Strategic Financial

Management
Unit-I
Corporate Policy: Strategic Financial Planning-
Changing Complexion of Regulatory Framework
- Shareholder Value Creation (SCV): Market
Value Added (MVA) – Market-to-Book Value
(M/BV) – Economic Value Added (EVA) –
Managerial Implications of Shareholder Value
Creation- Corporate Risk Management –
Understanding the firms Strategic Exposure.
CORPORATE POLICY
Policy
 A policy is a set of ideas or plans or principles or guidelines
that is used as a basis for making decisions, especially
in business.
 A policy is the statement or general understanding which
provides guidelines in decision-making to members of an
organization in respect to any course of action.
CORPORATE POLICY
Corporate Policy
 A documented set of broad guidelines, formulated
after an analysis of all internal and external factors
that can affect a firm's objectives, operations, and
plans. Formulated by the firm's board of directors.
 A formal declaration of the guiding principles and
procedures by which a company will operate typically
established by its board of directors or a senior
management policy committee.
Strategic Financial Management
The subject strategic financial management basically
involves in applying the knowledge and techniques of financial
management to the planning, operating and monitoring of the
finance function in particular as well as the organization in
general. So, strategic financial management basically involves
planning the utilisation of company’s resources in such a
manner that it brings maximum value to the shareholders in
the long run.
Financial Planning (I. M. Pandey, Page No: 561 - 567)
Financial planning involves preparation of projected or
proforma profit and loss account, balance sheet and funds flow
statement. Financial planning and profit planning help a firm’s
financial manager to regulate flows of funds which is his primary
concern. It focuses on aggregate capital expenditure
programmes and debt-equity mix rather than the individual
projects and sources of finance.
Definition

 Financial planning refers to planning with respect to all

finances and investments. Financial planning is the process of
analysing a firm’s investment options and estimating the
funds requirement and deciding the sources of funds.
 Financial planning indicates a firm’s growth, performance,
investments and requirements of funds during a given period
of time, usually three to five years.
 Financial planning involves the questions of a firm’s long-
term growth and profitability and investment and financing
decisions.
Features of a Financial Planning
 Evaluate the current financial condition of the firm
 Analysing the future growth prospects and options
 Appraising the investment options to achieve the stated
growth objectives.
 Projecting the future growth and profitability
 Estimating funds requirement and considering alternative
financing options
 Comparing and choosing from alterative growth plans and
financing options
 Measuring actual performance with the planned performance.
Steps in Financial Planning
The following steps are involved in financial planning
 Past Performance: Analysis of the firm’s past performance to ascertain the relationship
between financial variables, and the firm’s financial strength and weaknesses.
 Operating Characteristics: Analysis of the firm’s operating characteristics-product, market,
competition, production and marketing polices, control systems, operating risk etc.
 Corporate Strategy and Investment Needs: Determining the firm’s investment needs and
choices, given its growth objective and overall strategy.
 Cash Flow from Operations: Forecasting the firm’s revenues and expenses and need for funds
based on its investment and dividend policies.
 Financing Alternatives: Analysing financial alternatives within its financial policy and deciding
the appropriate means of raising funds.
 Consequences of Financial Plan: Analysing the consequences of its financial plans for the
long-term health and survival to firm.
 Consistency: Evaluating the consistency of financial policies with each other and with the
corporate strategy.
Classification of Financial Planning
Long-term Financial Planning (Strategic Financial Planning): Large companies
generally prepare financial plan for a long period, say, five years. Small companies may
choose a shorter period, say one year. The financial plan of large companies may be
highly detailed document containing financial plans for different strategic business units
and divisions. In practice, long term financial plans consider the proposed outlays of
fixed assets, R&D, product development actions, capital structure and sources of
financing. Termination of products, projects, repayment of debt also include in long term
financial planning. These plans are supported by a series of annual budgets and profit
plans.
Short Term Financial Planning (Operating Financial Planning): Short term plans
generally covered 1to 2 years. These plans include the sales forecast and various forms
of operating and financing data. The result of short-term financial plans is operating
budgets, cash budget and proforma of financial statements. Generally short-term
financial planning process begins with the sales forecasts.
Strategic Financial Planning
(Palanisamy Saravana, Jayaprakash Sugavanam Page No: xviii-xxvi)

