Corporate Finance

Aims

  1. Understand the application of capital budgeting and investment appraisal techniques applied to complex situations.

  2. Understand the financing decision and the uses and limitations of the weighted average cost of capital. The Modigliani Miller proposition and optimal capital structures.

  3. Understand the portfolio approach to risk and uncertainty and the relationship between risk and return.

  4. Understand the issues surrounding dividend and distribution policies.

  5. Demonstrate a knowledge of various business valuation techniques.

  6. Understand the problems associated with foreign exchange management.

Programme Content and Learning Objectives: 

After completing the programme students should be able to:

I. The broad environment of financial decision making involving corporate objectives and functioning of the capital markets:

Evolution of financial management in response to economic and other external factors e.g. technical developments and inflation resulting in the globalisation of financial decision making. The agency problem, finance theory in practice incorporating market and other imperfections. Financial markets, market efficiency and short-termism.

2. The capital investment decision in practice, including unequal project lives, effects of inflation and risk:

Identifying the relevant information in investment analysis. Evaluating replacement and other investment decisions. The problems of inflation and taxation. Replacement decisions. The control process as part of the investment decision. Post audit reviews.

3. The impact of risk and uncertainty on the financial decision-making process and the contribution of modern portfolio theory:

The need to understand how uncertainty affects investment decisions. Managers’ attitudes to risk. Mechanics of portfolio construction. Determination of appropriate risk premiums to incorporate into discount rates. The capital asset pricing model and its limitations.

4. The financing decision of firms, including leverage, debt/equity ratios and Ieasing decisions:

Treasury management and working capital policy. Short term asset management. Gearing and the advantages of debt capital. Factors to be taken into account when designing a capital structure policy. The Modigliani and Miller contribution. Buy or lease decisions, effects on overall financing strategy.

5. The role of financial markets in the provision of finance and the efficiency of the markets in the pricing of securities:

The key characteristics of the main sources of finance. The efficient market hypothesis and its practical implications The derivatives market including the role of options, futures and swaps.

6. The dividend policy debate, including the implications of particular dividend distribution policies on the future of the firm:

Competing views about the role of dividend policy. The implications of a change in dividend payouts. The ‘information content’ of dividends. The theory of dividend policy. Market imperfections and the clientele effect

7. Evaluation of acquisitions and mergers and the problems associated with the valuation decision:

The reasons behind the choice of merger or acquisition as a strategic option. Financing of acquisitions. The valuation problem particularly related to unquoted companies. Evaluation of the success of a merger or take-over.

8. The impact of international trade on financial decisions, including the impact of exchange rates and the problems both financial and non-financial of international investment:

Economic theory underlying the operation of international markets. Understand the three forms of risk involved in international trade: currency risk, translation risk and economic risk. Internal and external hedging of these risks.

Method of Assessment:

By written examination. The pass mark is 50%. Time allowed 3 hours.

The question paper will contain:

Six questions of which four must be answered. All questions carry 25 marks.