KASNEB Finance for Decision Making Notes

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CS Advanced Level Notes

FINANCE FOR DECISION MAKING UNIT DESCRIPTION

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.

LEARNING OUTCOMES

A candidate who passes this paper 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

Overview of Finance

• Nature and scope of finance
• Finance functions – Managerial, Routine and other emerging functions
• Goals of a firm; financial and non-financial objectives, overlaps and conflicts among the objectives
• Agency theory, stakeholder’s theory and corporate governance
• Ethical issues in financial management

Introduction to financing decision

• Nature and objectives of the financing decision
• Factors to consider when making financing decisions
• Sources of finances for organisations; internally generated funds and the externally generated funds, long term sources, medium term and short term sources of finance
• Sources of finance for small and medium sized enterprises (SMEs)
• Methods of issuing ordinary shares

Financial Statement Analysis and Forecasting

• Definition of financial statements analysis
• The roles of financial reporting and financial statements analysis
• Users of financial statements and their information needs
• Importance of financial statement analysis
• Cost of disclosing financial information; direct costs, indirect costs
• Analysing financial statements
  • Income statement: Components and format of the income statement
  • Statement of financial position; components and format of statement of financial position
  • Statement of changes in equity; components of equity, equity valuation ratios
  • Cash flow statements; component and format of the cash flow statement

• 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

• Common size statements – Vertical and horizontal analysis
• Red flags and accounting warning signs that may indicate financial statements are of poor quality

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Budgeting and budgetary control

• Nature and purposes of budgets
• Limitations of budgeting
• Preparation of budgets; master budgets, functional budgets, department budgets, cash budgets.
• Purpose of budgetary control; operation of a budgetary control system, organisation and coordination of the budgeting function
• Distinction between budgeting and budgetary control in the private and public sectors
• Cost-Volume-Profit (CVP) Analysis

Time-value of money

• Concept of time value of money
• Time value of money versus time preference of money
• Relevance of the concept of time value of money
• Compounding technique
• Discounting techniques
• The loan amortisation schedule

Basic Valuation models

• Concept of value
• Relevance of valuation of securities/firms
• Valuation of debentures, preference shares and ordinary shares

Introduction to capital structure decision

• Firms capital structure and factors influencing capital structure decisions
  • The meaning and relevance of cost of capital
  • Factors influencing firms cost of capital
  • Component costs of capital
  • The firm’s overall cost of capital – Weighted average cost of capital (WACC) and
  • Weighted marginal cost of capital (WMCC)

Introduction to Capital Budgeting decision under Certainty

• The nature and importance of capital investment decisions
• Capital investment’s cash flows – initial cash outlay, terminal cash flows and annual net operating cash flows, incremental approach to cash flow estimation
• 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
• Incorporating capital rationing in capital budgeting – The meaning and types of capital rationing
• Challenges encountered when making capital investment decisions in reality

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Working capital management

• Introduction and concepts of working capital
• Working capital versus working capital management
• Factors influencing working capital requirements of a firm
• Importance and objectives of working capital management
• Working capital financing policies

Dividend decision

• Forms of dividend payments
• When to pay dividends – Interim and final dividend
• Factors influencing dividend payments
• The firm’s dividend policy – The residual policy, stable predictable policy, constant payout ratio policy and regular plus extra policy
• 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
• Impact of a dividend decision on share price

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