Strategy
The term strategy has been coined from the Greek
word Strategia, which means art of a troop leader. As we all
know, a troop leader does not give any information and
makes the final decision based on a long-term vision,
similarly strategic decisions are also not disclosed and remain
only with the senior-level management.
 Strategy is a long-term plan, which is believed to take the
company to greater heights by exploring and exploiting all
possible opportunities available and using all emerging
possibilities.
 The process of planning something or carrying out a plan
in a skilful way.
Strategic Planning
Strategic planning implies identifying all
the long-term plans and framing a plan that best
suits the need to explore and exploit all
opportunities and maximize the usage keeping in
mind the long-term objective of the company.
Strategic Financial Planning
Chartered Institute of Management
Accountants of UK (CIMA) defines strategic
financial management as “the identification of the
possible strategies capable of maximizing an
organization’s net present value, the allocation of
scarce capital resources between competing
opportunities and the implementation and
monitoring of the chosen strategy so as to achieve
stated objectives”.
Scope of Strategic Financial
Planning
Financial Planning
& Analysis

Restructuring of Managing the

the Company Cash

Effective Utilization
Financial
of the Cash
Surplus Decision Making

Financial Control &

Implementing the
Same
Decisions in Strategic Financial Management
(I. M. Pandey, Page No: 4-5)
There are three types of decisions that are usually taken by managers.
These are:
Investment Decision: Investment decisions involve capital
expenditures. They are, therefore, referred as capital budgeting
decisions.
Investment Decision refers
 Where to Invest
 What Amount to be Invest
 How Long we Keep
Financing / Capital Structure Decision: Financing decision is the
second important function to be performed by the financial manager.
Financing Decisions Refers
 When to procure capital – (correct time)
 Where to procure capital-(Identifies & select the sources)
 How to procure-(Debt –Equity mix)
Dividend Decision: Dividend decision is the third major financial
decisions. The financial manager must decide whether the firm
should distribute all profits, or retain them, or distribute a portion
and retain the balance.
Dividend Decisions refers:
 How much should pay
 How much should retain
Strategic Financial Management

Financial Decision Investment Decision Dividend Decisions

Making Making Making

Company’s Capital Capital Project

Financial Analysis
Structure Analysis

Management of the Success of the Strategy

Changing Complexion of Regulatory Frame Work
Public Issue
An IPO (initial public offering) is referred to a flotation,
which an issuer or a company proposes to the public
in the form of ordinary stock or shares. It is defined as
the first sale of stock by a private company to the
public. They are generally offered by new and
medium-sized firms that are looking for funds to grow
and expand their business. In simple words
a public offering is the offering of securities of a
company or a similar corporation to the public.
 Regulation of public issue
Provisions of the Companies Act, 1956.

Securities Contracts (Regulations) Act, 1956.

SEBI rules & regulations

Compliance of Listing Agreement with the

concerned stock exchanges after the listing of
securities.

RBI regulations in case of foreign/NRI equity

participation.
Right issue/ Right offering
Rights offering is a group of rights offered to existing shareholders to
purchase additional stock shares, known as subscription warrants, in
proportion to their existing holdings. In a rights offering, the
subscription price at which each share may be purchased is generally
discounted relative to the current market price. Rights are often
transferable, allowing the holder to sell them in the open market. In a
rights offering, each shareholder receives the right to purchase a pro rata
allocation of additional shares at a specific price and within a specific
period (usually 16 to 30 days). Shareholders are not obligated to exercise
this right.

