20110417上海交大CFAä&cedil

20110417上海交大CFAä&cedil

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Unformatted text preview: 金程教育2011年6月CFA一级强化班讲义 金程教育 Corporate Finance 讲师:练叔凡 日期:2011年4月17日 地点: ■ 上海 □北京 □深圳 □南京 上海金程国际金融专修学院 Topic Weightings in CFA Level I Content Session No. Weightings Study Session 1 Ethics & Professional Standards 15 Study Session 2-3 Quantitative Analysis 12 Study Session 4-6 Economics 10 Study Session 7-10 Financial Reporting and Analysis 20 Study Session 11 Corporate Finance 8 Study Session 12 Portfolio Management and Wealth Planning 5 Study Session 13-14 Equity Investment 10 Study Session 15-16 Fixed Income 12 Study Session 17 Derivatives 5 Study Session 18 Alternative Investments 3 2-79 100% Contribution Breeds Professionalism 100% Corporate Finance SS10 R44: Capital Budgeting R45: Cost of Capital R46: Measures of Leverage (New Reading) R47: Dividends and Share Repurchases: Basics (New Reading) R48: Working Capital Management R49: Financial Statement Analysis R50: The Corporate Governance of Listed Companies: A Manual for Investors 3-79 100% Contribution Breeds Professionalism 100% Role of the Financial Manager (2) (1) Firm's Financial operations manager Financial (4a) markets (4b) (3) (1) Cash raised from investors: Cost of capital (WACC) (2) Cash invested in firm: Capital budget (NPV, IRR, PBP, DPBP, PI) (3) Cash generated by operations: Leverage (DOL, DFL, DTL), WC management (4a) Cash reinvested (4b) Cash returned to investors (Dividends and share repurchases) 4-79 100% Contribution Breeds Professionalism 100% Reading 44 Capital Budgeting 5-79 100% Contribution Breeds Professionalism 100% R44 Key Points Summary Capital budget assumption Decision are based on cash flows Time value of money After tax basis Project evaluation methods NPV IRR PBP DPBP PI Relationship between NPV and IRR Impact of NPV: NPV equals change of a company’s market value 6-79 100% Contribution Breeds Professionalism 100% The Basic of Capital Budgeting Capital budgeting is the process of determining and selecting the most profitable long-term projects Idea generation Analyzing project proposals Create the firm-wide capital budget Monitoring decisions and conducting a post-audit Capital projects can be classified as Replacement projects Replacement decision to maintain the business Replacement decision for cost reduction purpose Expansion projects Expansion projects for existing product Detailed analysis required Expansion projects for new product or new services Mandatory investment: regulatory, safety, and environmental project Other projects: projects are not easily analyzed through the capital budgeting process 7-79 100% Contribution Breeds Professionalism 100% Assumption of Capital Budgeting Decision are based on cash flows, not accounting income Incremental cash flows: the CF that is realized because of a decision Ignore: Sunk costs (any costs that cannot be avoided, even if the project is not undertaken). Financing costs / interest cost (financing costs are included in the project cost of capital or WACC). Include: Externalities A positive externalities A negative externalities: Cannibalization(食人族,吃同类的) Opportunity cost The timing of cash flows is important → Time value of money Cash flow are analyzed on an after tax basis 8-79 100% Contribution Breeds Professionalism 100% Mutually Exclusive vs. Independent Projects Independent projects (IRR) Projects are unrelated to each other and allow for each project to be evaluated based on its own profitability Mutually exclusive projects (NPV) Only one of several potential projects can be chosen Rank all alternatives and select the best one Project sequencing Some projects must be undertaken in a certain order, so that investing in a project today creates the opportunity to invest in other projects in the future Unlimited funds vs. Capital rationing Unlimited funds: company can raise the funds it wants for all profitability projects Many firms have constraints on the amount of capital they can raise, and must use capital rationing (choose more profitability projects) 9-79 100% Contribution Breeds Professionalism 100% Project Evaluation Methods NPV: Net present value IRR: Internal rate of return PBP: Payback period DPBP: Discount payback period PI: Profitability index 10-79 100% Contribution Breeds Professionalism 100% NPV: Net Present Value CFn CF1 CF2 + + ... + NPV = CF0 + 1 2 (1 + k ) (1 + k ) (1 + k ) n Decision making For independent projects: accept if NPV > 0 For mutually exclusive projects: choose the one with the highest NPV Advantage Shows the amount of gains as currency amount The NPV of project increases the value of