KAMAL MUSTAFA

ACCA (UK) MSC (UK) MBA (UK)

DMS (UK) DEM (UK)
 FINANCIAL DECISION MAKING
COURSE CONTENTS

1. THE FOUNDATIONS
2. THE FIRM AND ITS OPERATIONS
3. WORKING CAPITAL MANAGEMENT
4. INVESTMENT POLICY
5. FINANCING DECISIONS
6. DIVIDEND POLICIES AND DECISIONS
 FINANCIAL DECISION MAKING
COURSE CONTENTS
1. THE FOUNDATIONS

 OVERVIEW OF FINANCIAL MANAGEMENT

 ECONOMIC ENVIRONMENT FOR BUSINESS
 FINANCIAL SECURITIES AN MARKETS
 A REVIEW OF FINANCIAL ACCOUNTING
 FINANCIAL DECISION MAKING
COURSE CONTENTS
2. THE FIRM AND ITS OPERATIONS

 FINANCIAL STATEMENTS
 FINANCIAL ANALYSIS
 PROFIT PLANNING
 LEVERAGE
 FINANCIAL DECISION MAKING
COURSE CONTENTS
3. WORKING CAPITAL MANAGEMENT

 INTRODUCTION OF WORKING CAPITAL

 CASH MANAGEMENT
 MANAGEMENT OF RECEIVABLES (DEBTORS)
 MANAGEMENT OF STOCK
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COURSE CONTENTS
4. INVESTMENT POLICY

 CAPITAL BUDGETING
 RISK AND REQUIRED RETURN
 VALUATION OF THE FIRM
 MERGERS AND ACQUISTIONS
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COURSE CONTENTS
5. FINANCING DECISIONS

 SOURCE OF SHORT AND INTERMEDIATE-TERM

FINANCING
 LONG TERM FINANCING DECISIONS
 LEASE-BUY DECISIONS
 FINANCIAL DECISION MAKING
COURSE CONTENTS
6. DIVIDEND DECISIONS

 DIVIDEND POLICIES AND DECISIONS

OVERVIEW OF FINANCIAL MANAGEMENT

DIAGRAM
 OVERVIEW OF FINANCIAL MANAGEMENT

• EXAMPLE:
AT THE END OF 2012 BRITISH AIRWAYS MADE AN
ANNOUNCEMENT, AS PART OF A STOCK MARKET
BRIEFING, THAT THEIR QUARTER 4 PROFITS HAD
RISEN BY 30%. IMMEDIATELY AFTER THE
ANNOUNCEMENT THE SHARE PRICE FELL
REQUIRED:
• A) DISCUSS WHY SHAREHOLDERS MIGHT BE
DISSATISFIED, DESPITE HIGHER PROFITS?
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ANSWER
PROFITS ARE HISTORIC, SHAREHOLDERS CARE
ABOUT THE FUTURE – PERHAPS THEY
CONCERNED WHERE BA WERE PLANNING TO
INVEST?
THEREFORE INVESTMENT DECISIONS ARE VERY
IMPORTANT TO INVESTORS
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ANSWER

• INVESTMENT DECISIONS REQUIRE NEW

FINANCE, SHAREHOLDERS CARE ABOUT DEBT
LEVELS
• PERHAPS THEY CONCERNED INVESTMENT
INFORMATION THEREFORE FINANCING
DECISIONS ARE VERY IMPORTANT TO INVESTORS
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ANSWER
PROFITS ARE NOT CASH FLOWS, SHAREHOLDERS
OFTEN WANT TO SEE RETURNS THEY WILL BE
GETTING AS DIVIDENDS.

THEREFORE DIVIDEND DECISIONS ARE VERY

IMPORTANT TO INVESTORS
OVERVIEW OF FINANCIAL MANAGEMENT

• ENCOURAGING SHAREHOLDER WEALTH

MAXIMISATION

• PROBLEMS?
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AGENCY THEORY

• THE DANGER THAT MANAGERS MAY NOT ACT

IN THE BEST INTEREST OF SHAREHOLDERS IS
REFERRED TO AS THE AGENCY PROBLEM
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AGENCY THEORY

• Q: WHY DO MANAGERS AND OTHERS AGENTS

OF THE SHAREHOLDERS, SUCH AS EMPLOYEES
SOMETIMES HAVE DIFFERENT OBJECTIVES?
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UNLESS THEY ARE ALSO OWNERS OF THE

BUSINESS, MANAGER MAY PREFER TO :

1. MAXIMISE SHORT-TERM PROFITS

2. MINIMISE DIVIDENDS
3. REDUCE RISK BY DIVERSIFYING
4. BOOST THEIR OWN PAY & PERKS
5. AVOID DEBT FINANCE
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• THE DANGER THAT MANAGERS MAY NOT ACT

IN THE BEST INTEREST OF SHAREHOLDERS IS
REFERRED TO AS THE AGENCY PROBLEM

• IT CAN BE DEALT BY MONITORING THE

ACTIONS OF MANAGEMENT PERFORMANCE
OR BY THE USE OF INCENTIVE SCHEMES
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• HOW TO DEAL WITH AGENCY PROBLEM?

OVERVIEW OF FINANCIAL MANAGEMENT

CORPORATE GOVERNANCE

WHAT IS CORPORATE GOVERNANCE?

OVERVIEW OF FINANCIAL MANAGEMENT

• IN THE UK CORPORATE GOVERNANCE

REGULATIONS HAVE BEEN DESIGNED TO
MONITOR THE ACTIONS OF MANAGEMENT
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HERE SOME OF THE MAIN REQUIRMENTS:

1. BOARD OF DIRECTORS

2. KEY COMMITTEES
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BOARD OF DIRECTORS

1. SEPARATE MD & CHAIRMAN

2. MINIMUM 50% NON-EXECUTIVE DIRECTORS
3. CHAIRMAN INDEPENDENT
4. MAX 1 YEAR NOTICE PERIOD
5. NEDS SHOULD BE INDEPENDENT (3 YEARS
CONTRACT, NO SHARE OPTION)
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KEY COMMITTEES
1. REMUNERATION COMMITTEE

 PAY & INCENTIVES OF EXECUTIVE

DIRECTORS
 NEDs ONLY
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KEY COMMITTEES

2. AUDIT COMMITTEE

 RISK MANAGEMENT

 NEDs ONLY
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KEY COMMITTEES

3. NOMINATION COMMITTEE

 CHOICE OF NEW DIRECTORS

 NEDs ONLY
OVERVIEW OF FINANCIAL MANAGEMENT

INCENTIVE SCHEMES – TWO MAIN TYPES

1. PERFORMANCE RELATED PAY :

• EITHER AGAINST PROFIT OR A STRATEGIC
PERFORMANCE MEASURE
2. SHARE OPTIONS:
• OPTIONS TO BUY SHARES IN SAY 3 YEARS TIME
AT TODAY’S SHARE PRICE
 SUMMARY OF TODAY CLASS

• MAXIMISATION OF SH WEALTH

• ENCOURAGED BY CORPORATE GOVERNANCE

• COMMITTEES

• MAIN DECISIONS

• INVESTMENT, FINANCING & DIVIDEND