Corporate Finance

In this module you will study the main issues in modern corporate finance. The subject ‘corporate finance’ is a well-established discipline, which is concerned with corporations large enough to have issued shares that are ‘quoted’ on a stock market. We must, though, first clarify what we mean by the main issues, for the issues that are important to one person may be viewed as less important by others.

Learning outcomes

When you have completed your study of this module you will be able to:

• describe modern principles of corporate finance and evaluate their validity
• rationalise corporate finance decisions in the light of agency problems and conflict of interest among corporations' stakeholders
• analyse firms' investment decisions
• discuss firms' choice of capital structure and its implications for the value of the firm
• examine and discuss the key issues related to dividend policy and their implications for the value of the firm
• critically assess the reasons behind mergers and acquisitions and their welfare implications.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Hillier D, S Ross, R Westerfield, J Jaffe, & B Jordan (2021) Corporate Finance. 4th Edition. McGraw-Hill Education.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Excel worksheets: Worksheet exercises are available to download on the VLE.
  Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Perspectives on Corporate Finance

• 1.1 Introduction
• 1.2 Core Theories of Corporate Finance
• 1.3 Key Questions in Corporate Finance
• 1.4 The Objective of the Firm
• 1.5 Agency Problems
• 1.6 Conflict between Shareholders and Bondholders
• 1.7 Conclusion

Unit 2 Net Present Value and Capital Budgeting Decisions

• 2.1 Introduction to Capital Budgeting Decisions
• 2.2 Investment Principles and Net Present Value
• 2.3 Capital Budgeting Decisions
• 2.4 Analysing a Project – A Mini Case
• 2.5 Sensitivity and Scenario Analysis

Unit 3 Return, Risk, Portfolio and Asset Pricing Models

• 3.1 Introduction
• 3.2 Expected Return and Risk
• 3.3 How is the Equilibrium Return on Risky Assets Determined? – The Capital Asset Pricing Model
• 3.4 A More General Model: the Arbitrage Pricing Theory (APT)
• 3.5 Conclusion

Unit 4 Issues in Modern Finance: the CAPM, Efficient Market Hypothesis and Behaviour Finance

• 4.1 Introduction
• 4.2 The Use of CAPM for Calculating the Cost of Capital for Risky Projects
• 4.3 Efficient Capital Markets
• 4.4 Weak, Semi-strong and Strong Forms of Efficiency
• 4.5 Anomalies – Are they Meant to be Extinct?
• 4.6 Implications for Corporate Financing Decisions
• 4.7 Conclusion

Unit 5 Dividend Policy

• 5.1 Introduction
• 5.2 Empirical Evidence on Dividend Policy
• 5.3 The Irrelevance of Dividend Policy
• 5.4 Taxes Can Make Dividend Policy Matter
• 5.5 Asymmetric Information and Signalling
• 5.6 Dividend Policy and Agency Costs
• 5.7 Is There an Optimal Dividend Policy?

Unit 6 Capital Structure I

• 6.1 Introduction – How Much Debt Should the Firm Issue?
• 6.2 The Debt-Equity Irrelevance Theorem
• 6.3 Corporate and Personal Taxes
• 6.4 Effects of Bankruptcy Costs
• 6.5 Implications and Limitations of the Trade-off Theory of Optimal Capital Structure
• 6.6 Conclusion

Unit 7 Capital Structure II: Information Asymmetries and Agency Costs

• 7.1 Introduction
• 7.2 Asymmetric Information Explanations of Capital Structure
• 7.3 Minimising the Agency Costs of Equity and Debt
• 7.4 Conclusion

Unit 8 Mergers

• 8.1 Introduction
• 8.2 Merger Gains and the Sources of Gain
• 8.3 Rationale for Mergres to Take Place
• 8.4 Forms of Takeover
• 8.5 Some Stylised Facts about Merger Activity
• 8.6 Review of the Unit's Questions

Module samples

• M421 Module introduction (PDF)
• M421 Specimen examination (PDF)
• M421 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules