Financial Strategy

Formulation
Lecture # 3
Jamil Ahmed
Assistant Professor

Financial Strategy
Formulation
Assessing Corporate Performance
Ratios: DuPont, Profitability Ratios, Liquidity
Ratio, Shareholders Investment Ratios
(Dividend Yield, EPS, Dividend Cover, Dividend
Payout) Gearing Ratios (Financial Gearing,
Operational Gearing)
Trends Analysis: Ratios and FS
EVA : NOPAT (Cost of Capital x Capital
Employed)
MVA: Market Value of Capital Employed Book
Value of Capital Employed

Financial Strategy
Formulation
Optimal Capital Structure
Sources of Finance: RE, New Issue of Shares,
Floatation of Company, Preference Shares, Debt
Choice on the basis of Advantages and
Disadvantages of Debt
Debt: Debentures, Unsecured Loan Stock, Deep
Discount Bond, Zero Coupon, Convertible
Unsecured, Mezzanine Debt, Leasing, Eurobonds,
Trust deeds
Equity: Preference Shares, Common Shares, RE

Cost of Equity: CAPM, Arbitrage Pricing Theory, Fama

Factor (Two Factor Model)

Financial Strategy
Formulation
CAPM:

Financial Strategy
Formulation
Arbitrage Pricing Theory:

Risk Premium = r - rf = b(1) x (r factor(1) - rf) +

b(2) x (r factor(2) - rf)... + b(n) x (r factor(n) - rf)
Inflation
GNP
Investor Confidence
Shift in Yield Curve

Financial Strategy
Formulation

Fama French Three Factor Model:

Ri ,t R f ,t i i ,m RPM t i , sml SMLt i ,hml HML t i ,t

Ri,t is the utility stock return during period t
Rf,t if the return on the risk-free asset
should be zero
s are the betas for each factor
i,m is the CAPM beta
i,t is the regression error term

Financial Strategy
Formulation
Bond Yield Plus Premium Approach
Market Model or Gordon Growth Model

Dividend Policy
Risk Management: Theoretical and Practical

explaination
Assess exposure to business and financial risk
including operational, reputational, political,
economic, regulatory and fiscal risk
Developing a framework for risk management
Establishing Capital Investment and Risk Management

Monitoring Systems