Institute of Business Management & Administrative Sciences (IBMAS) Course Outline -MBA & MS
Corporate Finance
Course Introduction/Objective
This course aims to provide the students with the fundamental concepts, principles and
approaches of corporate finance, enable the students to apply relevant principles and
approaches in solving problems of corporate finance and help the students improve their
overall capacities.
Learning Outcomes
At the end of the course students will be able to understand;
• The concept of time value of money
• Bonds and Stocks Valuation
• Risk and Return Principles
• Capital Budgeting
• Financing
• Capital Structure and Dividend Policy essentials
• Financial Planning
Course Contents
THE FIRM AND THE FINANCIAL MANAGER
• What is corporate finance?
• The role of financial manager
• Legal forms of business organization
• Goals of the corporation
• Financial institutions and Markets
• Agency problem (principal-agent problems). How agency costs can be controlled in
corporate finance?
• Research articles (Ten ways to create shareholders wealth)
THE TIME VALUE OF MONEY
• The concept of future value and present value
• Multiple cash flows (future value and present value of multiple cash flows)
• Level cash flows (How to value perpetuities? How to value annuities?
• Inflation and time value money.
• Applications of time value money.
• Research articles
VALUING BONDS
• Bond characteristics
• Bond prices and yields
• Rate of return
• The interest rate risk
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Institute of Business Management & Administrative Sciences, (IBMAS) Course Outlines-MBA 3.5Years MS
• The yield curve
• Nominal and real rates of interest
• Default risk
• Research articles
VALUING STOCKS
• Stocks and the stock markets
• Book value, liquidation value, and market value
• Valuing common stock
• Estimating expected rates of returns
• Growth stocks and income stocks
• Other approaches valuing common stocks
• Valuing preferred stocks
• Research articles
RISK
• Risk and return fundamentals
• Measuring risk (variance and standard deviation)
• Risk and diversification (Diversification, asset versus portfolio risk, market risk
versus unique risk)
• The concept of risk-free borrowing and lending (Portfolios of risky and risk-free
assets, Determining the optimal portfolio,
• The market portfolio (the capital market line)
• The capital asset pricing model (CAPM) (The concept of securing market line,
estimation of betas)
• Alternatives to the CAPM (The Arbitrage Pricing Theory, the Fama-French (F-F)
model)
THE COST OF CAPITAL - RETURN
• Determining weighted average cost of capital
• Measuring capital structure
• Computing required rates of returns (The expected returns on corporate bond,
common stock, and preferred stock)
• How to interpret the weighted average cost of capital?
• Flotation costs and the cost of capital
CAPITAL BUDGETING PROCESS AND TECHNIQUES
• Payback analysis (The payback decision rule, pros and cons of back method,
discounted payback method, pros and cons of back method)
• Accounting based methods (Accounting rate of returns)
• Net present value (The NPV decision rule, pros and cons of NPV)
• Internal rate of return (How to determine the project’s IRR, pros and cons of IRR)
• IRR, NPV and mutually exclusive projects
• The concept of Profitability index – Benefit cost ratio
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Institute of Business Management & Administrative Sciences, (IBMAS) Course Outlines-MBA 3.5Years MS
• The profitability index and capital rationing
CASH FLOW AND CAPITAL BUDGETING
• Discount cash flows not profits
• Discount incremental cash flows (the concept of indirect effects, sunk cost, and
opportunity costs)
• Discount nominal cash flows by the nominal cost of capital
• Separate investment and financing decisions
• Computing cash flow for investment decisions (e.g., initial investment, cash flows
from operations, and terminal cash flow)
PROJECT ANALYSIS
• How firms organize the investment process (The capital budget, Project
authorizations)
• Sensitivity analysis and scenario analysis
• Breakeven analysis (Accounting breakeven analysis Vs. NPV breakeven analysis)
• Flexibility in capital budgeting (Decision trees, the option to expand, Abandonment
options, flexible production facilities, investment timing options)
AN OVERVIEW OF CORPORATE FINANCING
• Differences between investment and financing decisions
• The concept of an efficient market
• Three forms of the efficient market theory (Weak form efficiency, semi-strong form
efficiency, and strong form efficiency)
• Common stock
• Preferred stocks
• Corporate Debt
• Convertibles Securities
HOW CORPORATIONS ISSUE SECURITIES?
• Venture capital
• The initial public offering
• The underwriters and the procedures of underwriting
• General cash offers by public companies
• Market reactions to stock issues
• The private placement
CAPITAL STRUCTURE THEORY – AN OVERVIEW
• Modigliani and Miller capital structure irrelevance propositions (Assumptions of the
M&M capital structure model, Proposition I, and Proposition II)
• Modigliani and Miller capital structure model with corporate and personal taxes
• The trade-off model of capital structure
• The pecking order hypothesis
• Agency costs and capital structure
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Institute of Business Management & Administrative Sciences, (IBMAS) Course Outlines-MBA 3.5Years MS
• The signaling model of capital structure
• Capital structure patterns observed worldwide
DIVIDEND POLICY
• Dividend fundamentals (dividend payment procedures)
• Types of dividend policies
• Factors affecting the dividend policy
• Other forms of dividends
• Payout policy in a world with perfect capital markets (Modigliani and Miller
irrelevance proposition)
• The effects of market imperfections on payout policy
• The free cash flow hypothesis: dividend payments a solution to agency problems
FINANCIAL STATEMENT ANALYSIS
• Principal financial statements (Balance sheet, income statement, statement of retained
earnings, cash flow statement)
• Financial ratios (Liquidity ratios, activity/asset management ratios, gearing/ leverage
ratios, profitability ratios, and market value ratios)
• The DuPont system
• Measuring company performance
• The role of financial ratios
FINANCIAL PLANNING
• What is financial planning?
• Financial planning models (Components of a financial planning model)
• Pitfalls in model design
• The assumptions in percentage of sales model
• The role of financing planning models
• The concept of external financing and growth
WORKING CAPITAL MANAGEMENT AND SHORT-TERM PLANNING
• Working capital (the components of working capital, working capital and cash
conversion cycle, the working capital trade-off / strategies)
• Links between long-term and short-term financing
• Cash budgeting (forecast sources and uses of cash)
• Sources of short-term financing (bank loans, commercial papers, secured loans)
Recommended Books/Reading Material
1. Fundamentals of Corporate Finance by Richard A. Brealey, Stewart C. Myers and
Alan J. Marcus, International Edition, McGraw-Hill Inc., New York.
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Institute of Business Management & Administrative Sciences, (IBMAS) Course Outlines-MBA 3.5Years MS
2. Corporate Finance by Scott B. Smart, William L. Megginson and Lawrence J.
Gitman, Thompson (South-Western) USA.
3. Principles of corporate finance by Richard A. Brealey, Stewart C. Myers, 7 th edition,
McGraw-Hill Inc., New York.
Course Evaluation
Midterm exam: 30 marks
Final exam: 50 marks
Sessionals: 20 marks (Quizzes, 7 marks, Assignments: 7 Class
marks,
Participation/Presentation: 6 marks)
Total: 100 marks
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Institute of Business Management & Administrative Sciences, (IBMAS) Course Outlines-MBA 3.5Years MS
