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DOWNLOAD Assignments Autumn Semester 2011 for Post Graduate / M.Phil / Ph.D. Courses
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ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD
(Department of Business Administration)
*****
FUNDAMENTAL OF CORPORATE FINANCE (579)
(CHECKLIST)
SEMESTER: AUTUMN 2011
This packet comprises the following material:
1. Text Book
2. Course Outline
3. Assignment No 1 & 2
4. Assignment Forms (2 sets)
In this packet, if you find anything missing out of the above mentioned material, please
contact at the address given below:
Mailing Officer
Mailing Section, Block No. 28
Allama Iqbal Open University
H-8, ISLAMABAD
Ph: 051-9057611-12
Course Coordinator
ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD
(Department of Business Administration)
WARNING
1. PLAGIARISM OR HIRING OF GHOST WRITER(S) FOR SOLVING
THE ASSIGNMENT(S) WILL DEBAR THE STUDENT FROM AWARD
OF DEGREE/CERTIFICATE, IF FOUND AT ANY STAGE.
2. SUBMITTING ASSIGNMENTS BORROWED OR STOLEN FROM
OTHER(S) AS ONE’S OWN WILL BE PENALIZED AS DEFINED IN
“AIOU PLAGIARISM POLICY”.
Course: Corporate Finance (579) Semester: Autumn 2011
Level: MBA Total Marks: 100
ASSIGNMENT No. 1
Q. 1 Ahmed wants to save money to meet three objectives. First, he would like to be
able to retire 30 years from now with retirement income of Rs.20,000 per month
for 20 years, with the first payment received 30 years and 1 month from now.
Second, he would like to purchase a flat in Lahore in 10 years at an estimated cost
of Rs.325,000. Third, after he passes on at the end of the 20 years of withdrawals,
he would like to leave an inheritance of Rs.750,000 to his nephew Ahmed. He can
afford to save Rs.2000 per month for the next 10 years. If he can earn an 11 percent
EAR before he retires and an 8 percent EAR after he retires, how much will he
have to save each month in years 11 through 30? (20)
Q. 2 (a) A project that provides annual cash flows of Rs.24,000 for 9 years costs
Rs.110,000 today. Is this a good project if the required return is 8 percent?
What if it is 20 percent? At what discount rate would you be indifferent
between accepting the project and rejecting it? (10)
(b) Sharmeen is trying to determine whether to expand her business by building
a new manufacturing plant. The plant has an installation cost of Rs.18
million, which will be depreciated straight-line to zero over its four-year life.
If the plant has projected net income of Rs.1,632,000, Rs.2,106,500,
Rs.1,941,700 and Rs.1,298,000 over these four years, what is the project’s
average accounting return (AAR)? (10)
Q. 3 Consider the following information? (20)
State of Probability of state Rate of Return if state occurs
Economy of Economy Stock X Stock Y Stock Z
Boom 0.20 0.30 0.45 0.33
Good 0.40 0.12 0.10 0.15
Poor 0.30 0.01 –0.15 –0.05
Bust 0.10 –0.06 0.30 –0.09
i. Suppose the portfolio you invested is 30 percent each in stock A and C, and
40 percent in B. What is the expected return on portfolio?
ii. What is the variance of this portfolio? The standard deviation?
2
Q. 4 “Sensitivity analysis is useful in pinpointing the areas where forecasting risk is
especially severe.” Discuss the statement in detail and list down the drawbacks to
the various types of what-if analysis. (20)
Q. 5 “Managers should not focus on the current stock value because doing so will lead
to an overemphasis on short-term profits at the expense of long term profits.”
Critically evaluate the statement. (20)
ASSIGNMENT No. 2
Total Marks: 100
Pass Marks: 40
This assignment is required to be presented in the workshop, which is expected at
the end of the semester, probably prior to your final examination. Your attendance and
presentation of the assignment in workshop in compulsory without which you will not be
allowed to appear in the final examination in any case. You are also advised to prepare
two copies of this report. Submit one copy to your tutor as per due date given in your
tutorial schedule, attempt to incorporate examples from the newspapers, research journals
and magazines you studied in relation to the subject courses. Remember, to provide the
reference from where you quoted the example or source of data, otherwise it would be
consider plagiarized.
