Paper 10: Corporate Finance

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About Course

The Professional courses are administered at Foundation, Intermediate and Advanced Levels. Each level requires an average of one year, though candidates are advised to provide for an additional one year to meet requirements for internship/ practical experience.

A student must book for a minimum of three papers in a level in any order unless is exempted or has credits.

This course is aimed at persons who wish to qualify and work or practice as investment, securities and financial analysts, portfolio managers, investment bankers, fund managers, consultants on national and global financial markets and related areas.

Course Content

Course outline

1. Overview of corporate finance
Nature and scope of corporate finance Financial decision making process Role of finance manager Finance functions Goals of a firm Agency theory concept, conflict and resolutions Measuring managerial performance, compensation and incentives

2. Cost of capital
The concept and significance of cost of capital Components of cost of capital Weighted average cost of capital (WACC) of a company Marginal cost of capital (MCC) of a company Use of marginal cost of capital and the investment opportunity schedule in determination of the optimal capital budget Cost of debt capital using the yield-to-maturity approach and the debt-rating approach Computation of the cost of non-callable and nonconvertible preferred stock Computation of the cost of the cost of capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-premium

3. Capital structure
Sources of capital Factors to consider when selecting sources of funds Capital structure of a firm Factors influencing capital structure Capital structure theories: Net Income (NI) approach; Net operating Income (NOI) approach; Franco Modingiliani and Merton Miller (MM) propositions-MM without taxes, MM with corporate taxes, MM with corporate taxes and personal taxes, and MM with taxes and financial distress costs Target capital structure; reasons why a company’s actual capital structure may fluctuate around its target Measure of leverage: Overview of leverage; importance of business risk, sales risk, operating risk, and financial risk in leverage; classification of a risk; degree of operating leverage, the degree of financial leverage on a company’s net income and return on equity; breakeven quantity of sales levels; computational of the operating breakeven quantity of sales Role of debt ratings in capital structure policy Evaluating the effect of capital structure policy on valuation: factors to consider International differences in the use of financial leverage, factors that explain these differences, and implications of these differences for investment analysis

4. Capital investment decisions under certainty
Nature of capital investment decisions Classification of capital budgeting decisions Categories of capital projects Basic principles of capital budgeting; evaluation and selection of capital projects: mutually exclusive projects, project sequencing, and capital rationing Capital budgeting techniques Estimating project cash flows

5. Capital investment decisions under uncertainty
Nature and measurement of risk and uncertainty Investment decision under capital rationing: Multiperiod; investment decision under inflation, investment decision under uncertainty Techniques of handling risk: sensitivity analysis; scenario analysis; simulation analysis; decision theory models; certainty equivalent; risk adjusted discount rates; utility curves Special cases in investment decision: projects with unequal lives; replacement analysis; abandonment decision Real options in investment decisions: Types of real options; evaluation of a capital project using real options Common capital budgeting pitfalls Computation of accounting income and economic income in the context of capital budgeting Evaluation of a capital project using economic profit, residual income, and claims valuation models for capital budgeting

6. Management of working capital
Primary and secondary sources of liquidity; factors that influencing a company’s liquidity position Company’s liquidity measure in comparison to those of peer companies Evaluation of working capital effectiveness of a company based on its operating and cash conversion cycles; comparison of the company’s effectiveness with that of peer companies Effect of different types of cash flows on a company’s net daily cash position Computation of comparable yields on various securities; comparison of portfolio returns against a standard benchmark; evaluation of a company’s short-term investment policy guidelines Company’s management of accounts receivable, inventory, and accounts payable over time and compared to peer companies Evaluation of the choice of short-term funding available to a company

7. Mergers and acquisitions
Classification of mergers and acquisition (M &A) activities based on forms of integration and relatedness of business activities Common motivations behind M & A activity Bootstrapping of earnings per share (EPS); computation of a company’s post- merger EPS The relation between merger motivation and types of mergers, based on industry life cycles Contrast merger transaction characteristics by form of acquisition, method of payment, and attitude of target management Pre-offer defence mechanisms and post-offer takeover defence mechanism Computation of Herfindahl- Hirschman index, and the likelihood of an antitrust challenge for a given business combination Discounted cash flow analysis, comparable company analyses, and comparable transaction analyses for valuing a target company, including the advantages and disadvantages of each Computation of free cash flows a for a target company, and estimation of the company’s Intrinsic value based on discounted cash flow analysis Estimation of the value of a target company using comparable company and comparable transaction analyses Evaluation of a takeover bid; computation of the estimated post-acquisition value of an acquirer and the gains accrued to the target shareholders versus the acquirer shareholders Effect of price and payment method to the distribution of risks and benefits in M&A transactions Characteristics of M&A transactions that create value Equity carve-outs, spin-offs, split-offs, and liquidation

8. Dividend policy
Forms of dividends Dividend payment chronology Theories of dividend policy Factors that affect dividend policy Dividend payout policies Calculation of dividends

9. ANALYSIS OF CORPORATE GROWTH AND RESTRUCTURING

10. Islamic finance

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