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Principles of Corporate Finance FN2191

This course is aimed at students who are interested in understanding the principles of corporate finance.

Prerequisites/ Exclusions

If taken as part of a BSc degree, the following course(s) must be passed before this course may be attempted:

  • EC1002 Introduction to economics and either
  • MT105a Mathematics 1 or MT105b Mathematics 2 or MT1174 Calculus or MT1186 Mathematical methods.

This course may not be taken with:

  • FN3092 Corporate finance.

Topics covered

  • Project evaluation: the NPV rule and IRR rules of investment appraisal; ‘wrong’ investment appraisal rules: payback and accounting rate of return.
  • Real options: understand what real options are and why they are important in project valuation; understand and calculate the source of option value; three types of real options: options to abandon/expand/wait.
  • Dividend theory: the Modigliani–Miller and dividend irrelevancy; Lintner’s fact about dividend policy; dividends, taxes and clienteles; asymmetric information and signalling through dividend policy.
  • Capital structure: the Modigliani–Miller theorem: capital structure irrelevancy; taxation, bankruptcy costs and capital structure; weighted average cost of capital; Modigliani-Miller 2nd proposition; the Miller equilibrium; asymmetric information: 1) the under-investment problem, asymmetric information; 2) the risk-shifting problem, asymmetric information; 3) free cash-flow arguments; 4) the pecking order theory; 5) debt overhang.
  • Corporate governance: separation of ownership and control; management incentives; management shareholdings and firm value; corporate governance.
  • Mergers and acquisitions: motivations for merger activity; calculating the gains and losses from merger/takeover; the free-rider problem and takeover activity.
  • Equity offerings: understand venture capital and equity issuance in the public market; perform valuation with multiple financing rounds; initial public offerings and underpricing; winners’ curse problem.
  • Risk management: understand why and how companies manage risk; cost of hedging; covered and uncovered interest rate parity.

Learning outcomes

If you complete the course successfully, you should be able to:

    • explain how to value projects, and use key capital budgeting techniques (for example: NPV and IRR)
    • understand and apply real option theory as an advanced technique of capital budgeting
    • understand and explain the relevance, facts and role of the payout policy, and calculate how payouts affect the valuation of securities
    • understand the trade-off firms face between tax advantages of debt and various costs of debt
    • calculate and apply different costs of capital in valuation
    • understand and explain different capital structure theories, including information asymmetry and agency conflict
    • understand how companies issue new shares, and calculate related price impact in security offerings
    • discuss why merger and acquisition activities exist, and calculate the related gains and losses
    • understand risk, hedging, and numerous financial securities as tools to manage risk.

    Assessment

    Unseen written exam (3 hrs).

    Essential reading

    Brealey, Richard A., Stewart C. Myers, and Franklin Allen. Principles of Corporate Finance. (McGraw-Hill Education