Use the second copy of resource person in workshop for presentation in the
workshop. During the presentation, you can bring supporting material liked
transparencies and visual aids. You must ask for your support on your own analysis
regarding organization chosen. Placed below are 10 topics of which you should select
only one for writing a paper consisting of 30 typed pages.
Your are also required to select one of the following topics according to the last
digit of your roll number. For example, if your roll number is D-3427185 then you will
select topic # 5 (the last digit). The report should include:-
a) Introduction to the topic
b) Important sub-topics
c) Practical study of the organization with respect to the topic
d) Review of theoretical and practical situations
e) Merits, de-merits of the organization with respect to the topic
f) Conclusion and recommendation
g) Annex, if any
List of Topic:
1. Decision trees and subsequent decisions for two mutually exclusive projects
2. General cash offers by any public limited company of Pakistan
3. Impact of mergers and acquisitions upon the financial environment of Pakistan
4. The effect of financial leverage upon stockholders of a corporation
5. Working capital issues in a corporation
6. Cash management in banking sector of Pakistan
7. Various forms of debt financing available in Pakistan for a corporation
8. A company’s procedure for selling securities to the public
9. Cost of capital and capital structure of a business organization
10. Reasons for issues warrants and convertibles by the corporations
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FUNDAMENTAL OF CORPORATE FINANCE
Course Outline (MBA-579)
UNIT 1: VALUE
1. Why Finance Matters?
The Role of The Financial Manager
Organizing a Business
2. Present Value and the Opportunity Cost of Capital
Introduction to Present Value
Foundation of The Net Present Value Rules
3. How to Calculate Present Values?
Valuing Long - Lived Assets
Looking for Shortcuts- Perpetuities and Annuities
Compound Interest and Present Values
Nominal and Real Rates of Interest
Using Present Value Formulas to Value Bounds
4. The Value of Common Stocks
How Common Stocks are Traded?
How Common Stocks are Valued?
How to Estimate the Capitalization Rates?
The Link Between Stock Price and Earnings Per Share
Valuing a Business by Discounted Cash Flow
5. Why Net Present Value Leads to Better Investment Decisions Than
Other Criteria?
Net Present Value’s Competitors
Payback
Average Return on Book Value
Internal (or Discounted-Cash-Flow) Rates of Return
6. Making Investment Decision with the Net Present Value Rules
What to Discount?
Project Interactions
UNIT 2: RISKS
1. Introduction to Risk, Return, and the Opportunity Cost of Capital
Measuring Portfolio Risk
Calculating Portfolio Risk
How Individual Securities Affect Portfolio Risk?
Diversification and Value Additively
2. Risk and Return
The Relationship Between Risk and Return
Validity and Role of The Capital Asset Pricing Model
Some Alternative Theories
3. Capital Budgeting and Risk
Measuring Betas
Capital Structure and The Company Cost of Capital
Setting Discount Rates When You can’t Use A Beta Book
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UNIT 3: PRACTICAL PROBLEMS IN CAPITAL BUDGETING
1. A Project is Not a Black Box
Sensitivity Analysis
Monte Carlo Simulation
Decision Trees and Subsequent Decisions
2. Where Positive Net Present Value Come From?
3. Organizing Capital Expenditure and Evaluating Performance
Capital Budgets and Project Authorizations
Evaluating Performance
What can’t we do About Biases in Accounting Profitability Measures?
UNIT: 4 FINANCING DECISION AND MARKET EFFICIENCY
1. Corporate Financing and the Lessons of Market Efficiency
We Always Come Back to NPV
What is An Efficient Market?
