Course Outline

Transcription

1 AY 314 Business Finance II (B. Comm. & B. Comm. Accounting) and AY 875 Financial Management II (H.D.B.S.) Course Outline Lecturers: Dr. Shammyla Naeem Accountancy & Finance Room 349, Cairnes Building Ext or Objectives and The objective of this second course in Finance is to build on the foundations of the first course in extending your knowledge of the theory and practice of Financial Management. In particular, the course is designed to achieve the learning outcomes specified separately under each topic heading below. Prerequisite: Either Business Finance I, or Financial Management I, or an equivalent introductory course in Business Finance or Financial Management is a necessary prerequisite for this course. You must be particularly familiar with valuation using discounted cash flow models, valuation of shares and debt securities, capital investment analysis, and estimation and use of the weighted average cost of capital. If this course is a possible elective for you... In order to avoid mutual grief, it is very strongly recommended you should consider taking this course only if you have achieved a mark of at least 65% (~ Grade B+) in the prerequisite course. AY314 and AY875 Course Outline Page 1 of 6

2 Texts: References are given in this course outline to the following texts, copies of which are available in the Library: Richard Pike and Bill Neale: Corporate Finance and Investment: Decisions & Strategies. Pearson Education Limited, (7 th Edition). Glen Arnold: Corporate Financial Management. Pearson Education Limited, (4 th Edition). These editions will be used by the lecturer. 6 th or 5 th editions of Pike and Neale s book and 3 th edition of Arnold s book will also suffice. These textbooks are almost the same except for the titles and the end of chapter questions (in rare cases) which may be scrambled in the editions. Blackboard: Lecture notes, problems, and solutions will be provided on Blackboard. A selection of past examination papers and outline solutions to quantitative questions will also be available on Blackboard. Note: Documents on Blackboard will normally be in portable document format (.pdf), and printed course materials will have multiple slides per page. You should contact the lecturers if you require these materials in an alternative format due to a visual disability. Organisation: The course has three one-hour class sessions per week, as follows: Tuesday: : Lecture Hall 1, St. Anthony s Wednesday: : ENG-G047 Friday: 10-11: IT125 (Information Technology Building) Normally, the Tuesday and Wednesday classes will be lecture sessions, and the Friday class session will be a workshop session which will be used to review problem material. Advance preparation is required. You should study the readings and attempt the problems before class. You should also preview the lecture notes on Blackboard. Solutions to a selection of the listed problems will be discussed at the weekly workshop sessions, and the remainder are for self-study. Assessment and Examination: Continuous Assessment (interim test) 15% Wednesday 13 th Feb End of semester examination 85% 100% The 2½ hour end-of-semester examination paper will have two sections, with one question in Section A, and three questions in Section B. The question in Section A will be obligatory, for 40 marks. Two of the three questions in Section B must be attempted, and these questions will carry 30 marks each. There is no commitment that the examination questions will be of the same type or structure as those discussed at workshops. Examination questions will be designed to assess your level of understanding of the course material. This knowledge and expertise should be gained through studying assigned readings and class notes, and developing your analytical skills through practice with assigned problems. AY314 and AY875 Course Outline Page 2 of 6

