2. Financial Strategy
Unit 1 Fundamentals of Finance
Unit 2 Understanding Accounts
Unit 3 Cash flow and Forecasting
Unit 4 Finance Tools
Unit 5 Project Appraisal
Unit 6 Company Valuations
Unit 7 Risk Assessment and Interest Rate Risk
Unit 8 Foreign Exchange and Contingency Risk
Unit 9 Credit, Liquidity and Operational Risk
Unit 10 Measuring Performance
3. Efficient Market Hypothesis
In academic research we need to decide what is meant
by an “efficient market”
There are three levels of efficient market
Weak
Semi strong
Strong
4. EMH - Weak
The market ignores matters that have yet to happen
Prices only reflect previous events
5. EMH – Semi Strong
The market is assumed to price all information that is in
the public arena
This may seem obvious, but to what extent do African
civil wars affect the price of mobile phones?
[the phone equivalent of “blood diamonds” surrounds a
rare element “coltan” mined in Central Africa, an
essential component of mobile phones]
6. EMH - Strong
All knowledge, whether in the public domain or not, is
priced into shares by the market
In other words, insider dealing will occur and thus will
affect prices
7. Agency Theory
The problem:
How do shareholders ensure that directors and
managers act for shareholders’ benefit rather than their
own?
Is it possible to align directors’ interests with
shareholders?
8. Agency Theory: A question
“Executive share options don’t align shareholders’ and
senior management’s interests. In fact they often do
exactly the opposite”.
(Q1 Financial Strategy Exam October 2006)
Give some reasons why the above statement might be
true.
9. Agency Theory: A question
Three possible reasons
1 Directors may take a short term view of profit making
2 Might distort their view of risk taking
3 Might affect timings of dividends
10. Risk in finance
Unit One lists a number of sources of financial risk
There are two key points:
1 In finance risk is not seen as a “bad” thing – it is by
taking risk that returns are generated
2 Risk is measured by considering volatility: share price
risk is linked to the standard deviation of the price
around the average
