www.pearson-books.com CVR_ATRI6061_07_SE_CVR.indd Front cover image: © Getty Images Peter Atrill is a freelance academic and author working with leading institutions in the UK, Europe and SE Asia He has previously held posts as Head of Business and Management and Head of Accounting and Law at Plymouth Business School, Plymouth University FOR DECISION MAKERS The text is ideal for undergraduates from a nonfinance/accounting discipline taking an introductory module in financial management, and postgraduate students on courses such as the Diploma in Management Studies and MBA programmes The text is also suitable for finance and accounting students as a foundation for further study Peter Atrill MANAGEMENT New to this edition: • increased coverage of managing for shareholder value • additional activities throughout to help reinforce key points • increased coverage of the functioning of stock markets • more diagrams to help assist understanding • updated ‘real world’ examples • Visit www.pearsoned.co.uk/atrill to utilise a rich variety of online resources for lecturers and students SEVENTH EDITION FINANCIAL MANAGEMENT Adopting an innovative, open-learning approach to introduce the main principles of financial management in an accessible, non-technical way, this fully updated seventh edition provides a unique focus on the practical application of financial management and its role in decision making FINANCIAL MANAGEMENT FINANCIAL Peter Atrill SEVENTH EDITION FOR DECISION MAKERS Atrill FOR DECISION MAKERS SEVENTH EDITION 13/05/2014 14:04 FOR DECISION MAKERS FINANCIAL MANAGEMENT A01_ATRI6061_07_SE_FM.indd i 7/5/14 11:49 AM A01_ATRI6061_07_SE_FM.indd ii 7/5/14 11:49 AM FOR DECISION MAKERS FINANCIAL MANAGEMENT SEVENTH EDITION Peter Atrill A01_ATRI6061_07_SE_FM.indd iii 7/5/14 11:49 AM Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 1997 (print) Second edition published 2000 (print) Third edition published 2003 (print) Fourth edition published 2006 (print) Fifth edition published 2009 (print) Sixth edition published (print) 2012 Seventh edition published 2014 (print and electronic) © Pearson Education Limited 2014 (print and electronic) The right of Peter Atrill to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 The print publication is protected by copyright Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law Any unauthorised distribution or use of this text may be a direct infringement of the author’s and the publishers’ rights and those responsible may be liable in law accordingly All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners Pearson Education is not responsible for the content of third-party internet sites The Financial Times With a worldwide network of highly respected journalists, The Financial Times provides global business news, insightful opinion and expert analysis of business, finance and politics With over 500 journalists reporting from 50 countries worldwide, our in-depth coverage of international news is objectively reported and analysed from an independent, global perspective To find out more, visit www.ft.com/pearsonoffer ISBN: 978-1-292-01606-1 (print) 978-1-292-01609-2 (PDF) 978-1-292-01607-8 (eText) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloguing-in-Publication Data A catalogue record for the print edition is available from the Library of Congress 10 16 15 14 13 12 Front cover image: Getty Image Print edition typeset in 9.25/13pt Helvetica Neue LT Pro by 35 Print edition printed and bound by L.E.G.O S.p.A., Italy NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION A01_ATRI6061_07_SE_FM.indd iv 7/5/14 11:49 AM Contents Preface Acknowledgements How to use this book Guided tour of the book The world of financial management xiii xiv xvii xx Introduction Learning outcomes The finance function Structure of the book Modern financial management Why businesses exist? Balancing risk and return Behaving ethically Protecting shareholders’ interests Shareholder involvement 1 4 12 14 17 20 Summary Key terms References Further reading Review questions 27 28 28 29 29 Financial planning Introduction Learning outcomes Planning for the future The role of projected financial statements Preparing projected financial statements Preparing the projected statements: a worked example Projected cash flow statement Projected income statement Projected statement of financial position (balance sheet) Projected financial statements and decision making Per-cent-of-sales method Long-term cash flow projections Taking account of risk 31 31 31 32 33 34 35 36 40 42 43 45 49 54 CONTENTS A01_ATRI6061_07_SE_FM.indd v v 7/5/14 11:49 AM Summary Key terms Further reading Review questions Exercises Analysing and interpreting financial statements 69 Introduction Learning outcomes Financial ratios Financial ratio classifications The need for comparison Calculating the ratios A brief overview Profitability Efficiency Relationship between profitability and efficiency Liquidity Financial gearing Investment ratios Financial ratios and the problem of overtrading Trend analysis Using ratios to predict financial failure Limitations of ratio analysis 69 69 70 70 72 73 75 76 83 88 90 92 95 101 103 104 109 Summary Key terms References Further reading Review questions