shareholders instead of creditors Realistic discount rate – opportunity cost of funds Disadvantage Size of projects ignored 11-79 100% Contribution Breeds Professionalism 100% IRR: Internal Rate of Return n C Fi t= 1 (1 + IR R ) ∑ i = C F0 Decision making Minimum acceptance criteria: accept if IRR ≥ required rate of return Ranking criteria: choose the highest IRR Advantage Reflect the profitability of the project Disadvantage Assume the reinvestment rate is IRR No IRR & multiple IRR Conflicting ranking results of mutually exclusive projects with NPV 12-79 100% Contribution Breeds Professionalism 100% PBP: Payback Period Payback Period = the number of years to recover initial costs (非整数年数处理) Decision making Mutually exclusive and independent project: shorter PBP Minimum acceptance criteria: compare with industry average Advantage Simple An indication of a project’s risk and liquidity Disadvantage: no economically meaning Ignores the time value of money Ignores cash flows after the payback period Ignores the profitability of the project 13-79 13 100% Contribution Breeds Professionalism 100% DPBP: Discounted Payback Period Discounted Payback Period is the number of years it takes for the cumulative discounted cash flows from a project to equal the original investment (非整数年 数处理) Decision making The relation between DPBP and NPV Minimum acceptance criteria: DPBP exists Advantage An indication of a project’s risk and liquidity Considers time value of money Disadvantage: no economically meaning Ignores cash flows after the payback period → a poor measure of profitability 14-79 14 100% Contribution Breeds Professionalism 100% PI: Profitability Index PI = P V o f f uture cash f olow NPV = 1+ CF0 CF0 Decision making Minimum acceptance criteria: accept if PI > 1 (NPV>0) Advantage profitability of the project Disadvantage Complex calculation Benefit-cost ratio 15-79 100% Contribution Breeds Professionalism 100% NPV Profiles NPV profile: a graph that shows a project’s NPV for different discount rates NPV 800 Project B’s NPV Profile Crossover Rate=7.2% Project A’s NPV Profile IRRB=11.8% 5 16-79 10 IRRA=14.5% Cost of Capital (%) 15 100% Contribution Breeds Professionalism 100% NPV vs. IRR NPV is superior to IRR: consistent with the goal of shareholders wealth maximization Advantages of NPV and IRR Based on cash flows Considering time value of money Take into account the cash flows generated over the whole project life Disadvantages of IRR Conventional cash flows pattern Vs. Unconventional cash flow pattern Multiple IRRs or no IRR under unconventional CF Unrealistic reinvestment assumption 17-79 100% Contribution Breeds Professionalism 100% Population of NPV/IRR vs. PBP Location European countries use the payback period method as much as or more than NPV and IRR methods Size of the company Larger companies tended to prefer the NPV and IRR over the payback period Public and Private Private companies used the payback period more often than did public ones Management education The higher the level of education (i.e., MBA), the more likely the company was to use discounted cash flow methods such as the NPV and IRR NVP/IRR是先进指标的代表,土的用PBP 18-79 100% Contribution Breeds Professionalism 100% Impact of NPV Rule and Stock Price When the NPV is positive, firm value is increased and shareholder wealth is increased An NPV of zero means the project does not increase shareholder wealth An negative NPV means decrease shareholder wealth When the NPV is positive, stock price is increased The NPV of a project = change of the market value of the stocks 19-79 100% Contribution Breeds Professionalism 100% Reading 45 Cost of Capital 20-79 100% Contribution Breeds Professionalism 100% R45 Key Points Summary Component weight of WACC: market value or target structure Component cost of WACC Bond: YTM or debt-rating approach Preferred share: Dividends/Price Equity Bond yield plus risk premium approach CAPM approach Discounted cash flow approach CAPM approach Project’s beta: βE与βA的关系;从上市公司的βE算出项目的βA,再从项目βA 推出自己公司的βE CRP: 通过股权波动比,把两国债券收益差调整成股权收益差 Flotation cost: considered as CF0 MCC and break point 21-79 100% Contribution Breeds Professionalism 100% WACC WACC = ( w d )[ k d (1 − t )] + ( w ps )( k ps ) + ( w ce )( k s ) w is the proportion of each type of capital: Market value or target/optimal capital structure Yield to maturity approach kd kps ks Cost of debt Debt-rating approach Cost stock of preferred CAPM approach Cost of equity Bond yield plus risk premium approach DDM approach 22-79 100% Contribution Breeds Professionalism 100% After-Tax Cost of Debt Kd= r (1-t) = interest rate – tax saving Use the market interest rate