Financial management for decision makers 9th by peter atrill

FINANCIAL MANAGEMENT FOR DECISION MAKERS NINTH EDITION Peter Atrill FINANCIAL MANAGEMENT FOR DECISION MAKERS At Pearson, we have a simple mission: to help people make more of their lives through learning We combine innovative learning technology with trusted content and educational expertise to provide engaging and effective learning experiences that serve people wherever and whenever they are learning From classroom to boardroom, our curriculum materials, digital learning tools and testing programmes help to educate millions of people worldwide – more than any other private enterprise Every day our work helps learning flourish, and wherever learning flourishes, so people To learn more, please visit us at www.pearson.com/uk FINANCIAL MANAGEMENT FOR DECISION MAKERS NINTH EDITION Peter Atrill Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan PEARSON EDUCATION LIMITED KAO Two KAO Park Harlow CM17 9SR United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 1997 (print) Second edition published 2000 (print) Third edition published 2003 (print) Fourth edition published 2006 (print) Fifth edition published 2009 (print) Sixth edition published 2012 (print) Seventh edition published 2014 (print and electronic) Eighth edition published 2017 (print and electronic) Ninth edition published 2020 (print and electronic) © Peter Atrill 1997, 2012 (print) © Peter Atrill 2014, 2017, 2020 (print and electronic) The right of Peter Atrill to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 The print publication is protected by copyright Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law Any unauthorised distribution or use of this text may be a direct infringement of the author’s and the publisher’s rights and those responsible may be liable in law accordingly All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners Contains public sector information licensed under the Open Government Licence (OGL) v3.0 http://www.nationalarchives.gov.uk/doc/opengovernment-licence/version/3/ Pearson Education is not responsible for the content of third-party internet sites This publication contains copyright material of the IFRS® Foundation in respect of which all rights are reserved Reproduced by Pearson Education Ltd with the permission of the IFRS Foundation No permission granted to third parties to reproduce or distribute For full access to IFRS Standards and the work of the IFRS Foundation please visit http://eifrs.ifrs.org The International Accounting Standards Board®, the IFRS Foundation, the authors and the publishers not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise The Financial Times With a worldwide network of highly respected journalists, The Financial Times provides global business news, insightful opinion and expert analysis of business, finance and politics With over 500 journalists reporting from 50 countries worldwide, our in-depth coverage of international news is objectively reported and analysed from an independent, global perspective To find out more, visit www.ft.com/pearsonoffer ISBN: 978-1-292-31143-2 (print) 978-1-292-31146-3 (PDF) 978-1-292-31145-6 (ePub) British Library Cataloguing-in-Publication Data Library of Congress Cataloging-in-Publication Data Names: Atrill, Peter, author Title: Financial management for decision makers / Peter Atrill Description: Ninth edition | Harlow, England ; New York : Pearson, 2020 | Includes bibliographical references and index | Summary: “This book has been written for those wishing to achieve a broad understanding of financial management at either undergraduate or postgraduate/post-experience level It is aimed primarily at students who are studying financial management as part of their course in business, management, accounting, economics, computing, or some other area The book should also be suitable for those not engaged in formal study but, nevertheless, need to understand financial management to help manage their business” Provided by publisher Identifiers: LCCN 2019033692 | ISBN 9781292311432 (hardback) | ISBN 9781292311456 (epub) Subjects: LCSH: Accounting | Decision making Classification: LCC HF5636 A8843 2020 | DDC 658.15 dc23 LC record available at https://lccn.loc.gov/2019033692 10 24 23 22 21 20 Front cover image: © Singora/Shutterstock Print edition typeset in 9.25/13 pt Helvetica Neue LT W1G by SPi Global Print edition printed and bound in Slovakia by Neografia NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION Contents Preface Publisher’s acknowledgements The world of financial management xiii xiv Introduction Learning outcomes The finance function Structure of the book Modern financial management Why businesses exist? Balancing risk and return Behaving ethically Protecting shareholders’ interests Shareholder involvement 1 4 14 16 18 23 Summary Key terms References Further reading Critical review questions 30 32 32 32 32 Financial planning 33 Introduction Learning outcomes Planning for the future The role of projected financial statements Preparing projected financial statements The sales forecast Preparing the projected statements: a worked example Projected cash flow statement Projected income statement Projected statement of financial position (balance sheet) Per-cent-of-sales method Long-term cash flow projections Projected financial statements and decision making Taking account of risk Financial planning and gearing Financial gearing 33 33 34 35 36 36 37 38 42 44 47 51 54 56 58 58 CONTENTS v Operating gearing Combined gearing effect 67 73 Summary Key terms Further reading Critical review questions Exercises 77 79 79 79 80 