Final: 19-2-2016

Proof 21- 1-16

ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD

(Department of Commerce)

CORPORATE FINANCE (8524)

CHECKLIST
SEMESTER: SPRING 2016

This packet comprises the following material:

1.
2.
3.
4.

Text Book (One)

Course Outline
Assignment No. 1, 2
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:

The Mailing Officer

Mailing Section, Block # 28
Allama Iqbal Open University
Sector H-8, Islamabad.
Tel: (051) 9057611-12

Moazzam Ali
(Course Coordinator)

ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD

(Department of Commerce)

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 ASSIGNMENT(S) BORROWED OR STOLEN FROM
OTHER(S) AS ONES OWN WILL BE PENALIZED AS DEFINED IN AIOU
PLAGIARISM POLICY.

Course: Corporate Finance (8524)

Level: M. Com

Semester: Spring 2016

Total Marks: 100
Pass Marks: 50

ASSIGNMENT No. 1

Note: You are required to attempt all questions if you are unable to understand any
question of assignment, do seek help from your concerned tutor. But keep in
mind that tutors are not supposed to solve the assignment questions for you.
Q. 1 During the expansion phase of business, companies undertake some big projects
that involve decisions on using large sum of money generally called capital
budgeting decisions. These projects include installing new machinery or plant in a
company. Elaborate in detail the methods of evaluating the feasibility of
undertaking a large project in business.
(20)
Q. 2 It is usual practice in corporate world to acquire or merge with other companies for
achieving economies of scale and getting additional revenues. However, before
entering into a merger or acquisition transaction, a detailed analysis is conducted
by booth companies. You are required to explain the motives for merger and
acquisition transactions and explain in detail the characteristics of mergers and
acquisitions transactions.
(20)
Q. 3 (a)

(b)

A project has a total cost of Rs.455,000. The cash flows are 100,000 in the
first year, 200,000 in second year and 300,000 in the third year. Calculate the
Net Present Value (NPV) and also find the Internal Rate of Return if the
required rate of return is 17%.
(10)
A company sells food packages at Rs.17 per pack. The variable cost is Rs. 8
per pack and the fixed cost is 130,000 per year. Depreciation is recorded of
Rs.69,000 per year. What is the accounting break-even? Also find the
increase in operating cash flows if the sales increase by 11% above the
break-even quantity.
(10)

Q. 4 Determine whether it will be cheaper for the company to lease or to buy the asset in
the following case:
(10+10=20)
(a) A construction company has conducted an investment appraisal on a four
year project and has decided to proceed with the project. The project involves
the acquisition of plant and machinery that could be purchased for

Rs.29,00,000. The plant and machinery is expected to have a negligible

residual value at the end of the project.
Alternatively the asset could be leased using a finance lease for
Rs.185,000 per year, payable in arrears. Under the finance lease, the lessee is
responsible for all maintenance costs of the plant and machinery during the
lease term.
After the lease period ownership of the plant and equipment would pass
to the construction company. The implied interest and straight line
accounting depreciation will be tax allowable.
The company is subject to tax at 25%. Tax depreciation allowances are
available to the purchaser of business assets at 40% per year on a reducing
balance basis. The company can borrow at a rate of 9% per annum.
(b)

What is the Weighted Average Cost of Capital (WACC) in the following

case?
The Glass Ltd. has 1.3 million shares outstanding. The stock currently
trades for Rs.45 per share. The firm debt has a face value of Rs. 6 million
quoted at 92% of face value and is priced to yield at 12%. The risk free rate
is 9% and the market risk premium is 8%. The beta of Glass Ltd. is 0.64 and
the corporate tax rate is 32%.

Q. 5 (a)

A company may face financial distress due to its wrong financial decisions.
Further, it can go bankrupt and may face liquidation. You are required to
explain what is bankruptcy? Explain in detail the procedures to be followed
by a company for liquidation in the bankruptcy cases.
(10)
(b) Explain in detail the following theories of capital structure:
(10)
i.
Trade off Theory
ii.
Signalling Theory
iii. Peking Order Theory

GUIDELINES FOR ASSIGNMENT # 1

You should look upon the assignments as a test of knowledge, management skills, and
communication skills. When you write an assignment answer, you are indicating your
knowledge to the teacher:
Your level of understanding of the subject;
How clearly you think;
How well you can reflect on your knowledge & experience;
How well you can use your knowledge in solving problems, explaining situations,
and describing organizations and management;
How professional you are, and how much care and attention you give to what you do.
To answer a question effectively, address the question directly, bring important related
issues into the discussion, refer to sources, and indicate how principles from the course
materials apply. You must also be able to identify important problems and implications
arising from the answer.
For citing references, writing bibliographies, and formatting the assignment, APA format
should be followed.