Exercises 115 116 116 117 117 117 Making capital investment decisions Introduction Learning outcomes The nature of investment decisions Investment appraisal methods Accounting rate of return (ARR) Payback period (PP) Net present value (NPV) Why NPV is better Internal rate of return (IRR) Some practical points Investment appraisal in practice Investment appraisal and strategic planning The investment appraisal process Investment decisions and human behaviour vi 59 61 61 61 61 125 125 125 126 127 128 133 136 144 145 150 154 156 157 162 CONTENTS A01_ATRI6061_07_SE_FM.indd vi 7/5/14 11:49 AM Summary Key terms Further reading Review questions Exercises Making capital investment decisions: further issues 163 165 165 166 166 173 Introduction Learning outcomes Investment decisions when funds are limited Comparing projects with unequal lives The ability to delay The problem of inflation The problem of risk Sensitivity analysis Scenario analysis Simulations Risk preferences of investors Risk-adjusted discount rate Expected net present value Event tree diagrams Risk and the standard deviation The standard deviation and the normal distribution The expected value–standard deviation rule Measuring probabilities The limits of probability analysis Portfolio effects and risk reduction 173 173 174 177 180 181 182 184 191 191 193 196 197 201 204 208 209 209 210 211 Summary Key terms Further reading Review questions Exercises 219 221 221 221 222 Financing a business 1: sources of finance 227 Introduction Learning outcomes Sources of finance External sources of finance External sources of long-term finance External sources of short-term finance Long-term versus short-term borrowing Internal sources of finance Internal sources of long-term finance Internal sources of short-term finance 227 227 228 228 229 249 253 255 255 257 Summary Key terms Further reading 261 263 263 CONTENTS A01_ATRI6061_07_SE_FM.indd vii vii 7/5/14 11:49 AM Review questions Exercises Financing a business 2: raising long-term finance 269 Introduction Learning outcomes The Stock Exchange Stock market efficiency Are the stock markets really efficient? Share issues Long-term finance for the smaller business Business angels Government assistance The Alternative Investment Market (AIM) Amazon.com: a case history 269 269 270 275 280 284 292 301 304 305 307 Summary Key terms References Further reading Review questions Exercises 308 309 309 310 310 310 The cost of capital and the capital structure decision 315 Introduction Learning outcomes Cost of capital Weighted average cost of capital (WACC) Specific or average cost of capital? Limitations of the WACC approach Cost of capital – some evidence Financial gearing Degree of financial gearing Gearing and capital structure decisions Constructing a PBIT–EPS indifference chart What determines the level of gearing? The capital structure debate 315 315 316 330 333 334 334 336 339 341 344 346 348 Summary Key terms References Further reading Review questions Exercises 360 361 361 361 362 362 Making distributions to shareholders Introduction Learning outcomes viii 264 264 371 371 371 CONTENTS A01_ATRI6061_07_SE_FM.indd viii 7/5/14 11:49 AM Paying dividends Dividend distributions in practice Dividend policy and shareholder wealth The importance of dividends Factors determining the level of dividends Dividend policy and management attitudes: some evidence Dividend smoothing in practice What should managers do? Alternatives to cash dividends 372 373 376 382 386 390 392 393 394 Summary Key terms References Further reading Review questions Exercises 401 403 403 403 403 404 10 Managing working capital 407 Introduction Learning outcomes What is working capital? The scale of working capital Managing inventories Inventories management models Managing trade receivables Managing cash Managing trade payables 407 407 408 409 412 418 423 433 441 Summary Key terms Further reading Review questions Exercises 445 447 447 448 448 11 Measuring and managing for shareholder value Introduction Learning outcomes The quest for shareholder value Creating shareholder value The need for new forms of measurement Net present value (NPV) analysis Managing the business with shareholder value analysis Implications of SVA Economic value added (EVA®) Eva®-based ratios EVA® in practice EVA® and SVA compared EVA® or SVA? Market value added (MVA) 455 455 455 456 456 457 459 466 467 467 472 473 476 477 479 CONTENTS A01_ATRI6061_07_SE_FM.indd ix ix 7/5/14 11:49 AM www.downloadslide.com financial planning 2, 31 – 2, 33 financial policies dividends and 393 – financial position statements see statements of financial position financial problems and divestments 527 financial ratios 69 – 70 acid test ratios 91 – 2, 605 calculating 73 – classifications 70 – comparisons 72 – 3, 112 current ratios see current ratios dividend cover ratios 96, 374 – 5, 607 dividend payout ratios 95 – 6, 374, 607 dividend yield ratios 96, 100 – 1, 535 – 6, 607 economic value added 472 – efficiency ratios 71, 83 – 90 failure prediction using 104 – gearing see financial gearing interest cover ratios 93 – 4, 343, 609 inventories 414 – 15 investment ratios 71, 95 – 101 limitations of 109 – 14 liquidity ratios 71, 90 – over-reliance on 112 overtrading 