Analysing and interpreting financial statements Introduction Learning outcomes Financial ratios Financial ratio classifications The need for comparison Calculating the ratios A brief overview Profitability Efficiency Relationship between profitability and efficiency Liquidity Financial gearing Investment ratios Financial ratios and the problem of overtrading Key performance indicators Trend analysis Using ratios to predict financial failure Limitations of ratio analysis 89 89 90 90 92 94 95 96 103 109 111 113 116 124 125 126 127 132 Summary Key terms References Further reading Critical review questions Exercises 136 137 138 138 138 139 Making capital investment decisions Introduction Learning outcomes The nature of investment decisions Investment appraisal methods Accounting rate of return (ARR) Payback period (PP) Net present value (NPV) Why NPV is better Internal rate of return (IRR) Some practical points The main methods summarised Investment appraisal in practice vi 89 CONTENTS 147 147 147 148 150 151 156 160 167 168 173 177 178 Investment appraisal and strategic planning The investment appraisal process Investment decisions and human behaviour 180 181 187 Summary Key terms References Further reading Critical review questions Exercises 188 189 190 190 190 191 Making capital investment decisions: further issues 199 Introduction Learning outcomes Investment decisions when funds are limited Comparing projects with unequal lives The ability to delay The problem of inflation The problem of risk Sensitivity analysis Scenario analysis Risk preferences of investors Risk-adjusted discount rate Expected net present value (ENPV) Event tree diagrams Risk and the standard deviation The standard deviation and the normal distribution The expected value–standard deviation rule Simulations Measuring probabilities Portfolio effects and risk reduction 199 199 200 205 208 208 210 211 219 220 223 225 228 232 236 237 237 240 241 Summary Key terms Further reading Critical review questions Exercises 249 251 251 252 252 Financing a business 1: sources of finance Introduction Learning outcomes Sources of finance External sources of finance External sources of long-term finance Attitudes towards the level of borrowing External sources of short-term finance Long-term versus short-term borrowing Internal sources of finance Internal sources of long-term finance 257 257 257 258 258 259 272 282 287 288 289 CONTENTS vii Internal sources of short-term finance 290 Summary Key terms Further reading Critical review questions Exercises 296 297 298 298 299 Financing a business 2: raising long-term finance Introduction Learning outcomes The Stock Exchange Stock market efficiency Are the stock markets really efficient? Share issues Long-term finance for the smaller business Business angels Government assistance The Alternative Investment Market (AIM) 305 305 306 311 316 322 330 337 339 340 Summary Key terms References Further reading Critical review questions Exercises 346 347 347 348 348 348 The cost of capital and the capital structure decision 353 Introduction Learning outcomes Cost of capital Weighted average cost of capital (WACC) Specific or average cost of capital? Limitations of the WACC approach Cost of capital – some evidence The capital structure debate Gearing and signalling 353 353 354 371 375 376 377 378 388 Summary Key terms References Further reading Critical review questions Exercises 390 391 392 392 392 393 Making distributions to shareholders Introduction Learning outcomes viii 305 CONTENTS 399 399 399 Paying dividends Dividend distributions in practice Dividend policy and shareholder wealth The importance of dividends Factors determining the level of dividends Dividend policy and management attitudes: some evidence Dividend smoothing in practice What should managers do? Alternatives to cash dividends 400 402 404 410 416 420 422 423 424 Summary Key terms References Further reading Critical review questions Exercises 434 436 436 436 437 437 10 Managing working capital 441 Introduction Learning outcomes What is working capital? The scale of working capital Managing inventories Inventories management models Managing trade receivables Managing cash Managing trade payables 441 441 442 443 446 453 460 471 478 Summary Key terms Further reading Critical review questions Exercises 482 484 484 484 485 11 Measuring and managing for shareholder value Introduction Learning outcomes The quest for shareholder value Creating shareholder value The need for new forms of measurement Net present value (NPV) analysis Managing the business with shareholder value analysis Implications of SVA Economic value added (EVA®) EVA®-based ratios EVA® in practice EVA® and SVA compared EVA® or SVA? 491 491 491 492 492 493 495 502 503 504 508 509 511 512 CONTENTS ix www.freebookslides.com financial ratios (continued) price/earnings (P/E) see price/earnings ratios profitability ratios 91, 96–103, 109–11, 508 similar businesses comparisons 93 trend analysis 126–7 Financial Reporting Council (FRC) 28 financial statements analysis and interpretation see financial ratios credit control and 461 projected see projected financial statements quality 132 see also income statements; statements of financing decisions financing gap identification 48–9 financing opportunities and dividends 416 financing synergies 543 finished goods 442–3 five Cs of credit 460–2, 688 fixed charges 260, 688 fixed costs 67, 688 borrowing repayment influence 273 fixed interest rates 269–70, 688 flexibility finance leases 277 long-term versus short-term borrowing and 287 floating charges 260, 688 floating interest rates 269–70, 689 Footsie indices