To pass this unit (requires a Standardised Numerical Grade of 50 or better) the student must pass the final examination.

CLASSES

Face-to-Face Teaching: Generally 20 hours

Timetable: Detailed timetable for classes are on the Centre’s web site www.mafc.mq.edu.au

Class Changes: 

Students will only be permitted to change classes if authorised by the Applied Finance Centre.

Request for changes must be made:

• By completion of a Change of Unit Form, available on the Centre’s web site at www.mafc.mq.edu.au; or
• In person by going to reception at the relevant Applied Finance Centre location.

Consultation Times: 

Students who wish to contact any of the teaching staff may do so through:

• The Unit’s iLearn site, in relation to general queries (so that all students may benefit); or 
• Individual consultation with the lecturer by email in the first instance, if necessary.

REQUIRED AND RECOMMENDED TEXTS AND/OR MATERIALS

Background Text:

• Bodie, Kane & Marcus, Investments,  McGraw-Hill / Irwin, 9th edition ISBN 978-0-07-353070-3
• Ross, Westerfield & Jaffe, Corporate Finance, McGraw-Hill/Irwin, 10th edition 2013 (ISBN 9780078034770)  (RWJ)
• You are not required to buy latest editions of these books; whatever you used when you did the prerequisite will be sufficient

Additional Readings: 

• The unit notes make reference to additional downloadable material on the iLearn. This is for students interested in following up particular aspects in greater detail. 
• Students should assume these additional readings are not examinable unless otherwise advised.

Lecture Notes: Available in printed form and electronically via iLearn. 

Pre-Unit Materials: Information papers on statistics, regression, accounting and other material may be found at http://www.mafc.mq.edu.au/applications/minimum-knowledge-requirement/pre-course-materials1/. Students should work through this material prior to commencing the degree. The material will remain a useful reference as students progress through the program.

Useful References: Supplementary Not Required: Koller, Goedhart, Wessels (2010), Valuation: Measuring and Managing the Value of Companies, Wiley, 5th Edition.

Calculators: 

• A financial calculator that can handle time value of money calculations, logs and power functions is required.
• The Hewlett Packard calculator hp17bII+ is recommended.
• In examinations, hand held calculators are permitted. Mobile phones and computers are not permitted.

Assumed Knowledge: Mathematical content

• This Unit relies heavily on present value techniques. Students should be able to use the general formula for calculating the present value of a series of cash flows, as shown below:

                                                                                  Present Value = Σ_t=0ⁿ ( (Cashflow_t) / (1 + K_t )^t )

         as well as alternate expressions for calculating the present value of a series of cash flows using perpetuities and annuities. You should review Chapter 4 of the textbook if you are not comfortable with this material.

• Finance has a high level of numerate content. Consequently this Unit is, in parts, mathematical and arithmetical.  As an indication of the level of algebra required, Students should find the following problem easy to solve:

                                                                                 Solve for Z₅: $1,000 = $681.20(1+Z₅/2)¹⁰

• Students should look at the Web link below to obtain notes on the minimum mathematical and statistical knowledge required to undertake the Master of Applied Finance degree: http://www.mafc.mq.edu.au/applications/minimum-knowledge-requirement/pre-course-materials1/

Assumed Access:

• Access to a computer with word processing and spreadsheet capability is assumed, as is general computer literacy.

TECHNOLOGY USED AND REQUIRED

Unit iLearn Site: 

• Found by logging on to iLearn ilearn.mq.edu.au, then clicking on Investment and Credit Analysis.
• This is where you will find forums, downloadable resources and links to important pages. 
• The forum allows you to communicate with other students and lecturer(s) and may provide supplementary material. 
• You are requested to post your questions on the forums at least 24 hours prior to the assignment submission date or the examination date. Questions posted after that time may not be answered. Please try to not leave your questions to the last few days. 

Important Notice: 

• It is important that you familiarize yourself with the Unit’s iLearn site. 
• Students should check the Unit’s iLearn site regularly (minimum twice a week and prior to all lectures) and look for updates and distribution of materials (including case studies) related to the unit or assessments and, if relevant, participate in forum discussions. 

TOPIC 1: INDUSTRY AND STRATEGIC ANALYSIS

This topic is designed to provide an overview of industry and corporate strategy.  The financial performance of any business is inextricably linked to the strategic and operating decisions of management and the industry structure in which the firm exists.  The aim of this topic is to review several broad frameworks of strategic analysis in order to provide context to financial analysis and forecasting. 

• A framework of how management decisions translate to financial performance and corporate value will be examined.
• The subject will include an overview of Porter’s model of industry strategic analysis and Porter’s value chain analysis.  However, it is often difficult to translate a Porter analysis into a detailed investment analysis.
• The subject will then review operational strategy within the context of broader industry position and how this translates into operational and financial performance.  A review of the Product/Process matrix will lead into the next topic, Financial Statement Analysis, by describing the nature of operating decisions given a company’s chosen strategy.

