BUSINESS SCHOOL

Version: 2012 Business School

Unit of Study Outline

Unit code FINC2012
Unit titleCorporate Finance II

Semester2, 2012


Pre-requisite units: Corporate Finance I (FINC2011)
Co-requisite units: None
Assumed Knowledge and/or skills: You are assumed to be familiar with all content covered in
Corporate Finance I, particularly financial mathematics.


Unit coordinator: Andrew Lepone
Room: Room 408, Economics and Business Building
Email address:[email protected]
Phone:+61 2 9351 6453
Consultation Hours:Please go to Blackboard for details of all staff consultation times.
Class day(s): Please go to Blackboard for class times and locations.


Required Text / Resources:
It is highly recommended that all students purchase a copy of Brealey R, S Myers, and F Allen,
Principles ofCorporate Finance, 10th Edition, McGraw Hill, 2011.






This Guide to Unit Learning Content and Assessment MUST be read in conjunction with the Guide to Business
School Student Administration Manual
(sydney.edu.au/business/currentstudents/student_information/student_administration_manual) and University Policies
on Academic Honesty, Special Consideration, and all applicable policies that apply to every unit of study offered
by the Business School (http://sydney.edu.au/business/currentstudents/policy) . In determining applications and
appeals relating to these matters it will be assumed that every student has taken the time to familiarise
themselves with these key policies and procedures.

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Version: 2012 semester two, Business School 2


1. Unit of study information (School handbook description)
https://ssa.usyd.edu.au/ssa/handbook/uossearch.jsp?searchtype=S


2. Program Learning outcomes UG

1. Business Knowledge Our Bachelors programs develop each graduate to be adept in
identifying and understanding major commercial trends both locally and globally leading to
students who are able to demonstrate an understanding of the key challenges in managing
business in a range of business and cultural contexts.
2. Critical Thinking Our Bachelors programs develop each graduate to be a critical thinker and
discerning decision maker leading to students who are able to solve business problems by
identifying and critically evaluating implications of business decisions from a range of
disciplinary business perspectives.
3. Business Analysis and Problem-Solving Our Bachelors programs develop each graduate to
be a capable business analyst and problem-solver leading to students who are able to analyse
and diagnose business problems and design a range of business improvements that can result
in significant business process improvement and/or the exploitation of advanced information
and communications technologies.
4. Communication Our Bachelors programs develop each graduate to be an effective and
professional business communicator leading to students who are able to communicate
effectively, both orally and in writing, using a range of modes of communication including
business reports and presentations and including the ability to negotiate and persuade in a
business context.
5. Team Working Our Bachelors programs develop each graduate to be an effective team
member in a variety of business contexts leading to students who are able to collaborate
effectively with others in a professional business manner as both members and leaders of
teams, and in relation to client interactions.
6. Ethical and Social Responsibility Our Bachelors programs develop each graduate to be an
ethically- and socially-responsible professional leading to students who are able to
demonstrate an understanding of pertinent moral, ethical and corporate social responsibility
considerations and the potential impacts (positive and negative) that business decisions can
have on a range of stakeholder groups.

3. Unit Learning aims

The key focus or purpose of
this unit
Reinforce and extend the key financial concepts introduced in
FINC2011, primarily: risk, value and corporate policy
How this unit of study relates
to previously studied units
The first half of this unit will cover various investment products and
markets and how the financial manager can use them to create
value and manage risk. The latter half will be devoted to a detailed
discussion and analysis of corporate financing and financial policy.
How this unit of study
prepares students for
subsequent units
This unit will not only prepare the student for third year study in
finance, but also develop the students critical appraisal skills
through tutorials and assignments.
How this unit of study relates
to the degree program/s
This unit is a compulsory unit for the Finance major.





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Version: 2012 semester two, Business School 3


4. Assessment

Assessment
Name
Work Type
(Individual
or Group)
Programmelear
ning outcome/s
assessed
Word
length
Weight Due
Date
Closing
Date
Comp-
ulsoryY/
N*
Essay Individual Business
Analysis and
Problem-
Solving/Commu
nication
1000
words
20% 11/10/12 08/11/12 N
Mid-Semester
Examination
Individual Business
Knowledge /
Critical Thinking
N/A 15% 06/09/12 06/09/12 N
Final
Examination
Individual Business
Knowledge /
Critical Thinking
N/A 65% Exam
period
Date of
exam
N
Academic honesty
module
N/A 0% Wk 4 2012

*: if an assessment is compulsory, students must both submit and pass the assessment. If a student
does not either submit or pass the assessment the student will be given an AF fail for the entire unit,
regardless of what mark you have achieved.
**: Students must complete the academic honesty module in Blackboard with a mark above 80% by
the final day of exam, or an Absent Fail (AF) grade will be given for the entire unit. Students can
complete the module multiple times until this grade is achieved. Students who completed the module
with a score of 80% or above last semester do not need to do it again.
***: The due date for an assessment is the last day on which you can submit the assessment without
penalty. If you submit the assessment after that date, you will receive a late penalty, unless excused
by special consideration, special arrangement or disability services adjustment. The closing date is the
last day on which an assessment will be accepted for marking.

