PAPER NO. 11. FUNDAMENTALS OF FINANCE
UNIT DESCRIPTION
This unit covers the competencies required to manage finances in an organisation. Competencies include: Applying finance concepts in evaluating financial implications of relevant business decisions, applying time value of money principles in evaluating financing and investment decisions, evaluating appropriate source of business finance, applying appropriate capital budgeting techniques, maintaining liquidity through appropriate working capital management, applying risk and return concepts in making optimal investment decisions, identifying concepts that inform the dividend decision making process and identifying finance and investment opportunities using Islamic finance concepts
LEARNING OUTCOMES
• Apply finance concepts to manage finance in an organisation
• Apply time value of money principles to evaluate financing and investment decisions
• Determine the optimal cost of capital of an organisation
• Make capital budgeting decision using appropriate techniques
• Make working capital management decisions using appropriate methods
• Apply risk and return concepts to make optimal investment decisions
• Identify concepts that inform the dividend decision making process
• Apply valuation models to determine the value of securities
CONTENT:
1. Apply finance concepts to manage finance in an organisation
1.1 Nature and scope of finance
1.1.1 Investment decisions
1.1.2 Dividend decisions
1.1.3 Financing decisions
1.1.4 Liquidity decisions
1.2 Relationship between accounting and finance
1.2.1 Similarities and differences
1.2.2 Cost accounting
1.2.3 Financial accounting
1.2.4 Management accounting
1.3 Finance Functions
1.3.1 Routine
1.3.2 Non-Routine (Managerial)
1.4 Goals/Objectives of a Firm
1.4.1 Financial
1.4.2 Non-financial goals
1.4.3 Overlaps and conflicts among the objectives
1.5 Agency Theory
1.5.1 Key definitions
1.5.1.1 Principal
1.5.1.2 Agent
1.6 The nature of agency relationships
1.6.1 Ordinary shareholders and management
1.6.2 Shareholders and debenture holders
1.6.3 Shareholders and external auditors
1.6.4 Shareholders and Government
1.7 Causes of conflict in each relationship and suggested remedial measures
2. Evaluate appropriate source of business finance
2.1 Factors to consider when choosing a source of finance
2.2 Sources of finance
2.2.1 Short term
2.2.2 Medium term and
2.2.3 Long-term
2.3 Types of finance
2.3.1 Internally generated funds
2.3.2 Externally generated funds
2.4 The nature of each source of funds
2.5 Characteristics for sources based on
2.5.1 Short term sources
2.5.2 Medium term sources
2.2.3 Long-term sources
2.6 Merits and demerit for:
2.6.1 Short term sources
2.6.2 Medium term sources
2.6.3 Long-term sources
2.7 Sources of finance for small and medium sized enterprises (SMEs)
2.7.1 The SME owner, family and friends
2.7.2 The business angel
2.7.3 Trade credit
2.7.4 Leasing
2.7.5 Factoring and invoice discounting
2.7.6 The venture capitalist
2.7.6.1 Listing
2.7.6.2 Supply chain financing
2.8 Challenges encountered by SMEs in raising capital and remedial measures
2.8.1 SMEs’ difficulties in accessing finance
2.8.2 Lack of information infrastructure for SMEs
2.8.3 Low level of business R&D in SMEs sector
2.8.4 Insufficient use of information technology in SMEs
2.9 Remedies for the above challenges
2.9.1 Diversifying Channels of Financing
2.9.2 Development of SME Database and Credit Risk Analysis of SMEs
2.9.3 R&D Tax Incentives
2.10 Utilising Information for SMEs
3. Apply time value of money principles to evaluate financing and investment decisions
3.1 The Time value of money
3.1.1 Time value versus time preference for money
3.1.2 The relevance of time value of money
3.2 Estimating cash flows
3.2.2 Compounding techniques
3.2.3 Discounting techniques
3.3 Preparation of the loan amortization schedule
3.3.1 Principal amount
3.3.2 Repayment period
3.3.3 Rate of interest
4. Apply valuation models to determine the value of securities
4.1 Nature and scope of valuation models
4.2 Relevance of valuation of securities
4.2.1 Debentures
4.2.2 Preference shares
4.2.3 Ordinary shares
4.3 Concept of value
4.3.1 Going concern value
4.3.2 Liquidation value
4.3.3 Fair value
4.3.4 Investment value
4.3.5 Intrinsic value
4.4 Valuation of:
4.4.1 Debentures
4.4.2 Preference shares
4.4.3 Ordinary shares
5. Determine cost of capital for a business entity
5.1 The Cost of capital
5.5.1 Relevance of cost of capital to firms
5.5.2 Usage
5.5.3 Factors influencing a firm’s cost of capital
5.2 Components of cost of capital
5.2.1 Debt
5.2.2 Ordinary shares
5.2.3 Preference shares
5.3 The firm’s overall cost of capital:
5.3.1 Weighted average cost of capital
5.3.2 Weighted Marginal cost of capital
5.4 Limitations of the weighted average cost of capital
6. Apply appropriate project appraisal technique to make capital budgeting decisions
6.1 Nature and importance of capital investment decisions
6.2 Characteristics of capital investment decisions
6.2.1 Large investments
6.2.2 Irreversible decision