101 – past periods comparisons 72 planned performance comparisons 73 price/book value (P/B) 532, 610 price/earnings (P/E) see price/earnings ratios profitability ratios 71, 76 – 82, 88 – 90, 472 similar businesses comparisons 72 – trend analysis 103 Financial Reporting Council (FRC) 26 financial statements analysis and interpretation see financial ratios credit control and 424 projected see projected financial statements quality 109 – 10 see also income statements; statements of financial position financing decisions financing gap identification 45 – financing opportunities and dividends 387 five Cs of credit 423 – 4, 608 fixed charges 230 – 1, 608 fixed interest rates 239 – 40, 608 fixed operating costs 348 fixed-return capital 338 flexibility finance leases 243 gearing and 347 long-term versus short-term borrowing and 254 floating charges 230 – 1, 608 floating interest rates 239 – 40, 608 forecasting future demand 414 sales 34 – 620 Forth Ports 148 Franks, J 521 FRC (Financial Reporting Council) 26 free cash flows 460 – 5, 476, 538 – 9, 608 free-rider problem 22 Freeman Consulting 522 Freshfields 522 FTSE (Footsie) indices 15 – 16, 23, 271 – 2, 323, 608 funds availability determination, investment projects 157 – limited 174 – Furlong, Stephen 58 future growth value (FGV®) 488 – 9, 608 G3 technology 487 GB Airways Ltd 156 GE 510, 511, 512 gearing ratios 92 – 3, 343, 608 share warrants 242 see also financial gearing GEC 113 Germany investment appraisals 155, 176 GKN 11, 333, 532 Gladden, Brian 274 GlaxoSmithKline 148, 528, 532 Glencore 522 Go-Ahead Group 127, 392, 333 Goizueto, Robert 476 golden parachutes 525, 608 Goldman Sachs 522 Google 473, 494, 512 Gordon’s growth model 318 governance, corporate 17 – 20, 606 government assistance 293, 304 Greene King 427 Grigg, Chris 385 gross profit margins 80 – 2, 608 Gulf + Western 510 Halma 478 Hecht, Robert 443 hedging arrangements 240 – 1, 608 hidden problems and mergers 521 high-yield ( junk) bonds 238 – 9, 609 hire purchase 245 – 7, 608 Hochschild Mining 187 hollow swaps 111 home-made dividends 377 – 8, 380, 381 – horizontal mergers 502, 506, 608 Honeywell 510 Houchois, Philippe 82 human behaviour and investment decision-making 162 – human capital 347 hurdle rates 147, 316 INDEX Z07_ATRI6061_07_SE_IDX.indd 620 6/5/14 3:34 PM www.downloadslide.com IAG (International Airlines Group) 242, 413 IBE (Institute of Business Ethics) 15 – 16 IBM Global Business Services 416 IBO (institutional buyouts) 294 ignorance, zones of 107 IMI 373, 474, 478 Immelt, Jeffrey 511 imperfect markets and share buybacks 397 – in and out trading 111 incentives management see management shares 478 income statements economic value added (EVA®) 469 financial ratios 74 – operating cash cycles 437 projected 33, 40 – 1, 45, 46 – share valuations 530 Indesit 440 – indifference points 345 – 6, 608 Individual Savings Accounts (ISA) 380 inefficient stock markets 279 inflation 111 – 12, 139, 181 – 2, 434, 608 information asymmetry 383, 608 inside, dividend policies 389 on share buybacks for shareholders 401 signalling 383 – 5, 609 initial public offerings (IPO) 270 inside information, dividend policies 389 insolvency 104 – Institute of Business Ethics (IBE) 15 – 16 institutional buyouts (IBO) 294 insurance, credit 429 integration problems in mergers 521 Intel Corp 473 interest cover ratios 93 – 4, 343, 609 lost 137, 139 payments, investment appraisals 152 rates current market 327 fixed 239 – 40, 608 floating 239 – 40, 608 borrowing periods 254 risk 239 – 41 swaps 241, 609 interests conflicts of 385 – 6, 527 – management see management shareholders see shareholders public 526 internal finance 227 – 8, 255 long-term sources 255 – short-term sources credit control 257 – inventory levels reduction 258 – trade payables, delaying payment to 259 internal rate of return (IRR) 127, 145 – 50, 151 – 2, 609 average cost of capital 333 cost of capital 316 loan capital 327 long-term finance 298 ordinary (equity) shares 317 in practice 154 – preference shares 329 sensitivity analysis 186 specific cost of capital 333 internal variables projected financial statements 34 international accounting standards share options 493 International Airlines Group (IAG) 242, 413 International Telephone & Telegraph 510 interpretation of financial statements see financial ratios inventories 412 – 14 ABC system of control 417 – 18, 420, 605 average inventories turnover periods 83 – 4, 414 – 15, 437 – 9, 605 control levels 417 – 18 economic order quantity (EOQ) 418 – 21, 607 financial ratios 414 – 15 forecasting future demand 414 just-in-time (JIT) 421 – 3, 609 levels reduction 258 – management models 418 – 23 materials requirement planning (MRP) systems 421, 609 recording and reordering systems 415 – 17 investment appraisals accounting rate of return see accounting rate of return internal rate of return see internal rate of return methods 127 – net present values see net present values payback period see payback period practical points 150 – in practice 154 – process 157 – 62 strategic planning and 156 investment decisions 125, 173 appraisal see investment appraisals delaying 180 event tree diagrams 201 – expected net present value (ENPV) 197 – 200 expected value-standard deviation rule 209 