FORMATS

Unit title:Corporate Finance

Unit code:FIN501

Credit points:8cp

Unit description:This course is a broad based and concise introduction to the key concepts and practical aspects of financing and investment decisions focusing on core issues in finance and their relationship to the business world from the working executives perspective.

Unit objectives:This unit is designed to enable students to:

Knowledge

1. Describe the setting and identify the three key decision making issues in financial management

2. Explain the process of fund raising through various common instruments in the capital market

3. Understand the financial aspects of selecting business activities

4. Recognise the pros and cons of debt/equity-financing, dividend pay-out and practices in the field

5. Understand the rationale for mergers & acquisitions and leveraged buy-outs

Skills

1. Perform Discount Cash Flow and related techniques for analyzing securities valuation and project appraisal

2. Estimate the return on equity and debt-financing cost, including the Weighted Average Cost of Capital (WACC) as a hurdle rate for corporate investment

3. Determine appropriate mix and type of strategies for financing

4. Determine the amount and type of dividend policy

5. Monitor the cash and working capital management

6. Valuing a business for the purpose of strategic re-alignment

Values/Attitudes

1. Critically match financial strategies with corporate development

2. Sensitive and analytical approach towards risk premium assumed by business activities

3. Alert to the need for monitoring short-term financial plan with actual progress and feedback from business activities

Unit outcomes:1. Offer useful technical and management advice for investing in and financing business activities.

2. Formulate financing strategy and dividend policy in line with corporate development trends and financial environment

Readings:Recommended texts

1. DeMello, J. (2003), Cases in Finance, McGraw-Hill

2. Myddelton, D. (2000), Managing Business Finance, Prentice Hall

3. Keown, A.J., Martin, J.D., Petty, J.W. & Scott Jr., D.F. (2004), Financial Management Principles and Applications, 10th edn., Prentice Hall

Supplementary readings

1. Ball, R. (1994), On the Development, Accomplishments and Limitations of the Theory of Stock Market Efficiency, Managerial Finance 20 (1994 issue 2/3), p 3-48

2. Brealey, R.A. & Myers S.C. (2003), Principles of Corporate Finance, 7th edn., McGraw-Hill

3. Damodaran, A. (1998), Applied Corporate Finance: A Users Manual, J Wiley & Sons Inc.

4. Maeseneire, W.D. & Keuleneer L. (2003), Valuation of Companies, in Recent Trends in Valuation, edited by Luc Keuleneer & Willem Verhoog L Keuleneer, John Wiley & Sons Inc.

5. Myers, S. (2001), Finance Theory and Financial Strategy, in The New Corporate Finance: Where Theory Meets Practices, 3rd edn., edited by R.G. Chew Jr., 2001, McGraw-Hill

6. Ward, K. & Bender, R. (2002), Corporate Financial Strategy, 2nd edn., Butterworth-Heinemann

7. Varghese, S. (2002), Strategic Considerations - Making the Right Choice, in The Corporate Finance Handbook edited by Jonathan Reuvid, David Irwin & Edward George, 2002, Kogan Page Ltd

8. Stern, J.M., Jacobs, L.H., Chew Jr., D.H. (2003), The Revolution in Corporate Finance, 4th edn., Blackwell Publishers

9. Chew, D.H. (2000), The New Corporate Finance, 3rd edn., McGraw Hill/Irwin

Journals

1. Asia Pacific Journal of Management

2. Business Week

3. Far Eastern Economic Review

4. Fortune

5. Forbes

6. Harvard Business Review

7. Journal of Marketing

8. Newsweek

9. Sloan Management Review

10. Time

11. The Economist

Unit contents:TOPICS

1. The setting and issues of financial management decision making

Introduction on the role and objective of finance executives

Role playing on the three major decisions Debate on the market efficiencyReadings:

Myddelton Chapter 1

Damodaran Chapter 1,2;

Ball, R. (1994)

2. Basic finance and financial assets valuation

DCF is the key of this topic, how it is applied in various contexts are illustrate through short exercises with the aid of Excel, comments on its misuses and limits are found in Myers article and finally simple stock valuation example to illustrate the important of judgment in security valuation

Short exercises using Excel on:

Time value of money, Effective interest rate, NPV, annuity, dividend growth model, Pricing of coupon bond

Worked example on:

Stock valuation

Readings:

Myddelton 5.3, 11.3, 14.3

Myers, S. (2001)

3. Capital Market

A brief account on the funding organization and the appropriate application of various types of instruments.

Introduction on the market and instruments

Group presentation on the short-term, long-term financial markets

Readings:

Myddelton Chapter 1, 9 & 10

Ward Chapter 9

4. Determinants of returns on investments

A theoretically heavy but unavoidable topic, students are expected to read the class note on MPT and CAPM. Follow through a step-by-step example from information gathering to generating return rate estimates.

Components of interest rate, risk premium of investments brief summary

Worked example on cost of equity CAPM

Worked example on cost of loan Credit rating

Readings:

Myddelton Chapter 2

Damodaran Chapter 3, 4

5. Basic capital project appraisal

Project appraisal techniques and their strengths and weaknesses illustrated through simple in-class exercise and mini-case study

ARR, PB, IRR, NPV & PI

Mini case : Comparison of Capital Budgeting techniques

Readings:

Myddelton Chapter 5

DeMello case 12

6. Capital budgeting

Students construct a business plan for their product under the instructors guidance and a mini-case study serve to demonstrate how to perform scenario analysis

Worked example from sale projection to Business Plan

Mini case on: Scenario Analysis

Readings:Myddelton Chapter 6

DeMello case 14

7. Debt & Equity Financing

A simple worked example to compare the impact of debt vs. equity financing

A brief qualitative discussion on the possible consequences of too little or too much debt taken by a company and common strategies to change D/E ratio

Financing strategy and paid-out policy in line with corporate development

Readings:Myddelton Chapter 10, 11 & 12

Ward Chapter 2

8. Determining cost of capital

How to determine the WACC? The answer is demonstrated through the two mini case studies.

Readings:

Myddelton Chapter 11

DeMello case 15 & 16

9. Capital Structure Decision

The impact of capital structure on WACC is demonstrate through an example and the two mini cases:

Look Before You Leverage

Debt versus Equity Financing

Readings:Myddelton Chapter 12

DeMello case 19

10. Dividend Policy

Students are asked to find out how much and in what way should the earning be returned to shareholders in the cases:

Is It Much Ado About Nothing?

Dividend Policy

Readings:

Myddelton Chapter 12

DeMello case 21

Ward Chapter 6

11. Cash management

Students learn how to carry out cash budgeting by stepping through the case:

Getting Our Act Together: Cash Budgeting

Readings:

Myddelton Chapter 3

DeMello case 23

12. Working capital management

The mini-case: Timing Is Everything

serves to illustrate the improvement on financial efficiency through aligning inflow with outflow and production with anticipated demands

Readings:

Myddelton Chapter 4

DeMello case 22

13. Leveraged Buyout (LBOs) & Takeovers, Restructuring

The issues associated with M & A and the decision to liquidate or reorganize a company are illustrated in the two mini-cases.

Readings:

Myddelton Chapter 7 & 13

DeMello case 20 & 28

14. Company Valuation

Examples of RO (Real Options) application are briefly discussed using decision tree techniques as a means to augment the short coming of DCF techniques

Readings:

Myddelton Chapter 14

Maeseneire, W. D and Keuleneer, L. (2003)

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