Strategic Financial Management

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R. A. Hill

Strategic Financial Management

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Strategic Financial Management © 2008 R. A. Hill to be identified as Author Finance & Ventus Publishing ApS ISBN 978-87-7681-425-0

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Strategic Financial Management

Contents

Contents
PART ONE: AN INTRODUCTION 1. 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 Finance – An Overview Financial Objectives and Shareholder Wealth Wealth Creation and Value Added The Investment and Finance Decision Decision Structures and Corporate Governance The Developing Finance Function The Principles of Investment Perfect Markets and the Separation Theorem Summary and Conclusions Selected References PART TWO: THE INVESTMENT DECISION 2. 2.1 2.2 2.3 2.4 2.5 Capital Budgeting Under Conditions of Certainty The Role of Capital Budgeting Liquidity, Profitability and Present Value The Internal Rate of Return (IRR) The Inadequacies of IRR and the Case for NPV Summary and Conclusions 8 8 8 10 11 13 15 18 21 24 25 27 27 28 28 34 36 37

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Strategic Financial Management

Contents

3. 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4. 4.1 4.2 4.3 4.4 4.5 4.5 4.6 4.7

Capital Budgeting and the Case for NPV Ranking and Acceptance Under IRR and NPV The Incremental IRR Capital Rationing, Project Divisibility and NPV Relevant Cash Flows and Working Capital Capital Budgeting and Taxation NPV and Purchasing Power Risk Summary and Conclusions The Treatment of Uncertainty Dysfunctional Risk Methodologies Decision Trees, Sensitivity and Computers Mean-Variance Methodology Mean-Variance Analyses The Mean-Variance Paradox Certainty Equivalence and Investor Utility Summary and Conclusions Reference PART THREE: THE FINANCE DECISION

38 38 41 41 42 44 45 48 49 50 50 51 53 55 57 59 59 60 60 61 62 62

5. 5.1 5.2 5.3

Equity Valuation and the Cost of Capital The Capitalisation Concept Single-Period Dividend Valuation Finite Dividend Valuation

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Strategic Financial Management

Contents

5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 6. 6.1 6.2 6.3 6.4 6.5 7. 7.1 7.2 7.3 7.4 7.5

General Dividend Valuation Constant Dividend Valuation The Dividend Yield and Corporate Cost of Equity Dividend Growth and the Cost of Equity Capital Growth and the Cost of Equity Growth Estimates and the Cut-Off Rate Earnings Valuation and the Cut-Off Rate Summary and Conclusions Selected References Debt Valuation and the Cost of Capital Capital Gearing (Leverage): An Introduction The Value of Debt Capital and Capital Cost The Tax-Deductibility of Debt The Impact of Issue Costs Summary and Conclusions Capital Gearing and the Cost of Capital The Weighted Average Cost of Capital (WACC) WACC Assumptions The Real-World Problems of WACC Estimation Summary and Conclusions Selected Reference

63 64 64 65 66 68 70 72 72 73 74 75 78 81 84 85 86 87 89 95 96

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