human behaviour and 162 – inflation and 181 – limited funds 174 – nature 126 – non-divisible investment projects 176 – normal distribution 208 portfolio effects and risk reduction 211 – 18 probabilities 209 – 11 INDEX Z07_ATRI6061_07_SE_IDX.indd 621 621 6/5/14 3:34 PM www.downloadslide.com projects with unequal lives 177 – 80 risk 182 – 4, 193 – 7, 204 – 8, 211 – 18 scenario analysis 191 sensitivity analysis 184 – 90 simulations 191 – standard deviation 204 – investment projects appraisal – approval 160 classifying 158 – controlling 160 – evaluation of proposed projects 159 investment funds availability determination 157 – management 157 monitoring 160 – non-divisible 176 – profitable opportunities identification 158 refining 158 – investments additional non-current asset (ANCAI) 463 additional working capital (AWCI) 463 – Alternative Investment Market (AIM) 293, 305 – 7, 605 appraisals see investment appraisals business angels 302 – competing 132 decisions see investment decisions marketable 468 opportunities and dividends 387 of private-equity firms in UK businesses 294 projects see investment projects ratios 71, 95 – 101 replacement non-current asset (RNCAI) 463 scale 149 timing 282 investors good relations 524 projected financial statements and 56 – risk-averse 193 – 5, 611 risk-neutral 193, 195, 611 risk preferences 193 – risk-seeking 193, 195 – 6, 611 invoice discounting 252 – 3, 429, 609 invoices, prompt issue 429 IPO (initial public offerings) 270 IRR see internal rate of return ISA (Individual Savings Accounts) 380 ITV 235 J Sainsbury 57, 103, 333, 413 Japan dividends 394 inventories management 421 investment appraisals 155, 176 JD Wetherspoon 99, 127, 427 Jeffrey, Richard 95 JIT ( just-in-time) inventories management 421 – 3, 609 622 Johnson, Samuel 522 joint ventures 506 JP Morgan 522 junk (high-yield) bonds 238 – 9, 609 just-in-time (JIT) inventories management 421 – 3, 609 Kingfisher 162, 427 Kleinfeld, Klaus 471, 511 Kraft 510, 528 lead times 415, 416, 609 leadership, boards of directors 19 leases finance 242 – 4, 246, 608 operating 244, 610 sale-and-leaseback arrangements 244 – 5, 611 lenders attitudes 347 – confidence, bonus issues 289 shareholders’ conflicts of interest with 385 – Leng, Stephen 416 liabilities, current 42 – Liberty Global 238 limited funds 174 – linear programming 176, 609 Linklaters 522 Lintner, J 390, 392 liquidations net assets (liquidation) method, share valuations 533, 542, 609 liquidity ratios 71, 90 – listed businesses 271, 273 – AIM 305 – Little, Royal 510 Litton Industries 510 Lloyds Banking Group 11 loan notes 234 – 5, 238, 609 convertible 236 – 7, 515 – 16, 606 financial gearing 343 – takeovers and 515 – 16 see also bonds loans capital 232 – consideration for takeovers 515 – 16 cost of 326 – riskiness 237 – commitments and dividends 387 covenants 231 – 2, 387, 609 dividend policies and 387 notes see loan notes stock see loan notes subordinated 232, 612 term 213, 612 London Business School Risk Measurement Service 323 London Stock Exchange see Stock Exchange long-term borrowing rates 336 INDEX Z07_ATRI6061_07_SE_IDX.indd 622 6/5/14 3:34 PM www.downloadslide.com long-term cash flow projections 49 – 54 long-term finance 228 Alternative Investment Market (AIM) 293, 305 – business angels 293, 301 – comparison with short-term 253 – external sources see external finance government assistance 293, 304 internal sources 255 – for smaller businesses 292 – 307 see also Stock Exchange losses, accumulated and realised 372 Mace 214 Mahaney, Mark 505 management attitudes 347, 390 – 2, 393 – behaviour and post-completion audits 160 – goals, takeovers 512 – 13 incentives share buybacks and 400 – total shareholder return and 485 – inefficient, elimination of 506 interests conflicts with shareholders 386 takeovers 512 – 13 mergers and 506, 512 – 13, 521 neglect and mergers 521 roles share options 400 shareholders’ conflicts of interest with 386 stock market efficiency implications for 279 – 80 weak, elimination of 506 management buyins (MBI) 294 management buyouts (MBO) 294, 299 – 300, 527 – Manchester United 234 margins of safety 345 market capitalisation 272, 609 market efficiency market for corporate control 506 market expectations and dividends 388 market signalling 289, 399 – 400 market statistics for well-known businesses 99 market value added (MVA) 486, 609 economic value added (EVA®) and 479, 480 – limitations 481 – market values equity 271 per share 517 total market value (TMV) 396 – marketable investments 468 Marks and Spencer 78, 99, 127, 148, 413, 427 – matching 253 – materials requirement planning (MRP) systems 421, 609 Mayer, C 521 MBI (management buy-ins) 294 MBO (management buy-outs) 294, 299 – 300, 527 – McCabe, Phil 86 McDonald’s 484 MDA (multiple discriminate analysis) 105 – 6, 609 measurement betas 323 – free cash flows 460 – future growth value (FGV®) 488 – of probabilities 209 – 11 shareholder value 457 – Menzer, John 414 mergers 501 – 2, 609 activity 503 advisers 522 beneficiaries 519 – 22 benefits of scale 504 – competition elimination 506 complementary resources 507 – conglomerate 502, 606 demergers 526, 528 – 9, 606 diversification 509 – 12 financial performance 516 – 19 horizontal 502, 506, 608 management 521 