Financial Management

The Chinese University of Hong Kong CUHK Business School

FINA5010XA Financial Management

Term 2 2017 – 2018

Class Schedule  

Course Overview

Every organization of any size needs individuals with expertise in financial management.  This course provides an overview and analysis of financial decision-making within the corporate setting.  Various facets of financial management are tackled from both theoretical and applied perspectives.  You will learn the methods that financial managers use in determining what investments to make, which companies to acquire, and which products to introduce.  You will also discuss how stocks and bonds are priced, the relation between risk and return, and the estimation of a firm’s cost of capital.  A good knowledge of this course is important for careers in consulting, investment banking and corporate management.  

Course Learning Objectives

The theme of the course is how financial managers can create value through integrated financial, strategic, and operating decisions.  This course examines the role of finance in supporting the functional areas of a firm, and stresses an understanding of what creates value and why.  

Upon completion of this course, you will be able to:

1. Describe the objective of financial management and evaluate its validity.

1. Rationalize corporate finance decisions in light of agency problems and conflict of interest among stakeholders.

1. Apply the concepts of risk-return tradeoff and time value of money in financial management decisions, and in stock, bond, and asset valuation.

1. Evaluate corporate investment decisions using capital budgeting techniques.

1. Understand the overall concept of investment risk and its relation to expected return and asset pricing.

1. Discuss the determinants of capital structure and its implications for the value of the firm.

1. Provide 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.

References  

Textbook:  

• Ross, Westerfield, Jaffe, Lim, Tan and Wong, Corporate Finance, Asia Global

Edition, McGraw-Hill, 2015.

Other references:

• Berk and DeMarzo, Corporate Finance, 3rd Edition, Pearson, 2014.

Course Content and Organization

This course consists of three modules, as described below.

Module 1: Corporate Finance Overview and Capital Budgeting

Key topics:

Topic 1 – Introduction to Financial Management 

Topic 1 introduces the course by discussing the ultimate goal of financial management and introducing how financial managers can achieve that aim.  It will provide you a brief description of the key financial decisions in a corporation.  Following this introduction, you will study the agency problems and understand the nature of conflicts of interest that may arise among the various stakeholders of a firm.

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

• Explain and discuss the objective of the firm.
• Assess how the objective of the firm relates to conflicts of interest among stakeholders.
• Identify the potential conflicts that arise within the firm, and discuss the techniques that firms can use to mitigate these potential conflicts.

Topic 2 – Discounted Cash Flow Analysis 

Topic 2 presents the intuition of free cash flows and the concept of time value of money.  In particular, it introduces the relationship between present value and future value, and offers you the tools to value some special cash flows – perpetuity and annuity.  You will also learn how to compare various interest rates in-depth.  

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

• Estimate a firm’s free cash flow and explain why free cash flow has such an important effect on firm value.
• Understand the intuition for discounted cash flow modeling in the context of evaluating business investment projects.
• Learn about the fundamental concepts of time, present and future values of cash flows, discount rates and compounding rates.
• Identify the different types of annuities, calculate the present and future value of both an ordinary annuity and an annuity due, and calculate the relevant annuity payments.
• Define effective annual rate and annual percentage rate.

Topic 3 – The Long-term Investment Decisions 

Topic 3 introduces techniques that firms use to evaluate investments and decide which projects to pursue, including net present value, internal rate of return, payback period, and profitability index.  After mastering the tools to make investment decisions, you will learn how to derive the cash flows for a given project in order to determine which projects or investments a firm should undertake.