IPA006 Applied Business Finance

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This unit provides an overview and understanding of financing for the corporate sector including SMEs. The unit covers concepts such as time value of money, valuations, risks and returns, leasing, capital budgeting and structures.

Unit Learning Outcomes

  • Identify and communicate the primary objectives and fundamental principles of financial management and corporate financial decision making. 
  • Evaluate and apply analytical techniques for making financial decisions. 
  • Demonstrate critical analysis, problem solving and creative thinking. 
  • Make best use of technologies to find, use and disseminate financial information.

Topic Outlines

  1. The scope of corporate finance 
  2. Time value of money 
  3. Valuing shares and long-term financing 
  4. Valuing bonds and long-term debt 
  5. Risk & return: The trade-off between risk and return 
  6. Leasing 
  7. Capital budgeting I: Capital budgeting process and decision criteria 
  8. Capital budgeting II: Cash flow and capital budgeting 
  9. Cost of capital: Risk and capital budgeting 
  10. Capital structure 
  11. Sources of finance for SMEs

Unit Mode
Cloud (study anywhere)

Study Commitment
150 hours over the trimester

Assessments

One exam worth 100% of the final score.

The examination will be a two hour closed book examination with additional reading time. The exam will consist of a number of short answer, or problem based questions. You can typically expect four to seven questions in the exam.

A non-programmable calculator will be required for the exam.

All examinations will be held in venues notified by Deakin University. All exams will be held during the exam periods set by the University. Students will be notified of the exact date, time and location of the exam, approximately four weeks before the exam.

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Detailed Topics

Topic 1: The scope of corporate finance
a. Corporate finance functions
b. Legal forms of business organisation
c. Goal of financial manager
d. Agency problem

Topic 2: The time value of money
a. Describe the time value of money
b. Understand the power of compound interest
c. Calculate the present value and future value
d. Calculate the present value and future value of cash flow streams (i.e. mixed streams, annuities and perpetuities)
e. Identify the differences between stated and effective annual interest rates

Topic 3: Valuing bonds and long-term debt
a. Describe main principle of valuation
b. Understand bond & bond valuation
c. Explain the relationship between YTM & coupon rate
d. Explain the relationship between bond prices & interest rates
e. Understand the term structure of interest rates
f. Understand the characteristics of long term debt financing (cost of long term debt)
g. Describe the types of long term debts (public issue vs private issue)

Topic 4: Valuing shares and long-term financing
a. Share valuation
b. Dividend discount models, free cash flow approach, book value, liquidation value, comparable multiples)
c. Investment banking functions
d. Long term financing (Initial public offering (IPO), Seasoned equity offering (SEO), Rights Offering, Private placements

Topic 5: Risk & return: The trade-off between risk and return
 
Part 1 – The trade-off between risk and return

a. Calculate Investment’s total return in dollar and percentage terms.
b. Measure return and risk of a financial asset
c. Distinguish between systematic and unsystematic risk
d. Describe the concept of diversification and the link between systematic risk and return
 
Part 2 – Risk, return and the CAPM

a. Use risk-based approach to estimate an asset’s expected return
b. Describe how to measure systematic risk
c. Calculate the portfolio’s expected return and risk
d. Explain Capital Asset Pricing Model
e. Describe the concept of market efficiency

Topic 6: Capital Budgeting I: Capital budgeting process and decision criteria
a. Describe the ideal characteristics of a capital budgeting technique
b. Identify 6 different techniques that can be used to evaluate capital expenditures
c. payback period, discounted payback period, accounting rate of return, net present value, internal rate of return, profitability index
d. Describe the advantages and disadvantages of these techniques

Topic 7: Capital Budgeting II: Cash flow and capital budgeting
a. Identify the types of cash flows in the capital budgeting process; incremental cash flows
b. Discuss depreciation, fixed asset expenditures and working capital
c. Discuss sunk costs, opportunity costs and cannibalization
d. Describe capital rationing decision and the effect of human element on the capital budgeting process

Topic 8: Cost of capital: Risk and capital budgeting
a. Estimate the company’s weighted average cost of capital, with taxes and without taxes
b. Discuss operating leverage and financial leverage and their effect on the shareholders’ return
c. Describe breakeven analysis, types of real options and their role in improving the quality of decisions

Topic 9: Capital Structure
a. Discuss the effect of financial leverage on the company’s risk and return
b. Discuss Modigliani-Miller propositions I & II with no taxes and with taxes
c. Trade-off model (with financial distress cost, and agency cost)
d. Describe pecking-order theory

Topic 10: Sources of Finance for SMEs
a. Identify small and medium businesses in contrast to large firms
b. Understand some of the key differences between large companies and SMEs
c. Appreciate the financial goals of the owner-managers of SMEs
d. Use capital budgeting and cost-of-capital techniques for SMEs
e. Appreciate the financing requirements at various stages of the business life cycle of SMEs
f. Understand the role of venture capital
g. Appreciate the need for investment-readiness by SMEs seeking external funds
h. Appreciate the importance of the role of the SME finance function
i. Appreciate seven guides to sound financing of SMEs

Topic 11: Leasing
a. Appreciate seven guides to sound financing of SMEs
b. Definition of a lease
c. Different types of leases
d. Reasons for leasing
e. Valuing leases