CONTENT

SHEET 2

1) RISK VS UNCERTAINITY
2) NPV ADVANTAGES
3) LIQUIDITY VS PROFITABILITY
4) MANAGING SHORT-TERM CASH SURPLUS
5) FACTORING IN MGT OF A/C RECIEVABLES
6) SIMILARITIES AND DIFFERENCE BETWEEN WC INVESTMENT AND FUNDING

SHEET 3

7) FACTORS DETERMINING THE LEVEL OF WC INVESTMENT

8) FACTORS DETERMINING THE WC FUNSING STRATEGIES

SHEET 4

9) SENSITIVITY ANALYSIS
10) LIMITATIONS OF NPV
11) PROBLEMS OF SEVERAL IRR
12) PROBLEMS OF DIFFERENT BUSINESS RISKS

SHEET 5

13) INCORPORATING RISK INTO INVESTMENT APPRAISAL

14) LEASE OR BUY PROCESS
15) REASON FOR HARD AND SOFT CAPITAL RATIONING

SHEET 6
16) WAYS TO ENCOURAGE MANAGERS
17) SYSTEMATIC RISK VS UNSYSTEMATIC RISK
18) FINANCIAL OBJECTIVE OF LISTED COMPANY AND NFPO'S

SHEET 7
19) ATTRACTION OF LEASING
20) METHODS OF ISSUING NEW SHARES
21) ASSUMPTIONS OF CAPM

SHEET 8
22)
23)
1) RISK VS UNCERTAINITY

RISK REFERS TO THE SITUATION WHERE THERE ARE CHANCES OF MANY OUTCOMES AND THE PROBABILITIES OF THIS OCCURI
TO EACH OUTCOMES, THE CHANCES OF THESE OUTCOMES HAPPENING CAN THEREFOR BE QUANTIFIED USING AVAILABLE PA

UNCERTAINITY IS ALSO A SITUATION WHERE THERE ARE SEVERAL OUTCOMES BUT THE PROBABILITIES OF THIS CANNOT BE AS
OUTCOMES BECAUSE OF THE LACK OF HISTORICAL DATA. UNCERTAINITY INCREASES AS THE PROJECT LIFE INCREASES.

2) NPV OVER OTHER METHODS

CASHFLOW CONSIDERSTION (ROCE)

CONSIDER WHOLE PROJECT (PAYBACK)
TIME VALUE OF MONEY (PAYBACK, ROCE)
ABSOLUTE MEASURE OF RETUREN (PAYBACK, ROCE, IRR)
HANDLING NON-CONVENTIONAL CASHFLOWS (IRR)
DIRECT LINK TO SHAREHOLDER WEALTH (PAYBACK, ROCE, IRR)
GIVES PROPER INVESTMENT ADVICE

3) LIQUIDITY VS PROFITABILITY

PROFITABILITY AND LIQUIDITY ARE USSUALLY SEEN AS THE TWIN OBJECTIVE OF WC MGT.
PROFITABILITY OBJECTIVE REFLECTS THE PRIMARY OBJECTIVE OF SHARE HOLDERS WEALTH MAXIMISATION WHEREAS LIQUID
CAN BE SETTLED WHEN THEY BECOME LIABLE FOR PAYMENT.
THE TWO OBJECTIVES ARE IN CONFLICT BECAUSE LIQUID ASSETS SUCH AS BANK A/C EARN VERY LITTLE OR NO RETURN AT AL
WHETHER PROFITABILITY IS MORE IMPORTANT DEPENDS ON PARTICULAR CIRCUMSTANCES OF AN ORGAINISATION.

4) MANAGING SHORT TERM CASH SURPLUS

MONEY MARKET DEPOSIT

ONLY BE USED IF THERE IS A HIGH CERTAINITY OF CASF FLOWS

CERTIFICATE OF DEPOSIT
SECURITY ISSUED BY BANK, HOLDER CAN SELL IT BEFORE MATURITY SO IT'S MORE LIQUID, LOW RISK BUT LESS RET

TREASURY BILLS
2,3 AND 6 MONTH GOVT DEBT, LOW RISK, LIQUID, EVEN LOWER RETURNS.

GILT-EDGED GOVT SECURITIES

5) ASSIST OF FACTORING IN MGT OF A/C RECIEVABLES

FACTOR WILL ADMINISTRATE THE COMPANY'S SALES LEDGER .FACTOR IS A INSTITUTION WHICH EXPERTISE IN THIS AREA. THE
RECORD SALES, COLLECT PAYMENT AND TAKE APPROPRIATE LEGAL ACTIONS TO RECOVER DEBTS WHERE ITS NECESSARY.
THE FACTOR WILL OFFER FINANCE TO THE COMPANY. THIS IS USUALLY UP TO 80% OF THE FACE VALUE OF INVOICE RAISED. F
PASSED TO ISSUING COMPANY AFTER DEDUCTING A FEE EQUIVALENT TO INT CHARGE ON CASH ADVANCED.
IF FACTORING IS WITHOUT RECOURSE FACTOR WILL CARRY THE COST OF BAD DEBT RATHER THAN THE COMPANY, ALTHOUG
TO COMPENSATE THE EXTRA SERVICE.

