present value (PV) 41, 256–9, 263, 265–6, 273–4, 292–3, 294, 838–9, 301 see also adjusted present value; net present value price/earnings (P/E) ratio 383, 401, 402, 403–4, 422, 434 business life cycle 656–8 declining businesses 714, 719–20 dividend 703 growth businesses 673 mature businesses 697–8 share buy-back 707–9 start-up businesses 665 takeover target company valuation 750, 751–3 pricing efficiency 63 primary capital market 339, 343, 680, 681, 687 private equity company 665 private limited company (Ltd) 10, 11, 13–14, 339, 45 re-privatisation of public limited company 817–18 privatisation 829 re-privatisation of public limited company 817–18 sales by Government 817 probability 582 probability-adjusted cash flow forecast 670–1 problem children 637–9 process batch size 505 processing, inappropriate 497 Procter & Gamble 698 product alternative 10 defects 498–9 substitute 10 life cycle (PLC) 57, 634–7, 640, 659 new 57 portfolio analysis 636–9 diversification 698 production improved layout 504 master production schedule 504, 533 optimised production technology (OPT) 504–5, 533 profit 45 after tax (PAT) 72, 423–5, 489–90 before interest and tax (PBIT) see profit before interest and tax before tax (PBT) see profit before tax cash versus 419–27 for the year 389, 390, 392 forecast revised, issuing, post-bid takeover defences 793, 796–7 gross see gross profit income statement 26 margin ratio 407 maximisation as surrogate objective 55 public limited company 14 repatriation from international operations 555–6, 558 strategic financial decisions 73–4 profit and loss account 26 see also income statement profit-making organisation 11 profitability 430, 489 index (PI) 295–8 international investment 568–9 performance review process 380, 381 pressure on 10 ratios 386–93 profit after tax (PAT) 72, 423–5, 489–90 www.downloadslide.net Index profit before interest and tax (PBIT) 231, 390, 392–3, 428–9, 489, 644–6 profit before tax (PBT) 389, 390 to current liabilities ratio 430 project cash flow 269 project financing growth businesses 684–5 project risk growth businesses new projects 684–5 property risk 516, 533, 582–3 prospect theory 614–15 prospectus 340 public, the see general public Public Company Accounting Oversight Board, USA 141 Publicis Groupe 667 public limited company (plc) 10, 11, 14–16, 46 re-privatisation 817–18 Public Offer of Securities Regulations 1995: 340 public offers for sale see initial public offering; share public relations reorganisation and restructuring 814–15 public sector bodies 11 pull system 497, 503, 534 Punch Taverns 814–15 purchasing director 16 Purchasing Power Parity Theory 586–8, 589, 619 push system 503 put option 600, 619 PV see present value qard ul hasan (Islamic banking benevolent or good loan) 354 qualified accountant 13, 46 qualified opinion, audit report 147 qualitative forecasting 459, 472 quality control, total (TQC) 503 director 16 quango 11 quantitative forecasting 459–60, 472 quick ratio 382, 398–9, 400, 434 Qur’an 349 RADR (risk-adjusted discount rate) 254 Raju, Ramalingam 31–2 random walk theory 64 Ranks Hovis McDougall 734 Rappaport, Alfred 70, 72, 421, 743 rating, bond 325 rational investor 198–204 ratio analysis 385–406 inventories 500 trade payables 517 trade receivables 508 RBS see Royal Bank of Scotland real discount rate 277–8 real interest rate 277 ‘real’ investment 59, 61 types of decision Really Useful Group 818 real option 290–3, 301 receivables collection days see collection days valuation 24–5 see also trade receivables receiver 155, 166 receivership 230 ordinary shares and 316–17 records, inventories 499 redeemable bond 326, 327 redeemable debenture 324 redeemable preference shares 322 Registrar