Strategic Management (One Line Study)
1. Capital = Total asset – Current Liabilities
2. There are two kinds of funds used by a firm i.e. debt and equity.
3. The NI (Net Income) Approach has following three assumptions:
· There are no taxes
· Cost of debt is less than equity capitalization rate.
· Use of debt does not change the risk perception of the investors.
4. With a judicious mixture of debt and equity, a firm can evolve an optimum capital structure which makes value of firm highest and cost of capital is lowest.
5. In case of NOI (Net Operating Income): The overall capitalization rate remains constant for all levels of financial leverage.
6. Modigliani –Miller Theorem: There is no relationship between a firm’s market value and capital structure. Profitability of the firm’s activities is the only factor that determines the market value.
7. Arbitrage process ensures to the investor the same return at lower outlay as he was getting by investing in the firm whose total value was higher and yet his is not increased.
8. The use of debt by the investor for arbitrage is called homemade and personal leverage.
9. At a certain point, the raise of bankruptcy costs is higher than the tax shield.
10. Firm Manager (Insiders) knows more about their firm than shareholders and debt financiers (Outsiders).
11. The result of asymmetrical information is that companies must provide reliable information, which costs money.
12. Firms use different kind of accounting methods. Examples are FIFO, LIFO and accrual accounting.
13. The result of this packing theory is that a firm does not have a certain target debt ratio.
14. A negative correlation should always exist between cost of capital and profitability. SO Increase in cost of capital means decrease in profitability.
15. Theoretical and empirical research suggests that financial planner should plan optimal capital structure.
16. Net Income Approach: A change in financial leverage will lead to corresponding change in overall cost of capital as well as total value of the firm.
17. The objective of a dividend policy should be to maximize shareholder’s return so that the value of his investment is maximized.
18. Shareholders return consists of two components namely dividend and capital gains.
19. A Low payout policy: more retention of profit and less payout of dividend.
20. A high payout policy: more current dividend and less retained earning that may consequently results in slower growth and perhaps lower market price per share.
21. Dividend Relevance: Walter’s Model says choice of dividend policies almost always affect the value of the firm.
22. Growth Firms: Internal rate more than opportunity.
23. Normal firms: Internal rate equals opportunity.
24. Declining Firms: Internal rate less than opportunity.
25. Perfect capital markets: the firm operates in perfect markets where
· Investors behave rationally.
· Information is freely available to all.
· Transaction and floatation costs don’t exist
· No investor is large enough to affect the market price of share.
26. The crux of M-M hypothesis is that shareholders do not necessarily depend upon dividends for obtaining cash.
27. According to the M&M, the only important determinant of a company’s market value is its investment policy because it is responsible for the company future profitability.
28. Types of dividend Policy:
· Constant Payout policy(based on earning)
· Regular and stable dividend payment policy(The most popular kind of dividend policy is one that pays a regular, steady dividend)
· Multiple Increate in dividend
· Regular and extra dividend
29. Declaration date: The date on which the announcement is made of new dividend is called dividend “declaration date”.
30. Record Date: The dividend payment is made to the members whose names appear in the register of members on a particular date is called “Record date”.
31. Ex-dividend date: The date from which the stock begins to trade without the right to receive the dividend declared is called “ex-dividend date”.
32. Payment Date: The date on which company actually mails the dividend warrants is called “payment date”.
33. FEI survey (The US) of reason of share repurchase is distributing cash to shareholders 28%.
34. Methods of Buyback: Repurchase Tender Offers, Open market Purchases and Privately Negotiated Repurchases.
35. The Tender offer price is generally higher than the market price at the time of offer.
36. Tender offers are used primarily for large equity repurchases.
37. Open market operations can be spread out over longer period of time offers and are much more widely used for smaller repurchases.
38. Open market share repurchases programs are weaker signals of stock undervaluation than the tender offers.
39. Negotiated purchases have been associated with unwelcome suitors for the company and are used to ward off a group sometimes called “Raiders”.
40. Further issue after buyback: Where a company has resorted to buyback of its shares, it cannot make a further issue of the same kind of securities within a period of six month.
