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

CLASSES

Face-to-Face Teaching: Generally 36 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

Text:

Corporate Finance, McGraw-Hill/Irwin:

• Ross, Westerfield & Jaffe, 10th edition, 2012 (ISBN 9780078034770) (RWJ)
• Ross, Westerfield, Jaffe & Jordan, 11th edition, 2015 (ISBN 978-0077861759) (RWJJ)

Either edition of this text can be used. Note that references to the text in the course notes refer to the 10th edition, but a table of cross referencing to the 11th edition will be provided.

There is also an ebook version available should you wish to purchase that.

In both cases purchase the TEXT ONLY versions. More expensive version include access to Connect and LearnSmart however you will be able to access these directly via the course iLearn site.

Advanced Material:

• The Unit notes make reference to Advanced sections and reading material.  This is for students interested in following up particular aspects in greater detail.
• Students may assume these Advanced materials are not examinable unless otherwise advised.

Lecture Notes: 

• Available in printed form and electronically via iLearn. 
• The lecture notes include a number of references to Wesfarmers. The student is encouraged to download and become familiar with the latest Wesfarmers Annual Report and visit its website. The Centre’s use of Wesfarmers as a case company should not be construed as endorsement or criticism of its activities.
• iLearn will include a section for any identified errors in course notes and text book. Students should check iLearn to ensure they are advised of any changes or edits.

Study Problems: 

• Students will have access to learnSmart and Connect, which are online testing capabilities matched to the course textbook.
• Students are required to work systematically through a list of problems at the end of each topic.  Some work is online, via RWJ’s online learning resources, and the rest of the work is supplementary problems provided at the end of each topic’s course notes.
• These problems will not be collected but they will help you prepare for the exams.
• Answers to the supplementary problems will be posted to iLearn.
• Some problems have an Excel symbol next to them in the text indicating there are spreadsheets available for download at the McGraw Hill website for the text at www.mhhe.com/rwj. These spreadsheets contain macros that you may need to adjust your security settings to use them. In any case, they are not very useful.
• You can do all the problems using Excel and in some cases we provide solutions in spreadsheet format. Please note however that you are not able to use Excel under examination conditions; you must solve problems using pen, paper and calculator.  So it is advisable to ensure you can apply your analytical skills using a calculator.
• The Unit requires you to develop skills as well as knowledge. The only way to develop those skills is to work through the problems at the end of each topic. You are strongly encouraged to attempt each problem prior to looking at the solution provided.

Pre-Unit Materials: 

• Students should review Topic 5 of Portfolio Management & Valuation
• Students wanting to review introductory Financial Statement analysis and financial modelling, should review the gateway unit “Financial Statement Analysis & Modelling”. For those wanting to review introductory material on discounting and valuation, review the gateway unit “Finance Principles”.

Useful References: 

• Bodie, Kane and Marcus, Investments, McGraw Hill, any edition. (It may be useful to retain your PMV text book.)
• Copeland, Weston & Shastri, Financial Theory and Corporate Policy, 4th ed.,Pearson Addison Wesley, 2003.
• There are books available to help develop your Excel skills, which are needed for assignments. Two helpful books are:
  • Craig W. Holden, Excel Modelling in Corporate Finance, 2nd ed., Pearson Prentice Hall, 2005; or
  • Michael Rees, Financial Modelling in Practice, Wiley, 2008.

Calculators: 

• A financial calculator that can handle time value of money and cash flow calculations, logs and power functions is required.
• The Hewlett Packard calculator hp17bII+ is recommended.  The Texas Instruments BAII Plus is another good option. 
• 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 = Σⁿ_t=0 ((Cash Flow _t ) / (1+K_t)^t )

          as well as alternate expressions for calculating the present value of a series of cash flows using level and growing 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

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 Corporate Finance.
• This is where you will find links to forums, downloadable resources and other 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 to the forum 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.
• Students also have access to online teaching support material for the textbook. LearnSmart is an online multiple choice test facility, and Connect provides further practice at assigned problems from the text. Students are strongly encouraged to use both of these services – full details about access and use of these will be provided in class.