of Companies 12, 13, 14, 29, 46 regret avoidance 614 minimax decision rule 579, 581 regulation, inadequate, bank 361–2 rejecting takeover 793, 794 relevance 17–18 relevancy argument, dividend 712 reliability 17–18 religious board, Islamic banking 352 remuneration committee 110, 136–7 director see director see also pay reorganisation and restructuring 805–6 financial strategies in response to external issues 814 demerger 814–17 leveraged buy-out 818 privatisation, sales by Government 817 public relations 814–15 re-privatisation, return to private ownership 817–18 sale of subsidiary 814 spin-off 814, 815–16 financial strategies in response to internal issues convertible debt 812 debt restructuring 809, 812–13 investment in valueenhancing new project 807, 809 new equity finance 809, 810–12 sale and leaseback of asset 809, 810 sale of asset 809–10 share buy-back 807, 808 special dividend 807–8 too little debt 807–9 too much debt 809–13 management buy-in see management buy-in management buy-out see management buy-out reasons for 807 replacement cost of asset takeover target company valuation 748, 750 reports and reporting accounting see accounting; annual report and accounts aged accounts payable report 517–18, 532 aged accounts receivable report 509, 532 audit see audit report audit committee 118–19 business reporting 109 directors’ remuneration report 120–9, 153–4 environmental reporting 144–5 financial information reporting 29–32 financial reporting 34–8, 109 management 116 nomination committee 117 segmental reporting 375–7, 414–19, 434 social reporting 144–5 repositioning 698 933 www.downloadslide.net 934 Index representativeness 615–16 re-privatisation 817–18, 829 repurchase of ordinary shares see ordinary share: buyback reputation 152 required return 174 reservation of title 506 residual assets value international investment 565 residual income (RI) 70, 73, 82, 385 residual theory, dividend 652 resources analysis 53, 57, 82, 447 availability complementary 733, 734 responsibility director see director environmental 10 financial management 20–2, 38–9 social responsibility see corporate social responsibility; social responsibility restrictive covenant, debenture 325 restructuring see reorganisation and restructuring retained earnings 26, cash flow and 309–11 dividend and 317–18 mature businesses 698, 701 to total assets ratio 428–9 retention of title 506 return market 215 on market portfolio 204–7 on risk-free investment 215–16 portfolio 215 required 174 risk-free rate 197–8, 201–2, 204–7 risk and see risk and return risk-free 215 shareholder 70, 73 return on assets (ROA) 234, 389, 390, 392–3, 406–11, 434 return on capital employed (ROCE) 58, 381, 389, 390–1, 393, 434 cash 382, 399, 420–1 strategic performance assessment 465–8 working capital and 489–93 return on equity (ROE) 234, 389, 391, 393, 407–11, 434, 489–93 return on investment (ROI) 2, 385, 715 see also return on capital employed return on sales (ROS) 381 revenue 27 pressures on 10 revenue account 26 revenue budgeting reverse takeover 796, 800 review 53 performance see performance RI see residual income riba 350 rights issue 317, 318–20, 366, 810–12 deep discount 717–19, 721, 810–12 growth businesses 685–7 takeover 780–1 Rio Tinto 797–8 rising employee turnover 431 risk analysis 58, 289, 579, 582 assessment 382 business see business risk cash flow, relating to 68–9 commercial 147, 516 country see country or political risk credit 177, 208, 582–3 currency 177, 566, 208, 569–70 default 672 diversification 180–1 economic see economic risk exchange rate 582–9 financial see financial risk impact on financing 178 interest rate see interest: rate international investment 570–2 international