6) SIMILARITIES AND DIFFERENCES BETWEEN WC INVESTMENT AND WC FINANCING

WC INVESTMENT POLICY IS CONCERNED WITH THE LEVEL OF INVESTMENT IN CURRENT ASSETS, WITH ONE COMPANY BEING
WHEREAS WC FINANCING POLICY IS CONCERNED WITH THE PROPORTION OF SHORT-TERM AND LONG-TERM FINANCE USED
WC FINANCING POLICY USES AN ANALYSYS OF CURRENT ASSET INTO PERMENANT CURRENT ASSET AND FLUCTUATING CURRE
PERMENANT CURRENT ASSET IS THE MINIMUM ASSET BASE REQUIRED TO SUSTAIN NORMAL BUSINESS TRADING ACTIVITIES,
IN CURRENT ASSET DURING A PERIOD.
WC FINANCING POLICY RELIES ON MATCHING PRINCIPLE WHICH IS NOT USED BY WC INVESTMENT POLICY. IN MATCHING PRI
ASSETS) ARE FINANCED BY LONG TERM SOURCES OF FINANCE(EQUITY FINANCE OR LOAN NOT FINANCE ETC), WHILE FLUCTUA
SUCH AS OVERDRAFT OR A SHORT TERM LOAN.
BOTH OF THE POLICIIES USE THE TERMS CONSERVATIVE, MODERATE AND AGGRESSIVE. IN INVESTMENT POLICY THESE ARE U
INTER COMPANY BASIS. A COMPANY HAS MORE AGGRESSIVE APPROACH IF IT HAS LOW LEVEL OF INVESTMENT IN CURRENT A
IN WC FINANCING POLICY THIS TERMS ARE USED TO INDICATE THE WAY IN WHICH FLUCTUATING AND PERMENANT CURRENT
AGGRESSIVE FINACING POLICY MEANS THAT FLUCTUATING CURRENT ASSETS AND A PORTION OF PERMENANT CURRENT ASS
CONSERVATIVE APPROACH MEANS THAT PERMENANT CURRENT ASSET AND A PORTION OF FLUCTUATING ARE FINANCED FRO
AN AGGRESSIVE FINANCING POLICY WILL BE MORE RISKIER BUT MORE PROFITABLE BECAUSE SHORT TERM FINANCING IS RISK
THEREFOR EVEN IF WC INVESTMENT POLICY AND FINANCING POLICY HAVE ITS OWN SIMILARITIES THEY ARE STILL VERY DIFFE
CONSERVATIVE INVESTMENT POLICY WHILE FOLLOWING AGGRESSIVE FINANCING POLICY.
ROBABILITIES OF THIS OCCURING CAN BE ASSIGNED
NTIFIED USING AVAILABLE PAST DATA.

ILITIES OF THIS CANNOT BE ASSIGNED TO EACH

OJECT LIFE INCREASES.

XIMISATION WHEREAS LIQUIDITY IS NEEDED TO ENSURE FINANCIAL CLAIMS ON THE ORGANISATION

Y LITTLE OR NO RETURN AT ALL, SO THEY DECREASE PROFITABILITY.

AN ORGAINISATION.

QUID, LOW RISK BUT LESS RETURN.

H EXPERTISE IN THIS AREA. THEY WILL ASSES CREDIT WORTHINESS OF CUSTOMERS
S WHERE ITS NECESSARY.
VALUE OF INVOICE RAISED. FINANCE IS REPAID FROM SETTLED INVOICE AND THE BALANCE
ADVANCED.
AN THE COMPANY, ALTHOUGH THE FACTORS FEE WILL BE HIGHER THAN RECOURSE FACTORING

WITH ONE COMPANY BEING COMPARED TO ANOTHER.

D LONG-TERM FINANCE USED BY A COMPANY.
SET AND FLUCTUATING CURRENT ASSETS. WC INVESTING POLICY DOES BOT REQUIRE THIS.
USINESS TRADING ACTIVITIES, WHEREAS FLUCTUATING CURRENT ASSET IS THE VARIATIONS

NT POLICY. IN MATCHING PRINCIPLE LONG TERM ASSETS(NON-CURRENT ASSETS AND PERMENANT

INANCE ETC), WHILE FLUCTUATING CURRENT ASSETS ARE TO BE FINANCED FROM SHORT SOURCES

STMENT POLICY THESE ARE USED TO INDICATE THE LEVEL OF INVESTMENT IN CURRENT ASSET ON
OF INVESTMENT IN CURRENT ASSETS AND VICE VERSA.
NG AND PERMENANT CURRENT ASSETS ARE MATCHED TO SHORT TERM AND LONG TERM FINANCE.
OF PERMENANT CURRENT ASSETS ARE FINANCED FROM SHORT TERM FINANCE SOURCE, AND A
CTUATING ARE FINANCED FROM LONG TERM FINACING SOURCES.
HORT TERM FINANCING IS RISKY BUT MORE CHEAPER THAN LONG TERM FINANCING AND VICE VERSA.
ES THEY ARE STILL VERY DIFFERENT FROM EACH OTHER , A COMPANY COULD EVEN HAVE A
7) FACTORS DETERMINING THE LEVEL OF WC INVESTMENT

NATURE OF INDUSTRY AND LENGTH OF WC CYCLE

SOME BUSINESS HAVE LONG PRODUCTION PROCESS WHICH OBVIOUSLY LEADS TO LONG WC CYCLE AND LARGE IN
OTHER INVENTORIES SUCH AS SUPER MARKETS BUY GOODS ON LONG CREDIT TERMS HAVE RAPID INVENTORY TURNOVERS A
THEY OFTEN RECEIVE CASH FROM CUSTOMERS BEFORE THEY HAVE TO PAY THE SUPPLIERS SO THEY WILL HAVE VERY LITTLE IN

WC INVESTMENT POLICY
SOME COMPANIES TAKE A CONSERVATIVE APPROACH OFFERING LONG PERIOD OF CREDIT TO CUSTOMERS, CARRY
AND PAYING SUPPLIERS PROMPTLY. THIS HAVE SOMANY BENEFITS BUT IT'LL LEAD TO LARGE INVESTMENT IN WC.
OTHERS TAKES A MORE AGGRESSIVE APPROACH OFFERING MINIMAL CREDIT, CARRYING LOW LEVEL OF INVENTORIES AND DE
THIS'LL LEAD TO LOWER LEVEL OF WC INVESTMENT.