Conditions of Assessment

The Business School has standard conditions governing assessments such as grade descriptors, late
penalties, word length and so on. Please go to the Business School policy and implementation
information at http://sydney.edu.au/business/currentstudents/policy

Referencing Style

Students should adhere to the author-date (Harvard) citation style. All sourced material, including
direct quotations, must be appropriately acknowledged.

Assessment details

Assessment task 1

Essay
Essays must be completed individually.Further details are available at the end of this unit of
study outline.


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Version: 2012 semester two, Business School 4

All essays must be submitted electronically via Blackboard. Assignments submitted
electronically via Turnitindo not require cover sheets. Ensure that your student ID number (SID)
and Name is in the top right hand corner of each page. Full information about how to prepare
assignments for electronic submission can be found in the Turnitin Student Guide:
http://blackboard.econ.usyd.edu.au/webapps/portal/frameset.jsp?tab_tab_group_id=_20_1
Should submission problems occur, students should contact Business eLearning Support first
on 903 66433 or [email protected] or the Unit Coordinator as soon as
possible

Assessment Criteria

Your essay will be assessed based on its structure, your identification of academic evidence to
support your argument of the issue, as well as your ability to relate and apply the academic
evidence to finance practice.

Assessment task 2

Mid-Semester Examination
Lectures 1-5 will be covered in the mid-term, and this material will be examined again in the
final exam. The midterm will be a multiple choice exam.
Assessment Criteria

The exam will assess your ability to apply the theories and methods learnt in the unit. You will
be required to analyse and interpret various investment and derivative issues using the
techniques introduced in the unit.

Assessment task 3

Final Examination
The final will cover all the material covered in the course. Further details of the structure of the
exam will be provided during the final lecture. The exam will be held during the formal
university exam period.
Assessment Criteria

The exam will assess your ability to apply the theories and methods learnt in the unit. You will
be required to analyse, interpret and discuss various investment, derivative and corporate
finance issues using the techniques introduced in the unit.

5. Other suggested resources for students

All lectures and seminars are recorded and will be available within Blackboard for student use.
Please note the Business School does not own the system and cannot guarantee that the system
will operate or that every class will be recorded. Students should ensure they attend and
participate in all classes.

Supporting Texts

Bishop S. R., H. R. Crapp, R. W. Faff & G. J. Twite, Corporate Finance, 4th Edition, Prentice
Hall, 2000.
Ross, Westerfield, Jaffe, Corporate Finance, 6th Edition, McGraw Hill, 2002.
Hull, Options, Futures and Other Derivatives, 7th Edition, Pearson Prentice Hall, 2009.

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Version: 2012 semester two, Business School 5

You will not need to purchase any of these, but if you want a different presentation of a certain
issue they are a reasonable place to start.


6. Feedback andimprovements made in response to feedback

The Business School seeks feedback from students and staff in order to continually improve and
innovate all units offered. For information on previously collected feedback and innovation made in
response to feedback, pleasesee:

http://sydney.edu.au/business/learning/planning_and_quality/feedback/student


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Version: 2012 semester two, Business School 6

7. Unit schedule
All readings and questions refer to the Brealey, Myers and Allen text unless specified. EQ refers to
Extra Questions which are included on the next page.

Week/
Topic
Materials
(e.g. readings)
Lecture content Tutorial/workshop
content
Assessments
Due
1
30 Jul
Ch. 7 Portfolio Theory

2
6 Aug
Ch. 8 CAPM
Ch7 13, 14
Ch8 9, 10, 12

3
13 Aug Ch. 20 & Ch. 26
Introduction to
Forwards, Futures
and Options
Ch8 15
EQ 4, 6, 8

4
20 Aug Ch. 21
Contingent Claims
II:
Valuation
Ch20 13, 14, 21, 26
Ch26 17, 20, 31

5
27 Aug
Ch. 22 Real Options Ch21 9, 12, 13, 20, 21

6
3 Sep
N/A Mid-Semester
Exam No
Lecture
N/A 06/09/2012
During normal
lecture time and
in normal lecture
venue.
7
10 Sep
Ch. 17 & Ch. 18 Capital Structure I Ch22 9, 14, 15
8
17 Sep
Ch. 18 & Ch. 24 Capital Structure II Ch17 19, 20, 22
Ch18 12, 15