operations 548 international trade see international trade investment decision 284–93 investors’ attitude to 176–7 levels of 147–8 liquidity 177, 208 management 21 derivatives 598 exchange rate 594 interest rate 594 Johnson Matthey Plc 109–10 market see market risk measurement 181–5 operational 147 perceived 174 political see country or political risk premium 67, 204–5, 214–15, 265 project 684–5 reduction merger and acquisition justification 744 return and see risk and return social 180 systematic see systematic risk unsystematic see unsystematic risk risk-adjusted discount rate (RADR) 254 risk and return 41–2, 62, 67–8, 171–3 declining businesses 714–16 growth businesses 676–80 mature businesses 699 portfolio 186–93, 206 relationship between 173–6 start-up businesses 669–72 risk-averse investor 176, 194–5, 198, 201 risk-free investment 197–8, 201–2, 204–7, 215–16 risk-free rate return 197–8, 201–2, 204–7 risk-free return 215 risk-neutral investor 176 risk-taking investor 176, 198 Riyanto, Yohanes 612–13 ROA see return on assets Robinson, Geoffrey 154 ROCE see return on capital employed Roche 790–1 ROE see return on equity ROI see return on investment Romalpa clause 506, 534 ROS (return on sales) 381 Rose, Stuart 731–2 Ross, Stephen 219 Royal Bank of Scotland 361, 431, 594–5, 611, 738–9 Royal Caribbean Cruises Ltd 791 Royal Dutch Shell plc 734 www.downloadslide.net Index royalties 550, 564–5 RWE 667 Ryanair 381 Safeway plc 733 sale and leaseback of assets 809, 810 sales business life cycle 643 cash 507 cost of 25 director 16 force estimate 459 invoice 507–8 maximisation as surrogate objective 55 of assets, reorganisation and restructuring 809–10 of ordinary shares 316 reservation of title 506 return on (ROS) 381 revenue 27 capital expenditure to sales revenue ratio see capital expenditure gross profit compared with 381 growth 463–5 to total assets ratio 428–9, 463 SAP 667 Sarbanes–Oxley Act, USA 141 Satyam Computer Services 31–2 savings account Islamic banking 356 scale economies see economies of scale scandals, financial see financial scandals scenario analysis 289 Schlesinger, L 445 screening option 58 scrip (share) dividend 320–1, 707, 721 scrip (bonus) issue 317, 320, 366 secondary capital market 339, 343, 680, 681–2 secondary public offering (SPO) 685, 688 secretary see company secretary secured debenture 323–4 security market line (SML) 200, 216–17, 242 seed capital 666, 688 segmental reporting 375–7, 414–19, 434 semi-strong form efficiency 63–4 senior independent director 99 sensitivity analysis 284–93, 301 separation theorem 201–2, 208 service contract 152 set-up time reduction 504 settlement methods, trade receivables 507 SFAS 141 Business combinations 779 share 46 buy-back reorganisation and restructuring 807, 808 see also ordinary share directors’ interest in 115 dividend yield on 265 earnings yield on 265 employee share scheme 114 equity executive share option scheme 79 flotation see flotation listing 113 new issue 27 non-voting 316 option scheme 79 ordinary see ordinary share own, purchase by company 113 preference see preference share price as financial performance measure 423 business life cycle 656–8 declining businesses 714, 718–20 growth businesses 673 mature businesses 697–8 movement 64 start-up businesses 665, 670 variations due to market risk 215 see also ordinary share private limited company 14 public offer for sale 14 initial public offering see initial public offering valuation merger 758 volatility 215 see also share capital share (scrip) dividend 320–1, 707, 721 share capital authorised 316 fully-paid issued 316 issued 14, 316 Johnson Matthey Plc 113 minimum 14 share-for-share takeover bid 775–6 shareholder