Finance and Financial Management

Credit value 10 credits

1 Rationale

All managers need to have an understanding and knowledge of the basic principles of
finance in an international framework. This is necessary to allow them to assess the financial
implications of their decisions and appreciate the nature of the financial policies adopted by
their organizations. This class provides an introduction to relevant financial analysis and
theory.

2 Class description/introduction/cohesion

The class assumes no prior knowledge of finance and provides an introduction to financial
decision taking, corporate financial management and the nature of financial markets. The
class will introduce the concept of the time value of money, security valuation and capital
budgeting proposals for corporations. The class will also look at the relationship between risk
and expected return in financial markets. This class will also provide an introduction to the
role international finance in a multinational company. We introduce basic foreign exchange
market terminology and the basic theories of international finance. While emphasis will be
on the practical application of techniques and concepts, we will also study underlying
economic and institutional forces.

Some topics in the class syllabus require the use of accounting information and the class is
consequently linked to the class in Managerial Accounting. It will also make use of statistical
concepts and analysis developed in the class in Managing Information. The financial
analysis and theory developed in this class is a pre-requisite for the optional classes in
finance – Strategic Financial Management, Portfolio Theory and Security Analysis, and
Treasury Management. It also provides an introduction to financial planning for capital
budgeting purposes that is employed in Business Strategy. Moreover, this course provides
an overview of the basic foreign exchange market and examines challenges for firms created
by unexpected changes in foreign exchange rates.

3 Aims

The primary aims of the Finance and Financial Management class are to develop an
understanding of the principles of finance and financial decision taking, the nature of financial
markets and institutions, and corporate financial theory from an international perspective.
Corporate financial theory addresses two basic questions. How should a company evaluate
proposals to invest in additional assets (the investment decision)? And secondly, how should
the funds be raised to finance the purchase these assets (the financing decision)? The class
will develop the understanding relevant for answering these questions.
4 Learning outcomes

Subject Specific Knowledge and Skills:

On completing this class you will have the ability to understand:

 The main building blocks of modern financial theory,

 The workings of the major financial markets and different ways companies
raise finance, focusing on debt and equity instruments.
 The concept and uses of the time value of money, including compounding,
discounting, present values, future values, annuities and perpetuities.
 How to value securities and the concept of risk and return,
 Valuation of investment opportunities using discounting and non-discounting
methods, including net present value, internal rate of return, accounting rate
of return and payback.
 Identify investment projects that increase the firm’s market value, using the
concepts of Net Present Value and Equivalent Annual Cost;
 The nature of risk and its relationship with the return from an investment, and
how this links with a firm’s cost of capital
 the workings of the foreign exchange market;
 understand the economic determinants of foreign exchange rate and the role
of the central bank in the FX and money markets Understand the economic
determinants of foreign exchange rate and the role of the central bank in the
FX and money markets;
 Assess the firm’s cost of equity and debt capital;

Cognitive Abilities and Non-Subject Specific Skills:

During the class you will

 Develop the ability to calculate basic financial arithmetic and understand

some basic finance theories.
 Develop academic skills in reading and essay writing.
 Carry out practical assignments using analytical skills using financial
information.
 Access financial information from a variety of sources including newspapers
and the world-wide wed.
 An understanding of the role of analysis in the development of practical
decision taking techniques.
 Consider the link between theory and practice in a way that recognises the
imperfections in such links.
 team work and communication skills will also be developed in the assignment
project
5 Teaching and learning methods

Teaching will be delivered through a series of interactive lectures and discussions.

Lectures will require students to work through practical examples to illustrate the
concepts used in the class, and students will be expected to work through a number of
practical examples during each class.

6. Indicative Content/Structure of Class/Lecture Program

Topic Textbook Scope and Objectives:
Reading

Introduction Hillier et al. Overview of the Course

Chapter 1

Principles of Hillier et al. To introduce basic theories of finance and

valuation and Ch 4 the role of the financial manager within the
time value of organization. To be able to evaluate
money investment and financial proposals given the
net cash flows (NCFs), use annuities and
perpetuities in these decisions (calculate
future values and present values), and
calculate the annual equivalent of a
capitalised value. Students will also be able
to differentiate between real and nominal
cash flows and rates of return.