EFFICIENCY OF MGT AND TERMS OF TRADE

IF MGT OF THE COMPONENTS OF WC IS NEGLECTED, THEN INVESTMENT IN WC CAN INCREASE. FOR EG; FAILURE T
LEADS TO HIGH LEVEL OF RECIEVABLES, FAILURE TO MANAGE INVENTORY USING EOQ OR JUST IN TIME INVENTORY MANAGE
OF INVENTORIES.

8) KEY FACTORS DETERMINIGN WC FUNDING STRATEGIES

PERMENANT AND FLUCTUATING CURRENT ASSETS

PERMENANT ASSETS ARE THE CORE LEVEL OF CURRENT ASSETS NEEDED TO SUPPORT THE NORMAL LEVEL OF BUSI
BUSINESS ACTIVITIES WILL BE SUBJECT TO UNEXPECTED FLUCTUATIONS SUCH AS CUSTOMERS BEING LATE TO SETTING THEIR
TO UNEXPECTED VARIATIONS IN CURRENT ASSETS, THIS IS KNOWN AS FLUCTUATING CURRENT ASSET.

RELATIVE COST AND RISK OF SHORT-TERM AND LONG-TERM FINANCE

THE YIELD CURVE SHOWS THAT LONG TERM FINANCE IS MORE EXPENSIVE THAN SHORT TERM FINANCING. HOWEV
DEBT IS MORE EXPENSIVE IT’S A SECURE FORM OF FINANCE AND HENCE LOW RISK.
WHEREAS SHORT TERM FINANCE IS MORE CHEAPER BUT IS OPEN TO HIGHER RISKS.

MATCHING PRINCIPLE
MATCHING PRINCIPLE STATES THAT THE MATURITY OF ASSETS SHOULD BE REFLECTED IN THE MATURITY OF FINAN
SHORT TERM FINANCE SHOULD BE USED FOR FLUCTUATING ASSETS AND LONG TERM FINANCE SHOULD BE USED FOR PERMA

RELATIVE COSTS AND BENEFITS OF DIFFERENT FUNDING STRATEGIES

MATCHING FUNDING STRATEGY= LONG TERM FINANCE FOR PERMENANT AND NON CURRENT ASSET AND
CONSERVATIVE STRATEGY = LONG TERM FINANCE FOR PERMANENT, NON CURRENT ASSET AND SOM
SHORT TERM FINANCE FOR THE REST OF FLUCTUATING ASSETS
AGGRESSIVE STRATEGY = LONG TERM FINANCE FOR NON CURRENT ASSETS AND PART OF PERMEN
FLUCTUATING AND REST OF THE PERMANENT ASSETS.

CONSERVATIVE STRATEGY USING MORE LONG TERM FINANCE WILL BE LOW RISK BUT LOW IN PROFITABILITY
AGGRESSIVE STRATEGY USING MORE SHORT TERM FINANCE WILL BE IN HIGHER RISK AND HIGHER PROFITABILITY
MATCHING STRATEGY WOULD BALANCE THE RISK AND PROFITABILITY.

MANAGERIAL ATTITUDE TO RISK

IT WILL LEAD TO A COMPANY PREFERRING ONE WC FUNSING POLICY OVER ANOTHER. FOR EXAMPLE A MGT WHIC
CHOOSE CONSERVATIVE STRATEGY RATHER THAN AGGRESSIVE STRATEGY AND VICE VERSA.
ORGANISATION SIZE
ITS AN IMPORTANT FACTOR, ACCES TO DIFFERENT FORM OF FINANCE COULD BE FAVOURED DEPENDING ON ORGA
ONG WC CYCLE AND LARGE INVESTMENTS IN WC.
PID INVENTORY TURNOVERS AND VERY LESS RECIEVABLES,
HEY WILL HAVE VERY LITTLE INVESTMENT ON WC.

REDIT TO CUSTOMERS, CARRYING HIGH LEVEL OF INVENTORY

VESTMENT IN WC.
EVEL OF INVENTORIES AND DELAYED PAYMENT TO SUPPLIERS.

INCREASE. FOR EG; FAILURE TO APPLY CREDIT CONTROL

N TIME INVENTORY MANAGE WILL LEAD TO HIGH LEVEL

T THE NORMAL LEVEL OF BUSINESS ACTIVITIES.

BEING LATE TO SETTING THEIR A/C'S THIS WILL LEAD

ORT TERM FINANCING. HOWEVER EVEN IF LONG TERM

D IN THE MATURITY OF FINANCE USED TO SUPPORT THEM.

SHOULD BE USED FOR PERMANENT AND NON CURRENT ASSETS.

ND NON CURRENT ASSET AND SHORT TERM FINANCE FOR FLUCTUATING

NON CURRENT ASSET AND SOME OF FLUCTUATING CURRENT ASSET AND
LUCTUATING ASSETS
ASSETS AND PART OF PERMENANT ASSET AND SHORT TERM FINANCE FOR
ENT ASSETS.

ROFITABILITY
ER PROFITABILITY

R. FOR EXAMPLE A MGT WHICH DOES NOT WANT TO FACE HIGH RISK WILL
OURED DEPENDING ON ORGANISATION SIZE.
9) SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS INDICATES WHICH PROJECT VARIABLE IS THE KEY OR CRITICAL VARIABLE, THE VARIABLE WIT
SENSITIVITY CAN MAKE THE NPV ZERO WITH THE SMALLEST CHANGES.IT SHOWS WHERE MGT SHOULD FOCUS INORDER TO M
SUCCESFULL AND PROFITABLE.

