Introductory description

N/A.

Module web page

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

Financial Arithmetic: Discounted cash flow, annuities, perpetuities, Gordon growth model, net present value, internal rate of return.
Financial Markets: Equities, bonds, interest rates, currencies.
Market Efficiency: Efficient Markets Hypothesis, empirical tests, calendar anomalies, speculative bubbles.
Project Appraisal: Incremental cash flows, cost of capital, inflation, tax, economic rent, managerial flexibility and examples of real options.
Cost of Capital: CAPM, weighted average of cost of equity and cost of debt.
Company Financing: Raising financing, equity vs. debt, pecking-order hypothesis, rights issues, underwriting.
Capital Structure: Irrelevance propositions, taxes, costs of financial distress, agency effects, signalling.
Dividend Policy: Irrelevance proposition, taxes, transactions costs, signalling, agency effects, share buy-backs as an alternative to dividends.
Financial Planning: Short-term and long-term liability management.
Exchange Rates: Spot rates and forward rates, Interest-Rate Parity theorem, Purchasing-Power Parity.
Exchange-Rate: Transaction risk, translation risk, economic risk.
Internal vs. external hedging.
Risk Management.
Shareholder Value: Key shareholder ratios (e.g. earnings per share, dividend yield, price-earnings ratio). Key drivers of shareholder value.
Tesco case-study: Integrative exercise using CAPM, Gordon growth model and discounted cash-flow techniques to price Tesco shares.

Learning outcomes

By the end of the module, students should be able to:

• Critically appraise the value added by a capital project by calculating the present value of expected future cash flows, and estimating the cost of capital.
• Describe how inflation and tax impact project appraisal.
• List the different forms of market efficiency, and interpret the results of key empirical tests of the Efficient Markets Hypothesis.
• Compare and contrast the main sources of financing for a company.
• Explain what is meant by capital structure and dividend policy, and discuss the relevance of each to corporate financial management.
• Explain the importance of financial planning over both the short term and long term.
• Distinguish between spot and forward exchange rates.
• State and apply the Interest Rate Parity and Purchasing Power Parity theorems in the context of foreign exchange.
• Define key shareholder ratios (e.g. earnings per share, dividend yield and price-earnings ratio) and use discounted cash-flow techniques to estimate share prices.
• List and challenge the assumptions underpinning each of the key models studied.
• Reflect critically on the limitations of each of the models studied.

Indicative reading list

Hillier, D., Ross, S., Westerfield R., Jaffe, J., and Jordan B. Corporate Finance. (Third European Edition, McGraw-Hill, 2016).
Brealey RA, Myers SC & Marcus AJ. Fundamentals of Corporate Finance (9th edition, McGraw-Hill 2017).
Pike R, Neale B, Akbar S (with Linsley P.). Corporate Finance and Investment (9th edition, Pearson 2018).
Arnold G. Essentials of Corporate Financial Management (5th edition, Pearson, 2012).

Subject specific skills

Use discounted cash-flow techniques to value financial securities and/or estimate the value added by capital projects.
Construct spreadsheets to calculate Net Present Values and Internal Rates of Return.

Transferable skills

Use spreadsheet modelling skills.