3 Course Topics, Readings, and Problems 1. Leverage and Capital Structure: Understand, describe, and calculate the impact of operating and financial leverage (gearing) on the risk and returns of business activities, and differentiate between product-market risk, business risk, and financial risk; Describe the assumptions, rationale, and conclusions of Modigliani and Miller s (M&M) models of capital structure, and discuss the implications of market imperfections for M&M s conclusions; Apply the M&M propositions in estimating the theoretical impact of capital structure changes on the value of the firm, the value of equity, the cost of equity, and the overall cost of capital; Describe and explain the signalling effects of capital structure choices in conditions of information asymmetry, and explain the Pecking Order theory of capital structure as an alternative to the trade-off theory of Modigliani and Miller; Analyse the implications of capital structure choices using EBIT-EPS analysis; Discuss the factors which should be considered in determining the debt vs. equity choices of companies in the real world. (a) Leverage, Business Risk, and Financial Risk: Reading: Pike: 7 th Ed: Chapter 18, pp th Ed: Chapter 18, pp ; 5 th Ed: Chapter 18, pp Arnold: 4 th Ed: Chapter 21, pp rd Ed: Chapter 21, pp Problems: Pike: Review 18-1*; 18-3*. (*Solutions in Textbook Appendix) Leveraged Plc. (b) Capital Structure Theory and Capital Structure Decisions: Reading: Pike: 7 th Ed: Chapter 18 pp and pp. 526 End; Chapter 19 to p Pike: 6 th Ed: Chapter 18, pp and pp End; Chapter 19 to p Pike: 5 th Ed: Chapter 18, pp and pp End; Chapter 19 to p Arnold: 4 th Ed: Chapter 21, pp rd Ed: Chapter 21, pp Problems: Pike: Review 19-1*; 19-2*; 19-3*. G & U; McMunn; Ardrahan; Furbo; Leveraged & Unleveraged; Upper & Lower; Udinese & Lazio; Terebellum (a) and (b); Crash; Gourmet Technology AY314 and AY875 Course Outline Page 3 of 6

4 2. Dividend Policy: Describe the technical aspects of dividend declarations and payment; Discuss and explain the Miller and Modigliani (M&M) dividend irrelevance proposition and the basis for this view, including the homemade dividends argument; Describe dividend-clienteles, and their potential influence on dividend payout policies; Discuss and critically evaluate the arguments for the payment of generous dividends, including the bird-in-the-hand argument, the market response argument, and the agency cost rationale; Discuss and critically evaluate arguments favouring low or no dividends; Explain Lintner s behavioural model of dividend decisions; Explain the possible signalling effects of dividend announcements; Discuss the factors which should be considered in establishing a dividend policy; Compare and contrast alternative dividend strategies, including dividends as an annual residual, dividends as a fixed percentage of profits, and dividends as a long-term residual; Describe stock dividends (scrip issues) as an alternative to a cash dividend; Describe special dividends and share repurchases as alternative cash distribution methods. Reading: Pike: Chapter 17. Arnold: Chapter 22. Problems: Pike: Review 17-1*; 17-2*; 17-3*; 17-4*; 17-5*. 3. Mergers and Acquisitions: Bohermore; Rockbarton; Tee; Dividend Policy; Krypton Plc. Distinguish between horizontal, vertical, and conglomerate mergers; Discuss and critically evaluate the range of possible motives for mergers and acquisitions; Apply valuation techniques to estimate the economic benefits of a takeover or merger; Estimate the cost of an acquisition, the benefits of an acquisition, and the NPV of an acquisition to the shareholders of the acquiring company; Determine the impact of different cash or share-for-share offers on the allocation of the economic benefits of an acquisition between the shareholders of the bidding and the target companies, and advise accordingly on the offer to be made; Describe the bidding process and the process of completing a takeover; Explain the regulatory regime surrounding acquisition activity, including competition regulations, and the Takeover Panel regulations; Explain the advantages and disadvantages of alternative methods of financing a takeover. Reading: Pike: Chapter 20. Arnold: Chapter 23. Problems: Pike: Review 20-1*, 20-7*. Arnold: 23-5; Unit Tours; DVD & CD; Charter Airlines; Black & Scholes; EM Engineering; Locke Logistics; Inverin Seeds & Grain; Piano Tuners: High Tech & Fast Tech. 4. Project Cost of Capital and Adjusted Present Value: AY314 and AY875 Course Outline Page 4 of 6

