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CA Final - Strategic financial management

Strategic Financial Management in 12 sildes.
Best way to remember all the concepts in a nutshell is to develop story around it.

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CA Final - Strategic financial management

  1. 1. Summary: CA Final Paper 2: SFM • By- Shubham Agrawal WRO0393640
  2. 2. CHAPTER 1: Financial Policy & Corporate Strategy Fundamentals of Business Agency Theory ( Jenson & Meckling) Financing Decision Investment Decisions Dividend Decision Portfolio Decision Strategy at Hierarchy Levels Corporate Level Strategy Business Unit Level Strategy Functional Level Strategy Strategy Finance Management Strategic Financial Management Financial Planning Financial Resources Financial Tools Financial Goals Ensuring Sustainable Growth
  3. 3. CHAPTER 2: Project Planning & Capital Budgeting Project Feasibility Study Market Feasibility Technical Feasibility Financial Feasibility Under Normal Situation Financial Projections Social Cost Benefit Analysis Goods & Services Labour Foreign Exchange Social Rate of Discount Shadow Price of Investment Risk Adjusted Discount Rate Certainty Equivalent Approach Other Methods Scenario Analysis Sensitive Analysis Simulation Analysis Decision Tree Analysis Capital Budgeting Under Capital Rationing Internal Capital Rationing External Capital Rationing Under Inflation Depreciati on do not keep parity with Inflation Rate Due to inflation Investors require Nominal rate of return i.e. Real Rate + Inflation Rate Replacement Decision Using CAPM Estimate Beta of Capital Project Project Selection Real Option Growth Option Abandonm ent Option Timing Option Project Report Standard Deviation Independent Cash Flow Cash Flows dependent on each other Perfectly Correlated Moderately Correlated
  4. 4. CHAPTER 3: Leasing Decision Leases - Types Operating Lease Sales and Lease Back Leasing Financial Risk Leveraged Lease Sales-Aid Lease Evaluation - Financial Using Present Value Analysis (NPV) Using Bower- Herringer - Williamson Method Evaluation Collateral Security Offered Financial Strength & Credit Worthiness Domestic Leasing Cross-Border Leasing Financial Aspect Tax Aspect Using Internal Rate of Return (IRR) Lessee Perspective Lessors Perspective BELR is where lessee is indifferent between Borrowing & Buying option and Lease finance option. BELR is the minimum lease rental which he would accept. Selection between Borrowing & Leasing Break Even Lease Rental Structuring Lease Rentals Decision Making Deferred Lease Rentals Stepped Up Lease Rentals Ballooned Lease Rentals IF Net Present Value of Leasing NPV(L) / Net Advantage of Leasing is +ve select leasing otherwise Borrowing.
  5. 5. CHAPTER 4: Dividend Decision Dividend Policy i.e. Division of Net earnings into Retained Earning and Dividend Wealth Maximization Decision Long Term Financing Decision Constraint On Paying Dividend Desire of Shareholder Stability of Dividend Constant Dividend Per Share Constant Percentage of Net Earning Small Constant Dividend per share plus Extra dividend Form of Dividend Stock Dividend Cash Dividend Theories on Dividend Policies Traditional Position; Graham & Dadd Walter Approach Gordon Growth Approach Modigliani & Miller Hypothesis Linter’s Model Radical Approach Dividend Discount Model Zero- Growth Rate DDM Constant- Growth Rate DDM Variable- Growth Rate DDM Implied Growth Rate Implied Rate on Equity