on new debt, not the coupon rate Yield to maturity approach (annual return): 求合适的折现率 Debt-rating approach: 参考类似期限、等级债券 23-79 100% Contribution Breeds Professionalism 100% Cost of Preferred Stock k ps = D ps P D: preferred dividends P: market price of preferred stock 24-79 100% Contribution Breeds Professionalism 100% Cost of Equity Bond yield plus risk premium approach ks= bond yield + risk premium CAPM approach ks = rf +β(rm - rf) Discounted cash flow approach ks = (D1/P0)+g g = (1-payout rate) (ROE) 25-79 100% Contribution Breeds Professionalism 100% Bond yield plus risk premium approach ks= bond yield + risk premium Bond yield = market yield on the firm’s long-term bond Risk premium = historical spreads between bond yield and stock yield Emerging market, risk premium should be 3-5% 26-79 100% Contribution Breeds Professionalism 100% Capital Asset Pricing Model (CAPM) Step 1: estimate the risk free rate, RF Step 2: estimate the stock’s beta Step 3: estimate the expected rate of return on the market, or market risk premium Step 4: use CAPM ks = rf +β(rm - rf) Beta problems A project’s beta Country risk premium 27-79 100% Contribution Breeds Professionalism 100% CAPM: Project’s Beta Beat is affected by the systematic components of business and financial risks. Business risk Sales risk from the uncertainty of revenues Operating risk from the company’s operating cost structure Financial risk Fixed cost from using debt and leases brings uncertainty to net income and net cash flows A project’s beta is a measure of its systematic or market risk Beta can be observed from firms in the same investment class as the proposed investment. 28-79 100% Contribution Breeds Professionalism 100% CAPM: Project’s Beta (cont’) A two-step process is used (pure-play method) Step 1: Convert the observed, equity beta of the comparable public company, into an asset beta, or pure project beta, β u . Removing the effects of financial leverages β asset = β equity [ 1 1 + (1 − t ) D E Step 2: Calculate the new equity beta of this non-public company for the proposed capital structure of the new line of business β equity 29-79 D = β asset [1 + (1 − t ) ] E 100% Contribution Breeds Professionalism 100% CAPM: Project’s Beta (cont’) Company’s risk is shared by both share holders and creditors β asset = β debtωdebt + β equityωequity β debt = 0 β asset = β equityωequity β asset = β equity E E + (1 − t ) D 相同项目βA相同,不同公司同杠杆βE不同 从上市公司的βE算出项目的βA,再从项目βA推出自己公司的βE 30-79 100% Contribution Breeds Professionalism 100% CAPM: Country Equity Risk Premium Country equity risk premium in developing market Kce = Rf + β[E(Rmkt)- Rf + CRP] 超额回报中还要加入国家溢价 C RP = Sovereign yield spread × ( Annualized standard deviation of equity index of developing country ) Annualized standard deviation of sovereig n bond market in terms of the developed market currency CRP两国股权收益差:先求国债收益率差,再乘以两国股权波动的倍数(指 数年化标准差),把债的收益差倍增为股权的收益差 31-79 100% Contribution Breeds Professionalism 100% Dividend Discount Model Approach Gordon growth model P0 = D1 / (Kce-g) Kce= D1 / P0+g D1 / P0: dividend yield g = Retention rate*ROE = (1-payout rate)*ROE Payout rate = D/EPS 32-79 100% Contribution Breeds Professionalism 100% Flotation Cost Floatation cost: the costs associated with the issuance of new securities charged by investment bank, while based on the size and type of offering Incorrect method D1 re = +g P0 -F Correct method: consider as CF0, as floatation costs are a cash flow at the initiation of the project 33-79 100% Contribution Breeds Professionalism 100% Marginal Cost of Capital Cost of Capital (%) MCC is WACC for one more dollar of capital WACC=8.8% 8.8 WACC=8.6% 8.6 New capital raised $ 120 million Break point = amount of capital at which t he component' s cost of capital changes weight of the component in the capital structure 总融资临界点:杠杆固定,股权或债券融资成本条增时对应的总融资规模 34-79 100% Contribution Breeds Professionalism 100% Reading 46 Measures of Leverage 35-79 100% Contribution Breeds Professionalism 100% R46 Key Points Summary Degree of operating leverage (DOL) EBIT对销量的弹性 Q(P-V)/[Q(P-V)-F] Degree of financial leverage (DFL) EPS对EBIT的弹性 EBIT/EBIT-I Degree of total leverage DTL=DOL*DFL=Q(P-V)/[Q(P-V)-F-I] Breakeven point Q*(P-V)=F 36-79 100% Contribution Breeds Professionalism 100% Leverage and Risk Leverage is the use of fixed costs, operating or financial, in a company’s structure 固定支出带来的收益 Operating leverage results from fixed operating cost Financial leverage results from the use of debt financing and its associated fixed costs Business risk is the risk associated with operating earnings and results from a combination of sales risk and operating risk. 