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CASH
Key goal is to keep playing the game!
Cash can be consumed, traded for other assets.
Accountants match revenues with expenses, distinguish between
expenditures and expenses Managers focus on cash inflow and cash
outflow
Pattern recognition
Patterns affecting cash: cyclical, seasonal,
competitive, technological, regulatory and
tax
Identifying opportunities: Using past and
current data -> Predict future
Decision making: Offensive or defensive
move
Not possible every time therefore responses
may be delayed
Scenario Planning
It is not the same as worst or best case
scenario considerations
Nor it is linear extrapolation
TYPES OF RISK
Systematic Risk:Risk inherent to the entire market or an
entire market segment. affects the overall market, not just a
particular stock or industry. This type of risk is both
unpredictable and impossible to completely avoid
Measure
Performance in
relative sense
Assess Performance
on long term value
added
SENSITIVITY ANALYSIS
CHRYSLER IN 1980
Potential car buyers avoided Chrysler
acquainted with the fact about the large
debt pool.
LEHMAN BROTHERS
2008
$619 BILLION IN DEBT
Market reluctance to buy
its bonds during 2008
VALUE TRANSFER
Size of Pie doesnt change, but size of slices
changes
Value transfer among various shareholder
may vary
Variation in company strategy also changes
the value transfer
EXAMPLE 1
SITUATION: Stock is overvalued
Issue of stock when stock is overvalued.
Results in a value transfer from new
shareholders to old shareholders and
management
They will benefit the extent of overvaluation
EXAMPLE 2
SITUATION: Management decision changes the
character of cash flow stream in a way
unanticipated by capital suppliers
Conservative to Risk company strategy
Supplier of debt will suffer a capital loss
INCENTIVES
SITUATION 1: FIRM IS NEAR BANKRUPTCY
Incentive for management is to invest in Risky projects
Shareholders have a worthless claim unless the firm strikes it rich
SITUATION 2: DEBT-RIDDEN
Managers have strong incentive to perform well after leveraged buyouts
SITUATION 3: NATURE OF CONTRACT BETWEEN MANAGERS AND
SUPPLIERS
Entrepreneur expresses 51% ownership
Gives 100% equity to the capital supplier
Will keep the 51% on the basis of actual performance
Have strong faith in own abilities
SUMMARY
Finance is a way of thinking about cash, risk and value
It doesnt answer the questions, but identifies the right questions
Financial perspective tells whether a decision is feasible or not
Only recurrent danger is it can easily become the excuse for
inaction