5542-Corporate Finance

ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD
(Department of Business Administration)

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CORPORATE FINANCE (5542)

(CHECK LIST)

SEMESTER: AUTUMN 2010

This packet comprises the following material:

1.   Text Book

2.       Course Outline

3.       Assignment No 1 &  2

4.       Assignment Forms (2 sets)

In this packet, if you find anything missing out of the above mentioned material, please contact at the address given below:

Deputy Registrar,

Mailing Section, Block No. 28

Allama Iqbal Open University

H-8, ISLAMABAD

            Phone: 051-9057611-12

 

Course Coordinator

ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD

(Department of Business Administration)

WARNING

1.         PLAGIARISM OR HIRING OF GHOST WRITER(S) FOR SOLVING THE ASSIGNMENT(S) WILL DEBAR THE STUDENT FROM AWARD OF DEGREE/CERTIFICATE, IF FOUND AT ANY STAGE.

2.         SUBMITTING ASSIGNMENTS BORROWED OR STOLEN FROM OTHER(S) AS ONE’S OWN WILL BE PENALIZED AS DEFINED IN “AIOU PLAGIARISM POLICY”.

Course: Corporate Finance (5542)                                    Semester: Autumn 2010

Level: MBA                                                                                  Total Marks: 100

Pass Marks: 40

ASSIGNMENT No. 1

Q. 1      What are the major challenges which the finance managers in developing countries are facing while taking decisions with respect to foreign business?(20)

Q. 2      Critically examine Purchasing Power Parity Theory with the help of suitable examples.     (20)

Q. 3      “An alternative to investing in foreign stock is to invest in the shares of domestic MNCs.” Discuss. Are MNCs likely to provide a reasonable substitute for international portfolio investment?             (20)

Q. 4      “The nature and magnitude of foreign exchange exposure depends on the market segment in which a firm operates.” Comment on this statement with suitable examples. What are the important elements of a currency risk sharing agreement?                                                                                                (20)

Q. 5      “All hedging is speculation, but all speculation is not hedging.” Discuss.          (20)

ASSIGNMENT No. 2

Total Marks: 100

This assignment is required to be presented in the workshop, which is expected at the end of the semester, probably prior to your final examination. Your attendance and presentation of the assignment in workshop is compulsory without which you will not be allowed to appear in the final examination in any case. You are also advised to prepare two copies of this paper. Submit one copy to your tutor as per the due date given in your tutorial schedule, attempt to incorporate examples from the newspapers, research journals and magazines you studied in relation to the subject courses. Remember, to provide the reference from where you quoted the example or source of data, otherwise it would consider plagiarized.

Use the second copy resource person in workshop for presentation in the workshop. During the presentation, you can bring supporting material like transparencies and visual aids. You must ask your support on your own analysis regarding organization chosen. Placed below are 10 topics of which you should select only one for writing a paper consisting of 30 typed pages.

You are also required to select one of the following topics according to the last digit of your roll number. For example, if your roll number is D-3427185 then you will select topic # 5 (the last digit). The report should include: -

a)            Introduction to the topic

b)            Important sub-topics

c)            Practical study of the organization with respect to the topic

d)            Review of theoretical and practical situations

e)            Merits and demerits of the organization with respect to your topic

f)             Conclusions and recommendations

g)            Annex, if any

List of Topics:

1.             Critically analyse the Foreign Trade Policy announced by the Government of Pakistan.

2.             Explain the special features of Eurobond and Eurodollar markets and its impact on Pakistan Financial system.

3.             Explain the policy measures taken by Government of Pakistan to promote foreign direct investment, during the last five years.

4.             “The changing international financial system poses new challenges for finance managers in developing countries”. Explain.

5.             Explain and illustrate the importance of liquidity in international cash management.

6.             Choose any company of your choice and find out the financing techniques/methods used by it to finance imports and exports.

7.             “Rising prices of crude oil in the international markets will impact Pakistan’s Balance of Payment situation”. Explain.

8.             Explain the concept of foreign exchange risk exposure and distinguish between accounting and economic exposure.

9.             Comparative Advantage in International Trade can be categorized into three categories, namely (i) Natural Comparative Advantage, (ii) Acquired Comparative Advantage, and (iii) Induced comparative advantage. In view of these analyse Pakistan’s foreign trade for the last five years.

10.         “The quantum of Portfolio Investment is correlated to overseas interest and inflation rates” Explain.

CORPORATE FINANCE

Course Outline (MBA-5542)

UNIT 1: VALUE

               1.      Why Finance Matters?

·               The Role of The Financial Manager

·               Organizing a Business

               2.      Present Value and the Opportunity Cost of Capital

·               Introduction to Present Value

·               Foundation of The Net Present Value Rules

               3.      How to Calculate Present Values?

·               Valuing Long - Lived  Assets

·               Looking for Shortcuts- Perpetuities and Annuities

·               Compound Interest and Present Values

·               Nominal and Real Rates of Interest

·               Using Present Value  Formulas to Value Bounds

               4.      The Value of Common Stocks

·               How Common Stocks are Traded?

·               How Common Stocks are Valued?

·               How to Estimate the Capitalization Rates?

·               The Link Between Stock Price and Earnings Per Share

·               Valuing a Business by Discounted Cash Flow

               5.      Why Net Present Value Leads to Better Investment Decisions Than Other Criteria?

·               Net Present Value’s Competitors

·               Payback

·               Average Return on Book Value

·               Internal (or Discounted-Cash-Flow) Rates of Return

               6.      Making Investment Decision with the Net Present Value Rules

·               What to Discount?

·               Project Interactions

UNIT 2: RISKS

               1.      Introduction to Risk, Return, and the Opportunity Cost of Capital

·               Measuring Portfolio Risk

·               Calculating Portfolio Risk

·               How Individual Securities Affect Portfolio Risk?

·               Diversification and Value Additively

               2.      Risk and Return          

·               The Relationship Between Risk and Return

·               Validity and Role of The Capital Asset Pricing Model

·               Some Alternative Theories

               3.      Capital Budgeting and Risk

·               Measuring Betas

·               Capital Structure and The Company Cost of Capital

·               Setting Discount Rates When You can’t  Use A Beta Book

UNIT 3: PRACTICAL PROBLEMS IN CAPITAL BUDGETING

               1.      A Project is Not a Black Box

·               Sensitivity Analysis

·               Monte Carlo Simulation

·               Decision Trees and Subsequent Decisions

               2.      Where Positive Net Present Value Come From?

               3.      Organizing Capital Expenditure and Evaluating Performance

·               Capital Budgets and Project Authorizations

·               Evaluating Performance

·               What can’t we do About Biases in Accounting Profitability Measures?

UNIT: 4   FINANCING DECISION AND MARKET EFFICIENCY

               1.      Corporate Financing and the Lessons of Market Efficiency

·               We Always Come Back  to NPV

·               What is An Efficient Market?

·               The Lesson of Market Efficiency

               2.      An Overview of Corporation Financing

·               Common Stock

·               A Look At Debt, Preferred, and  Convertibles

·               Patterns of Corporate Financing

               3.      How Corporations Issue Securities?

·               Venture Capital 

·               The Initial  Public Offering

·               General Cash Offers By Public Companies

·               The Role of The Underwriters

·               The Private Placement

UNIT 5: DIVIDEND POLICY AND CAPITAL STRUCTURE

               1.      The Dividend Controversy

·               How Dividends are Paid?

·               How Do Companies Decide on Dividend Payments?

·               Controversy About Dividend Policy

·               The Rightist

·               Taxes and The Radical Left

               2.      Dose Debt Policy Matter?

·               The Effect of Leverage In  A Competitive Tax-Free Economy

·               How  Leverage Affects Returns

·               The Traditional Position 

               3.      How Much Should A Firm Borrow?

·               Corporate Taxes

·               Corporate and Personal Taxes

·               Cost of Financial Distress

·               The Pecking Order of Financing  Choices

               4.      Interactions of Investment and Financing Decisions

·               The After-Tax Weighted -Average Cost  of Capital

·               Adjusted Present Value

·               Adjusted Discount Rates and Adjusted Present Value

·               Discounting Safe, Nominal Cash Flows

UNIT 6: OPTIONS

               1.      Corporate Liabilities and the Valuation of Options

·               Calls, Puts, and  Shares

·               Holding Calls, Puts, and Shares In Combination

·               What Determines Option Values?

               2.      Application of Option Pricing Theory

·               The Value of Follow-On Investment Opportunities

·               The Option to Abandon

·               The Timing Option

·               Flexible Production Facilities

               3.      Warrant and Convertibles

·               What Is Warrant?

·               What Is Convertible Bonds

·               The Difference Between Warrants and Convertibles

·               Why Do Companies Issue Warrants and Convertibles

UNIT 7: DEBT FINANCING

               1.      Valuing Risky Debt

·               The Classical Theory of Interest

·               Term Structure and Yields to Maturity

·               Duration and Volatility

·               Explaining The Term Structure

·               Allowing for The Risk of Default

               2.      The Many Different Kinds of Debt

·               Domestic Bounds, Foreign Bounds and Eurobonds

·               The Bonds Contract

·               Security and Seniority

·               Repayment Provisions

·               Restrictive Convents

·               Private Placement and Project Finance

·               Innovation in The Bond Market

               3.      Hedging Financial Risk

·               Insurance

·               Hedging  With  Futures

·               Forwards Contents

·               Swaps

·               How to Set Up A Hedge?

·               Is “Derivative” A Four Letter Word?

               4.      Leasing

·               What is A Lease?

·               Why Lease?

·               Operating Leases

·               Valuing Financial Leases

·               When Do Financial Lease Pay?

·               Evaluating A Large, Leveraged

UNIT 8: FINANCIAL PLANNING

               1.      Analyzing Financial Performance

·               Financial Ratios

·               The Earning Record 

·               Application of Financial Analysis

               2.      Approaches to Financial Planning

·               What Financial Planning

·               Three Requirements for Effective Planning

·               Financing Planning Models

·               External Financing and Growth

               3.      Short Term Financial Planning

·               The Components of Working Capital

·               Links Between Long Term and Short Term Financing Decisions

·               Tracing Changes in Cash and Working Capital

·               Cash Budgeting

·               The Short Term Financing Plan

               4.      Credit Management

·               Terms of Sale

·               Commercial Credit Instruments

·               Credit Analysis

·               Credit Decision

·               Collection Policy

               5.       Cash Management

·               Inventories and Cash  Balances

·               Cash Collection and Disbursement Systems

·               Bank Relations

               6.      Long Term & Short Term Lending and Borrowing

·               Short-Term Lending

·               Money Market Investments

·               Floating-Rate Preferred Stock-An Alternative to Money-Market Investment

·               Short Term Borrowing

·               Term Loans

UNIT 9:          MERGERS AND INTERNATIONAL FINANCE

               1.     Mergers

·               Estimating The Economic Gains and Cost From Mergers

·               Sensible Motives For Mergers

·               Some Dubious Reasons For Mergers

·               Estimating The Cost of A Mergers

·               The Mechanics of A Merger

·               Merger Tactics

·               Leveraged Buy-Outs

·               Mergers and Economy

               2.      International Financial Management

·               The Foreign Exchange Markets

·               Some Basic Relationship

·               Insuring Against Currency Risk

·               International Investment Decisions

·               The Cost of Capital for Foreign Investments

·               Financing Foreign Operations

·               Political Risk

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