Corporate Finance

This course provides an introduction to the modem theory of finance. As such, it covers a broad range of topics and aims to give a general background to any student wishing to do further academic or practical work in finance or accounting after graduation.

The subject matter of the module can be broken down into two main areas:

• In the first section, we cover the valuation and pricing of real and financial assets. This provides you with the methodologies you will need to fairly assess the desirability of investment in physical capital, and price spot and derivative assets. We employ a number of tools in this analysis. The coverage of the risk—return trade-off in financial assets and mean—variance optimization will require you to apply some basic statistical theory alongside the standard optimization techniques taught in basic economics courses. Another important part of this section will be the use of absence-of-arbitrage techniques to price financial assets.

• In the second section, we will examine issues that come under the broad heading of corporate finance. Here we will examine the key decisions made by firms, how they affect firm value and the empirical evidence on these issues. The areas involved include the capital structure decision, dividend policy, and mergers and acquisitions.

In studying this subject, you should gain an appreciation of optimal financial policy on a firm level, under what conditions an optimal policy actually exists, and how the actual financial decisions of firms may be explained in theoretical terms.

This breaks down into more specific objectives: namely, when you have finished studying this subject and the recommended reading, you should be able to:

• evaluate investment projects using certain rules and justify the use of the NPV rule
• understand the fundamental asset pricing paradigms (i.e. the CAPM and Apr), and basic derivative pricing via absence-of-arbitrage techniques
• evaluate the evidence on information efficiency in financial markets
• discuss, on a theoretical level, the MM results that state that capital structure and dividend choices should not alter firm value
• explain why and how the MM results might be violated in reality
• discuss the fundamental practical and theoretical foundations of takeover and merger activity.

The Course Routes and Course Modules available for the study of Corporate Management at AUOL are shown here: