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DRPS : Course Catalogue : Business School : Business Studies

Postgraduate Course: Finance (MBA) (BUST11209)

Course Outline
SchoolBusiness School CollegeCollege of Humanities and Social Science
Credit level (Normal year taken)SCQF Level 11 (Postgraduate) AvailabilityNot available to visiting students
SCQF Credits10 ECTS Credits5
SummaryIt is no exaggeration to state that finance is a part of almost all business decisions. Issues of valuation and risk are central to many decisions facing firms.

Discounted cash flow techniques, time value of money, capital budgeting and risk, and other such concepts have entered into the business vocabulary and are used with varying degrees of knowledge and accuracy.

This course is intended to provide a foundation in financial decision making - and an understanding of the techniques of financial analysis. It introduces the key elements of financial management and provides an outline of how to carry out financial evaluations of business decisions.

The course covers both descriptive material on financial markets, institutions and instruments, and analytical material on the assessment of projects and the valuation of securities. Students are expected to cover the basics of net present value on their own.
Course description Session 1. Financial Instruments and Markets

The capital markets; debt and equity; sources of finance; cost of raising capital; (advanced) derivatives

How does borrowing from a bank differ from borrowing via issuing bonds? Why is bank lending the dominant form of debt in most countries? How does syndicated lending affect the role of banks? Initial public offers (IPOs). We shall consider the main methods of conducting IPOs and SEOs in the UK and USA, and then review some of the research on equity issues. The main puzzle with IPOs is why they appear, on average, to be substantially underpriced. Ritter and Welch consider this question in detail. Seasoned equity offers (SEOs) in the UK: rights issues, open offers and placings. In the UK, rights issues have largely been replaced by open offers and by private placings or placements. In rights issues the new shares are offered pro rata to the existing shareholders, who can sell the rights on the stock market if they wish. In a private placing the shares are simply placed (sold) to a group of investors, with no pro rata offer to the existing shareholders. An open offer is a hybrid between a rights issue and a placing. In all three types of offer it is normal to issue the new shares at a discount to the market price. Rights issues seem to be preferable to open offers and placings because the discount is not a cost in a right issue, on the face of it, whereas it is a cost to nonsubscribers in open offers and placings (as is under pricing in IPOs).

Session 2. The Financing Decision

Impact of raising new funds (either debt or equity) on the firm; leverage effect of borrowing; borrowing and bankruptcy

Session 3. Discounted Cash Flow Techniques

Methods to analyse investments or projects; simple figures of merit; time value of money calculations; the net present value criterion; extensions to the technique; determining relevant cash flows

Session 4. Case: Business Capacity - the Investment, Financing decision - and Corporate Management

Case study based lecture - forms the basis for the project assessment (group and individual). Please NOTE - while it may appear that the solutions are provided for the case - the entire aim of the case is to see how students combine judgement/ professionalism and presentation skills with technical calculations.
PS - This session may need to take place in the tutorial week of Session 3 - in order that the material is covered before study week. Note also that the group presentations will be required in the week of hand-in. The tutorial period will be used for this purpose.

'Classical' corporate finance theory assumes that information is freely available and that conflicts of interest between managers, shareholders and lenders do not exist. The DCF model of valuation is a classical model. However, classical theory is incomplete; there are many phenomena in corporate finance which it cannot explain adequately. These include decisions about the financing of firms, arrangements for controlling firms (corporate governance), the roles of financial contracts, institutions and markets, and the reasons for the existence and scope of firms.

Session 5. Risk Analysis in Investment Decisions

Risk-return trade-off; risk and diversification; risk-adjusted discount rates; the cost of capital; cost of capital in new investments; real options; economic value-added

Recommended self-study problems: All - TBA

The DCF framework for company or project valuation and investment decisions requires a cost of capital figure. But the cost of equity is very difficult to estimate. Adjusting for differences in risk across companies is one major problem, but even more fundamentally, there is great uncertainty about the equity or market risk premium: the difference between the expected rate of return on the stock market and the risk-free rate of interest. The standard method of estimation has been to take the average of the annual premiums over many years in the past. But the average premium for the 20th century, and especially for the last 60 years, is several percentage points higher than can be justified on a forward-looking basis, or by reference to economic theory.

Session 6. Financial Forecasting - NOTE we return to chapter 3

Developing a financial forecast; the percentage of sales approach; financial forecasts and operational and financial constraints; using a spreadsheet; taking account of future uncertainties

Recommended self-study problems: All - TBA

Session 7. Managing Growth

Sustainable growth; growth and the firm's performance and financing decisions; when growth is greater than sustainable; the problem of low growth

Recommended self-study problems: All - TBA

How much to borrow is one of the key financial decisions companies make. The familiar 'trade-off' theory of capital structure predicts that a firm will gear up to the point at which, for the marginal unit of debt, the tax advantage is equal to the expected cost of financial distress. Consideration of agency costs and benefits also implies that a firm will operate with a target gearing ratio. But the 'pecking-order' theory predicts that firms do not have target gearing ratios. Instead, they only borrow if internal cash flow is inadequate.

The size of the tax advantage to debt is unclear; in theory it could be zero. Graham presents a sophisticated measure of the tax advantage and argues that it is large and that US firms, on average, do not appear to exploit it fully. Several recent papers test whether firms operate with a target gearing ratio, as against the pecking-order view that they do not. The consensus view emerging is that firms do have target gearing ratios, but that some firms deviate from their target gearing for periods of up to a few years.

Guest speaker sessions - TBA

Entry Requirements (not applicable to Visiting Students)
Pre-requisites Co-requisites
Prohibited Combinations Other requirements For Business School PG students only, or by special permission of the School. Please contact the course secretary.
Course Delivery Information
Not being delivered
Learning Outcomes
Knowledge and Understanding:

The course is intended to introduce some of the fundamental concepts underlying finance theory and to outline the role of the finance function within an enterprise.

After completing the course, participants will;

o have an understanding of the functions and aims of financial management

o have an appreciation of some of the main techniques of financial analysis on which finance practice depends

o understand financial decision-making within the organisation

o understand the role of capital markets

o understand how debt and equity are valued in financial markets

o be able to apply simple discounted cash flow analysis to business decisions

o comprehend the criteria used to evaluate investments or capital projects

o appreciate how risk affects project evaluation

o know how to apply the financial approach to evaluate decisions with uncertain outcomes

Cognitive Skills:
The course will develop;

o skills of reasoning and numerical analysis

o comfort with the use of financial calculators
familiarity with financial concepts and techniques

Subject Specific Skills:
After completing this course, students should be able to;

o undertake simple financial computations, namely compounding and discounting in order to derive future values and present values for a series of cash flows

o use basic financial methodologies, namely present and future value calculations, to solve problems in finance

o undertake financial valuation using discounted cash flow analysis in situations of uncertainty

Participants will be able to;

o analyse straightforward financial problems that businesses encounter and be able to formulate appropriate solutions

o appraise critically the systems adopted by firms for assessing and approving major capital investments

o undertake a simple investment appraisal using discounted cash flow methods
Reading List
Additional Information
Graduate Attributes and Skills Not entered
KeywordsMBA Finance
Course organiserProf Jo Danbolt
Tel: (0131 6)50 2448
Course secretaryMiss Kate Ainsworth
Tel: (0131 6)51 3854
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