Module Information

This module is a core module to SMBs N400 (Accounting and Finance) and N310 (Business Finance) UG degrees; core to the Accounting and Finance 'major' and required for the Accounting and Finance minor; and core to the IMAPS degree G1N3 (Financial Mathematics).

The module covers topics in capital structure, dividend policy, leasing and working capital management, which are essential subject matter within any high-quality undergraduate degree in accounting and/or finance; and which are expected by:

Honours Degree Subject Benchmark Statement: Accounting (2007), Quality Assurance Agency for Higher Education

Honours Degree Subject Benchmark Statement: Finance (2007), Quality Assurance Agency for Higher Education

Further, the module contributes to the maintenance of (or is anticipated to contribute to the achievement of [further]) accreditation from professional accountancy bodies, including:

Institute of Chartered Accountants in England and Wales
Association of Chartered Certified Accountants
Chartered Institute of Management Accountants
Institute of Chartered Accountants of Scotland

This module aims to provide students with a thorough treatment of the key financial decisions which are faced by the directors and managers of firms, which include: (i) capital structure; (ii) dividend policy; (iii) leasing (versus borrow and purchase) policy; and (iv) working capital management.

This will be approached by consideration of context in which decisions upon these issues are made; presentation and analysis of the debates which have surrounded (and continue to surround) them; recourse to the associated theoretic and empirical academic literature; and destruction of the idea of a set of discrete, simple solutions.

Introduction to corporate finance (including agency and signalling theories)
Relevant aspects of corporate taxation
Capital structure
Dividend policy
Leasing policy
Working capital management

The following topics are covered:

1. INTRODUCTION TO CORPORATE FINANCE

This introduction will consider the structure of firms, their possible objectives, financing decisions and implications of the Efficient Market Hypothesis for the corporate finance manager. The following topics will be covered:

(a) Firm structure and their objectives
(b) The subject area of corporate finance
(c) The Efficient Market Hypothesis
(d) Signaling and agency theory
(e) Sources of Finance
(f) Debt versus equity Financing

2. TAXATION

An understanding of the tax environment is important as tax factors can play an important part in finance. This topic will consider the UK corporate tax structure and in particular the determination of taxable profits, including capital allowances, loss relief, and advance corporation tax (ACT). The following topics will be covered:

(a) Classification of tax systems
(b) Basis of assessment and advance corporation tax (and its abolition)
(c) Basis of deduction
(d) Revenue and Capital Expenditure
(e) Relief for Capital Expenditure: Capital Allowances
(f) Trading Losses
(g) Transfer pricing

3. COST OF CAPITAL AND CAPITAL STRUCTURE

Part I: Firms can obtain finance from a number of sources, e.g. from the issue of shares (equity) to borrowing (debt). The particular combination of debt and equity that is used to finance a firm is known as its "capital structure". This topic examines both the theoretical and empirical evidence as to the existence of a link between a firm's capital structure and its market value. The existence of such a link would have implications for example when considering an investment opportunity.

Part II: The topic then considers how investment appraisal techniques can be adapted for use by firms that are financed by a combination of equity and debt. This is important when the method of financing a proposal can alter the discount rate appropriate to the project. The following topics will be covered:

(a) Cost of Capital (Ordinary shares, retained earnings, preference shares, debt, Weighted Average Cost of Capital)
(b) Gearing and Debt/equity ratio
(c) Theories of Capital Structure: Traditional and Modernist views
(d) Modigliani and Miller derivations and arbitrage examples
(e) Market imperfections
(i) Corporate and Personal Taxes
(ii) Risky debt
(iii) Bankruptcy Costs
(f) Signaling and Agency theories
(g) empirical evidence
(h) Investment appraisal- Adjusted Present Value (APV)

4. EQUITY FINANCE AND DIVIDEND POLICY

This topic considers the different methods of issuing equity on the stock market and the potential link between a firm's market value and the proportion of its earnings that it pays to its shareholders, i.e. its dividend policy. The following topics will be covered:

(a)Methods of issuing equity
(b) Factors affecting dividend policy, which include signaling theory, agency theory and clientele theory
(c)Dividend relevance versus irrelevance
(d) Empirical evidence
(e) Dividend policies and alternative distribution channels.

5. LEASING
Leasing is one form of potential finance for a company. This topic considers the leasing versus purchase decision explores the differences between finance leases and operating leases and considers the reasons behind a company's decision to lease an asset, rather than purchase. The following topics will be covered:

(a)Finance Lease/ Operating Lease
(b) Financial accounting and tax accounting treatment
(c) Reasons for Leasing
(d) Lease Evaluation

6. WORKING CAPITAL MANAGEMENT

Working capital management is often neglected as a source of financing for a company but is vital for a company's long term success. The following topics will be covered:

(a) Reasons for investing in WCM
(b) Objectives of WCM and policies
(c) Cash conversion cycle and WCM requirement
(d) Stock management, cash management, debtor management, creditor management
(e) overtrading and the economic order quantity model