This content introduces Section A of the AFM syllabus, focusing on the expanded roles of a senior financial executive beyond traditional financial management, encompassing strategic planning, financial planning, communication, risk management, and ethical considerations, while also revising key concepts related to investment and financing decisions, particularly equity financing methods.
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So we are starting with section A of the
AFM syllabus
and in section A the core areas that we
will be discussing include the role of
senior financial executive or an advisor
like I always tell you this is how you
have to see yourself what are your roles
we'll be looking at that and that will
be talking about few things that you've
learned learned before when you did FM.
So this part there will be a lot of
refresh and maybe revision of what
you've known before but a bit new things
will also be added in that space. So
we'll look into those rows and we'll
look at risk management.
We look at behavior finance. Uh you've
not done this before. Risk management if
you've done it anywhere is the same
thing anywhere you seen it in any paper.
So that might be a revision for some
people but at the same time please pay
attention and I will close it out with
issues around ethics and corporate uh
environmental social and governance.
Right? So those are the four key areas
that we'll quickly cover under section
A. It's a bit big so I'll do couple of
videos to cover that and mostly
theoretical. After this we'll go into
section B. So this is what we want to
start with um today in this uh series.
So I'm going to start with the role of
senior financial
executive talking about an advisor,
financial advisor. So what are your
roles? As you know,
we've done this before in FM and we said
there are key roles that we expect the
finance manager to do. Those are the
same roles we'll be talking about here,
but we'll even talk about them more. But
before we go into the roles, why are we
even talking about the roles? Remember,
you have an organization
and every organization has its financial objective
objective
which is what they want to achieve.
Especially if you're a profit-making organization,
organization,
you have what we call the primary
objective, excuse me,
The primary objective of a company is
which means you want to be profitable.
You want to do an investment with NPV
that is positive whereas that is just
the minimum. There's a secondary
objective which is usually to achieve a target.
So remember primary objective we say we
want to be positive we want to be
profitable. So which means even if we
have NPV of plus 1 million for an
investment we are okay. We are
maximizing shareholders worth because we
are not making losses. We are making
more money for the shareholder. However,
on top of that, you can have a secondary
objective that is saying that before you
do an investment minimum, you must
and in that case it's gone beyond just
making positive NPV. Now you must make
certain amount and that is secondary
objective which means first of all you
must have achieved the primary objective
before you start talking about the
secondary objective. However, for you to
achieve this objective
maximizing share's worth or achieving
the target, there are roles that you
have to pay attention to. There are
things you have to do. There are
decisions that you have to take very
critical. Yeah. So those critical
decisions, we look at them
because if don't pay attention to those
decisions, you can't achieve this
objective. And the first one is for you
to choose the right investment. So
that's why we said investment decision
is critical
because it's investment that you make
that will generate those profit that
will generate those positive NPV. So
that's very critical and for you to make
investment decision
you need financing because no matter how
fantastic that investment is you need
money to
invest. So financing becomes the next
one and you finance investment you're
going to make profit. You have to share
the profit. How do you want to share it?
When do you want to share it? That is
where the dividend policy comes in. So
these three are your three key decisions
that you have to make as a senior
executive, as an advisor talking to a
client on what to do, right? So you need
to know where the fund will come from
the source.
What are you going to invest in? How do
you use the fund?
and when
and how much of dividend do you want to
share? Those are critical decisions that
has to to be taken.
However, this is what you've learned in
FM. But in AFM, we're now saying that
beyond all these critical decisions,
there are more decisions, there are more
things you have to there are more roles
you have to perform as a senior
executive. Yeah. And that is talking
about not just those three decisions but
even in terms of the overall strategy.