10) LIMITATIONS OF NPV

NPV ASSUMPTION ON OBJECTIVE OF SHAREHOLDER WEALTH MAXIMISATION

NPV ASSUMES THAT FIRMS PERSUE THE OBJECTIVE SOF SHAREHOLDER WEALTH MAXIMISATION. THIS IS QUESTION
STAKEHOLDERS WHO'S INTERESTS ARE CONFLICTING WITH SHAREHOLDERS. ADDITIONALY NPV IS LARGELY REDUNDANT IF OR
LIKE PUBLIC SECTOR ORGANISATIONS AND NOT FOR PROFIT ORGANISATIONS.

DIFFICULTY IN DETERMINING DISCOUNT RATE

NPV IS A DIFFICULT METHOD TO APPLY BECAUSE OF HAVING TO ESTIMATE THE CORRECT DISCOUNT RATE IT WILL
COST OF CAPITAL AND THERE BY IS MORE COMPLICATED THAN OTHER METHODS.

MID PERIOD CASH FLOWS

NPV CAN EASILY COPE WITH CASHFLOWS ARSING IN PERIOD ENDS, BUT CANNOT BE USED EASILY WHEN MID-PERIO

LIMITED USE IN SMALL BUSINESSES

NPV IS NOT WIDELY EMPLOYED IN SMALL BUSINESS, WHICH OFTEN PREFER SIMPLE INVESTMENT APPRAISAK METH

CONFLICT WITH REPORTED PROFIT

NPV FOCUS ON CASHFLOWS IF A FIRM PREFERS REPORTED PROFITS IT MAY CREATE A CONFLICT , ESPECIALLY IN PR
DELAYED CASH INFLOWS

DIFFICULTY IN VALUING NOM-QUANTIFIABLE BENEFITS OR COSTS

NPV STRUGGLES TO INCORPORATE NON-FINANCIAL FACTORS IKE STRATEGIC OR ENVIRONMENTAL BENEFITS THAT

11) PROBLEMS OF UNDERTAKING INVESTMENT APPRAISAL WHEN PROJECT HAS SEVERAL INTERNAL RATE OF RETURN
AN INVESTMENT PROJECT MAY HAVE MULTIPLE INTERNAL RATE OF RETURN IF IT HAS UNCONVENTIONAL CASHFLO
LIFE OF PROJECT.
FOR EG A PROJECT MIGHT HAVE AN INITIAL OUTFLOW FOLLOWED BY MANY YEARS OF CASH INFLOW AND A CASH OUTFLOW
IT DIFFICULT TO USE IRR IN INVESTMENT APPRAISAL METHOD TO INVESTMENT ADVICE.
ONE SOLUTION IS TO USE NPV METHOD SINCE THE NON CONVENTIONAL CASHFLOWS ARE EASILITY ACCOMODATED BY NPV.

12) BUSINESS RISK OF NEW PROJECT IS DIFFERENT FROM THE BUSINESS RISK OF CURRENT OPERATIONS
WHERE A PROPOSED PROJECT HAS BUSINESS RISK THAT IS DIFFERENT FROM CURRENT OPERATIONS IT IS NO LONG
IN CALCULATING NPV. WACC CAN ONLY BE USED IF BUSINESS RISK AND FINANCE RISK ARE NOT SIGNIFICANTLY AFFECTED BY
WHERE BUSINESS RISK CHANGES THE CAPM SHOULD BE USED TO CALCULATE A PROJECT SPECIFIC DISCOUNT RATE THAT TAK
INVESTMENT PROJECT.
VARIABLE, THE VARIABLE WITH THE SMALLEST
SHOULD FOCUS INORDER TO MAKE THE PROJECT

XIMISATION. THIS IS QUESTIONABLE GIVEN THE WIDE RANGE OF

IS LARGELY REDUNDANT IF ORGANISATIONS ARE NOT WEALTH MAXIMISING

RECT DISCOUNT RATE IT WILL NEED THE MORE KNOWLEDGE IN

USED EASILY WHEN MID-PERIOD CASHFLOWS ARE PRESENT.

NVESTMENT APPRAISAK METHODS QUESTIONING ITS PRACTICAL UTILITY.

A CONFLICT , ESPECIALLY IN PROJECTS WITH LONG TIME HORIZONS AND

IRONMENTAL BENEFITS THAT ARE HARD TO QUANTIFY BUT HAVE IMMEDIATE COSTS.

ERNAL RATE OF RETURN

S UNCONVENTIONAL CASHFLOWS. THAT IS CASHFLOWS THAT CHANGE SIGN OVER THE

FLOW AND A CASH OUTFLOW IN DECOMMISSIONING. THIS TECHNICAL DIFFICULTY MAKES

LITY ACCOMODATED BY NPV.

NT OPERATIONS IT IS NO LONGER APPROPRIATE TO USE WACC AS THE DISCOUNT RATE

SIGNIFICANTLY AFFECTED BY UNDERTAKING AN INVESTMENT PROJECT.
FIC DISCOUNT RATE THAT TAKES ACCOUNT OF THE SYSTEMATIC RISK OF A PROPOSED
13) INCORPORATING RISK INTO INVESTMENT APPRAISAL

SENSITIVITY ANALYSIS
THIS ASSESES THE SENSITIVITY OF PROJECT NPV TO CHANGES IN PROJECT VARIABLES. IT CALCULATE THE RELATIVE
REQUIRED IN A VARIABLE TO MAKE NPV ZERO. ONLY ONE VARIABLE IS CONSIDERED AT A TIME. WHEN EVERY VARIABLE HAVE
THEY KEY OR CRITICAL VARIABLES CAN BE IDENTIFIED. IT HELPS MANAGERS TO FOCUS ON THE CRITICAL VARIABLES AND MAK
PROFITABLE. ALTOUGH IT DOESN’T INCORPORATE PROBABILITIES IT CANNOT BE DESCRIBED AS A WAY OF INCORPORATING R
INVESTMENT APPRAISAL , BUT IT IS DESCRIBED AS SUCH.

