To provide students with an introduction into the area of corporate finance and the role and importance of foreign exchange and capital markets.
This will be achieved through the development of a common vocabulary and a set of tools that will assist students in gaining a basic understanding of what is corporate finance and it will lay the foundations for further study in this area The main areas that are going to be covered are: the time value of money; investment decision criteria; risk, return and the opportunity cost of capital; the foreign exchange market; equity and debt markets
This course will make it possible for successful participants:
This course is expected to be available early 2009
This first topic deals with the concept of a corporation and how ownership and management interact to create an entity which is, at least in theory, perpetual. The development of these concepts is particularly relevant to the shipping industry, which has seen a major shift from the traditional family-held and managed enterprise to a “corporate entity”, especially in view of increased financing needs.
One of the first issues relevant to corporations (and indeed any “investing entity”) is evaluating investments and finding the money to pay for them. The starting point in this issue is understanding the time value of money and the concepts associated with it.
What is a corporation; the separation of ownership and management; how does this apply to shipping? The role of the financial manager
Discounting; Compounding; Discrete and continuous compounding Present Value; Future Value Annuities; Perpetuities Nominal v. real interest rates; the impact of inflation
A company’s shareholders want the firm to invest in every project that is worth more than it costs, i.e. where the net present value is positive. This topic deals primarily with the NPV rule, but also with other measures some companies use when making investment decisions. The shipping industry is known for using some of these techniques (such as the payback period) as “rules of thumb” to make investment decisions. Is this sound? Is it better or worse than other methods? Finally, how will a finance manager cope with situations when the firm has only limited capital? Is NPV still the appropriate measure under capital rationing?
How does one apply the NPV rule in practice? What cash flows need to be discounted and how do we forecast them? How does the financial manager pull everything into a forecast of overall, “bottom-line” cash flows and what is the role of taxes, changes in working capital, inflation and salvage values? How should a financial manager apply the net present value rule when choosing between investments with different economic lives? These are generic questions addressed by this topic, which are also very relevant to shipping investments.
So far, evaluating a project has made reference to “risk” and “opportunity cost of capital”. This topic deals with issues such as: how we define risk; what are the links between risk and the opportunity cost of capital; and how the financial manager can cope with risk in practical situations.
A shipping company is a de facto international company. One of the key risks it faces is that arising from currency fluctuations. This topic examines the functions performed by the foreign exchange market, its participants, size and geographic and currency composition. It distinguishes between spot, forward, swap and other types of instruments. It identifies the forms of currency quotations used by currency dealers, financial institutions and agents of all kinds when conducting forex transactions. In the latter part of this topic, the concept of “forex exposure” is discussed. The key types of exposure are examined, alongside ways to measure and manage them.
Although shipping has been traditionally financed by commercial bank lending, shipping firms increasingly look to international capital markets to source new funds, either equity or debt. This topic lays the foundations for understanding how a firm – international, multinational or global – can use the global capital markets to minimise its cost of capital and maximise its access to capital. The topic starts with a review of how a firm’s cost of capital can be calculated and then examines the link between cost and availability of capital. The topic continues with examining: how a firm can source equity in global markets; how it can minimise its cost of capital by balancing debt and equity; and how important it is to measure and manage interest rate risk.