  6. 6. CHAPTER 5: Indian Capital Market Primary Market Secondary Market Functions Liquidity & Marketability of Securities Fair Price Determination Sources for Long term funds Helps in Capital Formation Reflects the general State of Economy Stock Exchange IndicesCapital Market Instruments Preference Shares Debentures/ Bond ADR GDR Stock/ Equity Shares Derivatives Financial Derivatives Commodity Derivatives OTC Derivatives Forward Contracts Future Contracts Options Stock Futures Index Futures Stock Options Stock Index Options Binomial Models Risk Neutral Method Black- Scholes Model Valuation Methods Embedded Derivatives Measuring Performance Types Rho Vega Gamma Theta Delta Commodity Market NCDEX MCX ICEX ICEX Indirect Investment Commo dity Futures Stocks of companies producing a commodity` Bonds Indexed on a commodity’s Price Reduce Exposure using Commod ity Swaps Fixed- Floating Swap Commodi ty- for - Interest Swap Swaption Caps FRA Interest Rate Swaps OTC Interest Rate Derivatives Floors Collars Generic Swap Non- Generic Swap
  7. 7. CHAPTER 6: Security Analysis Equity Oriented Debt Oriented i.e. Bond Fundamental Analysis Technical Analysis Bond Valuation Industry Analysis Company Analysis Dividend Growth Model & PE Multiple Economic Analysis Techniques Anticipator y Surveys Barometer / Indicator Approach Economic Model Building Approach Techniques Regressi on Analysis Input- Output Ratio Techniques Correlation & Regression Analysis Trend Analysis Decision Tree Analysis Methods of Technical Analysis Evaluation The Dow Theory Market Indicators Support & Resistance Levels Price Patterns Using data Analysis (Averages) Bollinger Bands Momentu m Analysis 1st Move – Accumula tion of Shares 2nd Move – Arrival of first Report of good earning 3rd Move – Rampant Speculatio n Breadth Index Volume of Transaction Confidence Index Relative Strength Analysis Odd-Lot Theory Channel Wedge Head & Shoulders Triangle or Coil Formation Flags & Pennants Form Double Top Form Double Bottom Form Gap Simple Moving average Exponenti al Moving Average Duration Macaulay Duration Modified Duration Bond Valuation Model Bond Value Theorem (4 basic theorems)
  8. 8. CHAPTER 7: Portfolio Theory 1. Activities in Portfolio Management 2. Objectives of Portfolio Management Phases of Portfolio Management Portfolio Theories Portfolio Strategy Hedge Funds Security Analysis Portfolio Analysis Portfolio Selection Portfolio Revision Portfolio Evaluation Traditional Approach Modern Approach ( Risk-Return Optimization/Marko witz Model) Risk Analysis Total Risk Diversion of Risk Expected Risk & Return Systematic Risk Unsystematic Risk Interest Rate Risk Market Risk Purchasing Power Risk Business Risk Financia l Risk Calculation of Systematic risk Correlation Method Regression Method For 1 Security For 2 Security More than 2 Securities Markowitz Model of Risk-return Optimization Capital Asset Pricing Model Arbitrage Pricing Theory Model Sharpe Index Model Single Index Model Based on Sharpe & Treynor Ratio Active Portfolio Strategy Passive Portfolio Strategy Market Timing Sector Rotation Security Selection Specialized Investment Selection of Securities Selection of Bond Selection of Stock Rebalancing Buy & Hold Policy Constant Mix Policy Constant Proportion Portfolio Insurance Policy (CPPI) Asset Allocation Strategy Integrated Asset Allocation Strategic Asset Allocation Tactical Asset Allocation Insured Asset Allocation Internation al Securities Efficient Mrkt. Theory Random Walk Theory Arbitrage Strategies Event- Driven Strategies Directiona l/ Tactical Strategies
  9. 9. CHAPTER 8: Financial Services in India Investment Banking Credit Rating Consumer Finance Factoring Housing Finance Asset Management Company Depository Services Debit Cards Online Share Trading Includes areas Comm. Bank Vs. Invest. Bank Mergers & Acquisition Private Placement Restructuring 1. Corporate Finance 2. Sales 3. Trading 4. Research 5. Syndicate Representing the target Representing the acquirer Customer approaches to investment bank Investment Bank approaches customer Financial Restructuring Organizational Restructuring Concept Agencies in India Credit Rating Process Limitation of credit rating Evaluation of credit worthiness 1. Credit Risk Evaluation 2. Expressing an opinion & not suggestion 3. As on specific date 4. Largely depends upon interest & Principal obligation being met timely CAMEL Model 1. Request from the issuer & Analysis 2. Rating Committee 