PROBABILITY ANALYSYS
THIS INCLUDES ASSIGNING PROBABILITIES TO EACH OUTCOME OF AN INVESTMENT PROJECT. THE RANGE OF NPV T
FROM AN INVESTMENT PROJECT IS CALCULATED TOGETHER WITH THE JOINT PROBABLITIES OF EACH OUTCOME. THE NPV AN
PROBABILITIES CAN THEN BE USED TO FIND EXPECTED/MEAN NPV WHICH COULD ARISE IF THE INVESTMENT IS REPEATED A L
IT GIVES THE WORST OUTCOMES AND THEIR PROBABILITIES, PROBABILITY OF NEGATIVE NPV, BEST OUTCOME AND THEIR PRO
AND THE MOST LIKELY OUTCOME.MANAGERS CAN THEN MAKE A DECISION ABOUT THE PROJECT.

RISK ADJUSTED DISCOUNT RATE

IT IS CORRECT TO ASS RISK PREMIUM TO THE NORMAL DISCOUNT RATE .THE THEORETICAL APPROACH TO THIS WO
TO DETERMINE A PROJECT SPECIFIC DISCOUNT RATETHAT REFLECTS THE SYSTEMATIC RISK OF A PROJECT. THIS CAN BE ACHIE
COMPANIES WHOSE BUSINESS RISK IS SAME AS THE PROPOSED PROJECT. REMOVING THE EFFECT OF THEIR FINANCIAL RISK B
EQUITY BETA TO GIVE AN AVG ASSET BETA. REGEARING THE ASSET BETA TO EQUITY BETA FOR REFLECTING THE FINANCIAL RI
COMPANY AND USING CAPM TO CALCULATE THE PROJECT SPECIFIC COST OF EQUITY.

ADJUSTED PAYBACK
PAYBACK CAN BE ADJUSTED FOR RISK IF UNCERTAINITY IS CONSIDERED SAME AS RISK BY SHORTENING THE PAYBA
THE LOGIC HERE IS THAT UNCERTAINITY INCREASES WHEN PROJECT LIFE INCREASES , SHORTENING PAYBACK PERIOD FOR A R
RISKY WILL REQUIRE TO PAYBACK SOONER, PUTTING THE FOCUS ON CASHFLOWS THAT ARE MORE CERTAIN BECAUSE THEY A
PAYBACK CAN ALSO BE ADJUSTED OF RISK BY DISCOUNTING FUTURE CASHFLOWS WITH A RISK ADJUSTED DISCOUNT RATE.

14) LEASE OR BUY PROCESS

WHEN CONSIDERING WHETHER TO LEASE OR BUY AN ASSET, BECAUSE THE CASHFLOWS OF LEASING AND BUYING
THE PROJECT LIFE, DISCOUNTED CASHFLOW TECHINIQUES SHOULD BE USED. WHEN CASHFLOWS ARE EXPRESSED IN PRESENT
WILL BE DIRECTLY COMPARABLE. THE CASHFLOWS SHOULD BE DISCOUNTED WITH THE POST-TAX COST OF BORROWING , THI
THAT ASSET IS LEASED OR PURCHASED WITH THE USE OF FINANCING, HENCE DISCOUNT RATE USED IS THE BORROWING COS
RELEVANT CASHFLOWS FOR LEASE ARE THE LEASE PAYMENTS AND TAX SAVINGS FROM THESE LEASE PAYMENTS. CASHFLOW
BE THE PURCHASE COST, SCRAP VALUE AND TAX SAVINGS FROM TAX ALLOWABLE DEPRECIATION. INTEREST OF BORROWING
ADJUSTED IN THE COST CAPITAL USED. COMMON CASHFLOWS ARE IGNORED. AFTER CALCULATING THE TWO SETS OF DISCO
LOWEST COST OPTION IS SELECTED.

15) REASONS FOR HARD AND SOFT CAPITAL RATIONING

CAPITAL RATIONING CAN BE DIVIDED INTO HARD CAPITAL RATIONING WHICH IS EXTERNALLY IMPOSED AND SOFT

SOFT CAPITAL RATIONING

INVESTMENT CAPITAL MAY BE INTERNALLY BECAUSE A COMPANY DOES NOT WANT TO TAKE ON A COMMITMENT
INTEREST PAYMENTS. A COMPANY MAY LIMIT FUND BECAUSE IT WISHES TO PERSUE CONTROLLED GROWTH RATHER THAN R
LIMIT IT INORDER TO CREATE AN INTERNAL MARKET WHERE PROJECTS COMPETE FOR FINANCE ,WITH ONLY THE BEST PROJEC
HARD CAPITAL RATIONING
EXTERNAL LIMITATION TO FUND CAN BE RELATED TO RISK AND TO AVAILABILITY OF FINANCE. FINANCE PROVIDERS
PERHAPS DUE TO ITS HIGH GEARING OR BECAUSE IT HAS A POOR RECORD OR POOR PROSPECTS IN TERMS OF PROFITABILITY
INVESTMENT MAY HAVE LIMITED AVAILABILITY BECAUSE OF THE POOR ECONOMIC STATE OF THE ECONOMY, OR BECAUSE OF
 . IT CALCULATE THE RELATIVE CHANGE
WHEN EVERY VARIABLE HAVE BEEN ASSESED
CRITICAL VARIABLES AND MAKE THE PROJECT
A WAY OF INCORPORATING RISK INTO