interests and goals 512 – 13 weak and inefficient, elimination of 506 motives for 504 – 13 rationale for mergers 503 – reasons for 522 – revenue sources, protection of 508 shares undervalued 512 valuations see shares success factors 523 supply sources, protection of 508 vertical 502, 613 see also takeovers MetroPCS 144 Microsoft 473, 504 – Millennium BCP 395 Modigliani and Miller (MM) capital structure debate 350 – dividends policies 377 – 81 money, time value of 139 – 41 monitoring investment projects 160 – Montgomery, Cynthia 512 Moody’s Investor Services 237 Morgan Stanley 522 mortgages 239, 609 Mothercare 392 motives for mergers 504 – 13 Motorola Solutions 473 MRP (materials requirement planning) systems 421, 609 multiple discriminate analysis (MDA) 105 – 6, 609 Munger, Charlie 398 – Murdoch, Rupert 510 MVA see market value added narrative reasoning 210 National Express 99 INDEX Z07_ATRI6061_07_SE_IDX.indd 623 623 6/5/14 3:34 PM www.downloadslide.com near-liquid assets 434 net assets (book value) method, share valuations 531 – 3, 609 net assets (liquidation) method, share valuations 533, 542, 609 net assets (replacement cost) method, share valuations 534, 542, 609 net cash flows from operating activities 51 net operating profit after tax (NOPAT) 467, 470 net present values (NPV) 127, 136 – 7, 609 cash flows 151 cost of capital 316 decision rules 158, 173 delaying an investment decision 180 discount rates and cost of capital 144 dividend policy and shareholder wealth 377 – economic values and 144 expected 197 – 200, 203, 206 – 7, 607 free cash flows measurement 460 – funds limited 174 – inflation 139 interest lost 137 internal rate of return and 145 – investment appraisal 427 loan capital 328 logical investors 139 long-term finance 298 non-divisible investment projects 176 – non-operating income 465 portfolio effects and risk reduction 211 – 12 in practice 154 – probabilities measurement 210 projects with unequal lives 177 – risk 137, 138 – 9, 206 – sensitivity analysis 184 – shareholder value analysis 459 – 60 standard deviation 206 – time and 137 – 41 zero 149 net realisable value 533, 609 neutral shares 323 new product development 158 News Corporation 510 Next 136, 148, 401, 410 Nissan 80, 423 Nominated Advisers (NOMAD) 305 Nomura 522 non-core operations 527 non-current assets, expansion of 75 non-diversifiable risk 215 – 16, 320, 609 non-divisible investment projects 176 – non-operating income 465 non-payment risk reduction 432 – non-recourse factoring 250 NOPAT (net operating profit after tax) 467, 470 normal distribution 208, 609 Novo Nordisk 484 Novotek 484 624 NPV see net present values objective probabilities 209, 610 OCC (operating cash cycles) 436 – 40, 610 offers for sale 285, 289, 610 Office of Fair Trading (OFT) 526, 610 Oliver, Bill 231 Opel 80 operating cash cycles (OCC) 436 – 40, 610 operating costs, fixed 348 operating efficiency increases 524 operating leases 244, 610 operating profits 75 margins 79 – 80, 81, 463 – 5, 610 operational efficiencies 505 operations management opportunity costs – 8, 137, 150, 316, 327, 434, 610 optimal capital structures 349, 610 options, shares see shares ordinary shares betas, measurement of 323 – cost of capital 316, 335, 348 – 50 dividend-based approach 316 – 19 risk/return approach 319 – 26 market value return on ordinary shareholders’ funds (ROSF) see returns source of finance 229 takeovers and 516 valuations 533 – 4, 538 – see also equity; shares overcollateralisation 247 overdrafts 249, 440, 605 overpayment and mergers 521 overstating revenue 110 – 11 overtrading 86, 101 – 2, 610 Oxford Catalysts 291 – P/B (price/book value) ratios 532, 610 P/E ratios see price/earnings ratios Pac-man defence 525, 610 Panasonic 237 past costs 150 past periods 72 Patsalos-Fox, Michael 512 payables see trade payables payback period (PP) 127, 133 – 6, 151, 154 – 6, 610 payments dividends see dividends late 85 – PBIT (profits before interest and taxation) see profits pecking order theory 256 – Pennon Group 358 PeopleVox 416 per-cent-of-sales method 45 – 9, 610 perfect capital markets 354 INDEX Z07_ATRI6061_07_SE_IDX.indd 624 6/5/14 3:34 PM www.downloadslide.com perfect negative correlation 213 perfect positive correlation 212 performance, poor and divestment 527 performance-related bonuses 478 pharmaceutical companies 147 – Philip Morris 510 Pirelli 385 placings 285, 290 – 1, 610 planned performance 73 planning financial 2, 31 – 2, 33 strategic, investment appraisal and 156 plugs 46, 610 poison pill 525, 610 poor performance and divestment 527 portfolio effects and risk reduction 211 – 18 post-completion audits 160 – 1, 610 Pötsch, Hans Dieter 82 PP see payback period pre-dispatching 111 preference shares cost of capital 329 – 30 loan capital compared 232 – source of finance 229 – 30 takeovers and 516 see also shares Premier Foods 333 premiums, risk see risk present values (PV) 140 – of future cash flows 503 – tables 142 – 3, 555 – see also net present values price/book value (P/B) ratios 532, 610 price/earnings (P/E) ratios 97 – 101, 610 merger evaluations 517 – 19 share buybacks or dividends 396 – share valuations 534 – 6, 542 stock market efficiency 279, 282 primary capital markets 270 private companies, conversion to 524 