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    Corporate Financial Strategy

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    Hammad Ahmad
    This document provides an overview and introduction to corporate financial strategy. It discusses key concepts such as risk and return, the two-stage investment process, drivers of shareholder value, and models for measuring value like net present value, economic profit and total shareholder return. It also outlines important considerations like stakeholder interests and issues of agency that are relevant to corporate financial strategy.

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    Corporate Financial Strategy

    Uploaded by

    Hammad Ahmad
    353 views14 pages
    This document provides an overview and introduction to corporate financial strategy. It discusses key concepts such as risk and return, the two-stage investment process, drivers of shareholder value, and models for measuring value like net present value, economic profit and total shareholder return. It also outlines important considerations like stakeholder interests and issues of agency that are relevant to corporate financial strategy.

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    Corporate Financial Strategy

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    This document provides an overview and introduction to corporate financial strategy. It discusses key concepts such as risk and return, the two-stage investment process, drivers of shareholder value, and models for measuring value like net present value, economic profit and total shareholder return. It also outlines important considerations like stakeholder interests and issues of agency that are relevant to corporate financial strategy.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    353 views14 pages

    Corporate Financial Strategy

    Uploaded by

    Hammad Ahmad
    This document provides an overview and introduction to corporate financial strategy. It discusses key concepts such as risk and return, the two-stage investment process, drivers of shareholder value, and models for measuring value like net present value, economic profit and total shareholder return. It also outlines important considerations like stakeholder interests and issues of agency that are relevant to corporate financial strategy.

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    You are on page 1of 14

    Chapter 1

    Corporate financial strategy: setting the


    context

    Corporate Financial Strategy

    Setting the context: contents


    Learning objectives
    Risk and return
    The two-stage investment process
    What does good look like?
    NPV illustration (Working Insight 1.3)
    Value is created above the line (Figure 1.4)
    Individuals have different risk appetites (Figure 1.5)
    The seven drivers of value
    Economic profit (Working Insight 1.5)
    Total shareholder return (Working Insight 1.6)
    The value matrix (Figure 1.6)
    Stakeholders are important
    Agency and double agency

    Corporate Financial Strategy

    Learning objectives
    1. Understand what financial strategy is, and how it can add value.
    2. Explain why shareholder value is created by investments with a
    positive net present value.
    3. Appreciate how the relationship between perceived risk and required
    return governs companies and investors.
    4. Differentiate the different models of measuring shareholder value.
    5. Explain why share price is not necessarily a good proxy for company
    value.
    6. Outline how agency theory is relevant to corporate finance.

    Corporate Financial Strategy

    Risk and return

    Required
    return

    Perceived risk

    Corporate Financial Strategy

    The two-stage investment process

    Shareholders
    (and others)
    invest in the company

    Company invests in a
    portfolio of projects

    Corporate Financial Strategy

    What does good look like?


    Is it a good

    Product?

    Is it a good Product?
    Is it a good Business?
    Is it a good

    Company?
    Is it a good

    Investment?

    Corporate Financial Strategy

    Value is created above the line

    Required
    return

    Increase return
    more than risk

    Reduce risk
    more than
    return

    Perceived risk
    Corporate Financial Strategy

    Individuals have different risk appetites


    Longserving
    manager

    Required
    return

    Venture
    capital fund

    Welldiversified
    institutional
    investor

    Perceived risk
    Corporate Financial Strategy

    The seven drivers of value

    1. Increase sales growth

    More profit

    2. Increase operating profit margin


    3. Reduce cash tax rate

    Out of fewer
    assets

    4. Reduce working capital as % of sales

    At lower risk

    6. Reduce weighted average cost of


    capital

    For as long as
    possible

    7. Increase timescale of competitive


    advantage

    5. Reduce fixed assets as % of sales

    Rappaport, Creating Shareholder Value, 1998


    Corporate Financial Strategy

    Economic profit
    Operating profit after tax
    Capital employed
    Cost of capital

    2,400
    20,000
    10%

    Operating profit after tax

    2,400

    less cost of capital (20,000 x 10%)


    Economic profit

    2,000
    400

    Return on capital employed (2,400/20000)


    Spread

    2%

    Economic profit (2% x 20,000)


    Corporate Financial Strategy

    10

    400

    12%

    Total Shareholder Return (TSR)

    Share price at 1 January


    Share price at 31 December

    100
    110

    Capital gain in the year


    Dividend paid in the year
    Total return

    5
    15

    Total shareholder return (TSR)

    Corporate Financial Strategy

    10

    11

    15%

    Figure 1.5 The value matrix


    > 1.0

    Value multiple
    Market value

    Fair value

    = 1.0

    < 1.0
    Negative

    Corporate Financial Strategy

    12

    Economic profit

    Positive

    Stakeholders are important


    Shareholders
    Investment institutions,
    family members, prospective
    investors
    Debt holders
    Banks, investment
    institutions, individuals

    Business and
    Financial
    strategy

    Customers
    Direct customers, end consumers,
    consumer groups

    Managers
    Board of directors, senior managers,
    other managers

    13

    Suppliers
    Long term suppliers, raw material
    suppliers, sub-contractors

    Government and regulators


    Tax authorities, trade department,
    employment department, governance
    regulators
    Employees
    Individuals, unions / staff
    associations, pensioners

    Corporate Financial Strategy

    Community
    Local community, environmental
    bodies, public at large

    Agency and double agency

    Net assets

    Debt

    Fixed assets
    Current assets
    less current
    liabilities
    Non-operating
    assets

    Equity

    Management
    Employees

    Corporate Financial Strategy

    14

    Fund
    managers

    Individual
    shareholders
    and
    pensioners

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