Capital Budgeting Hillier et al. To be able to identify and structure the costs
& Investment Ch 6 & 7 and benefits of capital expenditure proposals.
Appraisal Criteria: To be able to explain the rationale for the use
NPV, IRR, of the NPV and IRR rules in the evaluation of
Payback and investment and financing proposals, calculate
Accounting Rates NPVs and IRRs, consider the limitations of
of Return the IRR in the evaluation of mutually
exclusive investments and investments with a
non-standard pattern of cash flows. Students
will also apply and evaluate non-discounting
methods of investment appraisal based on
payback and accounting rate of return.
Coverage of capital rationing and profitability
indices will also be provided.
Risk- return Hillier et al. Understand the nature of risk concepts
trade-off and the Ch 9, 10, 12 employed in economics and finance;
CAPM Understand the difference between
diversifiable and non-diversifiable risk; the
relationship between the required rate of
return and risk; use the capital asset pricing
model and beta to determine the cost of
capital; understand the determinants of beta.
Understand the alternative approaches to
determining the companies’ opportunity costs
of equity capital; equity valuation models;
CAPM; determine a company cost of capital
for a given financing structure.

Bond, Equity and Hillier et al.
Firm Valuation. Ch 5
To be able to explain the main characteristics
of bonds and the information used to value
them. Students will also be able to calculate
the value of bonds and the rate of return
offered on bonds. To be able explain the
determinants of the prices of shares; the
valuation of companies: determine the rate of
return on shares; breakdown the return on
shares into capital gains and dividends;
understand the constant rate of growth of
dividend model; and use the dividend and
earnings models to evaluate shares and
companies.

Sources of Hillier et al. Understand how a firm can raise capital and
Finance: Debt & Ch 19 & 20 review the advantages and disadvantages of
Equity, IPOs and each capital source. Explain the nature and
SEOs role of rights issues in raising capital;
specifying the terms of a rights issue;
determine the implications of a rights issue
for shareholders; explain the role of
underwriters in certification of equity
offerings.

International Madura and Understand the economic determinants of

Financial Fox foreign exchange rate. Recognize the
Management: Ch. 4 & 6-8 relations among interest rate, inflation rate
Exchange Rates’ and foreign exchange rate in the spot and
Determinants, futures markets.
International
Parity conditions
and arbitrage (if
time allows)
8 Resources (staff/library/computing/a-v/accommodation)

The required text is provided for members of the MBM class and the Business Information
Centre provides access to a wide range of relevant materials on MyPlace, including the most
relevant academic and professional journals, analysts’ reports etc.

Suggested reading list

Hillier, D.J., Ross, S A, Westerfield R W, Jaffe, J. and Jordan, B. “Corporate Finance”.

European Edition, 3rd Edition, McGraw-Hill, 2016, ISBN: 9780077139148 / ISBN-10:
0077139143

Madura, Jeff & Fox, Roland, International Financial Management, 4th edition, Cengage
Learning EMEA, 2017, ISBN-13: 9781408088456 / ISBN-10: 1408088452

In addition to the recommended text the following texts cover the class syllabus and are useful
as alternative reading sources:

Brealey, R., Myers, S. and Allan, F. “Principles of Corporate Finance”. 12th Edition, McGraw
Hill, 2016, ISBN-13: 9780077151560 / ISBN-10: 0077151569

Shapiro, A.C. Multinational Financial Management, 9th edition, 2009, Wiley, ISBN:
9780470450352

9 Assessment

A group project will account for 50% of the class assessment and the exam will account for
the remaining 50%. Students are required to attain a mark of at least 40% in each piece of
assessment in order to pass the class.

10 Indicative Hours

The hours of student effort involved in this class are estimated to be distributed as follows.

Activity Hours
Class lectures (delivery) 20
Practice questions on lecture material 15
Preparation in advance of lecture (reading 15
textbook and lecture slides)
Reviewing lecture material after class 20
Student work on class assignment 30
Total 100