Important Notice: 

• It is important that you familiarise 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. 

PRELIMINARY MATERIAL

Students doing Corporate Finance in 2017 will have done Portfolio Management & Valuation (PMV) as a pre-requisite. You are strongly advised to review the material from Topic 5 of PMV on “Fundamental Stock Analysis”. The ilearn site also contains background material on the “Scope of Corporate Finance” which you are strongly encouraged to review prior to classes, as it helps define the scope of the unit.

TOPIC 1: SHAREHOLDER VALUE MAXIMISATION

Topics:

• Introduction
• The economic function of the corporation
• The corporate objective: to maximise shareholder value
• Some challenges to achieving shareholder value  maximisation
• Governance and Corporate Control
• Alternative forms of governance and ownership
• Putting Shareholder Value Objectives into Practice: an Introduction to Value Based Management
• Market Participants

Readings:

• RWJ Chapter 1
• M. Danielson, J. Heck and D. Shaffer, “Shareholder Theory – How Opponents and Proponents Both Get It Wrong”, Journal of Applied Finance, Volume 18 No 2 Fall/Winter 2008
• M. J. Mauboussin and D. Callahan, “Capital Allocation: Evidence, Analytical Methods, and Assessment Guidance”, Journal of Applied Corporate Finance, Volume 26, Number 4, Fall 2014

TOPIC 2: VALUATION PRINCIPLES: REVIEW & EXTENSION

Topics:

• Overview of Valuation Frameworks: OFCF, Residual Income and Multiples
• Review of DCF models: imputation, terminal values, consistency principle
• Review of Multiples Valuation
• Reconciling valuations under the alternative models
• Risk and Value
• Market Participants

Readings:

• Portfolio Management & Valuation, Topic 5
• RWJ, Section 31.1 – 31.3, Section 9.2 – 9.3

TOPIC 3: VALUATION APPLICATIONS: PART #1

Topics:

• From Enterprise Value to Equity Value
• Sum of the Parts Valuation
• Valuing a divestment
• Valuing Equity Securities
• Valuing a company with Minority Interests

Readings:

          N/A

TOPIC 4: VALUATION APPLICATIONS: PART #2 - PROJECT EVALUATION

Topics:

• Capital Allocation Decisions
• What is Net Present Value (NPV)?
• Calculating NPV using the standard DCF model
• Application of project evaluation tools
• Managing the capital budget
• Market Participants and Practice

Readings:

• RWJ Chapter 5, 6.1 – 6.4, 7.1 & 7.2
• Truong, G., G. Partington and M. Peat, “Cost of Capital Estimation and Capital  Budgetting Practice in Australia”, Australian Journal of Management, Vol 33, No 1, June 2008

TOPIC 5: VALUATION APPLICATIONS: PART #3 - STRATEGIC  FLEXIBILITY, VALUE & PROJECT SELECTION

Topics:

• Strategic Flexibility and Valuation: An Introduction
• Incorporating risk and strategic flexibility into Tasty Treats
• Using decision trees to evaluate risk and strategic flexibility
• Decision Tree Analysis of Tasty Treats Strategic Flexibility
• An extended example: Magna Charter

Readings:

• RWJ Chapter 7.3 – 7.4, 22.10-11, 23
• Powell and Baker, Ch 4 extracts on Decision Trees (pp55-56 and 64-77)

TOPIC 6: WEIGHTED AVERAGE COST OF CAPITAL

Topics:

• Introduction
• Cost of Capital, Discount Rates: Project v Company
• Risk and the cost of capital
• Adjusting for different financial structures
• Cost of Capital in practice
• The International CAPM
• Market Participants and Practice

Readings:

• RWJ Chapter 13
• James & Koller, Valuation in Emerging Markets

TOPIC 7: CAPITAL STRUCTURE & FINANCIAL STRATEGY

Topics:

• Introduction: the cash flow equation and financial strategy
• Effect of capital structure on Profit and hence on EPS and ROE
• The ‘tax / financial distress costs’ tradeoff model and the Modigliani and Miller (M&M) model
• Equity as an option – the Merton Model [Advanced]
• Agency costs models of capital structure
• Signalling models
• Financial Flexibility and Myers’ pecking order model
• Credit ratings and financial strategy
• Empirical evidence on capital structure
• Making capital structure decisions in practice: A process for selecting a capital structure

Readings:

• RWJ Chapter 16, 17, 22.9, 8.2 (pp 247 – 248)
• Denis, D., “Financial Flexibility and Corporate Liquidity”, Journal of Corporate Finance, 17 (2011), pp 667 -674

TOPIC 8: ALTERNATIVE VALUATION MODELS

Topics:

• Introduction
• The Assumed Financing Strategy underlying the use of WACC
• Alternative methods of incorporating financing effects in a valuation
• Generalising these results
• Choosing between WACC, APV and FTE
• Applications of APV and FTE

Readings:

• RWJ Chapter 13 and 18

TOPIC 9: CAPITAL MANAGEMENT & EQUITY STRATEGY - PRE- READING

Topics:

• Institutional Framework for Equity Capital
• Equity financing
• Dividend policy overview
• Capital management transactions

Readings:

• RWJ Chapter 20
• A Practitioner's Guide to Corporate Law, A Project of the NSW Young Lawyers Business Law Committee
• ASX Listing Rules: Chapter 7 - Changes in capital and new issues

TOPIC 9: CAPITAL MANAGEMENT & EQUITY STRATEGY - IN CLASS

Topics:

• Introduction
• Pricing an IPO
• Costs and benefits of a seasoned equity offering
• Dividend policy overview
• Capital management transactions
• Corporate Financial Policy and the Corporate Life Cycle

Readings:

• RWJ Chapters 19, 20

TOPIC 10: EVALUATING ASSET BASED FINANCINGS

Topics:

• Introduction
• The market for asset based financings
• Evaluating a lease -- The search for comparative advantage
• Generalising the results

Readings:

• RWJ Chapter 21
• AASB 117 Lease Fact Sheet

TOPIC 11: MERGERS & ACQUISITIONS

Topics:

• Introduction
• Value based thinking and M&A
• Evaluating some potentially dubious reasons for mergers and acquisitions
• Valuing synergies
• Calculating the Acquisition Cost and NPV of an acquisition when equity is used as consideration

Readings:

• RWJ Chapter 29
• Does M&A Pay? A Survey of Evidence for the Decision-Maker, Robert F Bruner

The Unit Schedule section of this Unit Guide was updated in April 2015.

The Assessment Tasks section of this Unit Guide was updated in December 2016.

Fail Hurdle grade added to grading descriptors table.

Pre-reading: Please read the preliminary material provided prior to the first class. It provides an overview of key concepts you should be familiar with, some institutional background on tax systems and some discussion on the scope of corporate finance.

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 Hurdle to High Distinction; and
  • A numerical Mark which is a summation of the individual assessment components, 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
  • Grades for all individual assessment items will be released to students, but Marks may not necessarily be released.

Specific Unit Grading: 

• To pass this unit (requires a Mark of 50 or better) the student must pass the final examination.
  • Students who have attained a total raw mark of 50% or greater in a unit, but have failed the Unit’s exam requirement and who have demonstrated “sufficient effort” in the exam, will be granted a single opportunity to sit a Supplementary Exam which will be graded on a pass/fail basis. The unit mark and grade for students who pass this examination will be those corresponding to the original total raw mark of all their assessment tasks, including the original exam. That is, the Supplementary Hurdle Exam only determines the meeting of the hurdle requirement. Students who have attained a raw mark of 50% or greater in a unit, yet failed all attempts at the requirement, will be awarded an FH grade with a final mark of 49.
• All final Marks and 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.