ROJECT. THE RANGE OF NPV THAT CAN RESULT

EACH OUTCOME. THE NPV AND THEIR JOINT
INVESTMENT IS REPEATED A LARGE NUMBER OF TIMES.
EST OUTCOME AND THEIR PROBABILITY

ETICAL APPROACH TO THIS WOULD BE TO USE CAPM

PROJECT. THIS CAN BE ACHIEVED BY SELECTING PROXY
CT OF THEIR FINANCIAL RISK BY UNGEARING THEIR
REFLECTING THE FINANCIAL RISK OF THE INVESTING

K BY SHORTENING THE PAYBACK PERIOD.

ING PAYBACK PERIOD FOR A ROJECT RELATIVLEY
ORE CERTAIN BECAUSE THEY ARE NEARER IN TIME .
ADJUSTED DISCOUNT RATE.

WS OF LEASING AND BUYING GENERALLY LAST OVER

WS ARE EXPRESSED IN PRESENT VALUES THE TWO OPTIONS
AX COST OF BORROWING , THIS IS FOR THE ASSUMPTION
USED IS THE BORROWING COST.
LEASE PAYMENTS. CASHFLOWS FROM PURCHASE OPTION WILL
N. INTEREST OF BORROWING IS NOT CONSIDERED BECAUSE ITS
TING THE TWO SETS OF DISCOUNTED CASHFLOWS THE

ERNALLY IMPOSED AND SOFT CAPITAL RATIONING WHICH IS EXTERNALLY IMPOSED

TO TAKE ON A COMMITMENT TO INCREASED FIXED

LED GROWTH RATHER THAN RAPID GROWTH. A COMPANY MAY
,WITH ONLY THE BEST PROJECT BEING GRANTED APPROVAL
FINANCE. FINANCE PROVIDERS MAY SEE A COMPANY AS TOO RISKY TO BE INVESTED IN,
S IN TERMS OF PROFITABILITY OR CASHFLOW. LONG TERM FINANCE FOR CAPITAL
HE ECONOMY, OR BECAUSE OF A BANKING CRISIS.
16) WAYS TO ENCOURAGE MANAGERS TO ACHIEVE STAKEHOLDER OBJECTIVES

ACHIEVEMENT OF STAKEHOLDER OBJECTIVES BY MANAGERS CAN BE ENCOURAGED BY MANAGERIAL REWARD SCH

SHARE OPTION SCHEME

MANAGERS CAN BE ENCOURAGED BY BRINGIGN THEIR OWN OBJECTIVES IN LINE WITH OBJECTIVES OF STAKEHOLD
SHARE HOLDERS.
THIS CAN BE ACHIEVED BY TURNING THE MANAGERS INTO SHAREHOLDERS THROUGH SHARE OPTION SCHEME, ALTOUGH TH
ARE AWARDED NEED VERY CAREFUL CONSIDERATION.

PERFORMANCE RELATED PAY

PART OF THE REMUNERATION OF MANAGERS CAN BE MADE CONDITIONAL UPON THEM ACHIEVING SPECIFIED PER
SO THAT ACHIEVING PERFORMANCE TARGETS ASSISTS IN ACHIEVING STAKEHOLDER OBJECTIVES. PERFORMANCE OBJECTIVES
CONSIDERATION IF THEY ARE TO BE EFFECTIVE IN ENCOURAGING MANAGERS TO ACHIEVE STAKEHOLDER TARGETS.

CORPORATE GOVERNANCE CODES OF BEST PRACTICE

STOCK EXCHANGE LISTING REGULATIONS

MONITORING
A THEORETICAL WAY TO ENCOURAGING MANAGERS TO ACHIEVE STAKEHOLDER OBJECTIVE IS TO REDUCE INFORM
(ONE PARTY HAVE MORE INFO THAN OTHER) BY MONITORING DECISIONS AND PERFORMANCE OF MANAGERS. ONE FORM O
AUDITING THE FS OF A COMPANY TO CONFIRM THE QUALITY AND VALIDITY OF THE INFORMATION PROVIDED TO STAKEHOLD

17) SYSTEMATIC VS UNSYSTEMATIC RISK- PORTFOLIO THEORY

PORTFOLIO THEORY SUGGESTS THAT THE TOTAL RISK OF A PORTFOLIO OF INVESTMENT CAN BE REDUCED BY DIVE
IN THE PORTFOLIO. EVEN WHEN PORTFOLIO HAVE BEEN WELL DIVERSIFIED OVER A NUMBER OF DIFFERENT PROJECTS THERE
SO THAT THERE IS A LEVEL OF RISK WHICH CANNOT BE DIVERSIFIED AWAY. THIS RISK IS THE RISK OF FINANCIAL SYSTEM AS A
SYSTEMATIC OR MARKET RISK. DIVERSIFIED RISK WHICH CAN BE REDUCED OR MINIMISED BY PORTFOLIO DIVERSIFICATION IS
IT RELATES TO INDIVIDUAL COMPANIES RATHER THAN FINANCIAL SYSTEM AS A WHOLE. THE CAPM ASSUMES THAT INVESTOR
CONCERNED WITH SYSTEMATIC RISK ALONE.