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Regulatory Framework of right issue
Section 62 of Companies Act, 2013 contains provisions on
“further issue of capital”, and enacts the principle of preemptive
rights of shareholders of a company to subscribe to new shares of
the company.
 Provisions of Section 62 of Companies Act, 2013 are
mandatory for all Private companies, Public Companies, Listed as
well as unlisted companies in relation to further Issue of Capital.
A rights issue by any listed issuer, where the aggregate value of
specified securities offered is fifty lakh rupees or more has to
comply with Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009, as
amended
19 (“ICDR Regulations”)
As per ICDR Regulations, the following companies are not
allowed to raise funds through a Rights Issue:
Issuer, Promoters/ Promoter Group or Directors or persons in control
of the Company debarred from accessing the capital market;
If there are any existing partly paid-up equity shares;
If firm arrangements of finance towards 75% of the stated means of
finance, excluding the amount to be raised rough the proposed rights
Issue is not made;
If the issuer of convertible debt instruments is in the list of wilful
defaulters published by the Reserve Bank of India or it is in default of
payment of interest or repayment of principal amount in respect of debt
instruments issued by it to the public, if any, for a period of more than
six months.
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Warrants
Meaning and concept of warrant
Warrants are capital market instruments used for raising funds by companies. Warrants
are a type of equity derivative instrument. The value of an equity derivative depends
partly on the value of the underlying security. It is an option issued by the company
granting the buyer a right to purchase some shares of its equity share capital at a given
exercise price during a stipulated period.
Types Of Warrants:
1)Detachable
Detachable warrants are issued in connection with other securities
(like bonds or preferred stock) and may be traded separately from
them.
2)Naked:Naked warrants are issued without any accompanying securities.
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Regulations of Warrants
Securities Contract Regulation Act, 1956
Companies Act, 2013
SEBI (Issue of Capital And Disclosure Requirements)
Regulations, 2009
FEMA Regulations
Warrants are considered as securities under
section 2(h) of the securities contract regulation act, 1956. As per
Section 2(h) of Securities Contract Regulation Act,
1956 “securities” include.
Shares, scrips, stocks, bonds, debentures, debenture stock or
other marketable securities of a like nature in or of any incorporated
company or another body corporate;
Rights
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or interest in securities;
Convertible debentures
The Convertible Debentures are a type of loan that can be converted into the stock of
the company after a stipulated time period at the option of the holder or the issuer in
special circumstances. These are issued with the intent to raise money to expand or
maintain the business operations at a considerable low-interest rate. Convertible
debentures are different from convertible bonds because debentures are unsecured; in
the event of bankruptcy, the debentures are paid after other fixed-income holders.
Type of convertible debentures
•Compulsory convertible debentures provide for the conversion within 18 months of
the issue
•Optional convertible debentures provide for the conversion within 36 months of the
issue.
•Debenture with “call “ or “put” option in case the conversion exceeds 36 months.
Regulations of convertible debentures
•RBI
•Companies
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Act 1956
SHARE HOLDER VALUE CREATION
In highly volatile and complicated marketplace, creating
shareholder value is the key to success in today's marketplace.
The value of a firm is the market value of its assets which is
reflected n the capital markets through the market values of
equity and debt. Thus, share holder value is:
Share holder value = Market value of the firm – Market value of the
debt.
The market value of the shareholders ‘equity is directly
observable from the capital markets. In theory, the market
value should be equal the warranted economic value of the
firm. 24
Reasons for share holder value creation
Creating value for shareholders is now a widely accepted corporate objective.
The interest in value creation has been stimulated by several developments.
Capital markets are becoming progressively global. Investors can willingly
shift investments to higher yielding, often foreign, opportunities.
Institutional investors, which usually were inactive investors, have begun
exerting influence on corporate managements to create value for shareholders.
Corporate governance is instable, with owners now demanding liability from
corporate managers. Manifestations of the increased assertiveness of
shareholders include the need for executives to justify their compensation
levels, and well-publicized lists of underperforming companies and overpaid
officials.
Business press is highlighting shareholder value creation in performance
rating exercises.
More focus is to link top management compensation to shareholder returns.
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Determinants of Shareholder Value Creation
•Investment
•Dividend policy
•Growth
•Restructuring strategies
•Liquidity
•Risk
•Cost of capital
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Approaches for Measuring
Shareholder Value
Market value added (MVA)
Market-to- Book value (M/BV)
Economic Value Added (EVA)

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MARKET VALUE ADDED (MVA) /ENTERPRISE
VALUE ADDED (EVA)

Market value of the firm’s shares is a measurement of the shareholders wealth. It is the shareholders’
appraisal of the firm’s efficiency in employing their capital.
In terms of market and book values of shareholder investment, shareholder value creation (SVC) may
be defined as the excess of market value over book value. SVC is also referred to as the market value
added.
Market value is also referred as the enterprise value. It is the total of the firm’s market value of debt and
market value of equity. Invested capital (IC) or Capital employed (CE) is the amount of equity capital and
debt capital supplied by the firm’s shareholders and debt-holders to finance asset.
Market value added (MVA) is a performance indicator that shows the amount by which the market value
of a company (market value of debt and market value of equity) exceeds the total amount of capital
contributed by investors (shareholders and debt holders).
In terms of shareholders’ wealth maximization, market value added is a very important indicator, so the
higher MVA, the better.

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