FMA200 Introduction

1st Semester
Corporate Finance/Financial Management
Text book: Correia

2nd Semester
Management & Cost accounting
Text book: Dury
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 Lecturers
Brenda Williams (academic trainee)
1st Semester = Finance
Ms Mariska McKenzie
Mr Thabiso Madiba
2nd Semester = Costing
Ms Elmare Kocks
Mr Tendani Mutshutshu
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 Year course
2nd Semester: Financial management
question included in every assessment.

Year course = know work from 1st semester.

Always study to understand the work.

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 FMA200 assessments

• Replacement assessments are written after the

assessment
• There will be NO EXCUSES ACCEPTED for missing
the assessment and replacement assessment

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 FMA200 assessments

Dates: 28 February – Assessment 1

10 March – Replacement Assessment
22 April – Assessment 2
4 May – Replacement Assessment
22 May – Assessment 3
If you write all three assessments, the marks for
the first two will be taken.
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 Financial manager
The role of the financial manager

We will define the role of the

financial manager with reference to
the accounting equation.

What is the accounting equation? 6

Accounting equation

ASSETS = EQUITY + LIABILITIES

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 Accounting equation

ASSETS = EQUITY + LIABILITIES

ASSETS = What the company

invests in, in order to make a return
for investors. Investment decisions.
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 Accounting equation

ASSETS = EQUITY + LIABILITIES

EQUITY + LIABILITIES = How the

company finances its assets.
Financing decision (equity vs debt).
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 Shareholder value

Objective of Financial management

= to maximise shareholder value

How can we maximise shareholder

value?
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 Shareholder value
Objective of Financial management = to
maximise shareholder value
ROA > Cost of finance
How can we maximise shareholder
value?
- Maximise return from investments
- Minimise cost from equity and funding
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 Shareholder value
Steinhoff
Share price in May 2013: Avg R25
Share price in Nov 2017: Avg R60

What was the growth rate in the

share price from May 2013 to Nov
2017? 12
 Shareholder value
Steinhoff
Share price in May 2013: Avg R25
Share price in Nov 2017: Avg R60
= 25% growth/return per year
PV = 25; FV = 60; n = 54 months; 12 P/Yr
i (return) = 19,61% growth per year,
compounded monthly (21,47% eff p/yr) 13
 Shareholder value
Steinhoff
Share price in May 2013: Avg R25
Share price in Nov 2017: Avg R60

Share price in Feb 2017: Avg R6

(Share price dropped 90%)
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 Stakeholders

Make long-term decisions that

benefit all the stakeholders of a
company, not short-term decisions
that benefit the share price and
directors’ bonuses in the short
term.
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 Stakeholders
Consider other stakeholders:
- Suppliers,
- Employees,
- Creditors
- General public
- Government
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 Ethics

As a CA you will need to adhere to

professional ethics and a code of
conduct.

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 Agency problem
- Financial Manager can be tempted to
act in their own best interest, not for
the company or shareholders.
- Be careful how directors and financial
managers are compensated.
- Another agency problem is when
directors only consider the interest of
shareholders and not the creditors. 18
 Maximise value
- Accounting profits can be
manipulated, defer expenses
- Timing
- Cost of capital
- Risk
- Corporate finance is focused on
cash flow, not profits 19
 EVA
(Economic Value Added)
Takes cost of capital into account to
determine the value added to a
company.

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 Investment decisions
- Non-current assets, for example do we
invest in a plant? What return will we
get, what is the risk?
- How do I value my investments?
- Working capital (current assets),
manage my inventory, debtors and
creditors effectively.
- Diversification (reduce risk) 21
 Financing decisions
Equity versus debt

- Advantages of equity?
- Advantages of debt?
Optimal mix

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 Financing decisions
- Mix between equity (own) and
borrowed capital.
- The equity and borrowed capital both
want a return (this is our cost of
capital).
- What is the relationship between risk
and return?
- Will Equity or liabilities cost more?
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 Bonds
(debt letters)
In finance, a bond is an instrument of
indebtedness of the bond issuer to the
holders. The issuer owes the holders
debt (principal amount) and interest
(the coupon) to be repaid on set future
dates. The principal amount is repayable
on the maturity date. 24
 Analysis of financial
statements
Work with ratios to determine how
solvent, liquid and profitable a
company is. Helps with decision making
for example: do we invest in or borrow
to the company?

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 Homework

Read Correia Chapter 1

Bring financial calculator to next class
(ideally HP 10BII)

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