18) FINANCIAL OBJECTIVE OF STOCK LISTED COMPANY AND NFPO'S

KEY FINANCIAL OBJECTIVE OF A LISTED COMPANY IS THE SHAREHOLDER WEALTH MAXIMISATION. THIS OBJECTIVE
MAXIMISATION OF SHARE PRICE. MAXIMISING THE COMPANY'S SHARE PRICE IS THE SAME AS MAXIMISING THE EQUITY MAR
MAXIMISING EQUITY MARKET VALUE CAN BE ACHIEVED BY MAXIMISING NET CORPORATE CASH INCOME AND THE EXPECTED
MINIMISING THE CORPORATE COST OF CAPITAL.
NFP ORGANISATIONS SEEKS TO PROVIDE SERVICES TO THE PUBLIC AND THIS REQUIRES INCOME. MAXIMISING NET
FINANCIAL OBJECTIVE FOR BOTH NFPO'S AND LISTED COMPANIES. BOTH TYPES OF COMPANIES NEED TO CONTROL THE USE O
BUDGETS, ANOTHER OBJECTIVE OF BOTH THE COMPANIES ARE TO SPEND WITHIN THE BUDGET. ANOTHER OBJECTIVE OF NFP
OT REFERSE TO FOCUS ON ECONOMY, EFFICIENCY AND EFFECTIVENESS. THESE CAN BE LINKED TO INPUT, PROCESS AND OUTP
LISTED COMPANIES ALSO SEEKS TO ACHIEVE VALUE FOR MONEY. A LISTED COMPANY HAS A PROFIT MOTIVE , AND SO VFM C
LIMKED TO OUTPUT. AN NFP ORGANISATION HAS SERVICE RELATED OUTPUTS THAT ARE DIFFICULT TO MEASURE SO IT FOCU
ALTOUGH BOTH LISTED COMPANY AND NFPO'S HAVE SIGNIFICANT DIFFERENCE THERE IS ALSO A CONSIDERABLE A
BY MANAGERIAL REWARD SCHEMES.

TH OBJECTIVES OF STAKEHOLDERS SUCH AS

PTION SCHEME, ALTOUGH THE CRITERIA BY WHICH SHARES

HEM ACHIEVING SPECIFIED PERFORMANCE TARGETS,

S. PERFORMANCE OBJECTIVES OF THIS NEED VERY CAREFUL
KEHOLDER TARGETS.

ECTIVE IS TO REDUCE INFORMATION ASSYMETRY

OF MANAGERS. ONE FORM OF MONITORING IS
ON PROVIDED TO STAKEHOLDERS.

NT CAN BE REDUCED BY DIVERSIFYING THE INVESTMENTS HELD

F DIFFERENT PROJECTS THERE IS A LIMIT OF RISK REDUCTION EFFECT
K OF FINANCIAL SYSTEM AS A WHOLE , ALSO REFERRED TO AS
ORTFOLIO DIVERSIFICATION IS CALLED UNSYSTEMATIC OR SPECIFIC RISK.
PM ASSUMES THAT INVESTORS HOLD DIVERSIFIED PORTFOLIO SO ITS

AXIMISATION. THIS OBJECTIVE IS USSUALLY REPLACED BY

MAXIMISING THE EQUITY MARKET VALUE OF THE COMPANY,
H INCOME AND THE EXPECTED GROWTH IN THE INCOME WHILE

ES INCOME. MAXIMISING NET CASH INCOME IS THEREFOR A KEY

NEED TO CONTROL THE USE OF CASH THEREFOR BOTH USES
. ANOTHER OBJECTIVE OF NFPO'S ARE VALUE FOR MONEY,
TO INPUT, PROCESS AND OUTPUT. DESCRIBED IN TERMS
OFIT MOTIVE , AND SO VFM CAN BE RELATED TO PERFORMANCE
ULT TO MEASURE SO IT FOCUS ON INPUTS.
RE IS ALSO A CONSIDERABLE AMOUNT OF SIMILARITIES BETWEEN THEM.
19) ATTRACTION OF LEASING AS SOURCE OF FINANCE

LEASING CAN ACT AS A SOURCE OF SHORT TERM OR LONG TERM FINANCE SHORT-TERM LEASING GIVES A SOLUTIO
WHEREBY AGING ASSETS CAN DECREASE COMPETITIVE ADVANTAGE. WHERE KEEPING UP-TO-DATE WITH THE LATEST TECHNO
OPERATIONS. SHORT TERM LEASE ALSO PROVIDES SKILLLED MAINTENANCE WHICH OTHERWISE MIGHT NEED TO BE BOUGHT
LONG TERM LEASE SPREADS THE COST OF THE ASSET OVER THE MAJORITY OF USEFUL LIFES AND MEANS THAT BUS
THE PURCHASE OF THE ASSET.
BOTH SHORT TERM AND LONG TERM LEASING PROVIDE ACCES TO NON CURRENT ASSETS IN CASES WHERE BORROWING MAY

20) METHODS OF ISSUING NEW SHARES

RIGHT ISSUE
RIGHT ISSUE INVOLVES ISSUING SHARES TO EXISTING SHAREHOLDERS IN PROPORTION TO THEIR EXISTING HOLDIN
CHEAPER TO ARRANGE THAN A PUBLIC ISSUE. BUT THE AMOUNT OF FINANCE RAISED IS LIMITED AS THERE IS A FINITE AMOU

PRIVATE PLACING
PRIVATE PLACING IS WHEN A COMPANY USSUALY WITH THE ASSITANCE OF AN INTERMEDIARY, SEKS OUT NEW INV
ISSUED TO FINANCIAL INSTITUTIONS WHEN PERFORMING A PLACING RATHER THAN TO INDIVIDUALS. THIS CAN BE USEFUL SO
OF THE COMPANY WILL BE DILUTED AS A RESULT. IT IS ALSO CHEAPER THAN PUBLIC ISSUE.