5 Explain the limitations of a company s weighted average cost of capital (WACC) when a project s risk or financing differ from that of the company overall; Calculate a project cost of capital based on a cost of equity derived from capital market data, and adjust this market-based equity cost for differences in financing using the M&M propositions, and the parallel beta adjustment process; Explain the rationale for the use of Adjusted Present Value (APV) rather than the conventional WACC approach to project evaluation, and discuss the advantages of the APV approach over the conventional approach; Apply the APV methodology to incorporate the tax-advantages of borrowing, security issue costs, and the value of subsidised financing into the evaluation of capital investment projects. Reading: Pike: 7 th Ed: Chapter 10, pp. 250 End; Chapter 19, pp. 554 End. Pike: Pike: 6 th Ed: Chapter 11, pp. 269 End; Chapter 19, pp. 535 End. 5 th Ed: Chapter 11, pp. 283 End; Chapter 19, pp. 528 End. Arnold: Chapter 19 (Review); Chapter 21, Appendices 21.1 and Problems: Pike: Review 11-5*, 11-8*, 19-9*. Multilasers; International Conglomerates; Wicklow Industries; Neptune Industries; Gorgon; Terebellum part (c); Aquarius. 5. Portfolio Theory and the Capital Asset Pricing Model: Understand, describe and explain the interactions between risky investment returns, and the riskreducing (diversification) properties of portfolios; Calculate the expected returns and the standard deviation risk of individual security investments, the covariance between returns on securities, the expected returns and standard deviation risk of a two-security portfolio, and the minimum-risk portfolio formed by combining two securities; Describe the normative process by which an investor should identify the set of efficient portfolios, and a preferred portfolio which maximises expected utility; Describe the derivation of the Capital Asset Pricing Model (CAPM), the partitioning of risk into diversifiable and non-diversifiable (systematic) elements, the relationship between systematic risk and expected returns, and the irrelevance of diversifiable risk in capital asset pricing; Apply the principles of the CAPM in a variety of decision making contexts; Outline the key empirical evidence on the descriptive validity of the CAPM, and the limitations of empirical tests of the model. Reading: Pike: Chapter 8; Chapter 9. Arnold: Chapter 7; Chapter 8. Problems (1): Pike: Review 8-3*, 8-4*. Arnold: 7-8; Topic 5 continued/ Portfolio Theory; Martha s Risky Investments. Problems (2): Pike: Review 9-1*, 9-2*, 9-3*, 9-4*, 9-5*. Arnold: 8-7; Continued/.. CAPM Exercises; W X Y & Z; Accord & Carina; Eyre Holdings; Lahinch; X & Y; A B & C; National Industries; Gamma and Kappa; Perseus AY314 and AY875 Course Outline Page 5 of 6

6 6. Risk Management: (a) Distinguish between transactions exposure, translation exposure, and economic exposure to movements in currency exchange rates; Describe the relationships between currency exchange rates, interest rates, and inflation rates; Describe the relationship between spot exchange rates and forward exchange rates; Describe and apply internal hedging techniques, including netting, leading and lagging, and the operation of currency bank accounts; Describe and apply external hedging techniques, including forward contracts, options forward, money-market hedges, currency options, currency futures contracts, and currency swaps; Identify appropriate strategies to hedge contingent currency exposures. Explain the nature of interest-rate risk exposure; Explain the characteristics of forward rate agreements, interest rate caps, interest rate floors, interest rate collars, and short-term interest rate futures, and apply these financial contracts to hedge interest-rate risk exposures; Explain interest rate swaps and the reasons interest rate swaps may be beneficial to both parties. Currency Risk Management Reading: Pike: Chapter 21. Arnold: Chapter 25. Problems: Pike: Review 21-2*; 21-5*; 21-6*; 21-11*. Storace; Interest Rate Parity; Bogearraí Teo; Harvard; Duke Woollen Products; New Inn; ForeverSoft; Western Direct; Newcastle Associates; Ballyduff, Delphinium. (b) Interest-Rate Risk Management: Reading: Pike: 7 th Ed: Chapter 13, pp End. Pike: 6 th Ed: Chapter 13, pp th Ed: Chapter 13, pp Arnold: 4 th Ed: Chapter 24, pp rd Ed: Chapter 24, pp Problems: Alpha and Zeta; Angus and Beginish; Zeus Commodities; Epsilon; Desdemona. 7. Review. AY314 and AY875 Course Outline Page 6 of 6