ASSIGNMENT No. 2
Total Marks: 100
This assignment is a research-oriented activity. You are required to select any trading/
manufacturing/ non-trading organization of your interest which supports you in preparing
a report of about 1000 words on the topic allotted to you, to be submitted to your teacher
for evaluation.
Select one of the following topics according to the last digit of your roll number. For
example, if your roll number is P-3427180 then you will select issue # 0 (the last digit): TOPICS:
0
The corporate governance practices in the listed companies in Pakistan
1.
Does the Board of Directors (BoD) have absolute powers in Pakistan?
2.
The suggestions on reforming corporate taxation in Pakistan
3.
Leasing or long term loans, which is the optimal way of financing in Pakistan?
4.
The history of bankruptcy among the listed companies in Pakistan
5.
The capital budgeting tools practiced by the listed companies in Pakistan
6.
The integration of the stock exchanges in Pakistan
7.
The potential of Sukuk financing in the corporate growth of Pakistan
8.
The benefits of mergers and acquisitions in banking sector of Pakistan
9.
Does debt financing reduce tax liability of a company?
The report should follow the following format:
1.
Title page
2.
Acknowledgements
3.
An abstract (one page summary of the paper)
4.
Table of contents
5.
Introduction to the issue (brief history & significance of issue assigned)
6.
Practical study of the organization (with respect to the issue)
7.
Data collection methods
8.
SWOT analysis (strengths, weaknesses, opportunities & threats) relevant to the
issue assigned
9.
Conclusion (one page brief covering important aspects of your report)
10. Recommendations (specific recommendations relevant to issue assigned)
11. References (as per APA format)
12. Annexes (if any)
GUIDELINES FOR ASSIGNMENT # 2:

1.5 line spacing

Use headers and subheads throughout all sections

Organization of ideas

Writing skills (spelling, grammar, punctuation)

Professionalism (readability and general appearance)

Do more than repeat the text

Express a point of view and defend it.

WORKSHOPS
The workshop presentations provide students opportunity to express their communication
skills, knowledge & understanding of concepts learned during practical study assigned in
assignment # 2.
You should use transparencies and any other material for effective presentation. The
transparencies are not the presentation, but only a tool; the presentation is the
combination of the transparencies and your speech. Workshop presentation transparencies
should only be in typed format.
The transparencies should follow the following format:
1)
Title page
2)
An abstract (one page summary of the paper)
3)
Introduction to the issue (brief history & significance of issue assigned)
4)
Practical study of the organization (with respect to the issue)
5)
Data collection methods
6)
SWOT analysis (strengths, weaknesses, opportunities & threats) relevant to the
issue assigned
7)
Conclusion (one page brief covering important aspects of your report)
8)
Recommendations (specific recommendations relevant to issue assigned)
GUIDELINES FOR PRESENTATION:

Make eye contact and react to the audience. Don't read from the transparencies or
from report, and don't look too much at the transparencies (occasional glances are
acceptable to help in recalling the topic to cover).
A 15-minute presentation can be practiced several times in advance, so do that until
you are confident enough. Some people also use a mirror when rehearsing as a
substitute for an audience.

WEIGHTAGE OF THEORY & PRACTICAL ASPECTS IN ASSIGNMENT # 2 &

WORKSHOP PRESENTATIONS
Assignment # 2 & workshop presentations are evaluated on the basis of theory & its
applicability. The weightage of each aspect would be:
Theory:
60%
Applicability (practical study of the organization):
40%

COURSE OUTLINE (8524)

CORPORATE FINANCE
UNIT1:
THE SCOPE OF CORPORATE FINANCE
1.1
The role of corporate Finance in Modern Business
1.1.1 How finance interacts with other functional business areas
1.1.2 Career opportunities in Finance
1.2
Corporate Finance Essentials
1.2.1 Debt and Equity: the two flavors of Capital
1.2.2 Financial intermediation and modern Finance
1.2.3 The Five basic corporate finance functions
1.3
Legal forms of business organization
1.4
The corporate financial managers goals
1.4.1 What should a financial manager try to maximize?
1.4.2 How can agency costs be controlled in corporate finance?
1.4.3 Why are ethics important in corporate finance?
UNIT2:
RISK AND CAPITAL BUDGETING
2.1
Choosing the right discount rate
2.1.1 Cost of equity
2.1.2 Cost of Debt
2.1.3 Weighted average cost of capital (WACC)
2.1.4 CAPM
2.2
A closer look at risk
2.2.1 Break even analysis
2.2.2 Sensitivity analysis
2.2.3 Scenario analysis
2.2.4 Monte Carlo simulation
2.2.5 Decision trees
UNIT3: RISK AND MANAGERIAL (REAL) OPTIONS IN CAPITAL BUDGETING
3.1
The problem of project risk
3.1.1
Expected Value
3.1.2 Standard deviation
3.1.3 Coefficient of variation (CV)
3.2
Total project risk
3.2.1 Probability tree approach
3.2.2 Simulation approach
3.2.3 Use of probability distribution information
3.3
Contribution to total firm risk: Firm-Portfolio approach
3.3.1 Expectation and measurement of portfolio risk
3.3.2 Correlation between projects
3.3.3 Combinations of risky investments
3.4
Managerial (real) options
3.4.1 Valuation implications
3.4.2 The options to expand (or Contact)
3.4.3 The options to abandon
3.4.2 The options to postpone
UNIT4: CAPITAL STRUCTURE
4.1
Capital structure and leverage
4.1.1 The target capital structure