41. The public announcement shall be made at least seven days before commandment of buy-back.
42. The deposit in the escrow account shall be made before the date of the public announcement
43. Theories Behind Share Repurchase:
· Dividend or Personal Taxation Hypothesis(See Definition)
· Leverage Hypothesis(See Definition)
· Information or signaling Hypothesis(See Definition)
· Wealth Transfer Among Shareholders(See Definition)
· Defense Against Outside Takeovers(See Definition)
44. Capital Asset Pricing Model (CAPM) is an equilibrium model, which describes the pricing of assets as well as derivatives.
45. Risk that can be away is called diversifiable risk or non systematic.
46. Rationale of CAPM: This method of valuing assets and calculating the cost of for an alternative i.e. the capital asset pricing model has come to dominate modern finance.
47. Investors can eliminate some sorts of risks known as Residual risk or alpha, by holding a diversified portfolio.
48. Some risk such as global recession cannot be eliminated through diversification.
49. Absorption: It is a combination of two or more companies into an existing company.
50. Consolidation: It is a combination of two or more companies into a new company.
51. Forms of Mergers: Horizontal Mergers, Vertical Mergers and Conglomerate Mergers.
52. Horizontal Merger: This type of merger involves two firms that operate and compete in a similar kind of business.
53. Vertical Mergers: Vertical mergers take place between firms in different stages of production/operations, either as forward or backward integration. Forward integration take place when a raw material supplier finds a regular procurer of its products while backward integration take place when a manufacturer finds a cheap source of raw material supplier.
54. Conglomerates Mergers: Conglomerates mergers are affected among firms that are in different or unrelated business activity. Firms that plan to increase their product lines carry out these types of mergers.
55. Financial Conglomerates: These conglomerates provide a flow of funds to every segment of their operations, exercise control and are the ultimate financial risk takers.
56. Friendly Takeover: The acquiring firm makes a financial proposal to target firm’s management and board.
57. Hostile Takeover: A hostile takeover may not follow a preliminary attempt at a friendly takeover.
58. Motive and Benefit of Merger: Limit competition, Utilize under-utilized market power, overcome the problem of slow growth and profitability, achieve diversification, and utilize under-utilized resources like human, physical and managerial skills.
59. Enhanced profitability: Economies of scale, operating economies and synergy.
60. Investor can reduce the non-systematic risk (i.e. company related risk) by diversification of their investment in share of a large number of companies.
61. The managerial synergy hypothesis is an extension of the differential efficiency theory. It states that a firm, whose management team has greater competency than is required by the current task in the firm.
62. The managerial synergy hypothesis is not relevant to the conglomerate type of mergers.
63. Financial synergy occurs as a result of the lower costs of internal financing versus external financing.
64. Operating economies of scale are achieved through Horizontal, Vertical and Conglomerate mergers.
65. Analysis of mergers and acquisitions: Planning, Searching and screening and Financial evaluation.
66. Book value: This based on the balance sheet value of owner’s equity. It is determined by giving net worth by the number of equity shares outstanding.
67. Appraisal value: This value is normally based on the replacement Cost of assets.
68. Market Value: Market value in the stock market quotations comprising yet another approach for estimating the value of a business.
69. For a firm having a high P/E ratio, ordinary shares represent ideal method for financing mergers and acquisitions.
70. Equity share is advantageous when the P/E ratio is high, for both the parties.
71. Tender offers as a method of acquiring a firm involve a bid by acquiring firm for controlling interest in the acquired firm. This approach is that purchaser approaches the shareholders of the firm rather than the management to encourage them to sell their share generally at a premium over the current market price.
72. A number of defensive tactics can be used to counter tender offer. Theses defensive tactics include white knights and Pac-Mans.
73. Interest of small investor: Usually the “Controlling Block” tends to be between 20 and 40 percent and is usually acquired from a single seller.
74. Notification: The acquire should intimate to the target company and the concerned stock exchange as soon as its holding touches 5% of the voting capital of the target company.
75. Some time amalgamation and consolidation is used interchangeably.
76. ABC is a technique to quantitatively measure the cost and performance of activities, resources and cost objects, including when appropriate, overhead.
