(AOI)

Allocative efficiency 分配效率 - ability of a financial market to direct funds to those organisations

Operatinal efficiency 運營效率 - ability of a financial market to operate with minimum transactio

**** Information processing efficiency - The market price for securities reflects all the relevant and availa
信息處理效率

Four (4) levels of efficiency:

**** 1. Zero efficiency

2. Weak form efficiency
3. Semi-strong form efficiency
4. Strong form efficiency

1. Zero efficiency (no efficient at all) - Share price in market does not reflect any information - share pr

2. Weak form efficiency - Share price reflect past information.

(Eg. annual report) - already happened

3. Semi-strong form efficiency - Share price reflect public information and past information. New infor

4. Strong form efficiency - Share price reflect public , past, private information.

(Private information only top management know)

 to those organisations (borrowers)

h minimum transaction costs = Can achieve

the relevant and available information

y information - share price very cheap

information. New information reflect publish.

Chapter 4: Business Finance (Souce of finance)

Debt finance
Advantage
Lower issuing cost
Cheapter than raising equity
Easy and fast to arrange
Tax deductible on interest payment

Short term debt finance (Overdraft, loan, trade credit, short term lease)
Overdrafts
Can renewed
Designed for day to day help
Only pay interest when overdrawn 透支時

Equity Finance
Advantage
Lower gearing
No repayment is required
No obligation 沒有義務 to pay dividends

Method of raise Equity Finance

Initial public offer (IPO) - New issue
Placing - New issue
Right issue

Types of bonds
Deep discount bonds (Company almost bankruptcy)
Zero coupon bonds
Convertible bonds

Relationship between Bond price and Market intrest rate

Bond price has an inverse relationship with the market interest rate
Interest rate increase, bond price decrease - (Because bond buyer won't pay for an existing bond with a fixe
Interest rate decrease, bond price increase
 Debt finance
Disadvantage
Higher risk of bankruptcy
Required security
Reduce financial flexibility for future financing
Higher gearing increase financial risk

(Overdraft, loan, trade credit, short term lease)

Loans
Medium term purposes
Advance interest and repayment
Loan interest rate lower than old rate

Equity Finance
Disadvantage
Dividend not tax deductible
Higher cost than debt
Dilutes EPS

hod of raise Equity Finance

public offer (IPO) - New issue
Placing - New issue
Right issue

Types of bonds
bonds (Company almost bankruptcy)
Zero coupon bonds
Convertible bonds

lationship between Bond price and Market intrest rate

ice has an inverse relationship with the market interest rate
ease - (Because bond buyer won't pay for an existing bond with a fixed interest rate)
Interest rate decrease, bond price increase
Chapter 6: CAPM

Systemaic risk Unsystematic risk

The variability in returns due to macro factors The variability in returns due to factors
that affect all securities traded in the market unique to the individual company

For example: For example:

Government policy changes Management capability
Interest rate changes R&D achievements
(Research and development)

Capital Asset Pricing Model (CAPM)

High risk, High return
!!!
Low risk, Low return
Advantage Disadvantage
Provide measurable relationship between risk Ignores other risk
and return (such as size of company)

Can use to estimate cost of capital for Beta value usually historic which unable to
securities, especially equity share give an accurate measure of risk

Weighted Average Cost of Capital (WACC)

Capital Structure theory

There is an optimal WACC (lowest) which

1. The traditional theory maximise value. The WACC will be a "U"
curve when increasing debt value.

No optimal WACC, level of debt or capital

2. Modigliani and Miller (tax)
structure will not affect from value
3. Modigliani and Miller (No tax) Optimal WACC is at 99.9999% debt level
Follow sequence:
- Retained earnings
- Straight debt
4. Peacking order theory
- Convertible debt
- Preference shares
- Issue new equity (ordinary) shares
Conditions for using WACC to evaluate Investments
Same business risk
Same financial risk
Small project only
Capital structure remain unchanged
Small size of company
r
Chapter (13): Exchange Rate Risk Management

(9 marks) Translation risk

- Arises 出現 in international companies with foreign subsidiaries.

- Income statements and statements of financial position will be denominated in the local currency of
- On consolidation, will be translated into the currency of the holding company.
- On translation of financial statements from one currency to another, losses or gains arise due to exchan
- translation risk is therefore the risk of losses (or gains) arising On the translation of the financial statem
into the currency of the parent company, for the purpose of preparing consolidated accounts.
- TR does not affect cash flows, does not directly affect shareholder wealth.

