Revision Flashcards
CGMA risk management strategy
1 Establish a risk management group and set goals.
2 Identify risk areas.
3 Understand and assess the scale of risk.
4 Develop a risk response strategy.
5 Implement the strategy and allocate responsibilities.
6 Implement and monitor the suggested controls.
7 Review and refine the process and do it again.
Scenario planning
Just not trying to predict the future instead tries to describe a range of plausible scenarios and the actions required that they do occur.
It tries to minimise surprise by rehearsing the future
Resource audit
Reveal strengths and weaknesses, helps understand core competencies and the organisations competitive position, and provide an analysis of how to create value.
Competencies
Threshold competencies – those necessary to compete in the market.
Unique resources – resources that cannot be easily imitated or obtained by competitors
Core competencies – activities and processes through which resources are deployed so as to gain a competitive advantage in ways that others cannot imitate or obtain
Foresight
Rehearsing alternative futures for the organisation.
All foresite techniques assume that action taken today will shape the future.
Foresight helps…
– Overcome vested interests
– expand mindset
– employees for new strategic views
– participants buy into or develop the organisations strategic vision
5 C’s of foresight
Communication – brings people together and provide structure.
Concentration – longer term
Coordination – allows different groups to harmonise research activities.
Consensus – around direction for research activities.
Commitment – to make results of research lead to action
5 C’s of foresight
Communication – brings people together and provide structure.
Concentration – longer term
Coordination – allows different groups to harmonise research activities.
Consensus – around direction for research activities.
Commitment – to make results of research lead to action
Dividend policy
Practical considerations
Shareholders wishes – will they sell? If dividend isn’t what they want
Market perceptions of dividend announcement
Availability of cash
tax implications
availability and conditions surrounding debt financing for investment
expected profit levels
level of cash needed to sustain future investment.
Dividend policy of competitors/industry norms
Common dividend policies
Growth year and year – linked to inflation/industry growth rates or sustainable level that is in line with profit growth.
Constant dividend pay percentage – best companies with stable profits, leads to dividend instability if profits are volatile.
Zero dividend – surplus funds invested in business to fund growth in business value and capital gains for investors
Dividend theories
Residual theory
– dividends paid out only after value enhancing projects have been financed.
- Whatever cash is left is returned to shareholders is dividend.
- This can lead to erratic dividend policy
Irrelevancy theory
– the return of shares is split into the capital gain and the dividend. The dividend decision determines how the return is delivered but it does not affect the total return.
– all that matters is that the company invests in positive NPV projects
– investors have the ability to manufacture their own dividend policies by selling or buying shares.
– in reality, tax and transaction cost implications means in this logic is flawed.
Business valuation models
Dividend valuation model - are levels sustainable?
Net present value of cash flows. - best method but difficult to predict
Asset base valuation - replacement cost
PE multiplier (profit must be audited) if unquoted could use a proxy or use buyers and bootstrap.
Ke and WACC
Share prices and dividend can be used to calculate cost of equity
Whack is useless discount factor in any NPV calculations.
Best to use an average share price when calculating WACC.
When calculating an investment in a different industry to use a proxy from that sector.
Capm (capital asset pricing model)
Calculate the expected rate of return for an asset or investment.
Beaters are users multipliers for calculating Ke. A higher beta results in a higher Ke and in turn a higher whack making an investment less attractive