4.2
4.3
4.4
4.5
4.6

Business and financial risk

Determining optimal capital structure
The Hamada equation
Capital structure theories
4.5.1 Trade off theory
4.5.2 Signaling theory
Using debt financing to constraints managers

UNIT5: DIVIDEND POLICY

5.1
Dividend fundamentals
5.1.1 Cash dividend payment procedures
5.1.2 External factors affecting dividend policy
5.1.3 Types of dividend policies
5.1.4 Other forms of dividends
5.2
Stock dividends, stock split and treasury stock
5.3
Dividend irrelevance theories
5.3.1 Bird-in-hand theory
5.3.2 Tax preference theory
5.3.3 Cliental effect
5.4
The residual dividend model
UNIT6: RISK MANAGEMENT
6.1
Overview of risk management
6.1.1 Risk factors
6.1.2 The hedging decision
6.2
Forward contracts
6.2.1 Forward prices
6.2.2 Currency forward contracts
6.2.3 Interest rate forward contracts
6.3
Future contracts
6.3.1 Hedging with future contracts
6.3.2 Concerns when using futures contracts
6.4
Options and swaps
UNIT7: LONG TERM LOAN AND LEASING
7.1
Characteristics of long-term debt financing
7.1.1 The choice between public and private debt issues
7.1.2 Debt covenants
7.1.3 Cost of long term debt
7.2
Corporate loans
7.2.1 Term loans
7.2.3 Syndicated loans
7.3
Corporate bonds
7.3.1 Popular types of bonds
7.3.2 Legal aspects of corporate bonds
7.3.3 Methods of issuing corporate bonds
7.3.4 General features of bond issue
7.3.5 High-yield bonds
7.3.6 International corporate bond financing
7.3.7 Bond refunding options
7.4
Leasing
7.4.1 Basic types of leases

7.4.2
7.4.3
7.4.4
7.4.5
7.4.6

Lease arrangements
The lease contract
The lease versus purchase decision
Effects of leasing on future financing
Advantages and disadvantages of leasing

UNIT8: MERGERS, ACQUISITIONS, AND CORPORATE CONTROL

8.1
Overview of corporate control activities
8.1.1 Corporate control transactions
8.1.2 LBOs, MBOs and Dual-class recapitalizations
8.1.3 Tender Offers, Acquisitions, and Proxy fights
8.1.4 Divestitures and spin-offs
8.2
Mergers and Business Concentration
8.2.1 Types of business combinations
8.3
Merger and Acquisition Transaction characteristics
8.3.1 Method of Payment
8.3.2 Attitude of Target Management
8.3.3 Accounting Treatment
8.3.4 Shareholder wealth effects and transaction characteristics
8.4
Rationale and motives for mergers and acquisitions
8.4.1 value-maximizing motives
8.4.2 Non-value maximizing motives
UNIT9: BANKRUPTCY AND FINANCIAL DISTRESS
9.1
Business failure fundamentals
9.1.1 Types of business failure
9.1.2 Major causes of business failure
9.2
Voluntary settlements
9.2.1 Voluntary reorganization
9.2.2 Voluntary liquidation
9.3
Reorganization in Bankruptcy
9.3.1 Reorganization procedures
9.3.2 Subsidies to firms that reorganize
9.3.3 Prepackaged Bankruptcies
9.4
Liquidation in Bankruptcy
9.4.1 Procedures
9.4.2 Priority of claims
9.4.3 Final Accounting
9.4.4 Predicting bankruptcy
Recommended Books:
- Introduction to Corporate Finance by William L. Megginson & Scot B. Smart
-

Fundamental of Financial Management by James C. Van Horne

Corporate Finance by Stephen A, Ross, Randolph Westerfield, Jeffer Jaffe

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