Transaction risk
- Risk of adverse exchange rate movements occurring in the course of normal international trading trans
- This arises when the prices of imports or exports are fixed in foreign currency terms
and there is movement in the exchange rate between
the date when the price is agreed and the date when the cash is paid or received in settlement.
- For example, if a Malaysian company buys goods from a US supplier (US$1 million), with payment in
it is exposed to a transaction risk, that the US dollar may strengthen in value against the Malaysian Rin

Economic risk
- Effect of exchange rate movements on the international competitiveness of a company
and refers to the effect on the present value of longer-term cash flows.
- It is the risk that over time a currency will depreciate or appreciate in value against other currencies,
so that a country's economy becomes more or less competitive.
- For example, a company A Sdn. Bhd. operates only in Malaysia.
Its domestic competitor, C Sdn. Bhd. imports raw materals from the USA.
If the Ringgit appreciates against the US Dollar, then C Sdn. Bhd. will pay less to purchase the same q
This will put C Sdn. Bhd. in a more advantageous position. A Sdn. Bhd. will lose its competitive edge

(4 marks) Interest Rate Parity Theory:

- Based on the assumption that exchange rates will adjust to elimate differences in interest rate between
- Currency of the country (higher interest rate will depreciate in value over time) against 反對

Internal Hedging method (Two):

1. Invoicing in home currency - to avoid forex risk

2. Leading and lagging - paying overseas supplier earlier (leading) if the home currency is expected to f
if the home currency is expected to appreciate.

Enternal Hedging method (Two):

1. Do nothing and deal in spot market

 2. Undertake the external hedging techniques - Eg. Money market

(2 marks) Recommend which hedging method.

Money market or forward exchange contract.

- reason (choose the cheaper) !!!!!!!!!!!!!!!!!!!!

(10 marks) Calculation of money market and forward exchange contract market:
in the local currency of the subsidiary.

gains arise due to exchange rate movements.

ion of the financial statements of a foreign subsidiary
dated accounts.

nternational trading transactions.

ed in settlement.
million), with payment in two months' time,
gainst the Malaysian Ringgit during the two-month credit period.

a company

gainst other currencies,

ss to purchase the same quantity of material as before.

lose its competitive edge 競爭優勢

es in interest rate between countries.

e) against 反對 (lower interest rate)

currency is expected to fall (lagging)

Net present value

(2 marks) - The net present value is positive/negative so the project is acceptable/rejected.

(15 marks) Calculation

(theory) Other methods to access risk and uncertainty

1. Risk Adjusted discount rate

higher risk, higher discount rate. Can using CAPM model

2. Simulation (monte Carlo)

- overvcome problem that having large number of possiblem outcomes

Two non financial factors

1. Risk of the future cash flow

2. Employee skills (can the staff carry the project, have good skill or not)

Sensitivity Calculation

formula

sensitivity = NPV/ PV of variable

*NPV = cost of sales + variable cost + fixes cost

- The lower sensitivity, more risky

Working Capital

Investing
Amount of working capital
Little working capital
Moderate
A lot working capital

Formula:

*** 1. Working capital

= receivables + inventory - payables

2. Current ratio
= current assets/ current liabilities

*** 3. Inventory turnover periods (days)

= Average inventory / Cost of sales x 365 days

*** 4. Receivables Turnover Period

= Credit sales/ average account receivables x 365 days

*** 5. Payables Turnover Period

= Credit purchases / average account payables x 365 days
- cost of goods sold (COGS) + closing inventory - opening inventory
*** 5. Working capital cycle
= sales/ average working capital

Investment policy:

1. Aggressive Working Capital Investment Policy

- Reduce financing cost, Increase profitability
- loss of goodwill system breakdown

2. Conservative Working Capital Investment Policy

- Increase financing cost, Reduce profitability
- Reduce the risk of operational breakdown
 Financing
Working Capital Investment Policy
Use short term financing to finance
Aggressive (High rish high return)
long term items
Moderate (Medium risk and return) Matching principle
Use long term financing to finance
Conservative (Low risk low return)
short term items

increase (high liquidity, low profitability)

decrease (high profitability, low liquidity)

below 1 hard to meet obligation

too high, too much cash

the higher, the better

(higher turnover, faster moving inventory)

les x 365 days

yables x 365 days

- opening inventory
ment Policy
Chapter 7: Working Capital

Objective Working Capital:

Better working capital management

More cash in hand

More money for investment

Increase internal souce of finance

Increase profitability
Increase shareholders wealth

Working Capital Investment Policy Financing Policies

No rely on the matching principle Relies on the matching principle
Does not require an analysis of current assets Require an analysis of current assets into
into permanent current assets and fluctuating permanent currect assets and fluctuating
current assets currect assets

Ways to reduce cash operating cycle

Reduce raw material inventory
Reduce work-in-progress (production)
Reduce finished goods inventory
Reduce receivables
Increase supplier credit terms
- purchase through just-in-time (JIT)
- using more advance technology
- not holding as much safety inventory
- offering cash discount for early settlement
- negotiation with supplier for more credit
 Investing
Amount of working capital Working Capital Investment Policy
Little working capital Aggressive (High rish high return)
Moderate Moderate (Medium risk and return)
A lot working capital Conservative (Low risk low return)
 Financing

Use short term financing to

finance long term items
Matching principle
Use long term financing to
finance short term items