see FTSE (Footsie) indices Ford 100 forecast financial statements see projected financial statements forecasting future demand 448 sales 36–7 see also entries beginning with projected foreign currency bank account 607–8 foreign exchange 600–3 dealing in 601–2 rates, determination of 602–3 foreign exchange contract 604 foreign exchange futures 614 foreign exchange markets definition 601 market efficiency 604–5 need for 601 Fortum 418 702 INDEX forward exchange contracts 608–9 forward rate 601, 602, 604 Fox 180 Franks, J 557 FRC (Financial Reporting Council) 28 free cash flows (FCF) 496–502, 511, 579–82, 689 free-rider problem 25 FTSE (Footsie) indices 25, 308, 362, 689 Funding Circle Holdings plc 309 funds availability determination, investment projects 181 limited 200–4 future cash flows, present values 541–2 future costs 174 future growth value (FGV®) 523–4, 689 FX futures 614 gearing combined effect 73–4 financial see financial gearing increasing 560 operating see operating gearing ratios 113–16, 689 share warrants 272 GEC 134 Germany investment appraisals 179, 204 Glencore 363 Go-ahead Group plc 447 Goizueto, Robert 510–11 golden parachutes 562, 689 Goldman Sachs 279, 558 Gordon’s growth model 356 governance, corporate 18–23, 686 government assistance 339–40 Graham, Benjamin 306 Greencore 543 Greggs 184 gross profit margins 101–3, 689 Group 615 Halma 401, 513, 519–20 hedges 609–10 hedging arrangements 270–1, 689 hidden problems and mergers 557 high-yield (junk) bonds 268–9, 689 hire purchase 279–80, 689 www.freebookslides.com home-made dividends 405, 408, 409 Honda 458 horizontal mergers 540, 544, 689 House of Fraser 310 HSBC 605 human behaviour and investment decisionmaking 187 human capital 273 hurdle rates 171, 354 IBO (institutional buyouts) 332 Iger, Bob 558 imperfect markets and share buybacks 428–30 Imperial Minerals 11 importing 598 incentives, management see management income statements economic value added (EVA®) 505 financial ratios 95 operating cash cycles 475 projected 35, 42–3, 47, 50 share valuations 569 takeovers 553 indifference charts 62–3, 70–1 indifference points 63–5, 71, 689 Individual Savings Accounts (ISA) 408 industry borrowing characteristics 274 inefficient stock markets 313 inflation 133, 161, 162, 208–10, 472, 689 inflows, cash 39, 40–1 information asymmetry 388, 412, 689 inside, dividend policies 418–19 on share buybacks for shareholders 434 signalling 412–14, 689 initial public offerings (IPO) 306 inside information, dividend policies 418–19 institutional buyouts (IBO) 332 insurance credit 466 transaction risk and 606 integration problems in mergers 557 interest cover ratios 114–16, 689 lost 161 payments investment appraisals 175 Sharia law and 271 rates borrowing periods 288 current market 367 fixed 269–70, 688 floating 269–70, 689 risk 270–1 swaps 270, 689 interests conflicts of 414–16, 567 management see management shareholders see shareholders public 564 internal finance 258, 288 long-term sources 289–90 short-term sources 288 credit control 291–2 inventory levels reduction 292 trade payables, delaying payment to 292–4 internal rate of return (IRR) 150, 168–73, 175, 689 average cost of capital 375 cost of capital 354 loan capital 368 long-term finance 334 ordinary (equity) shares 355 in practice 178–80 preference shares 370 sensitivity analysis 213 specific cost of capital 375–6 internal variables projected financial statements 36 international investment 621–3 international investment appraisal 620–3 cultural factors 62 environmental factors 621 exchange rate estimation 620 international investment 621–3 remittance restriction 620 risk assessment 621 risk reduciton 621–3 taxation 620 internationalisation of business 597, 598–9 appraisal 620–3 economic risk 615–17 foreign exchange 600–3 foreign exchange markets 604–5 investment and agency costs 623 investment at portfolio level 623 INDEX 703 www.freebookslides.com internationalisation of business (continued) problems of 605–6 relative exchange rates 603–4 risk reduction 599 shareholders’ wealth 599–600 transaction risk 606–15 translation risk 618–19 interpretation of financial statements see financial ratios Intu Properties 310 inventories ABC system of control 451–2, 454–5, 685 average inventories turnover periods 104, 448, 476–7, 685 control levels 451–2 economic order quantities (EOQ) 453–5, 687 enterprise resource planning (ERP) 455–6, 688 financial ratios 448 forecasting future demand 448 just-in-time (JIT) 456–8, 690 levels reduction 292 management 446–52 management models 453–60 recording and reordering systems 448–51 turnover periods 445 XYZ 458–60, 694 investment appraisals accounting rate of return see accounting rate of return internal rate of return see internal rate of return methods 150–1 net present values see net present values payback period see payback period practical points 173–80 in practice 178–80 process 181–6 strategic planning and 180 investment decisions 147, 199 appraisal see investment appraisals delaying 208 event tree diagrams 228–32 expected net present value (ENPV) 225–8 expected value-standard deviation rule 237 human behaviour and 187 inflation and 208–9 limited funds 200–4 704 INDEX nature 148–50 non-divisible investment projects 204 normal distribution 236 portfolio effects and risk reduction 241–7 probabilities 240–1 projects with unequal lives 205–8 risk 210–11, 220–5, 232–6, 241–7 scale of investment 172 scenario analysis 219–20 sensitivity analysis 211–19 simulations 237–9 standard deviation 232–7 investment grade, loan capital 268 investment projects appraisal 2–3 approval 184 classifying 182–3 controlling 184–6 evaluation of proposed