The Hong Kong Polytechnic University School of Accounting and Finance AF4320 Corporate Finance (2013/2014 Semester 1) Instructor

Dr. Stephen GONG* Dr. Jacqueline WANG Dr. Mindy XU *Subject Coordinator Required textbook Ross, Westerfield, and Jaffe (RWJ), Corporate Finance, 9th edition, Irwin McGraw-Hill. Reference books Brealey, R.A., S.C. Myers, and F. Allen, Principles of Corporate Finance, McGrawHill/Irwin, 11th Global Edition. Young, L. and R. Chiang, The Hong Kong Securities Industry, The Stock Exchange of Hong Kong and the Asian Pacific Institute of Business, Chinese University of Hong Kong, latest edition. McGuinness, P.B., A Guide to the Equity Markets of Hong Kong, Oxford University Press, latest edition. Role and purpose This subject builds on the AF3313 Business Finance and covers some advanced topics of corporate finance. This subject contributes to the achievement of the BBA Outcomes by enabling students to apply basic financial theories, analyze financial reports and understand the operation of financial markets (Outcome 9) and identify ethical issues as they arise (Outcome 5) and communicate in English effectively (Outcome 1 and Outcome 2). Learning outcomes On completion of this subject, students should be able to: l Understand the operation of financial markets; l Apply financial theories to maximize firm value or shareholders wealth; l Identify and learn to resolve ethical and governance issues in corporate finance. Indicative Content Corporate Governance Corporate goal. Agency problem, governance and control of the corporation. Efficient Market Hypothesis Three forms of efficiency. Implications for corporate finance. Market anomalies and empirical challenges. Long-term Financing
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Office M834 M507g M756

Extension 2766-7411 2766-7107 2766-4139

Email stephen.gong@polyu.edu.hk afwwj@polyu.edu.hk mindy.xu@polyu.edu.hk

Different types of equity and debt securities. Alternative equity and debt issue methods. Cash and rights offerings. Bond refunding. Capital Structure Theories of capital structure. MM propositions. Taxes, costs of financial distress. Agency costs of equity. Agency costs of debt. Capital structure in practice. Valuation and Capital Budgeting for the Levered Firms Adjusted Present Value approach, Flow-to-Equity approach, Weighted Average Cost of Capital (WACC) approach. Dividend Policy Dividends and stock repurchases. Stock dividends and stock splits. Theories of dividend policy. Dividend policies in practice. Options Option basics. Put-call parity, Option pricing. Stocks and bonds as options. Applications of option principles in corporate finance. Mergers and Corporate Restructuring Motives for mergers. Financial analysis for mergers. Defence tactics. Assessments Continuous Assessment 1. Class Participation 2. Individual Written Assignment 3. Midterm Test Final Examination Total 50% 10% 20% 20% 50% 100 %

Attendance and homework presentation The lecturer will randomly check attendance up to 5 times in the class and each incidence of absence from class will result in deduction of 2 points. Note, however, that attendance per se does not automatically entitle a student to full participation mark. Students are highly encouraged to actively participate in the class-room discussions, and to cultivate their ability to communicate in oral English effectively (Outcome 1). Students need to prepare for the homework questions before classes. The instructor will cold call in the class and the designated student/group will lose 2 points if s/he fails to discuss the solution to the assigned question, or to satisfactorily answer an ad hoc question posed by the instructor in class. Performance on problem solving will be evaluated based on the demonstrated effort. Individual written assignment The students should submit a written assignment with a word limit of 1000 words. This written assignment requires students to apply the principles of finance to analyze financial problems and understand the operation of financial markets (Outcome 9), and communicate in written English effectively (Outcome 2). If you are interested in improving your English
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writing skills, you may consult English Learning Center (http://elc.polyu.edu.hk). The assignment question will be posted on BlackBoard later. Midterm test and final examination The midterm test and final examination test students ability to utilize the taught financial theories and principals in problem solving (Outcome 9), and to identify ethical issues as they arise (Outcome 5). The date, venue, format and coverage of the test will be announced one week before the test. Makeup test will only be arranged for students who miss the mid-term test because of medical reasons. Teaching schedule The assigned questions are Questions and Problems, NOT Concept Questions. Topic 1 2 3 4 5-1 5-2 6 7 8 9 Chapter Chapter 1 Chapter 14 Chapter 20 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 22 Chapter 29 Topic Assigned Questions Introduction to Corporate Finance NA Efficient Capital Markets 1, 2 Issuing Securities to the Public 1, 17, 18 Long-Term Financing 1, 2, 8, 9* Capital Structure I: Basic Concepts 12, 16, 23, 24 Capital Structure II: Limits to the Use of Debt 1, 2, 6, 7 Valuation and Capital Budgeting for the 1, 15, 16 Levered Firm Dividends and Other Payouts 5, 6, 14, 16 Options 5, 6, 8, 23, 25 Mergers and Acquisitions 14, 17

*Question 9(b): Assume that the bonds will be called if interest rates rise should be changed to Assume that the bonds will be called if interest rates decline

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Grading criterion Assessment grades will be awarded on a criterion-referenced basis, and the students are passed on merit and graded according to their true performance. (i) Grade A to A+ Individual Written Assignment Criteria and Standards Demonstrate a strong understanding of the concepts and issues of the assigned topic Have an element of originality Reflect students own voice and opinions with critical evaluation and analysis Well written essay with recommending and reflecting Demonstrate a good level of understanding of the concepts and issues of the assigned topic Use and apply a range and a diversity of source materials in support Well written essay with application of the ideas Demonstrate a basic level of understanding of the concepts and issues of the assigned topic Use the relevant materials in the course Acceptable written essay Fail to demonstrate a minimum level of understanding of the concepts and issues of the assigned topic Seldom use the basic materials in the course Poor written essay Test / Examination Criteria and Standards Achieve a standard of excellent performance in the test / examination with extended ideas such as element of own voice and opinion, originality, recommending and reflecting Achieve a standard of good performance in the test / examination with good understanding such as a wide range and diversity of materials beyond those provided in the course, proper referencing, necessary analysis and application Meet a standard of acceptable performance in the test / examination with application of materials and without major errors of understanding Demonstrate a standard of marginally acceptable performance in the test / examination with some errors of understanding Fail to meet a minimum standard of passing the test / examination with major errors of understanding or omission of explanation

B to B+

C to C+

(ii) Grade A to A+ B to B+ C to C+ D to D+ F

Special Tips on How to Do Well in the Subject: According to Professor Eric Mazur of Harvard University, an effective way of learning is to practice what you learn. Indeed, it is an imperative that we take the (active) responsibility and initiative for learning. Make every effort to come to class on time. Absence from class may result in deduction of
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marks but coming to each class does not guarantee passing! Preview and review each topic (read the textbook as well as the Powerpoint slides). A stitch in time saves nine. Past experience indicates that one might have to travel a few rounds between a book chapter and the end-of-chapter practice questions before one can get a fair idea of the subject contents. Past experience also suggests that many students understand the need to take the teachers advice, and the dire consequences of not doing so, but often fail to follow. The choice (to excel, to do poorly, or to fail) is yours!

GOOD LUCK!

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