adding value for appeals to, post-bid takeover defences 793, 794 as stakeholder 54 capital growth 652–6 controlling 340 contracts with 114 directors’ appointment by 14 directors’ behaviour monitoring by 152 dividends, business life cycle and 652–6 equity see equity lender and, conflict between 75–6 managers’ behaviour monitoring by 152 ownership by 14 relations with 110–11 return 70, 73 business life cycle 652–6 uncertainty 172 see also total shareholder return (TSR) takeover, position in 798 users of financial information 33 value see shareholder value wealth maximisation 2–3, 7, 8, 10, 39–40, 55, 72, 74, 172 variables affecting 68–9 shareholder value 2–3, 8, 9, 67–70, 82 added (SVA) 70–1, 73, 82 corporate objectives 59 destruction 59–61 economic value added (EVA™) 70, 73, 81 increasing, declining businesses 718–20 measurement 70 residual income (RI) 70, 73, 82 shareholder return 70, 73 share option scheme 152 share premium account 316 Shari’a 348–57 935 www.downloadslide.net 936 Index Shari’a board, Islamic banking 352, 356 shipbuilding 640 shop-floor scheduling 504 short-term cash flow improvement 521–6 short-term debt 67, 483–4, 487–8 short-term external sources of finance 312–13 short-term financing short-term loan 313 shrinkage allowance 504 Siemens 283, 667, 668, 669 sight draft 512 signalling, dividend as device for 702, 703–4 simple dividend growth model 220–1 simple dividend model 220 simple interest 254–5 simulation analysis 288–9 sinking funds, debenture 324 Skilling, Jeff 31 skills analysis 57 slow payment of suppliers 394 Smith, Sir Robert 77, 138–9 SML (security market line) 200, 216–17, 242 Snake agreement 583 social constraints, international investment 554 social data, five year record 132 social factors, internationalisation 544 social reporting 132, 144–5 social responsibility 10 as surrogate objective 55 see also corporate social responsibility social risk 180 soft capital rationing 295 sole trader 10–12 Solnik, Bruno 179 SOP (Statement of Principles) 37 sources of finance 307–9 business life cycle 649–50 external long-term 314–38 short-term 312–13 global financial crisis 357–63 internal to businesses 309–12 Islamic banking and Islamic finance 348–57 Southall rail crash 156 SOX (Sarbanes–Oxley Act), USA 141 special investment account, Islamic banking 356 spin-off 814, 815–16, 829 Spirit plc 814–15 split, share 320 splitting businesses 717 SPO (secondary public offering) 685, 688 spot exchange rate 591–2, 619 spread, exchange rate 591 SSAPs (Statements of Standard Accounting Practice) 35, 46 SSAP 21 Accounting for leases and hire purchase contracts 335 stakeholder 54 attitudes 56 Standard & Poor’s 325 standard deviation 184–5, 189–93 standards, accounting see accounting stars 637–9 start-up businesses 663–4 equity finance 665 preference shares 322 private equity company 665 profile 665–6 risk and return 669–72 sources of support 666 transition to growth 675 venture capitalist 665, 666–9 start-up capital 666, 688 start-up phase business life cycle see business life cycle product life cycle 635–6, 640 Statement of Principles (SOP) 37 statement of affairs 159, 166 statement of cash flows 19, 27–9, 46, 460 statement of financial performance see income statement statement of financial position see balance sheet Statements of Standard Accounting Practice (SSAPs) 35, 46 statement of total comprehensive income, Johnson Matthey Plc 374 steadily increasing dividend payout policy 704 Stern Steward Management Services 72 stewardship 16 stock exchange 339, 342–5 flotation see flotation see also London Stock Exchange stock market 339 stock market valuation takeover target company valuation 747–8 Stoneman, P 798 straight bond value 778, 