projects 183–4 investment funds availability determination 181–2 management 181 monitoring 184–6 non-divisible 204 profitable opportunities identification 182 refining 182–3 investments additional non-current asset (ANCAI) 500 additional working capital (AWCI) 500 Alternative Investment Market (AIM) 340–4, 685 appraisals see investment appraisals business angels 339 competing 155–6 decisions see investment decisions marketable 505 opportunities and dividends 416 of private-equity firms in UK businesses 332 projects see investment projects ratios 91, 116–24 replacement non-current asset (RNCAI) 500 scale 172 timing 319 investors good relations 560 risk-averse 220, 692 risk-neutral 220, 222, 692 www.freebookslides.com risk preferences 220–3 risk-seeking 220, 223, 692 invoice discounting 285–7, 466, 689 invoices, prompt issue 467 IPO (initial public offerings) 306 IRR see internal rate of return ISA (Individual Savings Accounts) 408 Islamic finance 271 ITV 265 J D Wetherspoon 149 Japan dividends 423 inventories management 458 investment appraisals 179, 204 Jimmy Choo plc 73 JIT (just-in-time) inventories management 456–8, 690 Johnson, Samuel 558 joint ventures 543 junk (high-yield) bonds 268–9, 689 just-in-time (JIT) inventories management 456–8, 690 Kim, Scott 279 Kindred Group plc 56–7 Kingfisher plc 447 KPMG 46–7, 55, 218, 239, 529 Kraft Heinz 8–9, 561–2 late payments 107, 292–3, 467, 470 law of one price 603–4 Lazonick, William 433 lead times 448, 690 leadership, boards of directors 21 Leahy, Sir Terry 119 leases finance 275–8, 279, 688 operating 277–8, 691 sale-and-leaseback arrangements 278–9, 692 lenders attitudes 274 confidence, bonus issues 327 shareholders’ conflicts of interest with 415 leverage see gearing Lewis, Dave 414 liabilities, current 44–5 limited funds 200–4 Linde AG 546 linear programming 203, 690 Link Asset Services 275 Link Market Services 275 Lintner, J 420, 422 liquidation method, share valuations 573 liquidity ratios 91, 111–13 listed businesses 307–8, 309–11 AIM 341–3 loan notes 264, 690 convertible 265–7, 550, 686 junk bonds 268–9 takeovers and 550 see also bonds loans capital 262 consideration for takeovers 550–1 cost of 366–9 default risk 267–8 investment grade 268 commitments and dividends 417 covenants 261, 417, 690 dividend policies and 417 notes see loan notes stock see loan notes subordinated 262, 693 term 264, 693 London Stock Exchange see Stock Exchange long-term cash flow projections 51–4 long-term finance 259 Alternative Investment Market (AIM) 331, 340–4 business angels 331, 337–9 comparison with short-term 287–8 crowdfunding 343–4, 686 external sources see external finance government and assistance 331 internal sources 289–90 for smaller businesses 330–7 see also Stock Exchange losses, accumulated and realised 400 management attitudes 273–4, 420–2, 423 behaviour and post-completion audits 185 goals, takeovers 547–8 incentives INDEX 705 www.freebookslides.com management (continued) share buybacks and 432–3 total shareholder return and 521 inefficient, elimination of 544–5 interests conflicts with shareholders 414–15 takeovers 547–8 mergers and 544–5, 547–8, 557 neglect and mergers 557 roles share options 432 shareholders’ conflicts of interest with 414–15 stock market efficiency, implications for 315–16, 322 weak, elimination of 544–5 management buy-ins (MBI) 332 management buy-outs (MBO) 332, 333, 567 Maplin 310 margins of safety 63, 211 market capitalisation 308, 690 market efficiency 5, 604–5 market expectations and dividends 418 market for corporate control 544 market signalling 327, 431–2 market statistics for well-known businesses 121–2 market value added (MVA) 522, 690 directors’ performance measures 527 economic value added (EVA®) and 514–15, 517 limitations 518 margin 516 ratios 516–17 spread 516 market values equity 307–8 per share 553 total market value (TMV) 427–8 marketable investments 505 Marks and Spencer 121, 149, 363 matching 287 Mayer, C 557 MBI (management buy-ins) 332 MBO (management buyouts) 332–3, 567 McKinsey and Co, 185 MDA (multiple discriminate analysis) 129–30,  690 706 INDEX measurement betas 362–4 free cash flows 496–502 future growth value (FGV®) 523–4 of probabilities 240 shareholder value 493–4 Mercedes-Benz 100 mergers 540, 690 activity 540–1 advisers 557–8 beneficiaries 555–8 benefits of scale 542–4 competition elimination 544 complementary resources 545–6 conglomerate 540, 686 demergers 565, 567–9, 687 diversification 547 financial outcomes 552–5 horizontal 540, 544, 689 management 557 interests and goals 547–8 weak and inefficient, elimination of 544–5 motives for 542–8 rationale for mergers 541–2 reasons for 558–9 revenue sources, protection of 546 shares undervalued 547 valuations see shares success factors 559 supply sources, protection of 546 vertical 540, 694 see also takeovers Merlin Entertainments plc 171 Metro Bank 329 Mexico, road capacity in 156 modern financial management 4–5 Modigliani and Miller (MM) capital structure debate 380–6 dividends policies 405–8 money, time value of 163–5 money market hedges 609–10 monitoring investment projects 184–6 Monsanto 558 Moody’s Investor Services 267 Morgan Stanley 558 Morrison Supermarkets, Wm 126, 149 mortgages 269, 690 www.freebookslides.com motives for mergers 542–8 multiple discriminate analysis (MDA) 129–30, 690 Murdoch, Rupert 558 MVA see market value added narrative reasoning 240 NASDAQ 598 National Express 121 National Grid 121 near-liquid assets 472 net assets adjusted 507 share valuations book value method 571–3, 583, 690 liquidation method 573, 690 replacement cost method 574 net cash flows from operations 54 net operating profit