Biga Financial Management 1213861254667118 9

8/3/2019 Biga Financial Management 1213861254667118 9

1/53

FINANCIALMANAGEMENT

Ekrem [email protected]

Anadolu University

Open Education Faculty

Canakkale Office


2/53

What will we learn?1. An overview of managerial finance

- What is the finance?-Managerial finance in the 1990s

-The financial managers responsibility

-The goals of the corporation


3/53

What will we learn?2. The financial environment: Markets,

institutions

-The financial markets

-Financial institutions

-The stock market


4/53

What will we learn?3. Financial Ratios as a tool of financial analysis

Profitability Ratiosability of the firm to earn an

adequate return and control costs. Asset Utilization RatiosHow efficiently the

firms assets are being utilized.

Liquidity Ratiosfocus on short term risk

management. Debt Utilization Ratiosfocus on the capital

structure and long-term risk management


5/53

What will we learn?

3. Risk and rates of return

-Defining and measuring risk

-Expected rate of return


6/53

What will we learn?4. Strategic long-term investment

decisions

-Generating ideas for capital projects

-Project classifications

-Similarities between capital budgeting

evaluation techniques


7/53

What will we learn?5. Capital budgeting evaluation techniques

-Payback period method

-Net present value method

-Internal rate of return method


8/53

What will we learn?6. Practice of NPV and IRR methods

-Example of NPV

-Example of IRR

-Example of sensitivity analysis

Continuation of examples

So on, so far


9/53

What kind of resources can we use

when we doing research?1. All finance books

2. All articles about finance

3. www.ssrn.com4. www.makalem.com

5. www.ceterisparibus.com

6. Essentials of Managerial Finance, J. Fred Weston

and Eugene Brigham, Harcourt Brace&CompanyInternational Edition, 1992.

7. Finansal Ynetim, Semih Bker and et all, 2005.(The main book of our lesson!)


10/53

What is t

he finance?

Money

Stock exchange Banks

What else?

How about the companies?

Balance sheet


11/53

What is t

he finance?

To achieve the goals of company;

1. Finding funds from the most suitable

sources

2. Using them effectively and

3. Control the results


12/53

An Overview of Managerial Finance

A Short History of Managerial Finance 1930s: Liabilities and equity, Great Depression

1940

and1950

s: Assets, quantitative methods,discounted cash flow methods World War II

1960 and 1970s: Optimization of assets andliabilities and equity, statistical methods, oil crises

1980s: Globalization, interest rate and exchange risk,

macintosh 1990s to today: More risk, more computer, new

financial instruments and methods, Wall Street


13/53

An Overview of Managerial

FinanceBoard of Directors

President

Vice President:Sales

Vice President:Manufacturing

Vice President:Finance

Treasurer Controller

Credit Manager

Inventory Manager

Director of Capital Budgeting

Cost Accounting

Financial Accounting

Tax department


14/53

An Overview of Managerial

Finance

The Financial Managers Responsibility

Forecasting and planning

Major investment and control

Coordination and control

Dealing with the financial markets


15/53

An Overview of Managerial Finance

The goals of the corporation

Managerial incentives to maximize

shareholder wealth

Social responsibility

Stock price maximization and social welfare


16/53

Managerial incentives to maximize

shareholder wealthStockholders

Make the highest

money from thecompany

Do not want to share

theirs company with

others.

Managers

Having autonomy

Protect themselves from a

hostile takeoverora proxy

fightHostile takeover.doc

Try to maximize stockprices in reasonable level


17/53

Social responsibility Ethical responsibility to provide a safe working

environment

To avoid polluting water and air Produce safe products

But social responsibility has a cost

If the other firms in its industry do not follow suit,

their prices and costs will be lower Most investors do not like to buy socially oriented

companies shares.


18/53

Stock price maximization and social

welfare

What requires stock price maximization?

1. Efficient, low-cost plants that produce high-quality goods and services at the lowest possiblecost

2. Development of products that consumers want

and need, so the profit motive leads to newtechnology, to new products, and to new jobs


19/53

The Financial Environment:

Markets, Institutions

The Financial Markets

Physical asset markets

Spot markets and futures markets

Money markets

Mortgage markets World, national, regional and local markets

Primary markets-secondary markets


20/53

Physical asset markets

(Real asset markets)

Wheat,

autos,

real estate,

computers,

stocks,

bonds,

notes,

mortgages etc.


21/53

Spot markets, futures markets, money

markets, capital marketsIn spot and futures markets

you can buy and sell assets on

the spot delivery or for

delivery at some future date,such as six months, or a year

in the future.

Money markets are the

markets for debt securitieswith maturities of less than

one year where capital

markets for the long term.


22/53

World, national, regional and local

markets, primary-secondary markets

Primary markets, are the

markets in which

corporations raise newcapital.

Secondary markets, are

markets in which existing,

already outstandingsecurities are traded among

investors.


