Business Finance and Treasury
Financial Management Objectives
The primary objective is to maximise shareholder wealth. Understand the agency problem and corporate governance mechanisms. Candidates must know the time value of money: present value, future value, annuities, and perpetuities. Be able to calculate NPV, IRR, payback period, and profitability index.
Capital Budgeting
NPV is the preferred method; it uses cash flows and the opportunity cost of capital. IRR can be problematic with non-conventional cash flows or mutually exclusive projects. Traps: using accounting profit instead of cash flows; ignoring working capital changes; forgetting terminal value.
Cost of Capital
Calculate WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc). Understand how to estimate the cost of equity (CAPM: Re = Rf + β*(Rm - Rf)) and the cost of debt. Traps: using book values instead of market values; forgetting the tax shield on debt.
Treasury and Risk Management
Know the tools for managing interest rate risk (swaps, forwards, futures, options) and foreign exchange risk (hedging with forward contracts, natural hedging). Understand the difference between transaction, translation, and economic exposure.
Worked Example
A project requires an initial investment of $100,000 and generates cash inflows of $30,000 per year for 5 years. The cost of capital is 10%. NPV = -$100,000 + $30,000 * annuity factor (10%, 5 years). Annuity factor = (1 - 1/1.1^5)/0.1 = 3.7908. PV of inflows = $113,724. NPV = $13,724. Accept the project.
Rule of thumb: Accept projects with positive NPV; for mutually exclusive projects, choose the highest NPV.