You need to be able to develop the
overall strategy of the company because
your overall strategy must align with
those decisions. So if you don't pay
attention to the strategy you'll be
making wrong decision. Take for instance
if your strategy is to be a cost
leadership then you know that you have
to minimize cost in all front. So when
you are doing your financing decision
most likely you'll be looking at debt
because we agree that generally speaking
debt is cheaper. So in financing you'll
be tending towards using debt instead of
using equity
or if your strategy is to be a grand
champion. You want to be environmentally
so conscious and all of that then your
investment will be limited because you
can't invest in oil and gas. You can't
invest in things that creating
pollution. You have to focus so much in renewables.
renewables.
Even your financing will also be
tailored towards financing that are
focusing on green investment. So you
can't get money from just anywhere but
you'll be able to get money from green funds,
funds,
right? So and you're going to chase
green investment as well. So your
strategy will influence your three key policies.
policies.
strategy will influence all of this. So
very important to take note of that. Likewise,
Likewise,
beyond those three decisions, you will
be involved in develop developing
Yeah. So it's not just what do you need
to invest in, you need to also be able
to build a financial plan, which means
you are trying to set goals
for the company as well. How much do we
need to make? Especially talking about
the secondary objective
of achieving target.
This one, this is part of your objective,
objective,
part of your roles to be able to set
those target for the company. The plans,
what do we need to achieve? How much do
we need to make? And even after
developing the plans, it goes beyond
that because you not need to communicate.
communicate.
So the plans have to be communicated to
the stakeholders because if they don't
know about it, how can they work to
achieve it? So you must be able to
to anybody that needs to know your stakeholders.
stakeholders.
Yeah. And beyond that, definitely you
must be able to monitor your plans
and control it because if it's going out
of hand, you might need to act quickly
or you might need to even sometimes
abandon the plan. Sometimes you need to
make changes and that is also why your
risk management will come handy very
critical. So beyond those three core
decisions, you must be able to work on
strategy, build financial plans,
communicate effectively, monitor your
plans, and do effective risk management.
Those are additional rules that are
coming in that you probably didn't learn
under financial management paper. But
now all of these you need to know about
it. Yeah. So just talking about those
three key decisions just to maybe do a
quick revision for you. Remember when
we're talking about investment decision
what you are saying is that should we
invest or should we not invest and if we
are going to invest then NPV has to be
positive and if you're using IRRa method
then our IRA definitely must be more
than our cost of capital.
that those are the things you learned on
that uh financial mindment paper and
section B of the syllabus will really do
a lot of justice to this investment
decision likewise section C on mergers
and acquisition we're going to learn a
lot and for financing decision what
we're saying is that we can either
finance with debt or equity
or we can even finance with both right
so but there are things we need to
consider if we're going to use either um
edit or equity and which I'm going to
cover um briefly as we move on. So maybe
let me spend time on this
capital because there are few new
concepts that you need to learn and I'm
Yeah, we know equity is a owner's fund.
Yeah. So a bit of deep dive into this
that is talking about the capital that
has been contributed by the
owners of the business. So this is capital
capital contributed
by the owners. And who are the owners?
So we know that this is our equity.
Yeah. And that means we are saying this
and the reserves
because they've contributed money their
money has made more money and all of
that will be going into the reserves. So
and remember that your reserves can
either be capital reserve.
So I'm giving you some revision now
because these terminologies are quite
important as we move on into the core of
the syllabus. You need to remember all
these things I'm talking about. And you
also have the revenue reserve.
Yeah. And I'm sure you know your re
revenue reserve is your retained
earnings and your capital reserve.
You're talking about things like
revaluation reserve. You're talking
about things like share premium.
So please take note of that. Now, how do
you raise equity?
How to raise equity?
Very critical. You know this.
Some of this you probably know from FM,
but some might be new. So, please pay
very good attention here. How do you
raise equity?
The first method you know is IPO, which
we call the initial public offering. So,
I'm going to explain each of these. Pay attention.
attention.
This is your initial public offer. And
what does this mean? This is just the
first time a private company is going public.
public.
Private company going public. And this
requires a lot of things. Doing a lot of
brochure, marketing, getting
consultants, legal people to do
evaluation of the company for you. Then
you have to go to the stock exchange.
Take for instance if you're in London UK
London stock exchange if you're in the
US maybe New York Stock Exchange Toronto
Stock Exchange. So you're going there to
say I want to go public which means I
want to sell my shares to the public. We
want to go from being owned by few
people to being owned by anybody who is
interested in us. And that first time
you are doing that is called IPO. After
IPO if you want to go and raise more
shares in public to make more money then
that is called your public offering.
because it's not initial. You've done it
before. This is probably your second
third time. Yeah. All of these what you
are doing is you are you are looking for
money. So this is financing.
So if you're looking for money through
issue of shares, you can use any of this
method. You can also use what we call
the placement.
Yeah, placement you also selling to
public but not just all public. This
time around you are selling your shares
only to selected. So you must have
identify the people you want to sell to.
Those are the people you are selling to.
Not just anybody can buy. Only few
people can buy. Yeah. So that's another
method. Another method which you'll
probably just be hearing for the first
time is what we call the stock exchange introduction.
Stock exchange introduction. This one is
slightly funny because you're not
selling shares actually here. You're not
raising fund here. What you're just
doing is going from either one stock
exchange to another stock exchange. The
ownership is not moving. Yeah.
Yeah.
The current owners remains the new
owners. So same
previous owners will become the public owners.
owners.
Then after
they can decide to sell to anybody. But
at the point where you are doing stock
exchange introduction, if you are a
private company, it means that the
private owners,
if there are just three of them, yes,
they they are the ones that will become
You are not bringing new people in. You
are not raising fund.
Or if you are in London stock exchange,
you're just moving to New York Stock Exchange.
Exchange.
You're just changing stock exchange.
You're just changing market. You're not
selling new shares. From there on, you
can decide to start selling and because
your shares will become available in the
public. So people can buy if you want to
sell, right? That is that method.
Another method is what you refer to as
the offer for sale. Please pay attention.
attention. OFS
OFS
I call it offer for sale.
here slightly different. So the company
does not sell to the public directly but
rather the company sells to
So issuing house is like another
establishment another organization. So
company sells to issuing house is now
left for the issuing house to sell to public
and in that is your offer for sale. So
in that case the company doesn't have
any interaction with the public.
The company will only deal with the
issuing house for when you have offer
for sale. So the shares are already
being issued to the issuing house before
being sold to the public.
Slightly different is what you call the
offer for sale. However, by tender.
Please pay attention to these
differences. Very important.
So here the minimum price is set. So a
Then once the minimum price is set,
let's say for example, the company said
the minimum price to be $5 per share,
the next thing the company will do is to
invite public to bid above that minimum
price. So the next step will be bidding.
bidding.
So the public will bid. Remember in the
first one the company sells directly to
issue house
but when you are saying you are doing
offer for sale by tender here is by bidding
bidding
by the public not just so people can
bid. So when people bid, what the
company needs to do is to select. So
take for instance from this bidding,
let's say you have $6 for 200 shares.
You have $10 for take for instance 400
shares. You have someone even so rich is
able to bid $200 maybe for 20 shares.
You're going to have list of different
buildings like that. Then what the
company needs to do is to select the
highest price that guarantees 100%
subscription. So please pay attention
not that the company will sell the
shares based on the ISB of $200. No,
what the company needs to do is if the
company wants to sell, take for instance
maybe 500 shares.
You already know that if you sell at 500 shares,
you'll be able to get the funds that you
need. So, which means you need the
company needs to see what price here
will guarantee that we're able to sell
everything. What price will we
guarantee? That is what the company
needs to find out. So which means after
bidding the company needs to sell at the
that's guarantee
guarantee
100% subscription.
So it's not like they will sell at the
highest bidding price, but they will
sell at a price that will help them sell
all the shares that they want to sell.
say at $6
you have maybe 500 people that want to
buy at $10 400 people at $200 only 20
people. This company will not sell at $200,
$200,
but rather they will look at it to say,
okay, let's say we need to raise some
amount of money and we need to sell some
amount of shares. Then they will be
looking at we can't sell at $200 now
because we sell at $200, only 20 people
will buy it. If we sell at $10, then we
are guaranteed that 420 people will buy
because definitely if a guy can beat at
$200, you'll be able to buy at $10. But
if they decide to sell at $6, then they
know that almost everybody will be able
to buy because this will go, this will
go and this will go. So they might even
be able to sell almost 20 shares. So in
that case, it means that at $6, you can
sell as much as possible. But at $8,
what can you say? So they will check all
the list of what they have and make sure
that they sell at a price that
guarantees full subscription of the
shares they are planning to sell.
And if they only need 400 shares to be
sold, then that means they will sell at
$10 because they can see that at $10,
they will even get 420 shares being
sold. So that is offer for sale by
tender and I hope that is clear. There's
another method again that I want to
introduce to you and that is called the spark
spark
sparks acquisition. And what is spark?
You probably have spark company in the
spark company. Spark company just means
special purpose acquisition company. So
companies.
So these are not your usual trading
business companies. They are just a
shell company. Let me call that just a
shell. They don't do any operation.
There are shell companies. Yeah. And
these companies what they do is they
just raise money through IPO.
stock market. Yeah. Through IPO. And the
question is what do they do with the
money? Once they have this money, they
and they acquire them. So they look for
private company
So it's the private company that
actually has operations,
not the spark. Yeah, but guess what?
Because Park is already listed through
IPO. So by the time they acquire this
private company, what happens next? The
private company automatically becomes
public on acquisition.
And you can see this make life so easy
for private companies because in this
case they don't need to go through all
the stress of getting quoted on stock
market. They just get acquired and
automatically become
they become public company and that is
what spark does. They just acquire
private businesses and makes them public.
The last one
under this section
I think maybe one there's one more I'm
going to touch on which is right issue.
Yeah because it's good to also revise
that with you. Let me not assume that
you still remember.
Let's look at Dutch auction. Then I will
finish it with right issue.
Dutch auction. Yeah. So Dutch auction
from the word auction you can tell what
it means. Here you're just trying to
test the market with a temporary price.
Yeah. To see how people will respond. So
you can try with $10. Are people willing
to buy at $15? How many people are
willing to buy? So you just contact
potential investor to see if they are
willing to buy at a set price. If they
are not willing to buy at a set price,
you bring it down. If they willing to
buy at that price, you might even test
something higher. Right? So take for
instance because an auction you can say
okay I want to sell my shares at $20
and by time you tested the market only
10 people are willing to subscribe. So
no, this 10 people is too small. Then
the next thing you do is you bring it
down $18,
maybe 25 people, $15, maybe you get 50
people. So until you have a price that
gives you the amount of funds that you
want and the number of shares that been
is satisfactory, then you are happy at
that price. So at that price you can now
say okay this is the price that I'm
going to be selling my shares. So that
is what auction Dutch auction is all
about. You start from high price then
you start reducing it to get to a point
whereby your shares are fully taken and
you are able to get the funds that you
need. So take note the difference
between a Dutch auction and offer for
sale by tender. They are slightly
different. In offer for sale by tender,
you set a minimum price, then the public
will come with a price that they are
willing to pay. Then you pick a price
that helps you. But in Dutch auction,
you set a price, then you be checking
and you are reducing until you get to
the price that you need. So please take
note. And lastly, I will talk about the
right issue
which I believe you still remember very
well. And well, what is right issue?
When we talk of right issue, we're
talking about issuing new shares to an
existing shareholders. And usually it is
sold at discount to the market price.
And why do you do right issue? Because
you don't want dilution. So remember
three things. Yeah. At discount, this is
sold at discount.
