Corporate Financial Management

Course Objectives

At the end of the course the student will have the ability to:

Understand financial markets and the financial system and their role in the economy
Appreciate the role of financial managers and the concept of value
Apply techniques for effective investment decision making
Understand risk and portfolio theory
Appreciate issues in raising long and short term finance
Assessing and determining Working capital requirements
Implement dividend policies for the organisation
Understand mergers and acquisitions
Appreciate foreign exchange mechanism and risk

Course Content

The Financial World

The objective of the firm
Ownership and control
Primitive and modern economies
The role of the financial manager
The flow of funds and financial intermediation
Growth in the financial services sector
The financial system

The Investment Decision

Value creation and corporate investment
Net present value and internal rate of return
Modified internal rate of return

Project Appraisal: Cash Flow and Applications

Quality of information
Are profit calculations useful for estimating project viability?
The replacement decision
Replacement cycles
When to introduce a new machine
Drawbacks of the annual equivalent annuity method
Timing of projects
The make or buy decision
Fluctuating output

The Decision- Making Process for Investment Appraisal

Evidence on the employment of appraisal techniques
Payback
Accounting rate of return
Internal rate of return: reasons for continued popularity
The ‘science' and the ‘art' of investment appraisal
The investment process

Project Appraisal: Capital Rationing, Taxation and Inflation

Capital rationing
Taxation and investment appraisal
Inflation

Risk and Project Appraisal

What is risk?
Adjusting for risk through the discount rate
Sensitivity analysis
Scenario analysis
Probability analysis
The risk of insolvency
Problems of using probability analysis
Evidence of risk analysis in practice

Portfolio Theory

Holding period returns
Expected returns and standard deviation for shares
Combinations of investments
Portfolio expected returns and standard deviation
Dominance and the efficient frontier
Indifference curves
Choosing the optimal portfolio
The boundaries of diversification
Extension to a large number of securities
Evidence on the benefits of diversification
The capital market line
A practical application of portfolio theory
Problems with portfolio theory

The Capital Asset Pricing Model and Multi Factor Models

A short history of shares, bonds and bills
The capital asset pricing model
Factor models
The arbitrage pricing theory
The three-factor model
An alternative approach to the risk-return relationship
Project appraisal and systematic risk
Sceptic's views-Alternative perspectives of risk

Stock Markets

Stock exchanges around the world
Globalisation of financial flows
The importance of a well-run stock exchange
The London Stock Exchange
The UK equity markets available to companies
Tasks for stock exchanges
Trading systems
The ownership of UK quoted shares
Regulation
Understanding the figures in the financial pages
Taxation and corporate finance

Raising Equity Capital

What is equity capital?
Preference shares
Some unusual types of shares
Floating on the Official List
Methods of issue
Timetable for a new offer
How does an AIM flotation differ from one on the Official List?
The costs of new issues
Rights issues
Other equity issues
Scrip issues
Warrants
Equity finance for unquoted firms

Long-Term Debt Finance

Some fundamental features of debt finance
Bonds
Bank borrowing
Syndicated loans
Credit rating
Mezzanine debt and high-yield (junk) bonds
Convertible bonds
Valuing bonds
International sources of debt finance
Project finance
Sale and leaseback
Securitisation
The term structure of interest rates

Short-Term and Medium-Term Finance

Bank sources
Trade credit
Trade debtor management
Factoring
Hire purchase
Leasing
Bills of exchange
Acceptance credits (or bank bills or banker's acceptance

Treasury and Working Capital Management

Risk management
Working capital management
Investment of temporary surplus funds

Stock Market Efficiency

What is meant by efficiency?
Random walks
The three levels of efficiency
Weak-form tests
Semi-strong form tests
Strong-form tests
Behavioural finance
Misconception about the efficient market hypothesis
Implications of the EMH for investors
Implications of the EMH for companies

Value-Based Management

Value creation and value destruction
Earnings-based management
How a business creates value
Measuring value creation: External metrics

Managing a Value-Based Company and The Cost of Capital

An overview of the application of the value principles
Measuring value creation: internal metrics
The cost of capital
Empirical evidence of corporate practice
Implementation issues
Fundamental beta
Some thoughts on the costs of capital

Valuing Shares

Valuation using net asset value (NAV)
Valuation using income-flow methods
The dividend valuation models
Price-earnings ratio (PER) model
Valuation using cash flow
Valuation using owners earnings
Valuing unquoted shares
Unusual companies
Managerial control and valuation

Capital Structure

What do we mean by ‘gearing'?
The effect of gearing
The value of the firm and the cost of capital
Does the cost of capital (WACC) decrease with higher debt levels?
Modigliani and Miller's argument in a world with no taxes
The capital structure decision in a world with tax
Additional considerations
Some further thoughts on debt finance

Dividend Policy

Defining the problem
Modigliani and Miller's dividend irrelevancy proposition
Dividends as a residual
Clientele effects
Taxation
Dividends as conveyors of information
Resolution of uncertainty
Owner control (agency theory)
Scrip dividends
Share buy-backs and special dividends
A round-up of the arguments

Mergers

The merger decision
Definitions and semantics
Merger statistics
Merger motives
Financing mergers
The merger process
The impact of mergers
Managing mergers

Managing Risk

A long history
Options
Forwards
Futures
Forward rate agreements (FRAs)
Caps
Swaps
Derivatives users

Managing Exchange-Rate Risk

The effects of exchange-rate changes
Volatility in foreign exchange
The foreign exchange markets
Exchange rates
Types of foreign exchange risk
Transaction risk hedging strategies
Managing translation risk
Managing economic risk
Exchange rate determination

Recommended Text

Corporate Financial Management 2 nd Edition. Glen Arnold. Pearson.
ISBN No:-0-273-65148-X