private equity 293 – 301, 511, 610 probabilities analysis, limits of 210 – 11 assigning 210 – 11 distribution 204 – event tree diagrams 201 – expected value-standard deviation rules 209 expected values 198 measurement 209 – 11 normal distribution 208 objective 209, 610 standard deviation 204 – subjective 209, 612 products new, development 158 sales see sales profitability achieving 78 efficiency and, relationship between 88 – 90 financial gearing and 348 index 175 – 6, 610 investment project opportunities identification 158 ratios 71, 76 – 82, 88 – 90, 472 takeover bids defensive tactics 524 targeting 78 profits accounting 132, 457 – accumulated realised 372 gross profit margins 80 – 2, 608 before interest and taxation (PBIT) 336 – 8, 340, 343 PBIT-EPS indifference charts 344 – 6, 610 maximisation – net operating profit after tax (NOPAT) 467, 470 operating see operating profits rate of tax on 470 realised 372 stability and dividends 387 unrealised 372 see also profitability programming, linear 176, 609 projected cash flow statement 36 – 40, 435 projected financial statements 610 cash flow statements 33, 36 – 40 long-term projections 49 – 54 decision making 43 – external variables 34 financing gap identification 45 – income statements 33, 40 – 1, 45, 46 – internal variables 34 investors and 56 – per-cent-of-sales method 45 – preparing 34 – 43 risk and 54 – role 33 – scenario analysis 55 – sensitivity analysis 54 – statements of financial position 33, 42 – 3, 45, 46, 48, 58 – variables 34 worked example 35 – 43 public interests protection, takeovers 526 public issues 285, 290 – 1, 611 purchase consideration, takeovers 513 – 16 purchasing power, current general 181 PV see present values Pycroft, Stephen 214 quality financial statements 109 – 10 total quality management (TQM) 422 R&D (research and development) 147 – 8, 468, 505 ratios see financial ratios RBS 14, 522 INDEX Z07_ATRI6061_07_SE_IDX.indd 625 625 6/5/14 3:34 PM www.downloadslide.com realised losses 372 realised profits 372 receipts, identification of pattern of 430 – receivables see trade receivables record dates 373, 611 recording systems, inventories 415 – 17 recourse factoring 250 references, credit control 424, 425 refunding 254 Register of County Court Judgments 424 regulatory requirements 159 relevant costs 150, 611 remuneration, directors 20 Renault 80 reordering systems, inventories 415 – 17 replacement capital 293 replacement costs 531, 533 – 4, 611 replacement non-current asset investments (RNCAI) 463 reporting economic value added 474 repricing share options 493 – required rate of return 470 rescue capital 294 research and development (R&D) 147 – 8, 468, 505 resource management with economic value added 471 restructuring 526 – costs 468 – 70 retained earnings 255 – 7, 326 returning surplus funds 398 returns on capital employed (ROCE) 77 – 8, 79, 81, 88 – 90, 106 – 7, 112, 130, 611 expected 349, 351, 355 gearing and 347 investors’ requirements 139 to ordinary shareholders 336 – on ordinary shareholders’ funds (ROSF) 76 – 7, 79, 81, 343, 611 required rates 470 risk and 12 – 14, 232, 319 – 26 total shareholder return (TSR) 483 – 6, 612 Reuters 323 – revenue sources, protection of 508 reverse synergy 527 rights issues 285 – 8, 611 Rio Tinto 94 risk 611 assessment 216 – 18 capital structure modernist view 354 directors share options and 492 – diversifiable 215 – 16, 320, 607 diversification and downside 492 economics of gearing and 347 interest rates 239 – 41 investment decision-making 182 – 626 investors’ preferences 193 – management net present values 137, 138 – non-diversifiable 215 – 16, 320, 609 non-payment 432 – payback period (PP) 136 premiums 139, 196 – 7, 319 – 22, 324, 611 profit maximisation and projected financial statements and 54 – reduction, portfolio effects and 211 – 18 refunding 254 returns and 12 – 14, 232, 319 – 26 standard deviation and 204 – risk-adjusted discount rate 196 – 7, 611 risk-averse investors 193 – 5, 611 risk-free rate of return 196 – 7, 319 – 25 risk-neutral investors 193, 195, 611 risk-seeking investors 193, 195 – 6, 611 RNCAI (replacement non-current asset investments) 463 Roberts, Brian L 508 ROCE (return on capital employed) see returns rolling cash flow projections 39, 611 Rolls-Royce 99, 333 ROSF (return on ordinary shareholders’ funds) see returns Rosneft 384 round tripping 111 Royal Bank of Scotland (RBS) 14, 522 Royal Dutch Shell 291 – Rumsey, Gareth 86 Ryanair 57 – 8, 388 S&P (Standard and Poor’s) 237 safety inventories levels 415 – 16 Sage, David 39 Sage Group 15 Sahota, Jas 443 sale-and-leaseback arrangements 244 – 5, 611 sales existing products 158 forecasting 34 – revenue per employee 87 – 8, 611 revenue to capital employed 86 – 7, 611 as value drivers 461, 463 – Santos Ferreira, Carlos 395 scale, benefits of 504 – scale of investments 149 scarce finance 174 – scenario analysis 55 – 6, 191, 216 – 17, 611 scrip dividends 394 – 6, 611 scrip issues (bonus issues) 285, 288 – 9, 605 seasoned equity offerings (SEO) 270 Secker, Graham 94, 108 secondary capital markets 270 securitisation 247 – 8, 611 security 230 – 1, 348, 608 Seed Enterprise Investment Scheme (SEIS) 303 – INDEX Z07_ATRI6061_07_SE_IDX.indd 626 6/5/14 3:34 PM www.downloadslide.com sell-offs see