Introductory description

This module sets the foundations for students based outside WBS who may be planning to study Finance in more depth in electives such as IB253 Principles of Finance 1 and IB254 Principles of Finance 2. There are no pre-requisites.

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.

Topics covered include:

• Time value of money, compounding and discounting, future and present values of cash flows.
• Financial arithmetic: Annuities, perpetuities, applications to stock and bond valuation, Gordon Growth Model.
• Fundamentals of stocks and bonds
• Capital budgeting in perfect markets and risk neutrality: Net present value, internal rate of return and incremental cash flows, profitability index, payback rule, advantages and disadvantages, evidence from surveys on the preference of managers for capital budgeting techniques.
• Credit risk and probability of default, promised vs. expected interest rates and default premia, capital budgeting under uncertainty with debt and equity financing assuming risk neutrality.
• Risk aversion, Cost of Capital using the CAPM, capital budgeting in perfect markets under risk aversion, risk premia, empirical evidence on the validity of the CAPM, econometric methods to test the CAPM.
  -Weighted average of cost of equity and cost of debt, valuation from comparables.
• Capital Budgeting in imperfect markets: informationally inefficient markets, taxes, transaction costs, inflation, disagreement, bid/ask spreads.
  -Definitions of market efficiency, and evidence from empirical tests
• Capital Structure Irrelevance propositions, taxes, costs of financial distress, agency effects, signalling.
  -Company Financing Raising financing, equity vs. debt, pecking-order hypothesis.
• Dividend Policy Irrelevance proposition, taxes, transactions costs, signalling, agency effects, share buybacks as an alternative to dividends, evidence from managerial surveys.
• Financial Derivatives Options basics, valuation of put and call options at expiration, put call parity, risk management and hedging, Black Scholes pricing.

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, estimating the cost of capital.
• Demonstrate an understanding of portfolio theory and capital asset pricing model.
• Explain what is meant by capital structure and dividend policy and discuss the relevance of each to corporate financial management
• Price simple financial option contracts
• Explain key theoretical models and the assumptions that underpin them, and demonstrate an understanding of the limitations of those models.
• Draw conclusions from empirical evidence.
• Solve numerical problems and analyse case-study information.
• Communicate ideas effectively, both verbally and in writing.

Indicative reading list

Main text book: Welch, Ivo: Corporate Finance (4th Edition, 2017)
Hillier, Ross, Westerfield, Jaffe & Jordan: Corporate Finance (European ed., McGraw-Hill 2010)
Berk J., and DeMarzo P: Corporate Finance (2nd Edition, Prentice Hall 2011)

Subject specific skills

Demonstrate a solid understanding of the key issues in Finance
Understand how cash-flow techniques can be used 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, and to price simple financial option contracts.

Transferable skills

Discuss topical issues about the theory and practice of Finance.
Interpret and explain financial market information.
Solve structured numerical problems.
Construct spreadsheets to value financial instruments and test the robustness of those values to changes in key inputs.