Readings: 

• Koller, Goedhart, Wessels (2010), Valuation: Measuring and Managing the Value of Companies, Wiley, 5^th Edition, Ch4 Return on Invested Capital, p59-80. (Refer to as  KGW)
• McGahan, How Industries Change, Harvard Business Review October 2004, p87-94.
• Porter (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 2004 Export Edition, pp4-12, 36-48, 67-70.
• Smit and Trigeorgis (2004), Strategic Investments: Real Options and Games, Part 1, p3-33, and p39.
• M. Grinblatt & Sheridan Titman, Financial Markets and Corporate Strategy, McGraw-Hill International, 1998, Ch17, How Managerial Incentives Affect Financial Decisions,p605-628.
• Chew, The New Corporate Finance: Where Theory Meets Practice, McGraw-Hill 2^nd Edition, p101-118.
• Additional case studies on iLearn.

TOPIC 2: ANALYSYING FINANCIAL PERFORMANCE

Topic 2 will provide the basis for more detailed review of financial performance of an enterprise.  Students should re-familiarise themselves with the financial statement analysis conducted in ECFS866 Corporate Finance.  The topic will build on prior FSA skills to be applied across different settings in Topic 3. 

• A brief overview of cashflow analysis and financial statements will be provided as a refresher.
• A detailed review of the components of the income statement (breakdown of gross margin, COGS vs SG&A, fixed and variable costs) and working capital will be conducted.
• A more detailed Du Pont review will be conducted including sensitivity of outputs to differences in operating strategy.
• Note: Students are encouraged to source ratio definitions from several texts as terminology may vary.

Readings: 

• Koller, Goedhart, Wessels (2010), Valuation: Measuring and Managing the Value of Companies, Wiley, 5^th Edition, Ch8, Analysing Performance (p165-173).
• H. M. Schilt (2010), Financial Shenanigans: How to Detect Accounting Gimmicks & Frauds in Financial Reports, McGraw-Hill 3^rd Ed., p24-41.
• A. Damodaran, Leases, Debt and Value, Working Paper Stern School of Business (April 2009).
• Sherman & Young, Tread Lightly Through these Accounting Minefields, Harvard Business Review, July-August 2001, p129-135.
• Supplementary Reading: Ross, Westerfield & Jaffe, Corporate Finance, 9^th Edition, Ch 2 Financial Statements and Cashflow (p20-34) and Ch 3 Financial Statement Analysis (p44-76).
  • NB. Students should possess this text from Corporate Finance where this Chapter was covered in CF Topic 4.
• Sample Company Presentation: Western Digital.

TOPIC 3: MATCHING STRATEGY AND PERFORMANCE

Topic 3 follows Industry Analysis and Competitive Strategy analysis from Topic 1.  A brief overview of Operating Strategy will be conducted followed by a series of blind case examples to match financial performance across various industry groupings and company strategies.

• This topic will bridge financial performance and strategy
• The product/process matrix and financial performance will be examined.
• Industry case studies of FMCG, transport, industrial and other companies will be reviewed.

Readings: 

• B. Henderson, Cash Traps, The Boston Consulting Group, Perspectives Reprint No. 106.
• B. Henderson, The Experience Curve, The Boston Consulting Group, Perspectives Reprint No. 124.
• Sample blind financial statements and related ratios including one paired set from same industry.

TOPIC 4: ROBUST FINANCIAL MODELLING

DCF modelling is an often underappreciated tool due to its dependency on key inputs. Modelling involves more than extrapolating past historical performance and financial relationships.  In addition to industry and strategic factors, advanced, reliable modelling requires identification of key value drivers and extrapolation of those relationships.  This topic is designed to take students beyond static modelling to encompass a more dynamic - realistic - industry and company environment.  Topic 4 will cover:

• Advanced financial projections and modelling of key relationships
• Macroeconomic top down forecasting
• Understanding the modelling process and importance of the integrated financial model
• Value Driver Trees
• Improving the robustness of the model and reality checks

Readings: 

• Australian Bureau of Statistics, Statistical Language, http://www.abs.gov.au/websitedbs/a3121120.nsf/home/statistical+language.
• Fama & French, Forecasting Profitability and Earnings, Journal of Business Vol 73 No.2 (2000), p161-175.
• Supplementary Revision: Ross, Westerfield & Jaffe, Corporate Finance, 9^th Edition, Ch 4 DCF Valuation (p87-134).
  • NB. Students should possess this text from Corporate Finance Additional Recommended: Introductory text in econometrics or statistics

TOPIC 5: EQUITY VALUATION ANALYSIS

This topic will look at the functions of an equity analyst with a focus on applying the checks and balances discussed in Topic 4 on a financial model.  The topic will review the components of actual analysts’ reports by way of example.  Students will:

• Review components of an equity valuation analysis
• Link in use of DCF vs market multiples between short term trading and long term investment valuation focus.
• Examine ROIC over time under sensitivity and scenario analysis. 
• Discuss funding risks and link back to capital structure strategy from Corporate Finance.