after tax (NOPAT) 504, 507 net present values (NPV) 150, 160–1, 690 calculating 165 cash flows 175 cost of capital 354 credit decisions 472 decision rules 182, 204 delaying investment decisions 208 discount rates and cost of capita 167 dividend policy and shareholder wealth 406, 407 economic values and 168 expected see expected net present value free cash flows measurement 496–502 funds limited 200–4 inflation 162, 163 interest lost 161 interest payments 175 internal rate of return and 168–73 loan capital 368–9 logical investors 162 long-term finance 336 non-divisible investment projects 204 non-operating income 502 portfolio effects and risk reduction 241 in practice 178–80 probabilities measurement 240 projects with unequal lives 205–8 risk 161–2, 233–4 sensitivity analysis 211–19 shareholder value analysis 495–6 standard deviation 234–5 time and 161–5 UK business practice 178–9 zero 173 net realisable values 573, 690 netting transactions 608 neutral shares 362 new product development 182 Next plc 57–8, 102–3, 171, 172, 444 Nissan 100, 458 Noffke, Sue 62 Nominated Advisers (NOMAD) 340–1 non-core operations 566 non-current assets, expansion of 95 non-diversifiable risk 244–6, 359, 360, 690 non-divisible investment projects 204 non-operating income 502 non-payment risk reduction 470–1 non-recourse factoring 283 NOPAT (net operating profit after tax) 504, 507 normal distribution 236, 690 Northern Foods 543 Norwegian Cruise Line 149 NPV see net present values objective probabilities 240, 690 OCC (operating cash cycles) 474–8, 691 offers for sale 322, 327, 691 operating cash cycles (OCC) 474–8, 691 operating costs 498 operating efficiency increases 560 operating gearing 67–73, 691 degree of 72–3, 73–4, 687 indifference charts 70–1 indifference points 71 operating leases 277–8, 691 operating profits 96 free cash flows calculations 497 margins 99–100, 101, 102, 496–7, 500, 503, 691 operational synergies 544 operations management opportunity costs 8, 161, 174, 354, 367, 472, 691 optimal capital structures 377, 379, 691 options, shares see shares INDEX 707 www.freebookslides.com ordinary shares betas, measurement of 362–4 cost of capital 354, 375, 378–9 dividend-based approach 354–7, 364, 370 risk/return (capital asset pricing model) approach 358–66, 372 market value return on ordinary shareholders’ funds (ROSF) see returns source of finance 258, 259 takeovers and 550, 551 valuations 573–84 see also equity; shares outflows, cash 39, 40–1 overcollateralisation 281 overconfidence 320 overdrafts 282, 478, 685 overhead cost savings 543 overpayment and mergers 556 overseas financing 598–9 overseas investment 598 overtrading 107, 124–5, 691 owners, borrowing levels attitudes 272–3 P/B (price/book value) ratios 572–3, 691 P/E ratios see price/earnings ratios pac-man defence 562, 691 Panel on Takeovers and Mergers 564 past costs 173–4 past periods 92 Pay.UK 293 payables see trade payables payback period (PP) 150, 156–60, 175, 177, 178, 179, 691 payments dividends see dividends late 107, 292–3, 467, 470 pecking order theory 289–90, 387–8 Pennon Group 388 per-cent-of-sales method 47–51, 691 perfect capital markets 384 perfect negative correlation 242–3 perfect positive correlation 242 performance, poor and divestment 566 performance-related bonuses 513 performance share plans (PSP) 527, 531, 691 Permanent tsb Group Holdings 11 placings 322, 329–30, 691 708 INDEX planned performance 93 planning financial 2, 33 strategic, investment appraisal and 180 plugs 48, 691 poison pill 562, 691 poor performance and divestment 566 portfolio international investment 623 portfolio effects and risk reduction 241–7 post-completion audits 185–6, 691 PP see payback period Praxair In 546 preference shares cost of capital 369–71 loan capital compared 262 source of finance 258, 260 takeovers and 551 see also shares Premier Foods 363 premiums risk see risk share prices, takeovers 555–6 present values (PV) 163–4 of future cash flows 541–2 tables  166–7, 631–2 see also net present values price/book value (P/B) ratios 572–3, 691 price/earnings (P/E) ratios 120–3, 691 merger evaluations 553–5 share buybacks or dividends 427–8 share valuations 575 stock market efficiency 315, 318 prices/sales (P/S) ratio 576 PricewaterhouseCoopers (PwC) 477 primary capital markets 306 private companies, conversion to 560 private equity 332–7, 691 probabilities analysis, limits of 240 assigning 240 distribution 232–3 event tree diagrams 228–32 expected value-standard deviation rules 237 expected values 225 measurement 240 normal distribution 236 objective 240, 690 www.freebookslides.com standard deviation 232–7 subjective 240, 693 products new, development 182 sales see sales profitability achieving 98 borrowing repayment influence 274 efficiency and, relationship between 109–11 index 201–4, 691 investment project opportunities identification 182 ratios 91, 96–103, 109–11, 508 takeover bids defensive tactics 560 targeting 98 profits accounting 155, 494 accumulated realised 400 gross profit margins 100–3, 689 maximisation 7–9 net operating profit after tax (NOPAT) 504, 507 objectivity, lack of operating see operating profits precision, lack of rate of tax on 507 realised 400 stability and dividends 417 unrealised 400 see also profitability programming, linear 203, 690 projected cash flow statements 35, 38–42, 473 projected financial statements 35, 691 cash flow statements 35, 38–41, 51–4, 473 decision making 54–5 external variables 36 financing gap identification 48–9 income statements 35, 42–3, 47, 50 internal variables 36 per-cent-of-sales method 47–51 preparing 36, 37–8 44 risk and 56–8 role 35–6 scenario analysis 57–8 