Subject Code : AF5326

Subject Title : Managerial Finance

Level : 5

Credits : 3

Pre-requisites : None

Exclusions : Financial Management (AF5318) Finance for Executives (AF5327) Corporate Financial Management (AF5331)

Assessment : Coursework 50% Final Examination 50%

Minimum Pass Grade : Coursework (D) Final Examination (D) ROLE AND PURPOSE This course aims to provide students with a set of basic concepts and theories of modern corporate finance, with special emphasis on the link between theory and practice. Students will acquire a broad knowledge of financial management theories and practices. The subject lays a solid foundation for more advanced studies in finance. LEARNING OUTCOMES After completing the course, students should be able to:

• understand the basic principles of valuation and the basic concepts and techniques of capital investment appraisal;

• understand portfolio theory, the risk-return relation and cost of capital determination; • understand the dividend policy and capital structure irrelevancy arguments and the

conditions under which they are relevant; • understand the types of securities issued and traded in financial markets, and how

these can be used for raising funds and hedging risks; • apply the concepts, tools and analytical frameworks of financial decision-making to

solve practical problems. INDICATIVE CONTENT Objectives and Functions of Corporate Finance Corporate goals and financial objectives. Agency theory. Management compensation. Corporate governance. Value of the firm expressed as contingency claims. Principles of Valuation Time value of money. Compounding and discounting. Short-cuts of present value calculation. Valuation of shares and bonds.

Capital Investment Appraisal Real interest versus nominal interest. Cash flow and discounted cash flow. Capital budgeting techniques. Separating investment decision from financing decision. Replacement decisions. Risk analysis and real option. Portfolio Diversification and Capital Asset Pricing Model Concept and benefits of portfolio diversification. Systematic and diversifiable risk. Efficient portfolios. Two-Fund Separation Theorem. CAPM. Determinants and estimation of beta. Efficient Market Hypothesis Competition as a driving force behind information efficiency. Weak-form, semi-strong form and strong form Efficient Market Hypothesis. Empirical evidence. Cost of Capital Costs of equity and debt capital. Weighted average cost of capital. Source versus use of capital. Capital budgeting for the levered firm. Long-term Financing Basic features of equity and debt financing. Initial public offering: mechanism and pricing. Rights offering. Bond rating, call provisions and pricing. Types of securities issued and traded in financial markets in Hong Kong. Capital Structure and Dividend Decisions Issues of controversy. MM propositions, implications and limitations. Pecking Order Theory. Information content of capital structure and dividend decisions. Options Concepts, valuation and applications of options. Mergers and Corporate Restructuring Types of mergers. Rationale for mergers. Analysis of mergers. Mergers tactics and defence strategies. TEACHING/LEARNING APPROACH Concepts and key issues will be taught in the lectures. Students are expected to read the relevant chapters and try the end-of-chapter questions before coming to lectures. Apart from attending lectures, students should try to utilise group synergies by forming learning groups among themselves. They are also strongly encouraged to interact proactively with the instructor and with one another both within and outside class. INDICATIVE READING Textbook

• Ross, S.A., R.W. Westerfield, J.F. Jaffe and B.D. Jordan, 2008. Modern Financial Management, McGraw-Hill Book Company.

References

• Berk, J. and P. DeMarzo, 2007. Corporate Finance, Pearson Education.

• Brealey, R. A. and S.C. Myers, 2003. Principles of Corporate Finance, 7th Edition, McGraw-Hill.

• Chew, D. H. 2001. The New Corporate Finance: Where Theory Meets Practice, McGraw-Hill Book Company.

• Ho, S.S.M., R.H. Scott and K.A. Wong, 2004. The Hong Kong Financial System - A New Age, Oxford University Press.

• Siegel, J.J. 2002 Stocks for the Long Run, McGraw-Hill. • Bernstein, P.L. 1992. Capital Ideas: The Improbable Origins of Modern Wall

Street, Maxwell Macmillan International. • Bernstein, P.L. 2007. Capital Ideas Evolving, John Wiley & Sons.

STAFF RESPONSIBLE Stephen Gong