Advanced Financial Management FIN 3403
Learning Objectives:
Module 1
Ch. 1 Introduction to Corporate Finance:
-Know the three basic types of financial management decisions and the role of the Financial
Manager.
-Learn the various forms of business organization and know their advantages, disadvantages, and
financial implications.
-Know the goal of the financial manager and understand the conflict of interest that can arise
between owners and managers.
Module 2
Ch. 2 Financial Statements, Taxes and Cash Flow:
-Understand the information provided by financial statements.
-Differentiate between book and market values.
-Know what liquidity means
-Understand how to calculate average and marginal rates.
-Know the difference between accounting income and cash flow.
-Calculate a firm’s financial cash flow (also called the “free cash flow”).
Ch. 3 Working with Financial Statements:
-Understand what “standardized” financial statements are.
-Be able to compute and interpret important financial ratios.
-Understand the use of financial statement information.
-Know the importance of trend and peer analysis.
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-Be aware of difficulties that can arise when analyzing financial statement information.
Module 3
Ch. 5 Introduction to Valuation: The Time Value of Money:
- Be able to define time value of money and the terms discounting, compounding, simple and
compound interest.
- Understand the formulas for the computation of future values and present values of single cash
flows.
- Know how to solve for PV, FV, rate, or time in a single cash flow problem.
Ch. 6 Discounted Cash Flow Valuation:
-Know how to do time value of money calculations for multiple cash flows, i.e. be able to solve a
multiple cash flow time value of money problem for any variable.
-Know the differences between perpetuities, growing perpetuities, and annuities.
- Be able to convert an effective rate into a stated rate and vice versa.
- Be able to use the financial calculator and Excel to solve time value of money problems.
Module 5
Ch. 7 Interest Rates and Bond Valuation:
- Know the important bond features and bond types.
- Know how to calculate bond values and understand why they fluctuate.
- Be able to define interest rate risk and understand which factors influence interest rate risk.
- Understand how bonds are quoted in the financial press.
- Understand the term structure of interest rates and the impact of inflation on interest rates.
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Module 6
Ch. 8 Stock Valuation:
- Know 3 different main approaches to value stocks.
- Understand how stock prices depend on future dividends and dividend growth, and be able to
compute stock prices using the dividend growth model.
- Know how stocks are quoted in the financial press.
- Understand how stock markets work.
Module 7
Ch. 9 Net Present Value and Other Investment Criteria:
-Be able to compute 5 investment rules: the net present value, the payback, the discounted
payback, the internal rate of return and the profitability index.
-For each investment rule, understand the strengths and weaknesses.
-Understand when the IRR approach cannot be applied.
-Be able to calculate the crossover rate.
-Understand why the NPV is the best decision criterion.
- Know how the investment rules are applied by practitioners.
Module 8
Ch. 10 Making Capital Investment Decisions:
-Understand how to determine the relevant and irrelevant cash flows for capital investments.
-Know how to calculate the cash flow from assets (or free cash flow).
-Understand the basics of how to construct a capital budgeting financial model in Excel.
-Know the basics in theory of three special cases in capital budgeting.
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Module 10
Ch. 12 Some Lessons from Capital Market History:
-Know how to calculate the return on an investment.
-Understand the difference between the income and growth component of a return.
-Understand the historical returns and risks on various types of investments or asset classes.
-Know how to calculate the average return and variance of a series of past returns.
-Understand the basics of the bell shaped curve (normal distribution) and know how to calculate
in what range returns fall with a certain probability.
-Understand the meaning and importance of capital market efficiency.
-Be able to define the three forms of market efficiency.
-Know the evidence from tests of various forms of market efficiency.
Module 11
Ch 13 Return, Risk and the Security Market Line:
-Be able to calculate expected returns and variances of future returns for individual stocks and
portfolios of stocks.
-Understand the impact of diversification.
-Know the difference between systematic and unsystematic risk.
-Know how to interpret beta.
-Understand the security market line.
-Be able to apply the Capital Asset Pricing Model.
Module 12
Ch 14. Cost of Capital:
-Know how to determine a firm’s cost of equity, cost of preferred stock and cost of debt.
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-Know how to determine the firm’s overall cost of capital with the weighted average cost of
capital approach.
-Understand the impact of flotation costs on capital budgeting.
Module 13
Ch. 16 Financial Leverage and Capital Structure Policy:
-Understand what effect the optimal capital structure decision has on the firm’s value and the
weighted average cost of capital.
-Understand the effect of financial leverage (i.e. capital structure) on a firm’s earnings per share.
-Understand the concept of homemade leverage.
-Understand Merton Miller & Franco Modigliani’s capital structure theories with and without
taxes.
-Be able to compute the value of the unlevered and levered firm.
-Know how the introduction of bankruptcy costs leads to the static theory of capital structure.
-Understand how and why capital structures differ across different industries.
-Understand the difference between liquidation and reorganization.
Module 14
Review all the calculations that will be covered on exam III.
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