Common week 24 to 30 Sep
9
1 Oct Ch. 3 & Ch. 23
Debt Valuation:
Riskless and Risky
Cases
Ch18 18, 23
Ch24 18, 19, 26

10
8 Oct

Ch. 15 Issuing Equity
Ch3 18, 25, 27, 29
Ch23 9

Essay Due
11/10/2012
Midday
11
15 Oct
Ch. 16 Dividend Policy Ch15 - 11, 14, 15, 16

12
22 Oct
Ch. 19
Valuation and the
Cost of Capital
Ch16 9, 10, 14, 17, 21,
22

13
29 Oct
Review
Ch19 14, 15, 17, 18,
21




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Version: 2012 semester two, Business School 7

Extra Tutorial Questions

EQ4. Gavins friend is planning to invest $1million in a rock concert to be held 1 year from
now. The friend figures he will obtain $3million revenue from his $1million investment
unless it rains. If it rains, he will lose his entire investment. There is a 50% chance that it
will rain the day of the concert. Gavin suggests that he buy rain insurance. He can buy
one unit rain insurance for $.50, and this unit pays $1 if it rains and nothing if it does not.
He may purchase as many units as he wishes, up to $3million.
a. What is the expected rate of return on his investment if he buys u units of rain
insurance? (the cost of the insurance is in addition to his $1million investment)
b. What number of units will minimise the variance of his return? What is this minimum
value? And what is the corresponding expected rate of return? [Hint: before calculating
a general expression for variance, think about a simple answer]

EQ6. Assume that the expected rate of return on the market portfolio is 23% and the rate of
return on T-bills (the risk-free rate) is 7%. The standard deviation of the market is 32%.
Assume the market portfolio is efficient.
a. What is the equation of the of the capital market line?
b. i. If an expected return of 39% is desired, what is the standard deviation of this
position.
ii. If you have $1,000 to invest, how should you allocate it to achieve the above
position?
c. If you invest $300 in the risk-free asset and $700 in the market portfolio, how much
should you expect to have at the end of the year?

EQ8. The expected return of the S&P 500, which you can assume is the tangency (Market)
portfolio, is 16% and has a standard deviation of 25% per year. The expected return on
Microsoft is unknown, but it has standard deviation of 20% per year and a covariance with
S&P 500 of 0.10. If the risk-free rate is 6% per year,
a. Compute Microsofts beta
b. What is Microsofts expected return given the beta computed in part a.?
c. If Intel has half the expected return of Microsoft, then what is Intels beta?
d. What is the beta of the following portfolio: 0.25 in Microsoft, 0.10 in Intel, 0.75 in the
S&P500, -0.20 in GM (where
GM
= 0.80), 0.10 in the risk-free asset.
e. What is the expected return of the portfolio in part d.?


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Version: 2012 semester two, Business School 8

Essay

The essay must be completed individually. The essay is due on Thursday, 17 May, 2012 at
Midday. All assignments must be submitted electronically via Blackboard. Assignments
submitted electronically via Turnitin do not require cover sheets. Ensure that your student
ID number (SID) and Name is in the top right hand corner of each page.Clearly state the
topic you have attempted on the front page of your essay. Failure to do so will result in a 5%
penalty. A 10% penalty will be incurred for each business day the assignment is late.

The Task:

You must select one of the following four essay topics.

Topic A: Explain the respective roles of insurance contracts and derivatives in risk
management. How are these two approaches to risk management different and why is there a
need for both? Use examples to illustrate your answer.

Topic B: Historically, public listed companies raised further equity finance by making rights
issues. Over time however, rights issues have become less important and alternative
methods of raising seasoned equity capital have developed. Discuss the evolution of these
alternatives. A good answer will explainwhy these alternatives have evolved and the problems
they are intended to address.

Topic C: Real estate investment advisory services often suggest that, as a financial
investment, waterfront real estate will outperform other residential real estate (which is like
saying that blue chip shares will outperform other shares). Does this mean that the real
estate market is not efficient? Explain.

Topic D: The market risk premium is a widely used parameter in finance, but there is
considerable debate about the magnitude of this parameter. Explain why this is so and outline
at least three of the main issues in the debate. Based on your analysis of the debate, what
estimate of the market risk premium would you recommend for Australia? Justify your
recommendation.

Mandatory Requirements:

1. A synopsis of no more than 100 words is to preface the essay.

2. All essays must include a list of references in academic form using the author-date
(Harvard) citation style. All sourced material, including direct quotations, must be
appropriately acknowledged.

3. The maximum length of the essay (not including the synopsisand the reference list) is
1000 words. Essays exceeding the word limit will be penalised.