Paper 14

FINANCE FOR DECISION MAKING

This paper is intended to equip the candidate with knowledge, skills and techniques that will enable him/her to analyse and interpret financial statements and apply financial management principles to guide decision making.

On completion, a candidate should be able to

Describe the roles of the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows in evaluating a company’s performance and financial position
Identify various sources of finance
Make basic capital budgeting decisions under environment of certainty
Prepare budgets for organisations and explain budgetary controls
Make basic capital structure decisions
Make appropriate dividend decisions

Content

1
Overview of Finance
1. 1.1
  Nature and scope of finance
2. 1.2
  Finance functions - Managerial, Routine and other emerging functions
3. 1.3
  Goals of a firm; financial and non-financial objectives, overlaps and conflicts among the objectives
4. 1.4
  Agency theory, stakeholder’s theory and corporate governance
5. 1.5
  Ethical issues in financial management
2
Introduction to financing decision
1. 2.1
  Nature and objectives of the financing decision
2. 2.2
  Factors to consider when making financing decisions
3. 2.3
  Sources of finances for organisations; internally generated funds and the externally generated funds, long term sources, medium term and short term sources of finance
4. 2.4
  Sources of finance for small and medium sized enterprises (SMEs)
5. 2.5
  Methods of issuing ordinary shares
3
Financial Statement Analysis and Forecasting
1. 3.1
  Definition of financial statements analysis
2. 3.2
  The roles of financial reporting and financial statements analysis
3. 3.3
  Users of financial statements and their information needs
4. 3.4
  Importance of financial statement analysis
5. 3.5
  Cost of disclosing financial information; direct costs, indirect costs
6. 3.6
  Analysing financial statements
  1. 3.6.1
    Income statement: Components and format of the income statement
  2. 3.6.2
    Statement of financial position; components and format of statement of financial position
  3. 3.6.3
    Statement of changes in equity; components of equity, equity valuation ratios
  4. 3.6.4
    Cash flow statements; component and format of the cash flow statement
7. 3.7
  Ratio analysis; Meaning and uses of financial ratios - Calculation and interpretation of profitability ratios, Liquidity ratios, efficiency ratios, capital structure ratios, coverage ratios and equity ratios, and limitation of financial ratios (54)
8. 3.8
  Common size statements - Vertical and horizontal analysis
9. 3.9
  Red flags and accounting warning signs that may indicate financial statements are of poor quality
4
Budgeting and budgetary control
1. 4.1
  Nature and purposes of budgets
2. 4.2
  Limitations of budgeting
3. 4.3
  Preparation of budgets; master budgets, functional budgets, department budgets, cash budgets.
4. 4.4
  Purpose of budgetary control; operation of a budgetary control system, organisation and coordination of the budgeting function
5. 4.5
  Distinction between budgeting and budgetary control in the private and public sectors
6. 4.6
  Cost-Volume-Profit (CVP) Analysis
5
Time-value of money
1. 5.1
  Concept of time value of money
2. 5.2
  Time value of money versus time preference of money
3. 5.3
  Relevance of the concept of time value of money
4. 5.4
  Compounding technique
5. 5.5
  Discounting techniques
6. 5.6
  The loan amortisation schedule
6
Basic Valuation models
1. 6.1
  Concept of value
2. 6.2
  Relevance of valuation of securities/firms
3. 6.3
  Valuation of debentures, preference shares and ordinary shares
7
Introduction to capital structure decision
1. 7.1
  Firms capital structure and factors influencing capital structure decisions
2. 7.2
  The meaning and relevance of cost of capital
3. 7.3
  Factors influencing firms cost of capital
4. 7.4
  Component costs of capital
5. 7.5
  The firm’s overall cost of capital - Weighted average cost of capital (WACC) and
6. 7.6
  Weighted marginal cost of capital (WMCC)
8
Introduction to Capital Budgeting decision under Certainty
1. 8.1
  The nature and importance of capital investment decisions
2. 8.2
  Capital investment’s cash flows - initial cash outlay, terminal cash flows and annual net operating cash flows, incremental approach to cash flow estimation
3. 8.3
  Capital investment appraisal techniques; Features of an ideal capital budgeting technique, Non-discounted cash flow methods - payback period and accounting rate of return and discounted cash flow methods - net-present value, internal rate of return, profitability index and discounted payback period, Strengths and weaknesses of the investment appraisal techniques
4. 8.5
  Incorporating capital rationing in capital budgeting - The meaning and types of capital rationing
5. 8.6
  Challenges encountered when making capital investment decisions in reality (55)
9
Working capital management
1. 9.1
  Introduction and concepts of working capital
2. 9.2
  Working capital versus working capital management
3. 9.3
  Factors influencing working capital requirements of a firm
4. 9.4
  Importance and objectives of working capital management
5. 9.6
  Working capital financing policies
10
Dividend decision
1. 10.1
  Forms of dividend payments
2. 10.2
  When to pay dividends - Interim and final dividend
3. 10.3
  Factors influencing dividend payments
4. 10.4
  The firm’s dividend policy - The residual policy, stable predictable policy, constant payout ratio policy and regular plus extra policy
5. 10.5
  Why pay dividends/Dividend theories - Dividend relevance theories; Bird in hand theory, Clientele effect theory, Information signaling theory, Walter’s theory, Tax differential theory, Modigliani and Miller’s dividend irrelevance theory
6. 10.6
  Impact of a dividend decision on share price