sensitivity analysis 56–7 statements of financial position 35, 44–7, 50 variables 36 worked example 37–43 projected income statements 35, 42–3, 47, 49 projected statements of financial position 35, 44–7, 50 Prompt Payment Code 479 PSP (performance share plans) 527, 531, 691 public interests protection, takeovers 564 public issues 322, 327–8, 329–30, 691 purchase consideration, takeovers 548–51 purchasing power, current general 209 purchasing synergies 543 put option 610 PV see present values qualitative approach, sales forecasting 37 quality financial statements 132 total quality management (TQM) 457 quantitative approach, sales forecasting 37 R&D (research and development) 505 Ramirent plc 98 ratios see financial ratios raw materials 442 RBS (Royal Bank of Scotland) 16, 363 realised losses 400 realised profits 400 receipts, identification of pattern of 469 receivables see trade receivables record dates 401, 692 recording systems, inventories 448–51 recourse factoring 283 references, credit control 461 refunding risk 287 Register of County Court Judgments 461 regulatory requirements 183 relevant costs 173, 692 remittance restriction 620 remuneration chief executive officers 525–6 directors see directors Renault 100 Rentokil-Initial plc 172, 261 reordering systems, inventories 448–51 replacement capital 332 replacement costs 571, 573, 574 replacement non-current asset investments (RNCAI) 500 INDEX 709 www.freebookslides.com re-pricing share options 530 required rate of return 506 rescue capital 332 research and development (R&D) 505 resource management with economic value added 508–9 restricted shares 528, 692 restructuring 565–9 costs 505–7 retained earnings 289–90, 366 returning surplus funds 429, 431 returns borrowing levels affecting attitudes to 273 on capital employed (ROCE) 97–8, 99, 101, 109–11, 118–19, 130, 133, 134, 153, 692 expected 379, 381, 385 investors’ requirements 162 on ordinary shareholders’ funds (ROSF) 96–7, 98, 101, 692 required rates 506 risk and 14–16, 262, 358–60 risk-free rate 224, 359, 361, 365 total shareholder return see total shareholder return Reuters 363, 364, 558 revenue sources, protection of 546 synergies 544 reverse synergy 566 rights issues 322–5, 329, 692 risk 692 assessment 246–7 capital structure modernist view 384 default, loan capital 267–9 directors’ share options and 529–30 diversifiable 244–6, 359, 360, 687 diversification and economics of exchange rate 605 interest rates 270 investment decision-making see investment decisions investors’ preferences 220–3 management net present values 161–2 non-diversifiable 244–6, 359, 360, 690 non-payment 470–1 payback period (PP) 160 710 INDEX premiums 162, 224, 358–9, 364, 692 profit maximisation and projected financial statements and 56–8 reduction, portfolio effects and 241–7 refunding 287 returns and 14–16, 262, 358–60 standard deviation and 232–6 transaction 606 risk-adjusted discount rate 223–5, 692 risk assessment, international investment appraisal 621 risk-averse investors 220–3, 272, 692 risk-free rate of return 224, 359, 361, 365 risk-neutral investors 220, 222, 692 risk reduction international investment appraisal 621–3 internationalisation 599 risk/return (capital asset pricing model) approach 358–66, 372 risk-seeking investors 220, 223, 692 RNCAI (replacement non-current asset investments) 500 ROCE (return on capital employed) see returns rolling cash flow projections 41, 692 ROSF (return on ordinary shareholders’ funds) see returns Rothschild 244 Royal Bank of Scotland (RBS) 16, 363 Royal Dutch Shell 26, 275, 425 Royal Mail 121 Ryanair 149, 269, 444 S&P (Standard and Poor’s) 267–8, 369 safety inventories levels 449 safety margins 63, 211 Sage Group 17 Sainsbury 127, 278 sale-and-leaseback arrangements 278–9, 692 sales existing products 182 forecasting 36–7 per-cent-of-sales method 47–51, 691 revenue per employee 108–9, 692 revenue to capital employed 107–8, 692 trade receivables to, ratio 467, 693 as value drivers 498, 502 Satago 470 www.freebookslides.com Savannah Resources plc 214 scale of investment 172 scale, benefits of 542–4 scarce finance 200–4 scenario analysis 57–8, 219–20, 246–7, 582, 692 Schäfer, Klaus 418 Schroder Income Growth Trust 62 scrip dividends 424–6, 692 scrip issues (bonus issues) 322, 325–7, 686 seasoned equity offerings (SEO) 307 secondary capital markets 306 securitisation 281–2, 692 security 260–2, 274, 460, 692 Seed Enterprise Investment Scheme (SEIS) 339 self-insurance 606 sell-offs see divestments semi-strong form of market efficiency 312, 312, 315 sensitivity analysis 56–7, 211–19, 246–7, 582, 692 sensitivity charts 216–17, 692 SEO (seasoned equity offerings) 307 Severn Trent 149, 444 shareholder value 492, 693 analysis (SVA) 495–6, 693 business management with 502–3 economic value added (EVA®) compared 511–14 implications 503–4 creation of 492–3 criticisms 522–3 directors’ rewards and 524–32 economic value added see economic value added future growth value (FGV®) measurement 523–4 market value added see market value added measurement for 493–4 net present value analysis 495–501 total shareholder return see total shareholder return shareholders activism 25–9, 30 in bidding businesses 556–7 circularising, takeover bids defensive tactics 560–1 directors and 18–23 distributions buybacks 426–31 dividends see dividends interests championing 316 conflicts 414–16 protection of 18–23, 564 internationalisation, welth 599–600 involvement 23–9 lenders’ conflicts of interest with 415 managers’ conflicts of interest with 414–15 ownership of shares 23–4 mergers 555–7 return on ordinary shareholders’ funds (ROSF) see returns revolts 26 share buybacks, information