Module : Financial Analysis and Management

Module Leaders : S.A. Palan

1. Aim(s)
The module aims to:-

 Provide students with a comprehensive overview and understanding of

the strategic management of finances and financial concepts within an
organisation and of the relationship between management decisions
related to financial matters and other conceptual values within financial
planning areas as well as to business performance.

 Provide students with a critical understanding of the role of financial

principles and their utilisation in an organisation at the strategic level and
their impact at the level of decision making within organisations.

 Provide and enable students to possess a toolkit which supports their

critical awareness and understanding of the management of financial
responsibilities in a business.

 Explore, evaluate and differentiate between the three main types of

decision facing finance managers, namely:- , investment decision making,
financing decision making and dividend decisions.

 Analyse, illustrate and evaluate how decision making issues and outcomes
are interconnected and interrelated with key principles of finance namely
the time value of money; the risk-return trade-off; cash flows as a source of
value and market prices and their reflection and relationship to
information.

 Discuss and consider the relationship of strategic financial principles and

decision making to the regulatory framework of accounting, the analysis
of financial statements, and investment analysis and ethics in accounting.

 Enable students to understand the financial decision-making process and

to interpret the impact financial decisions will have on value creation.

2. Learning Outcomes

Upon successful completion of this module students will be able to:

 Define, synthesise and discuss the concept(s) of a successful business

 Analyse, and interpret financial accounting reports and relate this

analysis to the formulation of Financial Strategy and financial decision
making
  Compare, contrast and critically evaluate the performance of one
business with another and interpret their findings within the finance
related decision making frameworks

 Analyse, Compare and form critical judgements on the returns on

several investment options and strategies

 Comprehend the key functions of data and be able to systematically

and effectively interpret and form critical judgements on data and
formulate reports on their findings

 Discuss and analyse the time value of money concept and provide
supporting calculations, including the measurement and treatment of
risk.

 Identify, analyse and solve financial problems confronting business

enterprises, particularly problems relating to corporate investment,
asset management and financing decisions

 Use analytical techniques and electronic aids appropriate to

contemporary financial decision making

 Discuss issues of capital budgeting

 Analyse the impact of economic, legal and tax changes on the strategic
and financial position of the firm.

3. Learning and Teaching Delivery Methods

A variety of teaching approaches is used, including lectures, seminars, case

analysis, teamwork and extensive use of electronic resources for guided
research.
Approach Study Hours
Lectures / Seminars 24
Directed Learning 48
Independent Learning 128
Total 200

4. Assessment
Assessment Duration/Length of Weighting of
Type Assessment Type Assessment
 Unseen Examination 3 hours 100%

5. Indicative Content
Indicative Content
 The relationship between the three main financial statements
 Conceptual foundations of accrual accounting
 The basis of financial decision making
 Analysis of capital investment opportunities
 Working Capital and Cash Management
 Introduction to financial accounting ratios and analysis
 Capital budgeting concepts, methods and issues
 Profit and Profit Measures
 Costs and Cost Behaviour
 Sources of short-term finance
 Long-term debt finance
 Financing a business

6. Recommended Reading & Required Reading

Core Text:
 Brooks, R. (2009) Financial Management: Core Concepts, 1st edition, Pearson
Education

Recommended reading
 Arnold, G. & Estrada, J. (2006) The Handbook of Corporate Finance, Prentice Hall.

 Block, S.B. & Hirt, G.A. (2008) Foundations of Financial Management, 12th
edition, McGraw-Hill Education

 Brealey, R. A., Myers, S.C. & Allen, F. (2008), Principles of Corporate Finance, 9th
edition, McGraw-Hill

 Higgins, R. (2007) Analysis for Financial Management, ISE edition, McGraw-Hill

Education.

 Neale, B. & Pike, R. (2009) Corporate Finance and Investment Decisions and
Strategies, 6th edition, Prentice Hall
  Titman, S., Martin, J. & Keown, A. (2010) Financial Management: Principles and
Applications: International Edition, 11th edition, Pearson Education.

Useful web Sites:

www.bloomberg.com ; www.corporateinformation.com ; www.hoovers.com ;
www.londonstockexchange.com ; http://finance.yahoo.com/ ; www.hemscott.com

7. Lecture Sequence

Lecture No. Topic(s) Covered

Introduction
1 Introduction to Financial Management: Objectives, conflicts of
interest, corporate governance

Introduction to Financial Statements

2

Introduction to Financial Statements

3

SEMINAR 1

4 Capital budgeting
Basic techniques, discounting, annuities and perpetuities
Capital budgeting continued
5 Relevant cash flows, capital rationing, working capital, sensitivity
analysis.

6 Cost of Capital

SEMINAR 2
Cost of Capital continued
7 Equity, debt, WACC

8 Cost of Capital/Capital Budgeting continued

9 Financial Ratios and Financial Performance

SEMINAR 3
 Capital Structure Theories
10
Capital Structure Theories
11
Source of Finance 1
Long term – Debt vs Equity
12

Source of Finance 2
13 Long term – Debt vs Equity

Working Capital Management

14

REVISION 4

Sample Questions

QUESTION SAMPLES

Introduction to Financial Management: Objectives, conflicts of interest, corporate

governance

Question 1
The primary financial objective of companies is usually said to be maximisation of
shareholders’ wealth. Discuss whether this objective is realistic in a world where corporate
ownership and control are often separate, and environmental and social factors are
increasingly affecting business decisions.