3. Communicating to management & appeal 4. Pronouncement of ratings 5. Monitoring the assigned ratings 6. Rating watch 7. Rating coverage 8. Rating scores 1. Rating Changes 2. Industry Specific rather than company specific 3. Cost benefit Analysis 4. Conflict of interest 5. Corporate governance issues 1. Capital 2. Asset 3. Management 4. Earnings 5. Liquidity Sources Basis for credit evaluation ( 3 C’s) 1. Sellers 2. Finance Co. 3. Banks 4. Credit Card Co. 1. Character 2. Capital 3. Capacity ForfaitingMechanism Types Functions of a factor 1. Recourse & Non recourse 2. Advance & Maturity 3. Full Fact. & Partial Fact. 4. Disclosed & Undisclosed 5. Domestic & Export 1. Maintenance/ administration of sales ledger 2. Collection facility 3. Financing trade debts 4. Credit Control & Credit Protection 5. Advisory Services International Trade related but different from export factoring
  10. 10. CHAPTER 9: Mutual Funds Structure of Mutual Fund Classification of Mutual Fund Factors influencing selection Evaluating Performance Signals to exit Stock or Mutual Fund selection decision Functional Basis Portfolio Basis Ownership Basis Open Ended Funds Interval Scheme Close Ended Funds Equity Debt Special Growth Aggressive Income Balanced Bond Funds Gilt Funds Index Funds International Funds Sector Funds Off shore Funds Money Market Funds Fund of Funds Gold Funds Capital Protection oriented funds Public Mutual Funds Private Mutual Funds Foreign Mutual Funds Schemes Balanced Funds Equity Diversified Funds Sector Funds Equity Linked tax saving schemes Thematic Funds Arbitrage Funds Cash Funds Hedge Funds Exchange Traded Funds Index ETF Commodity ETF Currency ETF Net Asset Value Cost incurred by Mutual Fund Returns Ratio Sharpe Treynor Jensen’s Alpha
  11. 11. CHAPTER 10: Money Market Operation Concept/ Basics Structure Instruments Interest Rate Recent Developments in money market Features Pre-Conditions for an efficient money market Rigidities in Indian Money market Distinction between capital & money market Vaghul Group report & recommendation Organized Sector Unorganized Sector RBI PO Saving Commercial Bank Non Banking Co. Co-Operative Banks Indigenous Bankers Chit Funds Money Lenders Nidhis Securities Trading Corporation of India (STCI) Discount & Finance House of India (DFHI) Functions: 1. Participating in call money market 2. Dealing in treasury bills 3. Repo facility to bank 4. Rediscounting short term commercial bills 5. Participating in the inter bank call money Call/ Notice Money Inter-Bank Money Inter Corporate Deposit Inter-Bank Participation Certificate Treasury Bills Commercial Bills Certificate of deposit Commercial Paper Debt Securitization Money Market Mutual Funds Repurchase options & Ready Forward Contracts IBPC without risk IBPC with risk 182 Day 14 Day 364 Day On the basis of Derivate Usance Promissory Note (DUPN) Condition under which CP can be issued Benefit of CP Process of Issue Restoration of credit facility Active Secondary Market (Absent) Lead Bank Issuer Issuing & Paying Agent Investors To Investor:: (Higher Yield, Portfolio diversification, flexibility, liquidity) To Issuer: (Low Interest, access to short term funds, flexible & liquidity, Investor Recognition)
  12. 12. CHAPTER 11: FDI, FII & International Financial Management FDI International Financial Management FII Financing Decision Investing Decision Internal Source External Source Capital including retained earning Loan from Parent Company International Capital Market External Commercial Borrowings Euro- Currency Market Export Credit Facility Bond Issues Financial Institution Floating Rate Notes International Money Market Euro Bonds Foreign Bonds Fully Hedged Bonds Euro Commercial Papers Foreign Currency Convertible Bonds Ordinary Shares (Through Depository Receipt) GDR ADRIDR Euro Convertible Bonds Call Option (Company’s Right) Put Option (Holder’s Right) Unsponsor ed ADRs Sponsored ADRs Restricted ADR Unrestrict ed ARD Euro- Convertible