Financial Management

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When you have completed your work on this topic, you will be able to:

- Define net present value, internal rate of return, payback period, and profitability index and describe decision rules for each of the tools.

- Understand why NPV is equivalent to shareholder value and discuss the reasons IRR can give a flawed decision.

- Identify relevant cash flows for a capital budgeting problem.

- Use sensitivity analysis and scenario analysis to evaluate project risk.

Module 2: Valuation, Risk and Return, and Cost of Capital

Key topics:

Topic 4 – Bond and Stock Valuation

Topic 4 examines the valuation of bonds and stocks. It describes basic types of bonds and shows how bond prices change dynamically over time when interest rates change. It will also discuss how to compute the value of a stock with the dividend discount model. Finally, you will learn how the firm can be viewed as a combination of zero growth business and growth opportunities.

When you completed your work on this topic, you will be able to:

- Understand typical features of bonds.

- Compute the price and yield to maturity of a bond.

- Identify the main factors that affect the value of these securities.

- Describe the assumptions underlying the constant growth model.

- Understand the tradeoff between dividends and growth in stock valuation.

Topic 5 – Risk and Return

Topic 5 begins the discussion of risk and return and shows you how diversification enables an investor to reduce risk. You will learn how risk and return can be defined and measured. Using the framework of portfolio theory, you will also learn how investors can maximize the expected return on a portfolio of risky assets for a given level of risk. The relationship between risk and return will be described by the capital asset pricing model.

When you completed your work on this topic, you will be able to:

- Understand how return and risk are defined and measured.

- Explain how diversification reduces risk.

- Understand the importance of covariance between returns on risky assets in determining the risk of a portfolio.

- Explain the distinction between systematic and unsystematic risk.

- Explain the relationship between returns and risk proposed by the capital asset pricing model.

Topic 6 – Cost of Capital

Topic 6 uses the concept of the weighted average cost of capital (WACC) to develop a corporate cost of capital for use in capital budgeting. You will learn how to estimate the cost of each component of capital, and how to put the components together to determine the WACC. You will also examine factors that affect the WACC and learn how to adjust the cost of capital for risk.

When you completed your work on this topic, you will be able to:

- Explain why the weighted average cost of capital is used in capital budgeting.

- Estimate the costs of different capital components.

- Combine the different component costs to determine the firm’s cost of capital.

Module 3: Financing and Capital Structure

Key topics:

Topic 7 – Capital Structure

Topic 7 examines the capital structure decision of a firm. It examines the choices that a firm has in terms of both debt and equity. In particular, you will first learn the capital structure decision in a setting of perfect capital markets. You will then evaluate the basic trade-off between using debt and equity by weighing the benefits of borrowing against its costs.

When you completed your work on this topic, you will be able to:

- Understand that in the absence of taxes, transaction costs, and other market frictions, capital structure can affect firm values only when the debt-equity choice affects cash flows.

- Describe how leverage increases the risk of the firm’s equity.

- Demonstrate how debt can affect a firm’s value through taxes and bankruptcy costs.

Topic 8 – Hong Kong IPOs

Topic 8 provides a comprehensive overview of the IPO process in Hong Kong, with an emphasis on listings on the Main Board of the Hong Kong Stock Exchange. It covers the IPO process from the preliminary planning stages and pre-IPO considerations all the way up to, and including, a listed company’s post-IPO obligations.

When you completed your work on this topic, you will be able to:

- Understand the going public decision.

- Understand the key requirements for a listing in Hong Kong.

- Describe the role of professional parties in the listing process.

- Understand the process of going public.

Academic Integrity

The Chinese University of Hong Kong adopts a policy of zero tolerance for academic dishonesty; that is, plagiarism, undeclared multiple submission, cheating in tests and examinations and all other acts of academic dishonesty. Attention is drawn to University policy and regulations on honesty in academic work, and to the disciplinary guidelines and procedures applicable to breaches of such policy and regulations. Details may be found at http://www.cuhk.edu.hk/policy/academichonesty/.

With each assignment, students will be required to submit a signed declaration that they are aware of these policies, regulations, guidelines, and procedures. For group projects, all students of the same group should be asked to sign the declaration.

For assignments submitted via VeriGuide, the statement, in the form of a receipt, will be issued by