Essentials of Financial Management

BookOpen AccessEssentials of Financial Management

Essentials of Financial Management

2018

December 12th, 2018


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Description

Essentials of Financial Management is an Open Access e-textbook (paperback edition also available) suitable for students with limited knowledge of finance and financial markets. It answers the main questions of a corporate entity, such as how businesses finance their activities, how they select projects to invest in, the distribution of net cash flow and, of increasing importance, how businesses manage price risk relating to cost of goods sold or a decline in revenue. In providing invaluable guidance to finance, management and business students, Essentials of Financial Management employs two main philosophies: that finance is a real-life subject and that finance is a numerical subject, which is why this brilliant e-textbook contains real world examples as well as numerous Excel spreadsheet solutions for students to download and use.

Author Information

Jason Laws has over 20 years of experience in teaching finance at undergraduate, postgraduate, MBA and professional level and is currently Senior Lecturer in Corporate Finance at the University of Liverpool. Jason joined the University of Liverpool Management School in July 2011 having previously worked at Liverpool John Moores University, University of London, University of Leicester, SOAS, Singapore Institute of Management and University of Glasgow.

Table of Contents

Table of Contents
Section TitlePagePrice
Contents4
Introduction8
1 An introduction to equity markets10
1.1 The benefits of a smooth-running stock exchange10
1.2 The efficient market hypothesis11
1.3 Ordinary shares12
1.4 Preference shares13
Examples of preference dividends13
1.5 Authorised, issued and par values15
Example16
1.6 An initial public offering16
1.7 Stock market indices17
1.8 Stock market linkages18
1.9 Rights issues20
Example21
1.10 Stock splits22
1.11 Share repurchase23
Example24
2 Risk versus return26
2.1 A primer on the variance of an asset and covariance of a pair of assets26
2.2 The mean and variance of a portfolio31
Example35
2.3 Finding the risk of a three- or more asset portfolio41
2.4 Choosing the optimal portfolio42
2.5 The risk of large portfolios44
2.6 Market risk46
Example49
2.7 The capital asset pricing model50
Example53
2.8 The beta of a portfolio56
3 The time value of money, the dividend discount model and dividend policy58
3.1 The time value of money58
3.2 Present values59
Example60
3.3 Perpetuities and annuities61
3.4 Dividend discount model64
3.5 The Gordon growth model67
Example69
Solution70
3.6 Two-period dividend growth model70
3.7 Example with earnings growth73
3.8 Real-life dividend policy75
4 The valuation of bonds78
4.1 Introduction to bonds78
4.2 Bond pricing78
Example79
4.3 The price yield curve80
4.4 The risk of default82
4.5. Does the yield to maturity change?83
4.6 Bond duration84
Example84
4.7 Characteristics of duration86
4.8 Relationship between bond prices and duration88
Example89
4.9 Bond convexity90
5 Investment appraisal94
5.1 Introduction to investment appraisal94
5.2 The net present value decision rule95
Example95
Example96
5.3 The relationship between NPV and discount rate98
5.4 The internal rate of return100
Example103
5.5 Pitfalls with using the internal rate of return104
Example106
5.6 The crossover rate108
Example108
5.7 Payback112
6 The weighted average cost of capital114
6.1 Determining the appropriate cost of capital114
Example116
6.2 The cost of debt capital116
Example117
6.3 The weighted average cost of capital118
Example119
6.4 Bringing this all together120
Cost of debt120
Cost of equity121
WACC121
7 Foreign exchange risk124
7.1 Exchange-rate risk and exchange-rate regimes124
China124
Czech Republic125
France125
United Kingdom125
United Arab Emirates125
7.2 How big is the foreign exchange market?126
7.3 Spot and forward markets and currency quotations128
Example130
Example130
7.4 Calculating the forward rate131
Example133
8 An introduction to futures trading and hedging using futures136
8.1 Introduction to futures136
8.2 Futures positions137
8.3 Delivery138
Example138
8.4 Minimum performance bond requirements139
Example140
8.5 Hedging with futures contracts141
Example142
Example143
8.6 Basis145
Example146
Example148
8.7 Hedge efficiency149
Example150
8.8 Airlines hedging price risk151
9 Introduction to options154
9.1 Option terminology154
9.2 Option strategies156
9.3 Long call purchase156
9.4 Naked call write159
9.5 Long put purchase160
9.6 Naked put write162
9.7 Long and short straddle strategies164
9.8 The Black–Scholes option pricing model166
9.9 FX options as foreign currency insurance168
Example168
Example170
Solution to activities174
From Certificate of Incorporation of Alphabet33F174
Bibliography184
Articles184
Books185
Websites185