Introductory description

This module aims to provide students with the skills and tools of modern Finance theory that are necessary to critically evaluate decisions of the following types from different angles, ultimately enabling them to reach their own conclusion based on all information available.

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.

Corporate Finance is the study of financial decision-making processes for corporations. Unlike privately owned firms, corporations are structured on the basis of separation of ownership and control: while a corporation is owned by its shareholders, these do not run the day-to-day business of the firm. Instead, the shareholders appoint financial managers who are responsible for the firm’s investment and financing decisions. In other words, Corporate Finance deals with questions such as the following:

• What are the decisions that financial managers are required to make?
• What are the objectives that (should) govern these decisions?
• What are the constraints imposed by the economic and regulatory environment?
• How can the different available choices be evaluated and ranked?
• Can conflicts of interest deriving from separation of ownership and control distort the manager’s incentives to pursue their goals?
• Introduction to Corporate Finance
• Objectives of the Firm, Role of the Financial Manager
• Financial Statements and Financial Planning
• Time Value of Money
• Compounding, Future Value. Discounting, Present Value.
• Stock and Bond valuation
• Cost of Debt Capital. Cost of Equity Capital. Stock Value and Growth.
• Role of financial markets.
• Financial market efficiency.
• Risk, Return, and the CAPM
• Measures of Risk and Return
• Risk Premium, Diversification, the CAPM
• Capital Budgeting
• Cost of Capital, NPV and IRR
• Alternative Appraisal Methods.
• Cost of Capital and Leverage
• Financing Policy
• Sources of finance (Debt, Equity …)
• MM irrelevance proposition, Taxation, Bankruptcy, Agency Conflicts.
• Payout Policy
• Types of Payouts (Dividends, Repurchases…)
• MM irrelevance proposition, Taxation, Asymmetric Information
• Corporate Risk Management
• Motivations for managing risk.
• Insurance, Hedging (with futures, forward, and swaps)
• Mergers and Acquisitions
• Types of Mergers, Mechanics of Takeovers
• Sources of Synergy, Defence Strategies

Learning outcomes

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

• Define the objectives of the firm, and explain the role that the financial managers play in achieving these objectives.
• Define different sources of corporate financing (e.g. retained earnings, debt, equity), and explain their respective advantages/disadvantages.
• Identify the factors (e.g. risk, cost of capital) that affect investment appraisal, and explain how each affects project value.
• Estimate a firm's cost of capital, and understand how this changes as a function of leverage, taxation, and other factors.
• Define the factors that influence the firm's capital structure and payout policy and risk management policy, and explain how each affects the optimal decisions.
• Identify the testable implications of a theoretical concept, and assess its validity using empirical analysis.
• Evaluate and rank in real-word cases the (seemingly conflicting) factors influencing corporate decision-making.

Indicative reading list

Core text:
Brealey, R.A., Myers, S.C. and Allen, F. (2010) Principles of Corporate Finance (10th Global edn). Homewood, IL: Irwin McGrawHill
Other texts:
Berk, J. and DeMarzo, P. (2011) Corporate Finance London: Pearson
Bodie, Z.A. Kane and Marcus, A.J. (2011) Investments and Portfolio Management Maidenhead, Berks: McGraw-Hill

Subject specific skills

Perform tasks that are involved in corporate financial management.

Transferable skills

Numeracy (use spreadsheets (e.g. Excel) to compute the values of projects or securities, and perform risk and sensitivity analyses).
Written and oral communication (analyze and critically evaluate real-world cases, and communicate the findings either in writing or in a verbal presentation).
IT (use various data sources (e.g. web, publications, databases) to obtain and analyze financial data).