Readings: 

• Chew, The New Corporate Finance, McGraw-Hill 2^nd Edition, reprint of Stern Stewart Roundtable on Relationship Investing and Shareholder Communication, New York, p73-100.
• Chen, Harford, and Lin, Do financial analysts play a monitoring role?  Evidence from Natural Experiments, Working Paper, The Chinese University of Hong Kong and University of Washington.
• Gu and Wu, Earnings skewness and analyst forecast bias, Journal of Accounting and Economics 35, 5-29.
• Additional Reading: Muddy Waters Research, Sino Forest Corporation Report, 2 June 2011 (not available for publication, will be discussed in class).

Disclaimer: A number of equity broker reports will be used in this topic. These are not to be construed as investment recommendations and are for illustrative purposes only.

TOPIC 6: STRATEGIC POSITION AND CREDIT ANALYSIS

The objective of Topic 6 is to consider the relationship between strategic positioning and credit risk.Firstly, an overview of some credit metrics will be undertaken.Secondly, a review of rating agency methodology and credit protection mechanisms will be provided.Finally, the relation between company position and credit will be examined in addition to the strategic role of credit.

• Financial ratios, default prediction and credit scores and ratings.
• Credit related concept of risk and calculation of credit specific ratios. 
• Role and background of rating agencies.
• Discuss some of the protections to debt capital and feedback loop into operating decisions.

Readings: 

• M. Grinblatt & Sheridan Titman, Financial Markets and Corporate Strategy, McGraw-Hill International, 1998, Ch16, Capital Structure and Corporate Strategy, p577-597.
• Standard & Poors,  2008 Corporate Criteria: Analytical Methodology, April 15, 2008, 983195 | 301932338
• Standard & Poors,  Methodology: Business Risk/Financial Risk Matrix Expanded, September 18 2012, 1012975 | 301932338.
• Moody’s, Rating Methodology: Global Regulated Electric Utilities, March 2005, Report Number: 91730.
• Moody’s, Rating Methodology: Global Manufacturing Industry, December 2010, Report Number: 129387.
• B. Ganguin & J. Bilardello. Fundamentals of Corporate Credit Analysis, McGraw-Hill Professional, 2004, p20-46, 310-321.

This Unit Guide may be subject to change. The latest version is on the Centre’s web site www.mafc.mq.edu.au.

Students should read the Unit Guide carefully at the start of semester.  It contains important information about the unit.  If anything is unclear, please consult one of the unit lecturers.  

University Policy on Grading:

• Macquarie University’s Academic Senate has established a Grading Policy available at http://www.mq.edu.au/policy/docs/grading/policy.html. Your final result will include: 
  • A grade ranging from Fail to High Distinction; and
  • A Standardised Numerical Grade (SNG). A SNG is not a summation of the individual assessment components, but is allocated on the basis of the performance in all assessment items, providing the examination component is passed.
• It is important to note:
  • The Policy does not require that a minimum or maximum number of students are to be failed in any unit; 
  • Grades will not be allocated to fit a predetermined distribution; and
  • The process of allocating SNGs does not change the rank order of marks among students who pass the unit. 

Specific Unit Grading: 

• To pass this unit (requires a Standardised Numerical Grade of 50 or better) the student must pass the final examination.
• All final grades in the Applied Finance Centre are determined by a grading committee and are not the sole responsibility of the unit convenor.
• The core criteria used to assess student work in this unit are: 
  • Knowledge and understanding: Understanding key ideas, knowledge and use of concepts.
  • Application: Ability to apply theoretical ideas and frameworks in practice and in a critically reflective way. 
  • Reasoning and analysis: Ability to analyse, use critical reasoning and principles to formulate a position, balancing theory and personal reflection. 
  • Professional literacy and research: Understanding of professional factors (language and landscape) and ability to undertake appropriate research. 
  • Communication and presentation: Ability to communicate and present effectively (written and oral, as relevant).
  • Use of mathematical and statistical ideas: Ability to use mathematical and statistical ideas, methods and formulae appropriately. 
• Performance in relation to each of these criteria are assessed against the University’s grading descriptors:

Review of Grade and final examination Script viewing:

• A student who has been awarded a final grade for a unit and who does not believe it is an accurate reflection of their performance, and has grounds for such a claim and can demonstrate those grounds, may apply to have their grade reviewed. 
• For information on requesting a review of grade and/or viewing your final exam script, please refer to the University’s Grade Appeal Policy at http://www.mq.edu.au/policy/docs/gradeappeal/policy.html and MAFC Program Rules & Procedures at http://www.mafc.mq.edu.au.