Notesale: Turn your study into money

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Financial Strategy
Corporate Financial Strategy Chapter 1
Financial strategy has two components:
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Management of those funds, through reinvestment or distributing to SH’s

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Value can relate to the underlying business or the value created for investors
Stakeholders have different risk perceptions
Stakeholders define value as the returns generated in excess of required return
o Value is only created through projects with positive NPV
Financial strategy links strategic decisions to interests of shareholders and capital markets
A major objective of financial strategy is to add value- not always minimising costs
A logical way to judge the success of a financial strategy is by reference to the contribution
made to an overall objective
Value is a function of the relationship between perceived risk and required return
Stakeholders do not perceive risk in the same way- value can be created in the cracks
between different perceptions
Those who do not understand extent of risks they are taking may settle for less return
Corporate growth and success are often measured in terms of turnover/ profit
A prime role of management is to ensure shareholder value properly reflects corporate
value

Investor value: reflects the required returns of capital markets, and is mirrored in the financial
value placed on the company’s securities by the markets

Corporate value: the present value of the expected returns from a combination of the current
business strategies and future investment programs
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Through the use of discounted cash flow, the expected future cash flows are converted to
their present value equivalents by multiplying them by an appropriate discount factor (an
inverse interest rate)
o Takes into account the time value of money and the associated risk
Companies can increase SH value by creating a sustainable competitive advantage through
selecting and implementing an appropriate competitive strategy
Any remaining excess financial return from required return represents the value added for
SH’s
Diversification of portfolios reduces investors’ dependence on the performance of any single
company

Venture capitalist: investors who are only interested in relatively high-risk and high return
investments- demand a high minimum return from projects
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An investment showing lower than normal return is unattractive, with existing investors
looking to sell but potential investors have no incentive to buy
o Price of investment falls until return has increased to normal market level

Shareholder value can be measured in 3 ways: shareholder value added, economic profit and total
shareholder return

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