77. ABC is a process of simplifying and clarifying decisions required by the process evaluators and senior management using activity costs rather than gross allocations.
78. Most current established accounting systems normally capture and distribute resource costs by one of the following methods: Organizational element, budgetary account and Traditional cost accounting with direct and indirect cost allocation.
79. Direct Traceable cost: only raw material.
80. Traceable Cost: accounted for per activity.
81. Non Traceable cost: Small proportion that cannot be traced, like postage.
82. An activity model is a tool to assist in understanding and defining an organization.
83. An activity is the transformation of inputs into outputs performed by mechanism under the constraint set by controls.
84. Mechanism is never a part of the output while inputs are always in some way or the other part of the output.
85. Budgetary records maintained separately from the accounting systems. The records are useful to validate accounting costs, provide a rationale for division of costs or to replace missing data.
86. The number of employees is normally expressed in full-time equivalent (FTE).
87. Cost Benefit Analysis: This is the simplest form of comparison between ideas to determine which is faster, better or cheaper.
88. Characteristics of working capital are :
· It is continually required for a going concern.
· Quantum of working capital fluctuates depending on the level of activity.
· It is impacted by numerous transactions on a continuous basis.
· Decisions related to it are repetitive and frequent.
89. Factor influencing working capital requirements: Nature of Business, Seasonality of Operations, Production Policy, Market Conditions and Conditions of supply.
90. Net Working Capital: It is the difference between current assets and current liabilities.
91. Working capital is considered as life blood of an enterprise.
92. As per the study conducted by RBI, current assets constitute more than 50 percent of the total assets of the companies covered by study.
93. Flexible or conservative Policy: The investments in the current assets are high in this case. I.e. Maintenance of huge cash balances and marketable securities, large stock of inventories, generous term of credit are adopted under this policy. Therefore results fewer production stoppages, ensures quick deliveries, to customers and stimulates sales.
94. Aggressive Approach: There is very large risk of shortage of funds, leading to liquidity problems. This may cause frequent stoppages, delayed deliveries to customers and loss of sales.
95. A quantity discount is offered on large shipment.
96. Accrued Expenses: The expenses is incurred or accrued but not yet paid. Usually a date specified when the accrued expense must be paid. Wages, Income Tax, Property Tax are the example of it.
97. The float indicates the difference between the bank balances as per the bank book and as per the bank pass book/bank statement.
98. Postal Float: Time required from receiving the cheque from the customer through the post office.
99. Deposit Float: Time required by the company to process the received cheque and deposit the same in the bank.
100. Bank Float: Time required by the banker of the company to collect the payment from customers bank.
101. The cost of an investment includes acquisition charges such as brokerages, fees and duties.
102. Equity is the residual interest in the assets of an enterprise after deducting all its liabilities.
103. Significant influence may be gained by share ownership, statute or agreement.
104. Shares, Debentures and other securities held as “Stock in Trade” are not investment as defined in this statement.
105. Recognition of Interest, dividend and rental earned on investment are covered by Accounting Standard 9 “Revenue Recognition”.
106. Accounting Standard (AS) 13 ---à Accounting for investment.
107. Accounting Standard (AS) 19 ---à for lease.
108. Accounting Standard (AS) 23 ---à Accounting for investments in associates in consolidated financial statements.
109. Accounting Standard (AS) 27 ---à Financial reporting of interests in Joint Ventures.
110. Accounting Standard (AS) 4 ---à Contingencies and event occurring after balance sheet date.
111. Accounting Standard (AS) 21 ---à Consolidated Financial Statement.
112. Accounting Standard (AS) 02 ---à Inventory.
113. Human Capital also provides expert services such as consulting, financial planning and assurance services, which are valuable and very much in demand.
114. HRA can help in creating goodwill for a company. The company can project itself in having best practices with superior policies in place. Expert believes that this may help in the organization attract more investments.
115. Exit Cost Analysis: Exit costs can be classified into three categories, of lost efficiency prior to separation, job vacancy cost during the new search and termination pay.
116. Deterrents are low awareness and acceptance and lack of an industry statndard.
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