800 strategic choice 53, 58–9, 82 strategic decisions 53–4 strategic financial decisions 73–4 strategic management 21, 52–4, 82 strategic performance assessment 465–71 strategic planning 445–9, 472 strategic production option 291 strategy achievement programme 447 business 7–9, 59, 80 declining businesses 716–18 financial see financial strategy financial risk management 583, 610–12 formulation 447 hedging 610 international settlement 583 takeover see takeover see also business strategy strengths see SWOT analysis strike rate, option 599, 600–1, 619 striking price, ordinary share 341, 365 strong form efficiency 63–5 structural analysis 57 structural intervention 545–6 subjective curve-fitting 459 sub-prime mortgage 359 subsidiary 46 overseas 550–3, 554–7, 564–5, 569–70 sales of, reorganisation and restructuring 814 substitute products and services 10 succession planning, board of directors 104 sukuk 348–9, 354–5 Sunnah 349 super profits model 760 www.downloadslide.net Index supplier as stakeholder 54 development 504 pressure from 10 slow payment of 394 trading terms 511–12 users of financial information 33 surrogate objectives 55–6, 82 survival as surrogate objective 55 sustainability 91–3, 144–6 SVA (shareholder value added) 70–1, 73, 82 swap 594, 619 basis 610, 617 credit default 358, 364 foreign currency 606–8 interest rate 606–7, 608–9 mis-selling 611 plain vanilla 608–10, 619 swaption 594, 610, 619 switch trading 514 SWOT analysis 57, 380–1, 434–5, 447 synergy mergers and acquisitions justification 735, 742–3 systematic risk 175–6, 215–17, 208 growth businesses 676–9 non-diversifiable 178, 179 start-up 669 TA (throughput accounting) 505, 534 Taffler, Richard 428, 430 takeover 61, 347, 729–30, 765 complementary resources 733, 734 conglomerate 733, 734 cost 731–2 declining businesses 717–18 defences see post-bid defences below; pre-bid defences below directors, position of 798–9 employees, position of 799 financial institutions, position of 799 financial motives in 745–7 financing 774–8 bond 778 cash 775 convertible bond 775, 778 debenture and loan 775, 777 debt versus equity 780–1 mixed bid 779 preference shares 775, 778–9 share-for-share 775–6 vendor placing 775, 777 horizontal integration 732–3 justifications for 742–5 manager motives in 747 position of 798–9 market imperfections 733, 735 mature businesses as targets 712–13 post-bid defences 793 appeal to shareholders 793, 794 defence document 793, 794 increasing dividend 793, 795 issuing revised profit forecast 793, 796–7 offer to take over predator company 793, 796 rejecting and contesting 793, 794 revaluing assets 793, 794–5 taking over other companies 793, 797 white knight 793, 797–8 pre-bid defences 788 asset sell-offs 789, 793 golden parachute 789 investor communication 789 mutual shareholding 789, 792 operational efficiency improvement 789, 790 poison pill 789, 790–2 reasons for 730–1, 737–45 reverse 796 rights issue 780–1 shareholders, position of 798 strategies in 781 diversified companies 781–2 earn-out method 782, 788 earnings per share enhancement using debt financing 782, 786–7 earnings per share enhancement using equity financing 782–5 greenmailing 782 high-growth company purchase 782, 788 takeover (or acquisition) accounting 777, 800 target company valuation 747 accounting rate of return 750, 753 asset-based approaches 748–50 book value of net assets 748–9, 763 break-up, realisable value of assets 748, 750 capital asset pricing model 759–60 capitalised earnings 750–1, 763 discounted cash flow 750, 754–5 dividend yield model 759 earnings-based approaches 750–8 free cash flow model 750, 755–8 Gordon growth model 750, 753, 764 price/earnings (P/E) ratio 750, 751–3 replacement