23/53

The Financial Environment: Markets,

Institutions

Financial Institutions in Turkey

1. Commercial banks

2. Pension funds3. Mutual funds

4. Life insurance companies

5. Stock exchange (ISE)

6. Gold exchange (IGE)

7. Futures markets (Izmir Futures Market)


24/53


Institutions

Stock Exchanges

ISE

IGE

Turkish Derivatives Exchange

Over the counter market


25/53


InstitutionsIstanbul Stock Exchange 1985 December Inauguration of the Istanbul Stock Exchange

under the Chairmanship of Mr. Muharrem KARSLI

1986 January Commencement of stock trading at theCagaloglu building on January 3, 1986

1991 June Initiation of the Bonds and Bills Market andcommencement of Outright Purchases and Sales Transactions

1997 August launch of the Repo/Reverse Repo Market

2005 January ISE Derivatives Market is closed permanently

as of January 28, 2005


26/53


Institutions

Istanbul Gold Exchange

26 July 1995 Inauguration of the IGE

15 August 1997 establishment of the Futures and

Options Market


27/53

The Financial Environment:

Markets, Institutions

Turkish Derivatives Exchange (TURKDEX)

04 July 2002, establishment of the Turkish

Derivatives Exchange

04 February 2005, transactions started officially


28/53

Risk And Rates Of Return

Defining and measuring risk

Expected Rate of Return Measuring Risk: The Standard Deviation

Measuring Risk: Coefficient of Variation


29/53

Risk And Rates Of Return

What is the risk in finance?

Risk is the financial uncertainty that the actualreturn on an investment will be different from the

expected return.

The exposure to loss of investment as a result ofchanges in business conditions, domestic or

foreign economies, investment markets, interestrates, relative currency rates, or inflation.


30/53

Expected Rate of Return

Calculation of Expected Rates of Return:

Payoff Matrix

Expected Rate of Return.xls


31/53


The weights are the probabilities, and the

weighted average is the expected rate of

return,

Expected rate of return= !

n

i

iikP

1

.k


32/53


%15

%)70(3.0

%)15(4.0%)100(3.0

)()2()(33211

!

!

! kPkPkPk


33/53

Measuring Risk: Standard Deviation

XU1002002-12.xls


34/53

Coefficient of Variation as a Risk

Measure

Coefficient of variation (CV), standard deviation

divided by the expected return

kCV

W!


35/53

Strategic Long-Term Investment

Decisions

Generating ideas for capital projects

Who creates the capital budgeting projects?

Do we need to be an entrepreneur?

Two questions for testing being entrepreneur

(CV and address book)


36/53


DecisionsProject classifications

1. Replacement: Maintenance of business

2. Replacement: Cost reduction

3. Expansion of existing products or markets

4. Expansion into new products or markets

5. Safety and/or environmental projects

6. Other


37/53

Project classificationsReplacement: Maintenance of business

One category consists of expenditures to

replace worn-out or damaged equipmentused in the production of profitableproducts.

Should we continue to produce these products orservices?

Should we continue to use our existingproduction processes?


38/53

Project classificationsReplacement: Cost reduction

This category includes expenditures to replace

serviceable but obsolete equipment.

The purpose here is to lower the costs of labor,

materials, or other inputs such as electricity.


39/53

Project classificationsExpansion of existing products or markets

Expenditures to increase output of existing

products, or to expand outlets or distribution

facilities in markets now being served are

included here.


40/53

Project classificationsExpansion into new products or markets

These are expenditures necessary to produce a

new product or to expand into a

geographic area not currently being

served.


41/53

Project classificationsSafety and/or environmental projects

Expenditures necessary to comply with

government orders, labor agreements, or

insurance policy terms fall into this

category.


42/53

Project classificationsOther project investments

This catch all includes office buildings,

parking lots, executive aircraft, and so

on.


43/53


DecisionsSimilarities between capital budgeting

evaluation techniques

1. Project cost2. Expected cash flows estimation

3. Estimation of project riskiness

4. Cost of capital decision

5. Measurement of present value of cash inflows

6. Present value of the expected cash inflows andrequired outlay


44/53

Capital Budgeting Evaluation

Techniques

1. Payback Period2. Net Present Value (NPV)

3. Internal Rate of Return (IRR)

4. Sensitivity Analysis


45/53


Tech

niques

Payback period

Project S :

Net Cash Flow

Cumulative NCF


46/53

Payback period

Project (S)

Uncovered cost at start of year

Payback=Year before full recovery +

Cash flow during year

100

Payback Period (S)= 2 + = 2,333 Years300


47/53


Techniques

Payback period

Project L :

Net Cash Flow

Cumulative NCF


48/53

Payback periodProject (L)

200

Payback Period (L)= 3 + = 3,333 Years

600


49/53


Techniques

Net Present Value (NPV)

n

n

k

CF

k

CF

k

CFCFNPV)1(

..............)1()1( 22

1

10

!

! !

n

tt

t

k

CF

0 )1(


50/53


Techniques

Internal rate of return (IRR)

The IRR is defined as that discount rate which

equates the present value of a projects

expected cash inflows to the present valueof its expected costs.


51/53


TechniquesInternal rate of return (IRR)

0

)1(..............

)1()1( 22

1

1

0!

n

n

IRR

CF

IRR

CF

IRR

CFCF

0)1(0!

!

!

n

t

t

t

IRR

CF


52/53

Net Present Value (NPV)

To implement this method, it should beproceeded as follows:

Find the present value of investment and its futurecash flows with discounting at the projects cost ofcapital

Sum discounted investment and cash flows

If the NPV is positive then we accept the project. Ifwe have to choose a project among the alternateprojects, we should take into consider the highestNPV


53/53

Example of NPV and IRRSmall Scale Flower Cultivation Project

This project has written by Weitz Center experts for anarea in India.

The project covers an area about one acre. The aim isproducing and selling flowers. Projects cost will be

covered by a bank loan. All cost and sale data havebeen collected and realised that target sales could beachieved. Cost benefit analysisFlower.xls

Date post:	06-Apr-2018
Category:	Documents
Upload:	mohit-sharma
View:	216 times
Download:	0 times

Biga Financial Management 1213861254667118 9

Documents