6.2.3 High risk
6.2.4 Long-term effect on profitability
6.2.5 Impacts cost’s structure
6.3 Types of capital investment decisions
6.3.1 On the basis of expansion
6.3.2 On the basis of dependency
6.4 Capital investment cash flows:
6.4.1 Total initial cash outlay
6.4.2 The total terminal cash flows and
6.4.3 Annual net operating cash flows
6.5 The features of an ideal capital budgeting technique:
6.5.1 Based on size
6.5.2 Based on duration
6.5.3 Based on risk
6.5.4 Based on impact to cost structure
6.5.5 Based on difficulty
6.6 Capital Budgeting techniques
6.6.1 Non discounted techniques
6.6.1.1 Accounting Rate of Return (ARR)
6.6.1.2 Payback period
6.6.2 Discounted techniques
6.6.2.1 Internal Rate of Return
6.6.2.2 Net Present Value
6.6.2.3 Profitability index and
6.6.2.4 Discounted payback period approach
6.7 Merits and demerits of each capital budgeting technique
6.8 Conflict between NPV and IRR in Ranking Projects
6.9 Practical challenges of capital budgeting in the real world
6.9.1 Small businesses
6.9.2 Large businesses
6.9.3 Public institutions
6.9.4 Private institutions
7. Maintain liquidity through appropriate working capital management
7.1 Nature and importance of working capital management
7.2 Factors influencing working capital needs of a firm based on the:
7.2.1 Nature of business
7.2.2 Size of business
7.2.3 Production policy
7.2.4 Manufacturing process/length of production cycle
7.2.5 working capital cycle
7.2.6 Based on credit policy
7.2.7 business cycle
7.3 Working capital operating cycle
7.3.1 The relevance
7.3.2 Components of the cycle
7.3.3 Computation of the cycle
7.4 Working capital financing policies
7.4.1 Management of Cash
7.4.2 Management of Debtors
7.4.3 Management of creditors
7.4.4 Management of inventory
8. Apply risk and return concepts to make optimal investment decisions
8.1 The nature of risk and return
8.2 Distinction between risk-free and risky assets
8.3 Sources of risk
8.3.1 Competitive risk
8.3.2 Financial risk
8.3.3 Market and opportunity risk.
8.3.4 Political and economic risk
8.3.5 Technology risk
8.3.6 Operational risk
8.3.7 Environmental risk
8.4 Expected Return
8.4.1 For single asset
8.4.2 For two assets
8.5 Risk
8.5.1 Standard deviation and variance:
8.5.1.1 For a single asset
8.5.1.2 For two assets
8.5.2 Coefficient of variation
8.6 Relationship between risk and return on investment/Risk return trade off
9. Identify concepts that inform the dividend decision making process
9.1 Factors influencing the dividend decision of a firm
9.2 Forms of dividend payment
9.2.1 Stock
9.2.2 Cash
9.2.3 Property
9.2.4 Script
9.2.5 Liquidating
9.3 The firm’s dividend policy
9.3.1 Stable predictable policy
9.3.2 Constant pay-out Ratio policy
9.3.3 Regular plus extra policy and
9.3.4 Residual Dividend policy.
9.4 Dividend payment process
9.4.1 Declaration date
9.4.2 Ex-Dividend date
9.4.3 Record date
9.4.4 Payment date
9.5 Dividend theories
9.5.1 The MM dividend irrelevance theory
9.5.2 The residual dividend theory
9.5.3 The bird-in-the-hand theory
9.5.4 The tax preference theory
10. Identify finance and investment opportunities using Islamic finance concepts
10.1 History of Islamic finance
10.2 The nature of Islamic finance:
10.2.1 Islamic banks
10.2.2 Islamic insurance (Takaful) and Islamic financial instrument
10.3 Principles of Islamic finance
10.3.1 Equity based contracts
10.3.2 Sale based contracts
10.3.3 Debt based contracts
10.3.4 Charitable based contracts
10.4 Differences between Islamic and conventional finance
10.5 The concept of interest (riba) and how returns are made by Islamic financial securities
10.5.1 Sources of Islamic finance
10.6 Islamic finance drivers
10.6.1 Changing nature of regulation
10.6.2 Technological advancements
10.6.3 Cross border transactions
10.6.4 Growing Muslim populations
10.6.5 Emerging economic growth
10.7 Regulation of Islamic finance institutions
10.8 Emerging issues and trends
10.8.1 Cryptocurrency
10.8.2 Block chain technology
10.8.3 Crowdfunding
Suggested Methods of Delivery
• Presentations and practical demonstrations by trainer;
• Guided learner activities and research to develop underpinning knowledge;
• Supervised activities (cats and assignments)
The delivery may also be supplemented and enhanced by the following, if the opportunity allows:
• Visiting lecturers or experts from colleges and universities;
• Financial sector visits to firms.
Recommended Resources
1. Laptops/ computers
2. Calculators
3. Internet
Sample Reading and Reference materials
1. Pandey, I. M. (2015). Financial Management (11th edition). New Delhi: Vikas Publishing.
2. Damodaran, A. (2001). Corporate Finance: Theory and Practice (2nd edition). New York: John Wiley & Sons Inc.
3. Mclaney, E. (2017). Business Finance: Theory and Practice (11th edition). Harlow: Pearson.
4. Brealey, R. A., Myers, S. C., & Allen, F. (2019). Principles of Corporate Finance (13th edition). Boston: McGraw-Hill Education.
5. Kasneb e-learning resources (link on the Kasneb website).
6. Kasneb approved study packs.