PUBLIC OFFER
IF THE COMPANY IS LISTED IT MAY UNDERTAKE A PUBLIC OFFER WHEREBY SHARES ARE OFFERED FOR SALE TO THE
AS THERE ARE REGULATORY COSTS, AND LIKE PRIVATE PLACING CONTROL OF THE EXISTING SHAREHOLDERS WILL BE DILUTED
OF EQUITY FINANCE TO BE RAISED.

INITIAL PUBLIC OFFERING

IF THE COMPANY IS NOT LISTED IT CAN LIST THROUGH THE PROCESS OF AN IPO WHICH WILL RAISE EQUITY AT THE
OFFFERING AS THERE ARE FURTHER RELEGATION HAVING TO BE COMPLIED WITH, INCREASING COSTS. ONLY A LARGE COMPA
WOULD CONSIDER THIS.

21) ASSUMPTIONS OF CAPM

INVESTORS HOLD DIVERSIFIED PORTFOLIOS

WHILE PORTFOLIO THEORY CONSIDERS TOTAL RISK , THE CAPM CONSIDERS ONLY SYSTEMATIC RISK, AS IT ASSUME
THEREFOR ONLY REQUIRE SYSTEMATIC RISK IN THEIR PORTFOLIOS.

SINGLE-PERIOD TRANSACTION HORIZON

INORDER TO COMPARE THE RETURNS ON DIFFERENT ASSETS SUCH AS SHAREHOLDING, THE CAPM ASSUMES THAT
HORIZON, USSUALY TAKES TO BE ONE YEAR.

PERFECT CAPITAL MARKET

CAPM ASSUMES A PERFECT CAPITAL MARKETS, WITH NO TAXES, NO TRANSACTION COSTS AND PERFECT INFORMA

BORROWING AND LENDING AT RISK FREE RATE

CAPM ASSUMES THAT ALL INVESTORS CAN BORROW AND LEND AT THE RISK-FREE RATE OF RETURN. THIS REPRESE
AND IS ONE OF THE VARIABLES IN CAPM EQUATION.
RM LEASING GIVES A SOLUTION TO THE OBSOLECENCE PROBLEM ,
ATE WITH THE LATEST TECHNOLOGY IS ESSENTIAL FOR BUSINESS
MIGHT NEED TO BE BOUGHT IN BY THE LESSE, ALTOUGH THERE WIL BE A CHARGE FOR THIS.
L LIFES AND MEANS THAT BUSINESS DOESN’T HAVE TO SOURCE SEPARATE FINANCE TO COVER

SES WHERE BORROWING MAY BE DIFFICULT OR NOT EVEN POSSIBLE.

N TO THEIR EXISTING HOLDING. RIGHT ISSUES ARE OFTEN SUCCESFUL, EASIER TO PRICE AND
D AS THERE IS A FINITE AMOUNT THAT SHAREHOLDERS WILL BE WILLING TO INVEST.

RMEDIARY, SEKS OUT NEW INVESTOR ON ONE-TO-ONE BASIS. SHARES ARE NORMALLY ISSUED
UALS. THIS CAN BE USEFUL SOURCE OF EQUITY FOR AN UNLISTED COMPANY BUT CONTROL

RE OFFERED FOR SALE TO THE PUBLIC AT LARGE. THIS IS AN EXPENSIVE WAY OF ISSUING SHARES
AREHOLDERS WILL BE DILUTED. A PUBLICISSUE WILL, HOWEVER, ALLOW VERY LARGE AMOUNT

CH WILL RAISE EQUITY AT THE SAME TIME. AN IPO WILL BE MORE EXPENSIVE THAN A PUBLIC
COSTS. ONLY A LARGE COMPANY WISHING TO RAISE A SIGNIFICANT AMOUNT OF FINANCE

STEMATIC RISK, AS IT ASSUMES THAT ALL INVESTORS HOLD DIVERSIFIED PORTFOLIOS. INVESTORS WILL

NG, THE CAPM ASSUMES THAT ALL RETURNS ARE OVER A STANDARD SINGLE PERID TRANSACTION

COSTS AND PERFECT INFORMATION TO EVERYONE.

ATE OF RETURN. THIS REPRESENTS A MINIMUM RATE OF RETURN REQUIRED BY ALL INVESTORS
22) STRONG FORM AND SEMI STRONG FOR MARKET EFFICIENCY

MARKET EFFICIENCY IS USSUALY TAKEN TO REFER TP THE WAY IN WHICH ORDINARY SHARE PRICE REFLECTS INFOR
MARKET CAN BE DEFINED AS ONE IN WHICH SHARE PRICES FULLY AND FAIRLY REFLECT ALL AVAILABLE INFORMATION.
A SEMI-STRONG FORM EFFICIENT MARKET IS ONE WHERE SHARE PRICE REFLECT ALL PUBLICALLY AVAILABLE INFO,
SHARE PRICE MOVEMENTS, PUBLISHED COMPANY ANNUAL REPORTS AND ANALYSIS REPOSRTS IN THE FINANCIAL PRESS.
A STRONG FORM EFFICIENT MARKET IS ONE WHERE SHARE PRICE REFLECTS ALL INFORMATION WHETEHR PUBLICA
SHARE PRICE WOULD REFLECT EVERY INFORMATION.
 SHARE PRICE REFLECTS INFORMATION. AN EFFICIENT
ILABLE INFORMATION.
PUBLICALLY AVAILABLE INFO, SUCH AS PAST
IN THE FINANCIAL PRESS.
ORMATION WHETEHR PUBLICALLY AVAILABLE OR NOT.