销售与EBIT的关系 Financial risk is reflected in the greater variability of EPS compared to the variability of operating earnings (EBIT) as a result of using debt in the firm’s capital structure. EBIT与NI的关系 37-79 100% Contribution Breeds Professionalism 100% Operating Leverage DOL Definition: EBIT对销售的弹性 ΔEBIT percentage change in EBIT DOL = = EBIT ΔQ percentage change in sales Q EBIT=Q(P-V)-F Equation: DOL = 38-79 Q( P − V ) S − TVC = Q( P − V ) − F S − TVC − F 100% Contribution Breeds Professionalism 100% Financial Leverage DFL Definition: ΔEPS percentage change in EPS = EPS DFL = percentage change in EBIT ΔEBIT EBIT NI=(EBIT-I)*(1-t) → EPS=(EBIT-I)*constant Equation: DFL = EBIT EBIT − Interest When interest is zero, DFL=1. There is no financial leverage. DTL definition and equation: %ΔEPS DTL = DOL × DFL = %ΔQ 39-79 DTL = Q( P − V ) S − TVC = Q( P − V ) − F − I S − TVC − F − I 100% Contribution Breeds Professionalism 100% Leverage and risk Leverage The use of debt in a company’s capital structure reduces net income due to the added interest expense increase equity owner’s ROE increase the rate of change for ROE. The risks: creditor vs. owners Creditor Owners Claim on the assets and earnings Priority claim Residual claim after all expense Potential reward Limited to the promised interest and principal Greater potential upside returns 40-79 100% Contribution Breeds Professionalism 100% Breakeven Point The breakeven point is the number of units produced and sold where a company’s fixed costs are just covered 毛利=固定成本 (P-V)*Q=F QBE = Fixed operating and financial cos ts P −V $ QOBE = Fixed operating cos ts P −V Sales Revenue Total Operating Cost Net Profit (EBIT) Net Loss Breakeven Point (EBIT=0) Fixed cost Q 41-79 100% Contribution Breeds Professionalism 100% Reading 47 Dividends and Share Repurchases: Basics 42-79 100% Contribution Breeds Professionalism 100% R47 Key Points Summary Dividends Impact of cash dividends, stock dividends (stock split)对销量的弹性 Chronology Share repurchase Methods of share repurchase Impact of share repurchase 43-79 100% Contribution Breeds Professionalism 100% Dividends Cash dividends Reduces both the value of the company’s assets and the market value of equity. Comes in the form of Regular dividends Special dividends Liquidating dividends Stock dividends and stock splits Both create more shares A proportionate drop in the price per share No effect on shareholder wealth Reverse stock splits Fewer shares outstanding; higher stock prices; unchanged shareholder wealth 44-79 100% Contribution Breeds Professionalism 100% Dividend Payment Chronology Dividend payment chronology (t+3 3天后交割) Ex-dividend date: first day a share of stock trades without the dividend Holder-of-record date: the date on which the shareholders of record are designed to receive the dividend The ex-dividend date Holder-of-record date 2 days Date of payment The declaration date 45-79 100% Contribution Breeds Professionalism 100% Share Repurchase Three share repurchase methods Buy in the open market Buy a fixed number of shares at a fixed price (tender offer 要约回购) Repurchase by direct negotiation Repurchase financed with company’s excess cash Reduce number of shares outstanding → increase EPS Reduce interest income and earnings → decrease EPS Compare earning yield and after-tax yield of company fund Repurchase financed with debt Reduce number of shares outstanding → increase EPS Incur interest cost and reduce earnings → decrease EPS Compare earning yield and after-tax cost of debt 46-79 100% Contribution Breeds Professionalism 100% Impact of Dividends and Share Repurchase The impact on the indicators due to cash dividend, stock dividend, stock split and repurchase (post vs. pre) Indicator Cash Div. Stock Div. Stock Split Repurchase No changes Increase Increase Decrease Ex-div Pro-rata decrease Pro-rata decrease Increase EPS No change Decrease Decrease Increase P/E Decrease No change No change Uncertain Decrease by cash paid No change No change Decreased by cash paid Share owned by individual No changes Increase Increase Depends Ownership value Decrease in value but same in % of ownership No changes No change Increase No. of shares Stock price Market value 47-79 47 100% Contribution Breeds Professionalism 100% Reading 48 Working Capital Management 48-79 100% Contribution Breeds Professionalism 100% R47 Key Points Summary Liquidity measures Working capital management Manage cash position Forecast short-term cash flow Monitor Cash Uses and Levels Short-term securities tools Bank source Non-bank source Yield calculation 49-79 Receivable management Inventory management Payable management Short-term funding Working capital management Current ratio / quick ratio / cash ratio Receivable / payable / inventory turnover Operating cycle / cash conversion cycle Discount-basic yield Money market yield Bond equivalent yield 100% Contribution Breeds Professionalism 100% Liquidity measures Working Capital Turnover Proceeds from the sale of marketable securities A/R Inventory Sale Purchase A/P Pay for Inventory Cash out Pay by customer Cash In Cash tied up 50-79 100% Contribution Breeds Professionalism 100% Cash on hand Drags and Pulls on Liquidity Drag on liquidity-delay or reduce cash inflows Uncollected receivables Obsolete inventory Tight credit Pull on liquidity-accelerate cash outflows Making payment early Reduced credit limits Limits on short-term lines of credit Low liquidity positions 51-79 100% Contribution Breeds Professionalism 100% Liquidity Measures current assets current ratio= current liabilities quick ratio= cash+short-term marketable securities+receivables current liabilities cash ratio= cash+short-term marketable securities current liabilities 52-79 100% Contribution Breeds Professionalism 100% Liquidity Measures (cont’) credit sales receivables turnover = average receivables number of days receivable= 365 receivable turnover cost of g oods sold inventory turnover= averag e inventory number of days inventory= 53-79 365 inventor y t urnover 100% Contribution Breeds Professionalism 100% Liquidity Measures (cont’) purchases payables turnover ratio= averag e trade payables number of days of payables= 365 p a ybles turnover ratio operating cycle=days of inventory + days of receivables Cash conversion cycle=days of inventory + days of receivables – days of payable 54-79 100% Contribution Breeds Professionalism 100% Accounts Receivable Management Accounts receivable management Calculating Average days of A/R based on Receivable aging schedule Make comparison with Historical trends & Other firms Receivables Aging Days outstanding March Weighte $ 000’s d Average Collection Days Days * Weight <31 days 200 40% 22 8.8 31-60 days 150 30% 44 13.2 61-90 days 100 20% 74 14.8 >90 days 50 10% 135 13.5 Weighted Average Collection Period 55-79 100% Contribution Breeds Professionalism 100% 50.3 days Inventory management Inventory management Calculating Average days of inventory and Inventory turnover ratios Make comparison Within the same industry and business strategies 56-79 100% Contribution Breeds Professionalism 100% Payable Management Typical terms on payables (trade credit) contain a discount available to those who pay quickly as well as a due date. Term of “2/10 net 60” means that the invoice is paid within 10 days, the company gets a 2% discount on the invoiced amount and that if the company does not take advantage of the discount , the net amount is due 60days from the date of the invoice. discount 365/No. of days beyond discount period cost of trade credit=(1+ ) −1 1-discount 相当于:在第10天借入98元支付A/P,在第N天偿还100元(N小于60), 求年化借款利率 57-79 100% Contribution Breeds Professionalism 100% Cash Management The purpose of managing a firm’s daily cash position is to make sure there is sufficient cash ,but to avoid keeping excess cash balances. U.S. Treasury bills Short-term federal agency securities Bank certificates of deposit Refer to Fixed Income Banker’s acceptances Time deposits Repurchase agreements Commercial paper Money market mutual funds Adjustable-rate preferred stock 58-79 100% Contribution Breeds Professionalism 100% Cash Management - Yield The percentage discount from face value is: % discount=( FV - P ) FV Refer to Quantitative Method The discount-basis yield (bank discount yield or BDY) is: FV - P 360 d is c o u n t b a s is yie ld = ( )( ) FV t 360 = % d is c o u n t × ( ) t 59-79 100% Contribution Breeds Professionalism 100% Cash Management - Yield (cont’) The money market yield is: F-P 360 360 R mm =( )( )=HPR × ( ) P t t The bond equivalent yield is: F-P 365 365 BEY=( )( )=HPR × ( ) P t t Refer to Quantitative Method 60-79 100% Contribution Breeds Professionalism 100% Short Term Investment policy The risk of company’s short-term investment Credit risk Market risk Liquidity risk Foreign exchange risk Passive strategy & active strategy Investment policy Includes: investment strategy; the product; why to choose this/these product; what the amount; security rating; limitations or/and restrictions. 