biga financial management 1213861254667118 9
TRANSCRIPT
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FINANCIALMANAGEMENT
Ekrem [email protected]
Anadolu University
Open Education Faculty
Canakkale Office
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What will we learn?1. An overview of managerial finance
- What is the finance?-Managerial finance in the 1990s
-The financial managers responsibility
-The goals of the corporation
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What will we learn?2. The financial environment: Markets,
institutions
-The financial markets
-Financial institutions
-The stock market
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What will we learn?3. Financial Ratios as a tool of financial analysis
Profitability Ratiosability of the firm to earn an
adequate return and control costs. Asset Utilization RatiosHow efficiently the
firms assets are being utilized.
Liquidity Ratiosfocus on short term risk
management. Debt Utilization Ratiosfocus on the capital
structure and long-term risk management
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What will we learn?
3. Risk and rates of return
-Defining and measuring risk
-Expected rate of return
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What will we learn?4. Strategic long-term investment
decisions
-Generating ideas for capital projects
-Project classifications
-Similarities between capital budgeting
evaluation techniques
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What will we learn?5. Capital budgeting evaluation techniques
-Payback period method
-Net present value method
-Internal rate of return method
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What will we learn?6. Practice of NPV and IRR methods
-Example of NPV
-Example of IRR
-Example of sensitivity analysis
Continuation of examples
So on, so far
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What kind of resources can we use
when we doing research?1. All finance books
2. All articles about finance
3. www.ssrn.com4. www.makalem.com
5. www.ceterisparibus.com
6. Essentials of Managerial Finance, J. Fred Weston
and Eugene Brigham, Harcourt Brace&CompanyInternational Edition, 1992.
7. Finansal Ynetim, Semih Bker and et all, 2005.(The main book of our lesson!)
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What is t
he finance?
Money
Stock exchange Banks
What else?
How about the companies?
Balance sheet
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What is t
he finance?
To achieve the goals of company;
1. Finding funds from the most suitable
sources
2. Using them effectively and
3. Control the results
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An Overview of Managerial Finance
A Short History of Managerial Finance 1930s: Liabilities and equity, Great Depression
1940
and1950
s: Assets, quantitative methods,discounted cash flow methods World War II
1960 and 1970s: Optimization of assets andliabilities and equity, statistical methods, oil crises
1980s: Globalization, interest rate and exchange risk,
macintosh 1990s to today: More risk, more computer, new
financial instruments and methods, Wall Street
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An Overview of Managerial
FinanceBoard of Directors
President
Vice President:Sales
Vice President:Manufacturing
Vice President:Finance
Treasurer Controller
Credit Manager
Inventory Manager
Director of Capital Budgeting
Cost Accounting
Financial Accounting
Tax department
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An Overview of Managerial
Finance
The Financial Managers Responsibility
Forecasting and planning
Major investment and control
Coordination and control
Dealing with the financial markets
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An Overview of Managerial Finance
The goals of the corporation
Managerial incentives to maximize
shareholder wealth
Social responsibility
Stock price maximization and social welfare
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Managerial incentives to maximize
shareholder wealthStockholders
Make the highest
money from thecompany
Do not want to share
theirs company with
others.
Managers
Having autonomy
Protect themselves from a
hostile takeoverora proxy
fightHostile takeover.doc
Try to maximize stockprices in reasonable level
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Social responsibility Ethical responsibility to provide a safe working
environment
To avoid polluting water and air Produce safe products
But social responsibility has a cost
If the other firms in its industry do not follow suit,
their prices and costs will be lower Most investors do not like to buy socially oriented
companies shares.
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Stock price maximization and social
welfare
What requires stock price maximization?
1. Efficient, low-cost plants that produce high-quality goods and services at the lowest possiblecost
2. Development of products that consumers want
and need, so the profit motive leads to newtechnology, to new products, and to new jobs
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The Financial Environment:
Markets, Institutions
The Financial Markets
Physical asset markets
Spot markets and futures markets
Money markets
Mortgage markets World, national, regional and local markets
Primary markets-secondary markets
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Physical asset markets
(Real asset markets)
Wheat,
autos,
real estate,
computers,
stocks,
bonds,
notes,
mortgages etc.
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Spot markets, futures markets, money
markets, capital marketsIn spot and futures markets
you can buy and sell assets on
the spot delivery or for
delivery at some future date,such as six months, or a year
in the future.
Money markets are the
markets for debt securitieswith maturities of less than
one year where capital
markets for the long term.
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World, national, regional and local
markets, primary-secondary markets
Primary markets, are the
markets in which
corporations raise newcapital.
Secondary markets, are
markets in which existing,
already outstandingsecurities are traded among
investors.