for 434 stakeholders and 13–14 takeovers 556–7 total shareholder return see total shareholder return value see shareholder value wealth dividend policies and 404–10 maximisation 6–11, 13, 316, 545, 693 shares aggressive 362 buybacks 426–31, 693 consideration for takeovers 549–50 defensive 362 employee share option schemes 560 issues 322 bonus issues (scrip issues) 322, 325–7, 686 offers for sale 322, 327–8, 691 placings 322, 329–30, 691 public issues 322, 327, 329–30, 691 rights issues 322–5, 329, 692 tender 327–8, 693 timing 315–16 listed 23–4 neutral 362 options 693 directors 529–30, 687 employees 560 management 432 ownership 23–4 performance share plans (PSP) 527, 531, 691 INDEX 711 www.freebookslides.com shares (continued) prices bonus issues 327 bubbles 320, 321, 521 directors’ share options and 529–30 indices 308 premiums on, takeovers 555–6 rights issues 322–5 setting 327–9 striking 328 support 428, 431 total shareholder return and 521 repurchase, takeover bids defensive tactics 560 restricted 528, 692 undervalued 429, 547 valuations 569–71 asset-based methods 571–4, 583 cash flow methods 577–84 stock market methods 574–7, 583 values total shareholder return and 521 warrants 271–2, 694 see also earnings per share; ordinary shares; preference shares Sharia law 271 shortest-common-period-of-time approach 205–6, 693 short-term finance 259 comparison with long-term 287–8 external sources see external finance internal sources see internal finance plans 35 short-termism 317–18 signalling dividends 412–14, 422, 431–2 financial gearing and 388–90 information 412–14, 689 market 327, 431–2 similar businesses 93 simulations 237–9, 693 Sky plc 149 slow payers 470 small and medium-sized businesses 292–3 smaller businesses long-term finance for 330–7 Smith, Terry 29, 118–19 Smurfit Kappa Group plc 98 712 INDEX sources of finance see external finance; internal finance; long-term finance; Stock Exchange South West Water 270 special-purpose vehicles (SPV) 281 specific cost of capital 375–6 spin-offs see demergers Sports Direct 10–11 spot rate 601, 602, 604 SPV (special-purpose vehicles) 281 Stagecoach 280, 363 stakeholder approach 11–14, 693 Standard and Poor’s (S&P) 267–8, 369 standard deviation 232–6, 693 statements of financial position distributions to shareholders 406, 407 economic value added (EVA®) 505–7 financial ratios 93, 134 market value added 515 operating cash cycles 475–6 projected 35, 44–7, 50 share valuation 570 working capital 444 Stern Stewart 504–5, 509, 514, 517, 523–4 Stewardship Code (UK) 28–9, 694 Stifel 310 Stock Exchange 172, 258, 306–7, 693 deep discount bonds 265 indices see FTSE (Footsie) indices listed businesses 307–8, 309–11 raising finance 308–9 share price indices 308 short-termism 317–18 UK Corporate Governance Code 20, 21 warrants 271–2 stock markets anomalies 318–19 efficiency 311–22, 688 inability to fool 316 indices see FTSE (Footsie) indices inefficient 313 overreaction 318 reactions 316 risk levels assessing 316 share valuation methods 574–7 stock see inventories; shares strategic focus and divestment 566 strategic management www.freebookslides.com strategic planning and investment appraisal 180 strike rate 610 striking prices 328 strong form of market efficiency 312–13, 315 subjective probabilities 240, 693 subordinated loans 262, 693 sub-prime crisis 282 success factors 559 synergies from 543–4 threats of, dividend policies and 417–18 see also mergers suppliers credit control and 461 delayed payments to 292 payment periods 464 relationships, cash management and 472 supply chain synergies 543 supply sources, protection of 546 swaps, interest rate 270, 689 synergies from takeovers 543–4 synergy, reverse 566 Taffler, R 131 takeovers 540, 693 activity 540–1 advisers 557–8 beneficiaries 555–8 benefits of scale 542–4 bid rejections 559–69 counterbids 562 defensive tactics 418, 560–2, 566 management interests and goals 547–8 overcoming resistance to bids 563 purchase consideration 548–51 reasons for 558–9 protection of interests of shareholders and public 564 Talpa Media 265 targets dividends 403 payback period 160 profitability 98 tax exhaustion 386, 693 tax synergies 543 taxation capital structure modernist view and 384 cash tax rates see cash international 620 investment appraisal 175 Modigliani and Miller (MM) view 384–6 tender issues of shares 327–8, 693 term loans 264, 693 terminal values (TV) 498–9, 580–2 Tesco plc 118–19, 121, 126, 271, 363, 414, 444, 445, 447, 568 Thomson Reuters 558 time net present values and 161–5 profit maximisation periods and risk, economics of value of money 163–5 timing investments 319 share issues 315–16 TMV (total market value) 427–8 Total 425 total business value 501, 502, 511 total market value (TMV) 427–8 total quality management (TQM) 457 total shareholder return (TSR) 518–21, 528, 693 Townsville, Australia solar photovoltaic system in 169 TQM (total quality management) 457 trade-off theory of capital structures 386–8, 693 trade payables 442 average settlement periods 105–7, 445, 476–7, 480, 685 control 480–1 delaying payment to 292–4 management 478–81 trade receivables 442 ageing schedules 467–8, 685 average settlement periods 104–5, 445, 467, 476–7, 685 economic value added (EVA®) 505 management 460–71 to sales ratio 467, 693 see also credit trade references, credit control 461 traditional view, capital structure debate 378–80 transaction risk 606, 619 currency futures 612–15 INDEX 713 www.freebookslides.com transaction risk (continued) currency options 610–12 dealing with 606–15 doing nothing 606–7 foreign currency bank account 607–8 forward exchange contracts 608–9 home currency trading 