Corporate Finance

NS e-Prep Course

Nanyang Technological University
Learning Objectives

Corporate Finance – Scope
1 appreciate how finance interacts with other functional areas of any business and see the diverse career opportunities available to finance majors

2 describe how companies obtain funding from financial intermediaries and markets, and discuss the five basic functions that financial managers perform

3 assess the costs and benefits of the principal forms of business organization and explain why limited liability companies, with publicly traded shares, dominate economic life in most countries

4 define agency costs and explain how shareholders monitor and encourage corporate managers to maximise shareholder wealth.

Financial state and cash flow analysis
1 understand the key financial statements that companies are required to provide to their shareholders

2 evaluate the company’s cash flows using its financial statements, including the statement of cash flows

3 calculate and interpret liquidity, activity and debt ratios

4 review the popular profitability ratios and the role of the DuPont system in analysing the company’s returns

5 compute and interpret the price/earnings and market/book ratios

6 discuss the basics of corporate taxation of both ordinary income and capital gains.

The time value of money
1 understand how to find the future value of a lump sum invested today

2 calculate the present value of a lump sum to be received in the future

3 find the future value of cash flow streams, both mixed streams and annuities

4 determine the present value of future cash flow streams, including mixed streams, annuities and perpetuities

5 apply time-value techniques that account for compounding more frequently than annually, stated versus effective annual interest rates, and deposits needed to accumulate a future sum

6 use time-value techniques to find implied interest or growth rates for lump sums, annuities and mixed streams, and an unknown number of periods for both lump sums and annuities.

Valuing bonds
1 understand how to find the future value of a lump sum invested today

2 calculate the present value of a lump sum to be received in the future

3 find the future value of cash flow streams, both mixed streams and annuities

4 determine the present value of future cash flow streams, including mixed streams, annuities and perpetuities

5 apply time-value techniques that account for compounding more frequently than annually, stated versus effective annual interest rates, and deposits needed to accumulate a future sum

6 use time-value techniques to find implied interest or growth rates for lump sums, annuities and mixed streams, and an unknown number of periods for both lump sums and annuities.

Valuing shares
1 describe the differences between preferred and ordinary shares

2 calculate the estimated value of preferred and ordinary shares using zero, constant and variable growth models

3 value an entire company using the free cash flow approach

4 apply alternative approaches for pricing shares that do not rely on discounted cash flow analysis

5 understand how investment bankers help companies issue equity securities in the primary market

6 be aware of the Australian secondary securities exchange markets in which investors trade shares.

The trade-off between risk and return
1 calculate an investment’s total return in dollar or percentage terms, identify the components of the total return and explain why total return is a key metric for assessing an investment’s performance

2 describe the historical performance of asset classes such as Treasury bills, Treasury bonds and ordinary shares, and articulate the important lessons that history provides

3 calculate the standard deviation from a series of historical returns

4 distinguish between systematic and unsystematic risk, explain why systematic risk is more closely linked to returns than is unsystematic risk and illustrate how diversification reduces volatility.

Risk, return and the capital asset pricing model
1 illustrate three different approaches for estimating an asset’s expected return

2 calculate a portfolio’s expected return, standard deviation and its beta

3 explain how the capital asset pricing model (CAPM) links an asset’s beta to its expected return

4 describe the concept of market efficiency and its important lessons for investors.

Options
1 illustrate three different approaches for estimating an asset’s expected return.

2 calculate a portfolio’s expected return, standard deviation and its beta.

3 explain how the capital asset pricing model (CAPM) links an asset’s beta to its expected return.

4 describe the concept of market efficiency and its important lessons for investors.

Capital budgeting process and decision criteria
1 understand capital budgeting procedures and the ideal characteristics of a capital budgeting technique

2 evaluate the use of the payback period, the discounted payback and the accounting rate of return to evaluate capital expenditures

3 discuss the logic, calculation and pros and cons of the net present value (NPV) method, as well as a variant of this, the economic value added (EVA) method

4 describe the logic, calculation, advantages and problems associated with the internal rate of return (IRR) technique

5 differentiate between the NPV and IRR techniques by focusing on the scale and timing problems associated with mutually exclusive capital budgeting projects

6 discuss the profitability index and findings with regard to the actual use of NPV and IRR in business practice.

Cash flow and capital budgeting
1 differentiate between cash flow and accounting profit with regard to incremental cash flow, financing costs, taxes and non-cash expenses

2 discuss depreciation, fixed asset expenditures, working capital expenditures and terminal value

3 understand relevant cash flows and the effects of sunk costs, opportunity costs and cannibalisation

4 demonstrate the procedures for determining the relevant cash flows for a capital budgeting problem

5 analyse capital rationing decisions, competing replacement projects with unequal lives and excess capacity utilisation projects

6 describe how the human element can affect the capital budgeting process and its outcomes.

Risk and capital budgeting
1 understand operating leverage and financial leverage, and the potential effect each of them has on a company’s cost of capital

2 estimate the company’s weighted average cost of capital, both with and without the allowed tax deductibility of interest payments to bondholders

3 review the roles of breakeven analysis and sensitivity analysis in evaluating investment opportunities

4 explain how scenario analysis and decision trees can be used to assess an investment’s risk

5 describe the types of real options and their role in valuing potential investments

6 discuss the strategic aspects of capital budgeting with regard to competition and the role of real options in improving the quality of decisions.

Raising long-term financing
1 discuss the basic choices that corporations face in raising long-term financing

2 describe the costs and benefits of raising long-term funds by issuing securities rather than by borrowing from a financial intermediary

3 understand how investment banks help corporations issue securities, and describe the services investment banks provide before, during and after a security issue

4 explain the basic issuance and pricing patterns observed in the initial public offering (IPO) market

5 describe the basic issuance and pricing patterns observed in the market for seasoned equity offerings (SEOs), and explain why so few large companies issue seasoned ordinary equity

6 explain some important aspects of international ordinary equity offerings, including the role of American Depositary Receipts (ADRs).

