1. Corporate Financial Strategy Lecture 12: Revision Lecture
Module Leader: Professor Jon Tucker
Selected slides by McGraw Hill

2. Lecture Objectives Summary of topics covered on the module
Exam structure
Exam technique

3. Introduction to Corporate Finance, Valuing Bonds and Shares
What we covered:
Shareholder maximization as goal of corporation
Valuing bonds
Term structure of interest rates
Real and nominal interest rates
Valuing stocks
Key revision tasks:
Be able to calculate bonds values, duration and volatility
Explain theory and evidence on the term structure of interest rates
Be able to calculate stock values, including DDM, plowback, DCF

4. Revision of Investment Appraisal Techniques
What we covered:
Different investment appraisal techniques – Book rate of return, Payback, IRR, and their drawbacks
Profitability index
Applying the NPV rule – ‘the 4 rules’
Choosing among competing projects
Key revision tasks:
Be able to use each investment appraisal technique
Discuss the relative merits of each technique
Be able to work a detailed NPV example

5. Risk and Return, Portfolio Theory, and the CAPM
What we covered:
Computation of stock returns through time
Meaning of risk premium
Computing portfolio risk – variance, standard deviation
Understand how diversification reduces risk
Concept of beta and its computation
Markowitz portfolio theory
Discussion of foundations of CAPM, APT, 3-factor model
Key revision tasks:
Be able to compute all aspects of stock and portfolio risk e.g. portfolio return, standard deviation, variance, beta
Discuss development of Markowitz theory
Understand theory and evidence for basic CAPM and alternatives

6. Current Practice in Capital Budgeting and Real Options
What we covered:
Computation of project and company cost of capital and WACC
How to estimate beta
Determination of asset betas
Certainty equivalent cash flows
Basic capital investment process and sensitivity analysis
Real options and decision tree problems
Key revision tasks:
Be comfortable with cost of capital and WACC calculations
Be able to draw decision trees and compute NPVs, particularly for examples with expansion and abandonment real options

7. Market Efficiency, Behavioural Finance, and Corporate Financing
What we covered:
Efficient markets, EMH, and tests
Evidence, anomalies, behavioural finance
Six lessons of market efficiency
Financing patterns in the real world
Different financial markets and institutions
Key revision tasks:
Be able to discuss the issue whether markets are efficient or not
Identify and seek to explain why anomalies exist
Understand the scope and variation of financial markets and institutions

8. Issuing Equity, Dividend Policy and Debt Policy
What we covered:
Understand the process of issuing equity – VC and IPO
Rights issue calculations
Payout debate, theory and evidence – value relevance?
Dividends vs. repurchases, high vs. low dividends?
Key revision tasks:
Understand mechanics of equity financing methods
Be able to tackle rights issue calculations
Be able to discuss in detail the dividend debate

9. Debt Policy, Financing and Business Valuation
What we covered:
The range of capital structure theories (Traditional through to Miller (1977), TO and PO theories
Valuing an entire business
Adjusted present value – meaning and calculation
Key revision tasks:
Be able to discuss the key theories and (value relevance) debate relating to capital structure
Understand how to value an entire business using DCF
Appreciate how APV can help adjust for financing side effects

10. Derivatives and Option Pricing Methods
What we covered:
Basic options terminology – option, put, call, position diagrams
Determination of options values, put-call parity equation
Basic options valuation - replicating portfolio approach, risk-neutral method, binomial method, Black-Scholes
Key revision tasks:
Be able to compute the value of financial options using the various techniques
Understand position diagrams and the factors driving the value of financial options

11. Bond Markets and Ratings, Debt Instruments
What we covered:
Difference between promised and expected yields on corporate debt, credit default swaps
The option to default on a bond
Bond ratings and default probability
Different types of bonds and debt, bond contract details
Key revision tasks:
Be able to explain what drives bond yields
Understand the basic models which help us to predict debt default

12. Forwards, Futures and Risk Management
What we covered:
Risk management and the firm, insurance
Forwards, futures, swaps markets and valuation of these
How the forex market works
Four exchange rate parity relationships and evidence
Key revision tasks:
How can we use various instruments and techniques to control for risk?
Definitions and calculations for forwards, future, swaps
Calculate various rates from parity conditions formulae and define/explain the four relationships

13. Mergers and Acquisitions, Corporate Restructuring, and Governance
What we covered:
Types of mergers, good and questionable reasons for mergers
Merger calculations – gains, costs, NPV using cash/stock
Who invests in what and how does it change by country?
Definition of corporate governance and different models
Key revision tasks:
Be able to define different merger types and good/bad reasons for mergers
Be able to compute basic merger calculations
Be able to define corporate governance and competing models

14. Exam structure and technique
Section A (40%) Answer ALL questions
6 x short calculation / discussion questions
Section B (30%) Answer ONE question only
3 x longer calculation / discussion questions
Section C (30%) Answer ONE question only
3 x discussion / essay questions
You will be provided with a basic formula sheet at the end of the paper – do not rely on this (learn the formulae!)
2 hour paper, thus:
A: 48 minutes
B: 36 minutes
C: 36 minutes

15. Exam structure and technique
Short calculation / discussion questions – section A
Practice using all of the tutorial and lecture examples we have gone through
The scope here spans the entire syllabus
Start by extracting the numbers from the question and write them at the top of your answer
Always show all of your workings
Do not spend too much time on one particular question – move on if you get stuck and then come back to it
Write down any assumptions you make to help you answer the question
Make sure to write something for the discussion parts of a question (even if you are not sure)

16. Exam structure and technique
Longer calculation / discussion questions – section B
Will often come with discussion elements too – do the calculations first and then the discussion parts
Always have a go at the discussion parts
At times discussion parts may ask you about whether you think a particular technique is useful or not – learn their relative merits
Show your workings – tell the marker what you are doing, keep it tidy
Remember currency, units, magnitude, UK convention for commas and decimals
Write out the expression for calculations before you attempt them where appropriate

17. Exam structure and technique
Discussion/essay questions – section C
Structure essay-style questions:
Introduction
Outline structure of rest of answer
Define terms of reference
Arguments in support of answer to question
Summary and conclusion – re-address the question and give conclusion based on your most important points
Read the question carefully and make some attempt to answer what is asked for (rather than what you would like the question to ask)
You must have at least 6 good points to make in an essay answer – do not focus on one small part of a given topic
Don’t simply list everything you have learned
You should be able to write at least two pages for an answer in 36 minutes

18. Exam structure and technique
General points:
Make sure your calculator/pens, etc., work before the exam
Look at your watch and have a strict cut-off point for each section
If you are running out of time (ONLY) then bullet-point the other things you intended to cover
Spend the first 5 minutes of each section B and C question just thinking (for essay questions you could even write a very short essay plan before your answer if you like)
Answer all questions you have chosen and all parts to each question

19. Exam structure and technique
Good luck and thanks for studying Corporate Financial Strategy!