Zero Bonds Euro-Bonds with Equity Warrants Euro Issues 1.Eligibility for issue 2.Advantage of Euro-Issues 3.Disadvantages of Euro Issue 4.Structuring of Euro-Issue 5.Pricing of the issues 6.Methodology for Euro-Issue Cross Border Leasing Capital Budgeting Working Capital Budgeting/ Management Inventory Management Receivables Management Cash Management Optimizing Cash Flow Movement Investing excess cash Accelerate Inflows Managing Blocked Funds Leading & Lagging Strategy Netting Approach Minimizing tax via TP Project Cash Flow Parent Cash Flow Bilateral Netting Strategies Multilateral Netting Strategies
  13. 13. CHAPTER 12: Foreign Exchange Exposure & Risk Management Foreign Exchange Market Risk ManagementRisk Consideration Financial Risk Business Risk Credit Risk Interest Rate Risk Liquidity Risk Market/Price Risk Reinvestment Risk Country Risk Foreign Exchange Exposure Operating Exposure Transaction Exposure Translation Exposure Actions to control risk Strategies for Exposure Management Low Risk: Low Reward Low Risk: High Reward High Risk: Low Reward High Risk: High Reward All Exposure s Hedged Selective Hedging No Hedging Active Trading Techniques for Managing Exposure Hedging Netting Matching Leading & Lagging Price Variation Invoicing in Foreign Currency Asset & Liability Management Arbitra ge Money Market Hedge Currency Risk Hedge Derivatives Forward Based Derivatives Options Forward Contracts Swaps Futures Contract Extension Cancellation Early Delivery Interest Rate Futures Currency Futures Stock Futures Commod ity Swaps Interest Rate Swaps Currenc y Swaps Equity Swaps Canape Swaps Callable Swap Swapti on Forw ard Swap Plain Vanill a Swap Basic Swap Rate Asset Swaps Mortg age Swap Amor tizing Swap 1.Market Participants 2.Nostro, Vostro & Loro Account 3.Exchange Rate Determination 4.Exchange Rate Quotation 5.Cross Rates ExchangeRate Forecasting Technical Forecasting Fundamental Forecasting Market-Based Forecasting Mixed Forecasting ExchangeRate Theories Interest Rate Parity Purchasing Power Parity International Fisher Effect Pure Expectation Theory
  14. 14. CHAPTER 13: Mergers, Acquisition & Restructuring Mergers & Acquisition Restructuring Types of Merger Reason for M&A Gains from Synergy Accounting Problems for M&A in India Acquisition & Takeover Acquisition Process Legal Aspects Defending a company in a Takeover Bid Target Valuation for M&A’s Horizontal, Vertical, Conglomerate, Congeneric, Reverse Merger Synergistic Operating economics, Diversification, Taxation, Growth, Consolidation of production capabilities & increasing market powers Value of acquirer + Stand alone value of target + Value of Synergy- Cost of acquisition = Combined Value Corporate Restructuring Financial Restructuring Demergers or Divestment Corporate Controls 1. Sell off 2. Spin off 3. Split up 4. Carve Outs 5. Sale of a division 1. Going Private 2. Equity Buyback 3. Restructuring of an existing business 4. Buy-outs Due Diligence Earning Based Earning Market Based Valuation Asset Based Valuation 1. Discounted cash flow/ free cash flow valuation 2. Cost to create 3. Capitalized earning method 4. Chop-Shop Method 1. Net adjusted asset value or economic book value 2. Intangible Asset Valuation 3. Liquidation Value 1. Market Capitalization for listed companies 2. Market capitalization of comparable companies for unlisted companies Legal issues, Financial & tax issue, Marketing issues, Cross border issues, Cultural & ethical issues Divesture, Crown jewels, Poison pill, poison put, greenmail, white knight, white squire, golden parachutes, Pac- man defense 1. Define the acquisition criteria 2. Competitive Analysis 3. Search and screen 4. Strategy development 5. Financial evaluation 6. Target contact & negotiation 7. Due diligence 8. Arranging for finance for acquisition 9. Putting through the acquisition & post merger integration Acquisition Takeover Strategy: 1. Street Sweep 2. Bear Hug 3. Strategic alliance 4. Brand Power