FN3092 Corporate finance
Students may bring into the examination hall their own hand held electronic calculator. If calculators are used they must satisfy the requirements listed in Section 4, Assessment for the programme, of the Detailed Regulations.
May not be taken with AC3059 Financial management.
Prerequisites (applies to degree students only)
EC1002 Introduction to economics andeither MT105A Mathematics 1 or MT105B Mathematics 2 or MT1174 Calculus.
Project evaluation: Hirschleifer analysis and Fisher separation; the NPV rule and IRR rules of investment appraisal; comparison of NPV and IRR; 'wrong' investment appraisal rules: payback and accounting rate of return.
Risk and return - the CAPM and APT: the mathematics of portfolios; mean-variance analysis; two-fund separation and the CAPM; Roll's critique of the CAPM; factor models; the arbitrage pricing theory.
Derivative assets - characteristics and pricing: definitions: forwards and futures; replication, arbitrage and pricing; a general approach to derivative pricing using binomial methods; options: characteristics and types; bounding and linking option prices; the Black-Scholes analysis.
Efficient markets - theory and empirical evidence: underpinning and definitions of market efficiency; weak-form tests: return predictability; the joint hypothesis problem; semi-strong form tests: the event study methodology and examples; strong form tests: tests for private information.
Capital structure: the Modigliani-Miller theorem: capital structure irrelevancy; taxation, bankruptcy costs and capital structure; 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.
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.
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.