Introduction to Financial Statements

Question 2

The following information has been obtained from the accounts of two companies A and B

who operate within the same business sector:

Profit and loss account (extracts) for the year ended 28 February 2009:

A B

£000 £000

Profit before tax 450 220

Taxation (100) (40)

----- -----

Profit after tax 350 180

Dividends (175) (100)

----- -----

Retained profit for year 175 80

==== ====

Balance sheet (extracts) as at 28 February 2009:

£1 Ordinary shares 1,100 500

Long-term loans 200 600

Retained profits 480 250

----- ----

1,780 1,350
 ==== ====

Market price of one share £3.80 £4.00

REQUIRED:

a) Calculate the following for EACH of the companies:

 gearing ratio
 earnings per share (EPS)
 PE ratio
 dividend cover
 dividend per share and dividend yield
 ROCE for the shareholders and the company

b) Comment on the financial performance of the two companies.

c) Explain the importance of using a range of ratios to monitor the financial

performance of a business.

Capital budgeting Techniques

Question 3

Your aunt places $13,000 into an account earning an interest rate of 7% per year. After 5
years the account will be valued at $18,233.17. Which of the following statements is correct?

A) The present value is $13,000, the time period is 7 years, the present value is
$18,233.17, and the interest rate is 5%.

B) The future value is $13,000, the time period is 5 years, the principal is $18,233.17, and
the interest rate is 7%.

C) The principal is $13,000, the time period is 5 years, the future value is $18,233.17, and
the interest rate is 7%.

D) The principal is $13,000, the time period is 7 years, the future value is $18,233.17, and
the interest rate is 5%.

Question 4

An investment of $100 today is worth $116.64 at the end of two years if it earns an annual
interest rate of 8%. How much interest is earned in the first year and how much in the
second year of this investment?

A) The interest earned in year one is $8.32 and the interest earned in year two is $8.32.
B) The interest earned in year one is $8.00 and the interest earned in year two is $8.64.
C) The interest earned in year one is $8.64 and the interest earned in year two is $8.00.
D) There is not enough information to solve this problem.

Capital Budgeting Continued

Question 5
Discounted payback period.

Given the following four projects and their cash flows, calculate the discounted payback
period with a 5% discount rate, 10% discount rate, and 20% discount rate. What do you
notice about the payback period as the discount rate rises? Explain this relationship.

Cash Flow A B C D

Cost $10,000 $25,000 $45,000 $100,000

Cash Flow Year 1 $ 4,000 $ 2,000 $10,000 $ 40,000

Cash Flow Year 2 $ 4,000 $ 8,000 $15,000 $ 30,000

Cash Flow Year 3 $ 4,000 $14,000 $20,000 $ 20,000

Cash Flow Year 4 $ 4,000 $20,000 $20,000 $ 10,000

Cash Flow Year 5 $ 4,000 $26,000 $15,000 $ 10,000

Cash Flow Year 6 $ 4,000 $32,000 $10,000 $0

258 Brooks • Financial Management: Core Concepts

©2010 Pearson Education, Inc. Publishing as Prentice Hall

Question 6
Net present value.

Quark Industries has a project with the following projected cash flows:

Initial Cost, Year 0: $240,000

Cash flow year one: $ 25,000

Cash flow year two: $ 75,000

Cash flow year three: $150,000

Cash flow year four: $150,000

a. Using a 10% discount rate for this project and the NPV model, determine whether
this

project should be accepted or rejected.

b. Should it be accepted or rejected using a 15% discount rate?

c. Should it be accepted or rejected using a 20% discount rate?

Question7
Profitability Index.

Given the discount rates and the future cash flows of each project, which projects should
they accept using profitability index?

Cash Flow Project U Project V Project W Project X

Year 0 $2,000,000 $2,500,000 $2,400,000 $1,750,000

Year 1 $ 500,000 $ 600,000 $1,000,000 $ 300,000

Year 2 $ 500,000 $ 600,000 $ 800,000 $ 500,000

Year 3 $ 500,000 $ 600,000 $ 600,000 $ 700,000

Year 4 $ 500,000 $ 600,000 $ 400,000 $ 900,000

Year 5 $ 500,000 $ 600,000 $ 200,000 $1,100,000

Discount rate 6% 9% 15% 22%

Cost of Capital & Cost of Capital Continued

Question 8

WACC. Eric has another get-rich-quick idea, but needs funding to support it. He chooses an

all-debt funding scenario. Eric will borrow $2,000 from Wendy, who will charge him 6% on
the

loan. He will also borrow $1,500 from Bebe, who will charge 8% on the loan, and $800 from

Shelly, who will charge 14% on the loan. What is the weighted average cost of capital for
Eric?

Question 9

WACC.
Grey’s Pharmaceuticals has a new project that will require funding of $4 million. The

company has decided to pursue an all-debt scenario. Grey’s has made an agreement with
four

lenders for the needed financing. These lenders will advance the following amounts and
interest rates:

Lender Amount Interest Rate

Stevens $1,500,000 @ 11%

Yang $1,200,000 @ 9%

Shepherd $1,000,000 @ 7%

Bailey $ 300,000 @ 8%

What is the weighted average cost of capital for the $4,000,000?

Cost of Capital &Capital Budgeting Continued

Question 10

Cost of Equity: SML. Stan is expanding his business and he will sell common stock for the

needed funds. If the current risk-free rate is 4% and the expected market return is 12%, what

is the cost of equity for Stan if the beta of the stock is:

a. 0.75?

b. 0.90?

c. 1.05?

d. 1.20?