61-79 100% Contribution Breeds Professionalism 100% Short Term Funding Short term deficient in cash balance can be managed by following ways: Sources of short-term funding from banks Lines of credit: for large, financially sound companies Uncommitted Line of credit: bank may refuse to extend an offer of credit Committed Line of credit: bank charges a fee for making a commitment for short term lending, more reliable A revolving line of credit: a commitment for longer term lending, more reliable than Committed term lending Pledge assets as collateral for bank borrowings Banker’s acceptances: mainly used by firms that export goods, who get guarantee from the buyer’s bank Factoring: sale A/R to bank Non-Bank sources of short-term funding Expensive for smaller firms and firms with poor credit Commercial paper: creditworthy companies can issue short-term debt securities 62-79 100% Contribution Breeds Professionalism 100% Reading 49 Financial Statement Analysis 63-79 100% Contribution Breeds Professionalism 100% R49 Key Points Summary Financing surplus Interest is based on long-term debt, rather than driven by sales directly, that results surplus which is difference between the projected growth in assets and the projected growth in liabilities and stockholders’ shares 64-79 64 100% Contribution Breeds Professionalism 100% Reading 50 The Corporate Governance of Listed Companies: A Manual for Investors 65-79 100% Contribution Breeds Professionalism 100% R50 Key Points Summary Good corporate governance Board of directors Independence & Qualification Board committees Management Shareholder rights 66-79 100% Contribution Breeds Professionalism 100% Corporate Governance Corporate governance is the set of internal controls, processes, and procedures by which firms is managed Good corporate governance practices seek to ensure that: The Board of directors protects shareholder interests The firm acts lawfully and ethically in dealing with shareholders The rights of shareholders are protected and shareholders have a voice in governance The board acts independently form management Proper procedures and controls cover management’s day-to-day operations The firm’s financial, operating and governance activities are reported to shareholders in a fair, accurate and timely manner 67-79 100% Contribution Breeds Professionalism 100% Corporate Governance: Content Corporate Board of directors Independence & Qualification Board committees Management Shareholder rights 68-79 100% Contribution Breeds Professionalism 100% Board of Directors The duty of board is to protect the long-term interests of shareholders An effective board needs to have the independence, experience, and resources necessary to perform the duty There is a need for specific, specialized, independent advice on various firm issues or risks The independent board will have the ability to hire external consultants without management approval, this enables the board to receive specialized advice and provide independent advice without the influence by management interests The independence and qualification of board is essential 69-79 100% Contribution Breeds Professionalism 100% Independence A majority of the board of directors is comprised of independent members (not management). The board meets regularly outside the presence of management. Board members are not closely aligned with a firm supplier, customer, share-option plan or pension adviser. The chairman of the board is not the CEO or former CEO of the firm. Otherwise, impair the ability and willingness of the board to express opinions contrary to those of the management. Independent board members have a primary or leading board member in cases where the chairman is not independent 70-79 100% Contribution Breeds Professionalism 100% Frequency of Board Elections to Ensure Independence Whether there are annual elections or staggered multiple-year terms (a classified board). A classified board may serve another purpose—to act as a takeover defense. Whether the board filled a vacant position for a remaining term without shareholder approval. Whether shareholders can remove a board member. Whether the board is the proper size for the specific facts and circumstances of the firm. 71-79 100% Contribution Breeds Professionalism 100% Other Policies to Ensure Independence Discourage board members from receiving consulting fees for work done on the firm’s behalf Discourage board members from receiving finders’ fees for bring mergers, acquisitions, and sales to management attention Limit board members’ ability to receive compensation beyond the scope of their board responsibilities Disclose all material related-party transactions or commercial relationship with board members 72-79 100% Contribution Breeds Professionalism 100% Qualification Board members without the requisite skills and experience are more likely to defer to management when making decisions. This can be a threat to shareholder interests. When considering the qualifications of board members, consider whether board members: Can make informed decisions about the firm’s future. Can act with care and competence as a result of their experience with: Technologies, products, services which the firm offers. Financial operations and accounting and auditing topics. Legal issues. Strategies, planning. Business risks the firm faces. Have necessary experience and qualifications Have other board experience. 