Existing shareholders are the ones that
buy and most importantly there's no
dilution when you're doing right issue.
Yeah. And please quick remember quick um
reminder about theoretical extra price.
This is important. Remember how we do
it. You need to know what theoretical
extra price is. And I told you in FM
theoretical extra price is just an
estimate. is an indication of where that
share would trade after the right has
been issued. Remember it says
theoretical so which means not real.
Yeah. And it's X which means is in the
past of what right issued. So the right
must have been issued. So that is the
price we expect the share to trade after
the right has been issued. So that is
theoretical extra price. And how do we
calculate it? For instance, we say just
for an example, let's say we want to do
one for five. Yeah, one for five, right?
Is which means for every five old shares
you have, we will will give you one new
share. If the market price, take for
instance, is $20
and you want to issue that right at a
discount, definitely say it's a 10% discount.
discount.
So what this means is that the right
price will be 90% of 20 and that is uh $18.
$18.
So which means the right will be issued
the new share of one will be issued at
$18. So if you need to calculate
theoretical extra price please quick
revision is what I'm doing for you now
take note. So 145 is the ratio. The one
new share will be issued at $18 and the
five old share definitely at market
price which is $20. So if you do the
valuation of that 18 * 1 that is 18 20 *
5 that is 100. So for every ratio which
is totaling six you have a valuation of
18 + 100 that is 118. So which means our
theoretical extract price is equals to
118 / 6 and that will give you let's see
what that will be.
Get a calculator quickly
118 / 6 and that's $19.7.
So which means after the shares the
right has been issued we will expect
that this share will trade at $19.7 but
not necessarily going to be the case but
that is the indication that we can get.
Yeah. Yeah. Finally, let me also mention
concepts such as the bonus or what you
call the script dividend or script issue
or capitalization issue is the same
word, same meaning. Capitalization
issue. You are an advanced finance
manager. So you cannot say you don't
know what all this terminology means.
You will see them in your questions in
exams as we move on in the syllabus. So
please pay attention and make sure you
remember this bonus issue just mean that
you are giving shares to existing
shareholders free of charge. You are not
collecting money from them. So usually
So you might be dividend you're trying
to issue from retain earnings. So in
this case you're debiting your retain
earnings and crediting share capital.
Right? So remember shareholders don't
pay for this. is you given to them free
of charge. Yeah. So usually your equity
will not change. So no change to equity balance.
It's just moving around. You're just
capitalizing the reserve. So take for
instance remember if you are doing
dividend that you're not paying cash.
Instead you are giving shares. You're
going to be debiting return earnings
which means you're moving from revenue
reserve and you are crediting share capital.
capital.
you're going to capital that is why it
is also called capitalization issue
because you are capitalizing your
reserve by moving funds from that to
becoming shares also lastly there's also
a concept called share split
yeah share split very important and what
we are saying here is you're just
dividing the shares that's what you're
saying you're dividing the share capital
yeah And what does it happen when you do
that? It makes your share to be cheaper.
And your share is cheaper then mostly
becomes more marketable because means
more people will be able to afford your
share. Yeah. Take for instance if your
share is currently let's say
is at $5 per share.
Share split means that if this company
has 100 shares issued and they are all
trading at $5, if they decide to do
share split say of two for one. So which
means for every one share it will become
two then that means this company is
going to have 200 shares.
But the company needs to maintain its
capitalization because your
capitalization amount will not change
because you are splitting though the
market might react in certain way and
that might change but initially when you
split it's it has to be done
proportionately and means that this
share will now become $2.5
and in that case you still maintain your
$500 capitalization which is the
situation you had originally. Yeah. So
after that has been done, market can now
react and this price might keep changing
going forward. So those are key concepts
that I need to revise with you under equity.
equity.
The next video I'm going to go into
debts and um I'll do a quick revision
with you as well on types of debt and
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