607 money market hedges 609–10 netting transactions 608 translation risk 618–19 management 618–19 problem 618 transmission of cash 478 trend analysis 126–7 Trinity Mirror 35 TSR see total shareholder return TV (terminal values) 498–9, 580–2 Tyman plc 98 UDG Healthcare plc 98 UHY Hacker Young 275 UK Business Angels Association (UKBAA) 339 UK Corporate Governance Code 20, 21–2, 28, 694 UK Stewardship Code 28–9, 694 UKBAA 339 undervalued businesses 316 undervalued shares 429, 430, 547 Unilever 561–2 Uniper 418 United Kingdom CAPM use 363 debt 274–5 dividend policies 423 equity risk premiums 361 investment appraisal methods 178–9, 204 mergers 556 post-completion audits 186 private equity investments 332 takeovers 541, 551 target capital structures 374–5 United States directors share options 530 dividend policy 420–2, 423 inventories management 456 investment appraisals 179, 204 junk bonds 268–9 mergers 556 securitisation 282 714 INDEX takeovers 551 United Utilities 363 univariate analysis 128, 129, 694 unrealised profits 400 utility functions 220–3, 694 utility theory 220–3 valuations dividends 372 shares see shares values book value method, share valuations 571–3, 583, 690 businesses 379–80, 381, 385 discounted values of future dividends received 578 drivers 498, 694 economic 168 economic value added (EVA®) see economic value added equity, market values 307–8 expected 225, 243, 688 expected net present value (ENPV) see expected net present value future growth value (FGV®) 523–4, 689 market value added see market value added market see market values money, time value of 163–5 net present values see net present values net realisable value 573, 690 present values (PV) see present values price/book value (P/B) ratios 572–3, 691 shareholders see shareholder value shares see shares terminal (TV) 498–9, 580–2 total business 501, 502, 511 total market (TMV) 427–8 undervalued businesses 316 undervalued shares 429, 430, 547 Vanderbilt, Cornelius 562 variable costs 67, 694 variables projected financial statements 36 variance 234–5 Vattenfal 98 venture capital 332, 694 vertical mergers 540, 694 Virgin Americ 552 www.freebookslides.com Vodafone 149, 598 Volkswagen 100 Volvo 100 WACC (weighted average cost of capital) 371–7, 694 Wal-Mart 14 WaltDisney Corporation 516 Walton, Sam 14 warrants 271–2, 694 weak form of market efficiency 311–12, 312 wealth diminishing marginal utility of wealth 221 maximisation payback period and 160 in practice 11 profit maximisation and 7–9 shareholders see shareholders weighted average cost of capital (WACC) 371–7, 694 Weinstock, Lord 134 Wells Fargo bank 609 white knights 561, 694 white squires 561, 694 Whittaker, John 310 working capital 441 additional working capital investment (AWCI) 500 cycle 442–3 definition 442–3, 694 expansion 96 management of 443 projections 52–3 scale 443–6 see also cash; inventories; trade payables; trade receivables World’s Most Ethical Companies list 17 WPP 26 XYZ inventories management 458–60, 694 Yagil, J 178–9, 203, 423 year-end assumptions 175 Zmijewski, M.E 128 Z-score models 130–1 INDEX 715 FINANCIAL www.freebookslides.com FOR DECISION MAKERS NINTH EDITION MANAGEMENT Now in its ninth edition, Financial Management for Decision Makers provides students with a unique focus on the practical application of financial management and its role in decision making Covering topics such as financial planning, making capital investment decisions, and financing a small business, it provides an ideal introduction to the world of financial management New to this edition: • A new chapter on international aspects of financial management, which explores the benefits and problems associated with internationalisation and the management of foreign exchange risk • Updated explanations throughout including greater coverage of behavioural finance and share valuation methods • Increased number of activities, giving more opportunities to engage with the key concepts • Updated Real World examples, which provide connections between the theory and practice of financial decision making This text is ideal for undergraduates from a non-accounting or non-finance discipline taking an introductory module in financial management It is also suitable for postgraduate students enrolled on certificate and diploma courses in financial management, as well as those enrolled on Diploma in Management Studies and MBA programmes The text can also be used by finance and accounting students as a foundation for further study Visit www.pearsoned.co.uk/atrill to gain access to a suite of resources which accompany this text: • For instructors: Solutionʼs manual and PowerPoint slides • For students: Opportunities to practise and additional support given through a companion website Peter Atrill is a freelance academic who has worked with leading institutions in the UK, Europe and SE Asia He was formerly the Head of Business and Management and Head of Accounting and Law at Plymouth Business School, Plymouth University Front cover image © Singora/Shutterstock www.pearsoned.co.uk ... Library of Congress Cataloging-in-Publication Data Names: Atrill, Peter, author Title: Financial management for decision makers / Peter Atrill Description: Ninth edition | Harlow, England ; New... electronic) © Peter Atrill 1997, 2012 (print) © Peter Atrill 2014, 2017, 2020 (print and electronic) The right of Peter Atrill to be identified as author of this work has been asserted by him in... flourishes, so people To learn more, please visit us at www.pearson.com/uk FINANCIAL MANAGEMENT FOR DECISION MAKERS NINTH EDITION Peter Atrill Harlow, England • London • New York • Boston • San Francisco