73-79 100% Contribution Breeds Professionalism 100% Qualification (cont’) When considering the qualifications of board members, consider whether board members: Have served on board for more than 10 years. While this adds experience, these board members may be too closely allied with management. Have made any public statement indicating their ethical stances. Have had any legal or regulatory problems as a result of working for or serving on the firms’ board or the board of another firm. Regularly attend meetings. Are committed to shareholders. Do they have significant stock positions? Have they eliminated any conflicts of interest? 74-79 100% Contribution Breeds Professionalism 100% Management: Code of Ethics A code of ethics for a firm sets the standard for basic principals of integrity, trust and honesty, it gives the staff behavior standards and addresses conflicts of interest. Make sure the board of directors receives relevant corporate information in a timely manners The ethical code should be in compliance with the corporate governance laws of the location country and local stock exchange The ethical code should prohibit advantages to the firm’s insiders that are not offered to shareholders A person should be designated to be responsible for corporate governance Give reasons to waivers from the ethical code received by selected management personnel Explain the reasons for any recent waivers of the ethical code The firm’s ethical code should be audited and improved periodically 75-79 100% Contribution Breeds Professionalism 100% Board Committee Audit committee Committee Member independence Committee Member qualification Independent auditor ( Internal & External) Remuneration/Compensation committee Committee Member Independence Appropriate Executive Compensation Packages Reasonable option schemes Nominations Committee Committee Member Independence Creating nomination procedures and policies Recruiting qualified board members Regularly reviewing performance, independence skills, and experience of existing board members 76-79 100% Contribution Breeds Professionalism 100% Shareholder Rights The ability to vote is a fundamental shareholder right Investors should consider whether their ability is limited by the firm, which makes them difficult to vote Voting rules Confidential Voting Ensure all votes are counted equally and less influenced by insiders Cumulative Voting Enhance the likelihood that shareholders’ interest are represented on the Board Voting for other corporate Changes The ability of shareholders to approve changes to the company’s corporate structure and policies 77-79 100% Contribution Breeds Professionalism 100% Shareholder Rights (cont’) Shareowner Sponsored Proposals Shareowner-Sponsored Board Nominations Whether the shareholders have the power to put forth an independent Board nominee Shareowner-Sponsored Resolutions The right to propose initiatives for consideration at the annual meeting Advisory or Binding Shareowner Proposals Whether the Board or Management are requires to actually implement any shareholder – approved proposal Shareowner Legal Rights Whether the shareholders have the legal right to enforce and protect shareholder rights 78-79 100% Contribution Breeds Professionalism 100% Shareholder Rights (cont’) Takeover defenses Provisions are designed to make a company less attractive to a hostile bidder Golden parachutes → rich compensation package to target’s top managers who lose their jobs as a result of takeover Poison pills → give right to target’s shareholders to buy the target’s shares at a discount Greenmail → allow the target to buy back its shares form the bidder at a premium to the market price Whether the firm requires shareholders’ approval to implement such Takeover defenses Whether the shareholders have the power to put forth an independent Board nominee Different classes of common equity 79-79 100% Contribution Breeds Professionalism 100% ...
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This note was uploaded on 11/02/2011 for the course FINANCE 612 taught by Professor Liyang during the Spring '11 term at Covenant School of Nursing.

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