Centre for Financial
& Management Studies (CeFiMS) - University of London
Individual
Professional Courses – IPC
Corporate Finance [FM202]
Introduction
The theories, examples,
and empirical studies in Corporate Finance which are discussed
in this course concentrate on the finance of corporations whose shares
are traded on a well organised stock market. The purpose of the course
is to explain the observable financial decisions of corporations and
portfolio managers, and to interpret the behaviour of the securities
markets which results from the decisions of those and other agents.
Traditionally, the securities markets considered in corporate finance
are ‘spot’ or ‘cash’ stock markets dealing in company shares and bonds.
But modern finance also includes large and growing markets in ‘derivatives’,
especially options and futures, which are contracts relating to the
future prices of the underlying shares or bonds. To ‘explain the behaviour’
of any of the financial markets involves explaining how the prices of
shares, bonds and derivatives are determined.
Aims & Objectives
The course aims to enable
students to understand and analyse the theoretical principles relating
to corporate finance, and the controversies and criticisms which surround
these theoretical propositions. It focuses on the relation between corporations’
decisions on investing in productive (‘physical’) assets and issuing
financial liabilities, and the markets in the financial liabilities
(equities and debt) which they issue. The theorems concerned with corporations’
decision problems which the course examines include the Net Present
Value Rule, the Modigliani–Miller Theorem on Dividend Policy and their
earlier seminal Theorem on Debt–Equity Ratios, and Agency Theory; and
the main theorems focusing on the Operation of Financial Markets analysed
are the Efficient Markets Hypothesis, the Capital Asset Pricing Model,
and the Theory of Option Pricing.
Resources
Students receive a looseleaf
binder containing eight ‘course units’; these texts are carefully structured
to provide the main teaching and are equivalent to traditional course
lectures, defining and exploring the main concepts and issues, locating
these within current economics debate and introducing and linking the
further assigned readings. Two obligatory assignments, which are marked
by your CeFiMS tutors, and a specimen examination paper are also included
within the student pack, along with the following:
Textbooks:
Thomas E. Copeland and
J. Fred Weston, Financial Theory and Corporate Policy, Third
Edition, 1992, Addison-Wesley Publishing Company, ISBN0201106485.
Richard A. Brealey and Stewart C. Myers, Principles of Corporate
Finance, Sixth Edition, 2000, McGraw-Hill Inc, ISBN0077095650.
Clifford W. Smith, Jr [ed.] The Modern Theory of Corporate Finance,
Second Edition, 1990, McGraw-Hill International, ISBN0070591091.
Readings:
A compilation of further
readings: recently published articles or seminal writings which augment
and illustrate the main text.
Course Timetable
This shows the linkage
between the various components of the course and indicates the schedule
for reading the texts, submitting assignments, etc.
Course Content
Unit 1 Valuing Investments
and Shares
This unit introduces the
core theories of corporate finance; it raises key questions; analyses
capital budgeting techniques – net present value and internal rate of
return; the valuation of equities; the Fisher Separation Theorem and
the Gordon Growth Model.
Unit 2 Dividend Policy
and Valuation of Shares
Unit 2 explores the effects
of dividend policy on share values; the Modigliani-Miller Model; role
of taxes; asymmetric information and signalling; dividend policy and
agency costs.
Unit 3 Debt–Equity Policy
In Unit 3, the capital
structure question is investigated; the Debt–Equity Irrelevance Theorem
is introduced and discussed, along with an exploration and explanation
of weighted average cost of capital; corporate and personal taxes; bankruptcy
costs.
Unit 4 Agency Theory:
Corporate Finance in the Presence of Conflicting Interests
Unit 4 looks at the theory
of the firm. It analyses the agency costs of equity and debt, and teaches
other applications of agency cost models. In these models, conflicts
of interest between shareholders and managers, and shareholders and
bondholders are the focus.
Unit 5 Mergers and Acquisitions
This unit looks at takeover
booms and the market for corporate control; it examines evidence on
the source of gains; agency cost theory and free cash flow; and provides
a critical analysis of takeover and debt.
Unit 6 Valuation of Risk:
Capital Asset Pricing Model
The capital asset pricing
model is analysed in Unit 6, along with arbitrage pricing theory, and
other aspects of risk.
Unit 7 Valuation of Risk:
Options
Unit 7 analyses alternative
perspectives on option pricing; it also discusses the payoff and price
of an option; introduces option pricing models; and looks at applications
of option theory in corporate finance.
Unit 8 International Corporate
Finance
This final unit examines
the globalisation of international financial markets, modifying the
basic theories introduced in the course to deal with the international
aspects of corporate finance.
Tuition & Assessment
The course is assessed
by two assignments, written at set intervals during the course, and
a three-hour examination taken at the end of the study year after all
coursework has been completed. Assignments count for 30% of the final
course result, whilst the examination contributes the remaining 70%.