Capital structure
1 explain how financial leverage increases both a company’s risk and its returns

2 understand how the Modigliani-Miller model indicates that capital structure is irrelevant in a world without taxes and other market frictions

3 discuss how the presence of corporate and personal taxes affect capital structure

4 explain how the costs of insolvency and financial distress affect capital structure decisions and explore the questions raised by the agency cost/tax shield trade-off model of corporate leverage

5 describe the most important capital structure patterns observed around the world and explain what factors may be driving leverage choices.

Long-term debt and leasing
1 describe the most important characteristics of long-term debt financing, such as the factors that influence its cost and the covenants lenders include to protect their investment

2 discuss the differences between the two main types of loans arranged by corporate borrowers and explain why syndicated loans have become such an attractive source of debt financing

3 describe the most important types of corporate bonds issued by domestic corporations and compare these to bonds issued by international borrowers

4 explain how companies decide whether to refund an existing bond issue by exercising a call option

5 explain the difference between operating leases and capital, or financial, leases

6 describe the steps involved in deciding whether to acquire an asset through a lease or by borrowing the money required to purchase the asset (the lease-versus purchase decision).

Payout policy
1 discuss the fundamentals of payout policy, including cash dividend payment procedures, types of policies and share repurchases

2 describe some of the key factors affecting dividend and share repurchase decisions

3 understand why payout policy is irrelevant in a world with perfect capital markets

4 review the arguments for dividend relevance in the imperfect (real) world, including agency and signalling models

5 review real-world influences on payout policy such as taxes, transactions costs and uncertainty

6 summarise key lessons regarding payout policy.

Financial planning

1 understand the relationship between a company’s strategy and its plans, and the roles that finance plays in constructing strategic plans

2 describe the impact of growth on the company’s balance sheet and the role of the sustainable growth model as a planning device

3 discuss the role of pro forma financial statements in the financial planning process and the shorthand approach for estimating external funds required

4 explain the ‘plug figure’ used in constructing a pro forma balance sheet and the information it provides in the financial planning process

5 review the conservative, aggressive and matching financing strategies that a company might employ to fund the long-term trend and seasonal fluctuations in its business

6 describe the role of the cash budget in planning and monitoring the company’s cash inflows and outflows on a short-term basis.

International investment decisions
1 describe the difference between fixed and floating exchange rates, and interpret exchange rate quotes taken from the Web or financial newspapers

2 revise the NPV decision rule for capital budgeting analysis to incorporate the added complexity that arises when an investment is undertaken in a foreign currency.

Cash conversion, inventory and receivables management
1 describe the cash conversion cycle, the company’s objectives with regard to it and the actions the company can use to accomplish these objectives

2 explain the cost trade-offs the company must consider when finding the optimal levels of both operating assets and short-term financing

3 discuss the key concerns of the financial manager with regard to inventory and some of the popular techniques used to manage it

4 review the key aspects of a company’s credit standards, including the five C’s of credit and the role of credit scoring

5 analyse proposed changes in a company’s credit standards and its credit terms using both descriptive and quantitative techniques

6 understand the collection policy procedures used by companies, the techniques companies use in credit monitoring and the cash application process.

Cash, payables and liquidity management
1 understand float, its components and the financial manager’s responsibilities with regard to cash position management

2 eview the objective of cash collections, the key types of collection systems and the role of lockbox systems in cash collection

3 describe the role of cash concentration and various mechanisms used by companies to transfer funds from depository banks to concentration banks

4 explain accounts payable management with regard to the average payment period and the effect of cash discounts on timing the payment of accounts payable

5 discuss popular disbursement products and methods and recent developments in accounts payable and disbursements

6 describe popular investment vehicles for short-term surpluses and the key sources of borrowing used to meet short-term deficits.

Entrepreneurial finance and venture capital
1 describe how the financing of entrepreneurial growth companies differs from the financing techniques used by more mature, publicly traded corporations

2 discuss the main types of institutional venture capital funds in operation today, and explain how these differ in terms of organisation, financing and investment objectives

3 explain how venture capitalists structure their investments, and why they use staged financing and generally use convertible preferred shares as their investment vehicle. Review how venture capitalists price their investments and the principal methods they use to exit an investment

4 describe the international markets for venture capital, particularly those in Australia, the US, Western Europe, Canada, Israel, China and Japan.

Mergers, acquisitions and corporate control
1 describe the most important forms of corporate control transactions and distinguish between transactions that integrate two businesses and those that split up an existing single business

2 discuss the differences between horizontal, vertical and conglomerate mergers

3 explain the different methods of payment acquirers use to execute mergers and acquisitions, and discuss how returns to target and bidder company shareholders differ between cash and share mergers

4 contrast the motivations of managers who implement value-maximising mergers and

Insolvency and financial distress
1 describe and differentiate between business failure, insolvency, financial distress and bankruptcy

2 discuss why companies may seek insolvency

3 explain how companies in Australia undertake the process of appointing an administrator and what that role entails

4 describe the alternatives that are available to companies that find themselves in financial distress

review the tools used by many analysts in attempts to predict the occurrence of insolvency.

Introduction to financial risk management
1 describe the types of financial risks that can adversely affect a company’s cash flows and explain why companies might choose to hedge those risks

2 calculate the price of a forward contract and illustrate how to use such a contract to hedge a financial risk exposure

3 explain the differences between forward and futures contracts

4 describe the basic features of options and swaps and explain how they can be used to hedge financial risk exposure.

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