The Lesson of Market Efficiency
2. An Overview of Corporation Financing
Common Stock
A Look At Debt, Preferred, and Convertibles
Patterns of Corporate Financing
3. How Corporations Issue Securities?
Venture Capital
The Initial Public Offering
General Cash Offers By Public Companies
The Role of The Underwriters
The Private Placement
UNIT 5: DIVIDEND POLICY AND CAPITAL STRUCTURE
1. The Dividend Controversy
How Dividends are Paid?
How Do Companies Decide on Dividend Payments?
Controversy About Dividend Policy
The Rightist
Taxes and The Radical Left
2. Dose Debt Policy Matter?
The Effect of Leverage In A Competitive Tax-Free Economy
How Leverage Affects Returns
The Traditional Position
3. How Much Should A Firm Borrow?
Corporate Taxes
Corporate and Personal Taxes
Cost of Financial Distress
The Pecking Order of Financing Choices
4. Interactions of Investment and Financing Decisions
The After-Tax Weighted -Average Cost of Capital
Adjusted Present Value
Adjusted Discount Rates and Adjusted Present Value
Discounting Safe, Nominal Cash Flows
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UNIT 6: OPTIONS
1. Corporate Liabilities and the Valuation of Options
Calls, Puts, and Shares
Holding Calls, Puts, and Shares In Combination
What Determines Option Values?
2. Application of Option Pricing Theory
The Value of Follow-On Investment Opportunities
The Option to Abandon
The Timing Option
Flexible Production Facilities
3. Warrant and Convertibles
What Is Warrant?
What Is Convertible Bonds
The Difference Between Warrants and Convertibles
Why Do Companies Issue Warrants and Convertibles
UNIT 7: DEBT FINANCING
1. Valuing Risky Debt
The Classical Theory of Interest
Term Structure and Yields to Maturity
Duration and Volatility
Explaining The Term Structure
Allowing for The Risk of Default
2. The Many Different Kinds of Debt
Domestic Bounds, Foreign Bounds and Eurobonds
The Bonds Contract
Security and Seniority
Repayment Provisions
Restrictive Convents
Private Placement and Project Finance
Innovation in The Bond Market
3. Hedging Financial Risk
Insurance
Hedging With Futures
Forwards Contents
Swaps
How to Set Up A Hedge?
Is “Derivative” A Four Letter Word?
4. Leasing
What is A Lease?
Why Lease?
Operating Leases
Valuing Financial Leases
When Do Financial Lease Pay?
Evaluating A Large, Leveraged
UNIT 8: FINANCIAL PLANNING
1. Analyzing Financial Performance
Financial Ratios
The Earning Record
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Application of Financial Analysis
2. Approaches to Financial Planning
What Financial Planning
Three Requirements for Effective Planning
Financing Planning Models
External Financing and Growth
3. Short Term Financial Planning
The Components of Working Capital
Links Between Long Term and Short Term Financing Decisions
Tracing Changes in Cash and Working Capital
Cash Budgeting
The Short Term Financing Plan
4. Credit Management
Terms of Sale
Commercial Credit Instruments
Credit Analysis
Credit Decision
Collection Policy
5. Cash Management
Inventories and Cash Balances
Cash Collection and Disbursement Systems
Bank Relations
6. Long Term & Short Term Lending and Borrowing
Short-Term Lending
Money Market Investments
Floating-Rate Preferred Stock-An Alternative to Money-Market
Investment
Short Term Borrowing
Term Loans
UNIT 9: MERGERS AND INTERNATIONAL FINANCE
1. Mergers
Estimating The Economic Gains and Cost From Mergers
Sensible Motives For Mergers
Some Dubious Reasons For Mergers
Estimating The Cost of A Mergers
The Mechanics of A Merger
Merger Tactics
Leveraged Buy-Outs
Mergers and Economy
2. International Financial Management
The Foreign Exchange Markets
Some Basic Relationship
Insuring Against Currency Risk
International Investment Decisions
The Cost of Capital for Foreign Investments
Financing Foreign Operations
Political Risk
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