cost of assets 748, 750 stock market valuation 747–8 super profits model 760 types of 732–7 underlying principles 731–2 vertical integration 733–4 see also merger target company undervaluation, financial motives for takeover 745 valuations see takeover tax burden 407 tax haven 560 tax shield 222–3, 237, 242, 323, 560, 699, 746 taxation 10, 19 derivatives 612 dividend 700–1 international operations and investment 560–2, 569–70 investment decision 279–82 Tayles, MA 274 Taylor Wimpey plc 495–6 technological comparison 459 technology 10 optimised production technology (OPT) 504–5, 533 937 www.downloadslide.net 938 Index tender, issue by 339, 341, 365 terminal sign 431 Tesco plc 761–4, 809 test, efficiency 64–5 Thames Trains 156 Thomas Cook 445 threats see SWOT analysis throughput accounting (TA) 505, 534 tick, futures 603, 619 time commitment, director 106 time value of money 41, 263 option 601, 620 Time Warner 776, 812–13 timeliness 17–18 timing cash flow 68–9 option 291 Tobin, J 201 Tomkins 154–5, 734 total assets current liabilities/total assets ratio 430 retained earnings/total assets ratio 428–9 sales revenue/total assets ratio 428–9, 463 working capital/total assets ratio 428–9 total investment 487 total liabilities current assets/total liabilities ratio 430 market value of equity/total liabilities ratio 428–9 total quality control (TQC) 503 total shareholder return (TSR) 73, 172, 654 Toyota 146 TQC (total quality control) 503 trade credit 310, 311 trade payables management 510–11 international trade 513–16 payment methods 512–15 payment policies 517–18 purchase invoices 516–17 suppliers and trading terms 511–12 ratio 517 short-term cash flow improvement 522–3 trade receivables cash discount 508 cash flow 505–6 collection policies 508–10 credit management 505–6, 508–10 customers and trading terms 506 overdue account 509 ratio 508 sales invoice 507–8 settlement methods 507 short-term cash flow improvement 522 traded option 594, 600–1, 603, 620 trademark licensing 547–9 trading fraudulent 160, 166 wrongful 159–60, 166 traditional approach to capital structure 235–6 traditional view, dividend 652 training and development, director 107 transactional intervention 546 transaction exposure 592–3, 594, 620 transfer price 550, 554, 562–4, 573 translation exposure 592–3, 594, 620 transportation 497 TransTec 154 Treasury bill 339, 357 treasury management 18–19, 46 treasury share 707 true and fair view 24, 30, 46, 147 trust deed, debenture 324 trust financing mudaraba (Islamic banking) 352, 356 trustworthiness 152 TSR (total shareholder return) 73, 172, 654 turbulence phase business life cycle 642, 696–7 product life cycle 635–6 Turnbull Committee 77, 137, 139 Turner Review 361 turnover asset see asset turnover capital 395, 396, 397–8 Tversky, Amos 614 Tweedie, Sir David 37 UITF (Urgent Issues Task Force) 35 UKBAA (UK Business Angels Association) 674 UK Business Angels Association (UKBAA) 674 UK Corporate Governance Code 77, 82, 139–43, 363 UK GAAP 35 UK Government funding 314, 338 UKLA (UK Listing Authority) 342 UK Listing Authority (UKLA) 342 uncertainty analysis 289, 579–81 decision-making 173 fundamental 147 investment decision 284–93 resolution, dividend 701 see also risk underwriter 346, 347 unemployed tax shield financial motives for takeover 746 ungeared beta 677–9 Unilever plc 707 unit trust 347 United Kingdom global financial crisis 357, 360–1 United States corporate governance 141 global financial crisis 357–61 univariate time series models 459 unlimited company 13 unnecessary inventories 497 unnecessary motion 498 unregulated trading in derivatives 611 unsystematic risk 175–6, 215, 208 diversifiable 179, 196 growth businesses 676 mature businesses 699 start-up 669 Urgent Issues Task Force (UITF) 35 USA see United States users of financial information 32–3 usury 350 utility curve see indifference curve valuation of businesses asset-based approaches 749–50 earnings-based approaches 750–60 www.downloadslide.net Index valuation of assets 24–5 value adding for shareholders book 70, 748–9, 763 corporate see corporate value option 601 ordinary share 220 providing 69 risk and return and 67–8 shareholder see shareholder value value added tax (VAT) 19, 524 value analysis 717, 722 value chain 717, 722 Van Binsbergen, J 240 variable dividend rate preference share 322 variances 184–5, 189 VAT (value added tax) 19, 524 VC see venture capitalist VCTs (Venture Capital Trusts) 673 vendor managed inventory (VMI) 398, 435, 503 vendor placing 774, 775, 777, 800–1 venture capitalist (VC) 315, 322, 688 growth businesses 675–6, 682 management buy-out 821–2 start-up businesses 665, 666–9 Venture Capital Trusts (VCTs) 673 vertical analysis 381, 413–14, 435 vertical integration 733–4 vicarious liability, director 153 VIN analysis 501 Virgin Group 817 Vivendi Universal 734 Vizada 713 VMI (vendor managed inventory) 398, 435, 503 volatility, share 215 voluntary organisations 11 voluntary winding-up 159, 166 voting rights, ordinary shares 316 WACC see weighted average cost of capital waiting 497 Walker, Malcolm 175 Wal-Mart Inc 733 Warner Music 796 warrants 314, 332–3, 366 Wasps rugby union club 826–7 wastage allowance 504 WC see working capital WCR see working capital: requirement weak form efficiency 63–4 weaknesses see SWOT analysis wealth book 26 shareholders see shareholders Weber, J 738 weighted average cost of capital (WACC) 223–5, 242, 391 capital structure 235–6, 239–41 declining businesses 718–20 growth businesses new project 684–5 international investment 566–8 investment appraisal 265 uses 225–7 Welch, Alex 691 white knight 793, 797–8, 801 wholesale banking sector 347 Whyte, Craig 159 Williams, Gervais 655 Williamson, Chris 283 window dressing 30, 46 Wine Investors 344 Woodford, Michael 34 working capital 27, 46, 228, 481–4 balance sheet 490–1, 493 cash improvement techniques 520–1 cash management 527–31 cycle see operating cycle definition 487–8 income statement 490–1, 493 inventories see inventories investment decision 278–9 long-term cash flow improvement 526–7 management 8, 9, 310, 311–12 as strategic tool 488–94 need for 484–6 operating cycle performance 518–20 policies 494–503 requirement (WCR) 486–7, 488, 494, 496, 519, 554–5 short-term cash flow improvement 521–6 to total assets ratio 428–9 trade payables see trade payables trade receivables and credit management see trade receivables World Trade Center destruction 357 WorldCom 30 Worldwide International UK Limited 161 wrongful trading 159–60, 166 Yang, J 240 yield coupon 778, 800 dividend see dividend zakat 350 zero correlation 187, 191, 192 zero dividend payout policy 704 zero dividend rate preference share 322 Z-Score 428–30, 431 939 www.downloadslide.net ... −103.9 28 .7 −75 .2 12. 0 4.0 12. 0 194.0 26 .9 −59 .2 − 32. 3 20 .0 ? ?26 .9 52. 3 20 .0 14.0 27 7.8 − 42. 9 − 32. 3 −75 .2 20.0 42. 9 95 .2 20.0 52. 0 308.8 −87.9 28 .7 −59 .2 20.0 79 .2 79 .2 20.0 E 20 .0 95 .2 20.0 Planning... 1, 320 (115) 1 ,20 5 1,008 576 1,584 (1 32) 1,4 52 87.5% of sales 50% of sales 22 ROCE 23 ROE Equity 1,000 18 .2% (20 0/1,100) 20 .0% (20 0/1,000) 1 ,20 5 1,4 52 18.3% (24 1/1, 320 ) 20 .0% (24 1/1 ,20 5) 18 .2% (29 0/1,584)... 60 24 0 1,000 – 1,000 840 83 28 8 1 ,21 1 – 1 ,21 1 1,008 111 345 1,464 – 1,464 1,000 1 ,21 1 1,464 20 .0% (20 0/1,000) 20 .0% (20 0/1,000) 20 .5% (24 8/1 ,21 1) 20 .5% (24 8/1 ,21 1) 20 .4% (29 8/1,464) 20 .4% (29 8/1,464)