divestments semi-strong form of market efficiency 276 – 7, 279 sensitivity analysis 54 – 5, 184 – 90, 216 – 17, 539, 611 sensitivity charts 189 – 90, 611 SEO (seasoned equity offerings) 270 Severn Trent 94, 127, 410, 427 Shapira, Adrienne 414 shareholder value 455 – 6, 612 analysis (SVA) 459, 612 business management with 466 implications 467 creation of 456 – criticisms 487 economic value added see economic value added future growth value (FGV®) measurement 488 – implementation 489 – 90 market value added see market value added measurement for 457 – net present value analysis 459 – 60 total shareholder return 483 – shareholders activism 23 – boards of directors, relations with 20 circularising, takeover bids defensive tactics 524 – directors and 17 – 20 distributions buybacks 396 – 401 dividends see dividends interests championing 280 protection of 17 – 20, 526 involvement 20 – lenders’ conflicts of interest with 385 – managers’ conflicts of interest with 386 ownership of shares 21 – mergers 519 – 21 return on ordinary shareholders’ funds (ROSF) see returns revolts 24 share buybacks information for 401 stakeholders and 11 takeovers 519 – 21 total shareholder return (TSR) 483 – 6, 612 value see shareholder value wealth dividend policies and 376 – 82 maximisation 6, – 9, 12, 280, 508, 612 shares aggressive 323 buybacks 396 – 401, 612 consideration for takeovers 514 – 15 defensive 323 employee share option schemes 524 financial gearing 343 – incentives 478 issues 284 bonus issues (scrip issues) 285, 288 – 9, 605 offers for sale 285, 289, 610 placings 285, 290 – 1, 610 public issues 285, 290 – 1, 611 rights issues 285 – 8, 611 tender 290 – 1, 612 timing 279 listed 21 – neutral 323 options 612 directors 490 – 4, 606 employees 524 management 400 ownership 21 – prices bonus issues 289 bubbles 283 – 4, 485 directors share options and 493 indices 271 – reaction to investment plans 281 rights issues 285 – setting 290 – striking 290 – total shareholder return and 485 repurchase, takeover bids defensive tactics 524 undervalued 398, 512 valuations 529 – 31 asset-based methods 531 – choice of model 542 cash flow methods 536 – 40 stock market methods 534 – values total shareholder return and 485 warrants 241 – see also earnings per share; ordinary shares; preference shares Sharp 237 short-term finance 228 comparison with long-term 253 – external sources see external finance internal sources see internal finance plans 33 short-termism 274, 281 – shortest-common-period-of-time approach 177 – 8, 612 Siddall, S 94 Siemens 471, 511 signalling dividends 383 – 5, 392, 399 – 400 financial gearing and 344 information 383 – 5, 609 market 289, 399 – 400 Silverman, Henry 511 similar businesses 72 – simulations 191 – 2, 612 Slaven, Helen 417 slow payers 432 INDEX Z07_ATRI6061_07_SE_IDX.indd 627 627 6/5/14 3:34 PM www.downloadslide.com smaller businesses long-term finance for 292 – 307 Sobel, Robert 510 Sony 236 – sources of finance see external finance; internal finance; Stock Exchange South West Water 358 special-purpose vehicles (SPV) 247 – specific cost of capital 333 spin-offs see demergers Sprint Nextel 144 SPV (special-purpose vehicles) 247 – St Modwen 231 Stagecoach Group 247 stakeholder approach – 11, 612 Standard and Poor’s (S&P) 237 standard deviation 204 – 9, 612 Standard Life 148 statements of financial position distributions to shareholders 378 economic value added (EVA®) 469 financial ratios 73 – 5, 112 – 14 market value added 482 operating cash cycles 438 projected 33, 42 – 3, 45, 46, 48, 58 – share valuation 530 working capital 410 statistical techniques, sales forecasting 35 Stern Stewart 467 – 8, 472, 478, 479 – 81, 488 Stewardship Code (UK) 26, 612 stock see inventories; shares Stock Exchange 227, 269 – 70, 612 deep discount bonds 236 indices see FTSE (Footsie) indices listed businesses 271, 273 – raising finance 272 – share price indices 271 – short-termism 274, 281 – UK Corporate Governance Code 19, 20 warrants 241 stock markets anomalies 282 – efficiency 275 – 84, 607 inability to fool 280 indices see FTSE (Footsie) indices inefficient 279 overreaction 282 reactions 280 risk levels assessing 280 share valuation methods 534 – Stoxx Euro 600 index 385 strategic focus and divestment 527 strategic management strategic planning and investment appraisal 156 striking prices 290 – strong form of market efficiency 276 – 7, 279 sub-prime crisis 248 subjective probabilities 209, 612 628 subordinated loan 232, 612 suppliers credit control and 424 relationships, cash management and 434 supply sources, protection of 508 sustainable development 484 – swaps, interest rate 241, 609 Swindell, Gavin 443 Swiss Re 385 synergy, reverse 527 T-Mobile USA 144 Taffler, R 109 takeovers 501 – 2, 612 activity 503 advisers 522 beneficiaries 519 – 22 benefits of scale 504 – bid rejections 524 – counterbids 525 defensive tactics 524 – 5, 527 management interests and goals 512 – 13 overcoming resistance to bids 526 purchase consideration 513 – 16 reasons for 522 – protection of interests of shareholders and public 526 shares undervalued 512 valuations see shares: valuations success factors 523 threats of, dividend policies and 388 see also mergers targets dividends 375 profitability 78 Tate and Lyle 