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The Financial Environment: Markets,
Institutions
Financial Institutions in Turkey
1. Commercial banks
2. Pension funds3. Mutual funds
4. Life insurance companies
5. Stock exchange (ISE)
6. Gold exchange (IGE)
7. Futures markets (Izmir Futures Market)
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The Financial Environment: Markets,
Institutions
Stock Exchanges
ISE
IGE
Turkish Derivatives Exchange
Over the counter market
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The Financial Environment: Markets,
InstitutionsIstanbul Stock Exchange 1985 December Inauguration of the Istanbul Stock Exchange
under the Chairmanship of Mr. Muharrem KARSLI
1986 January Commencement of stock trading at theCagaloglu building on January 3, 1986
1991 June Initiation of the Bonds and Bills Market andcommencement of Outright Purchases and Sales Transactions
1997 August launch of the Repo/Reverse Repo Market
2005 January ISE Derivatives Market is closed permanently
as of January 28, 2005
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The Financial Environment: Markets,
Institutions
Istanbul Gold Exchange
26 July 1995 Inauguration of the IGE
15 August 1997 establishment of the Futures and
Options Market
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The Financial Environment:
Markets, Institutions
Turkish Derivatives Exchange (TURKDEX)
04 July 2002, establishment of the Turkish
Derivatives Exchange
04 February 2005, transactions started officially
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Risk And Rates Of Return
Defining and measuring risk
Expected Rate of Return Measuring Risk: The Standard Deviation
Measuring Risk: Coefficient of Variation
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Risk And Rates Of Return
What is the risk in finance?
Risk is the financial uncertainty that the actualreturn on an investment will be different from the
expected return.
The exposure to loss of investment as a result ofchanges in business conditions, domestic or
foreign economies, investment markets, interestrates, relative currency rates, or inflation.
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Expected Rate of Return
Calculation of Expected Rates of Return:
Payoff Matrix
Expected Rate of Return.xls
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Expected Rate of Return
The weights are the probabilities, and the
weighted average is the expected rate of
return,
Expected rate of return= !
n
i
iikP
1
.k
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Expected Rate of Return
%15
%)70(3.0
%)15(4.0%)100(3.0
)()2()(33211
!
!
! kPkPkPk
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Measuring Risk: Standard Deviation
XU1002002-12.xls
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Coefficient of Variation as a Risk
Measure
Coefficient of variation (CV), standard deviation
divided by the expected return
kCV
W!
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Strategic Long-Term Investment
Decisions
Generating ideas for capital projects
Who creates the capital budgeting projects?
Do we need to be an entrepreneur?
Two questions for testing being entrepreneur
(CV and address book)
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Strategic Long-Term Investment
DecisionsProject classifications
1. Replacement: Maintenance of business
2. Replacement: Cost reduction
3. Expansion of existing products or markets
4. Expansion into new products or markets
5. Safety and/or environmental projects
6. Other
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Project classificationsReplacement: Maintenance of business
One category consists of expenditures to
replace worn-out or damaged equipmentused in the production of profitableproducts.
Should we continue to produce these products orservices?
Should we continue to use our existingproduction processes?
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Project classificationsReplacement: Cost reduction
This category includes expenditures to replace
serviceable but obsolete equipment.
The purpose here is to lower the costs of labor,
materials, or other inputs such as electricity.
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Project classificationsExpansion of existing products or markets
Expenditures to increase output of existing
products, or to expand outlets or distribution
facilities in markets now being served are
included here.
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Project classificationsExpansion into new products or markets
These are expenditures necessary to produce a
new product or to expand into a
geographic area not currently being
served.
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Project classificationsSafety and/or environmental projects
Expenditures necessary to comply with
government orders, labor agreements, or
insurance policy terms fall into this
category.
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Project classificationsOther project investments
This catch all includes office buildings,
parking lots, executive aircraft, and so
on.
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Strategic Long-Term Investment
DecisionsSimilarities between capital budgeting
evaluation techniques
1. Project cost2. Expected cash flows estimation
3. Estimation of project riskiness
4. Cost of capital decision
5. Measurement of present value of cash inflows
6. Present value of the expected cash inflows andrequired outlay
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Capital Budgeting Evaluation
Techniques
1. Payback Period2. Net Present Value (NPV)
3. Internal Rate of Return (IRR)
4. Sensitivity Analysis
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Capital Budgeting Evaluation
Tech
niques
Payback period
Project S :
Net Cash Flow
Cumulative NCF
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Payback period
Project (S)
Uncovered cost at start of year
Payback=Year before full recovery +
Cash flow during year
100
Payback Period (S)= 2 + = 2,333 Years300
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Capital Budgeting Evaluation
Techniques
Payback period
Project L :
Net Cash Flow
Cumulative NCF
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Payback periodProject (L)
200
Payback Period (L)= 3 + = 3,333 Years
600
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Capital Budgeting Evaluation
Techniques
Net Present Value (NPV)
n
n
k
CF
k
CF
k
CFCFNPV)1(
..............)1()1( 22
1
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n
tt
t
k
CF
0 )1(
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Capital Budgeting Evaluation
Techniques
Internal rate of return (IRR)
The IRR is defined as that discount rate which
equates the present value of a projects
expected cash inflows to the present valueof its expected costs.
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Capital Budgeting Evaluation
TechniquesInternal rate of return (IRR)
0
)1(..............
)1()1( 22
1
1
0!
n
n
IRR
CF
IRR
CF
IRR
CFCF
0)1(0!
!
!
n
t
t
t
IRR
CF
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Net Present Value (NPV)
To implement this method, it should beproceeded as follows:
Find the present value of investment and its futurecash flows with discounting at the projects cost ofcapital
Sum discounted investment and cash flows
If the NPV is positive then we accept the project. Ifwe have to choose a project among the alternateprojects, we should take into consider the highestNPV
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Example of NPV and IRRSmall Scale Flower Cultivation Project
This project has written by Weitz Center experts for anarea in India.
The project covers an area about one acre. The aim isproducing and selling flowers. Projects cost will be
covered by a bank loan. All cost and sale data havebeen collected and realised that target sales could beachieved. Cost benefit analysisFlower.xls