127, 427 tax exhaustion 356, 612 taxation Modigliani and Miller (MM) view 354 – investment appraisal 151 technology, emerging 505 telecommunications businesses 487 Tempur-Pedic 284 Tencent 484 tender issues of shares 290 – 1, 612 term loans 213, 612 terminal values (TV) 462 – 3, 539 Tesco 78, 99, 103, 410, 484, 528, 532 Textron 510 Thomson Reuters 522 time net present values and 137 – 41 and risk, economics of value of money 139 – 41 timing investments 282 share issues 279 INDEX Z07_ATRI6061_07_SE_IDX.indd 628 6/5/14 3:34 PM www.downloadslide.com TMV (total market value) 396 – TNK-BP 384 Torex 417 total business value 464, 476 total market value (TMV) 396 – total quality management (TQM) 422 total shareholder return (TSR) 483 – 6, 612 Toyota 80 TQM (total quality management) 422 trade loading 111 trade-off theory of capital structures 356 – 7, 612 trade payables average settlement periods 85 – 6, 437 – 9, 443, 605 delaying payment 259 management 441 – trade receivables ageing schedules 430, 605 average settlement periods 84, 430, 437 – 9, 605 economic value added (EVA®) 470 management 423 – 33 see also credit trade references, credit control 424 traditional view, capital structure debate 348 – 50 trend analysis 103 Trinity Mirror 24, 33 TSR (total shareholder return) 483 – 6, 612 TUI Travel 99, 333 TV (terminal values) 462 – 3, 539 Tyco 510 Uglow, Ben 471 UK Corporate Governance Code 18 – 20, 25, 490 – 1, 612 UK Stewardship Code 26, 612 undervalued businesses 280 undervalued shares 398, 512 Union Pacific 484 United Kingdom dividend policies 394 investment appraisal methods 154, 155, 176 mergers 519 takeovers 516 target capital structures 332 United States conglomerates 509 – 12 directors share options 493 dividend policy 390 – 1, 394 economic value added (EVA®) 472 – inventories management 421 investment appraisals 155, 176 junk bonds 238 – mergers 519 securitisation 247 – takeovers 516 United Utilities 532 univariate analysis 104, 612 unrealised profits 372 utility functions 193 – 6, 612 utility theory 193 – valuations dividends 331 shares see shares values book value method, share valuations 531 – 3, 609 businesses 350, 351, 355 discounted values of future dividends received 536 drivers 461, 613 economic 144 economic value added (EVA®) see economic value added equity, market values 271 expected 198, 209, 607 expected net present value (ENPV) see expected net present value future growth value (FGV®) 488 – 9, 608 investing approach 108 market value added see market value added market see market values money, time value of 139 – 41 net present values see net present values net realisable value 533, 609 present values (PV) see present values price/book value (P/B) ratios 532, 610 shareholders see shareholder value shares see shares terminal (TV) 462 – 3, 539 total business 464, 476 total market (TMV) 396 – undervalued businesses 280 undervalued shares 398, 512 Vanco 40 Vanderbilt, Cornelius 525 variables projected financial statements 34 variance 206 – venture capital 293, 613 Verison Wireless 144 vertical mergers 502, 613 Viacom 510 Virgin Media 238 – Virgin Money 248 Vodafone 16 – 17, 278, 427 Volkswagen 82 WACC (weighted average cost of capital) 330 – 6, 613 Wal-Mart 12, 414 Walt Disney Company 507 – Walton, Sam 12 Warburton, Max 82 warrants 241 – 2, 613 weak form of market efficiency 275, 277 INDEX Z07_ATRI6061_07_SE_IDX.indd 629 629 6/5/14 3:34 PM www.downloadslide.com wealth maximisation payback period and 136 in practice 11 profit maximisation and – shareholders see shareholders weighted average cost of capital (WACC) 330 – 6, 613 Weinstock, Lord 113 Welch, Jack 511 WH Smith 427 – white knights 525, 613 white squires 525, 613 Whole Foods Market 474 – Williams, Gareth 385 Wind Telecomunicazioni 239 Winner, Michael 273 Winterkorn, Martin 82 Wm Morrison Supermarkets 103, 127, 427 Wolfenzon, Daniel 511 Wolseley 240 Wood, Peter 273 Woolworths 245 630 working capital 407 additional working capital investment (AWCI) 463 – cycle 408 – definition 408, 613 expansion 75 management of 409 nature and purpose 408 – projections 52, 53 – scale 409 – 12 see also cash; inventories; trade payables; trade receivables Xerox Corp 473 Xstrata 94, 522 Yahoo! 504 – year-end assumptions 152 Z-score models 107 – Zmijewski, M.E 104 zones of ignorance 107 Zook, Chris 510, 512 INDEX Z07_ATRI6061_07_SE_IDX.indd 630 6/5/14 3:34 PM www.downloadslide.com Z07_ATRI6061_07_SE_IDX.indd 631 6/5/14 3:34 PM www.downloadslide.com Z07_ATRI6061_07_SE_IDX.indd 632 6/5/14 3:34 PM www.downloadslide.com Z07_ATRI6061_07_SE_IDX.indd 633 6/5/14 3:34 PM www.downloadslide.com Z07_ATRI6061_07_SE_IDX.indd 634 6/5/14 3:34 PM .. .FOR DECISION MAKERS FINANCIAL MANAGEMENT A01_ATRI6061_07_SE_FM.indd i 7/5/14 11:49 AM A01_ATRI6061_07_SE_FM.indd ii 7/5/14 11:49 AM FOR DECISION MAKERS FINANCIAL MANAGEMENT SEVENTH... rationale for mergers Wealth-enhancing motives for mergers Other motives for mergers Forms of purchase consideration Mergers and financial performance Who benefits? The merger puzzle Ingredients for. .. return’, Financial Times Mastering Management Series, 1, 13 (Dimson, E., 1995), Financial Times; Box 1.3 from ‘Forget how the crow flies’, The Financial Times, 17/01/2004 (Kay, J.), copyright © The Financial