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CIFA INTERMEDIATE LEVEL
COURSE OUTLINE
GENERAL OBJECTIVE
This paper is intended to equip the candidate with the knowledge, skills and techniques that will enable him/her to make corporate finance decisions.
LEARNING OUTCOMES
On successful completion of this paper, the candidate should be able to:
- Make capital budgeting decisions under environment of certainty, uncertainty and risk
- Make appropriate capital structure decisions of a firm
- Select the optimal capital structure of a firm
- Manage the working capital of a firm
- Undertake corporate restructuring
- Evaluate mergers and acquisitions
- Make decisions in the context of Islamic Finance
CONTENT
Overview of corporate finance
- Nature and scope of corporate finance
- Financial decision making process
- Finance functions
- Goals of the firm
- Agency theory concept, conflicts and resolutions
- Measuring managerial performance, compensation and incentives
Cost of capital
- The concept and significance of cost of capital
- Components of cost of capital
- Weighted average cost of capital (WACC) of a company
- Marginal cost of capital( MCC) of a company
- Use of marginal cost of capital and the investment opportunity schedule in determination of the optimal capital budget
- Cost of debt capital using the yield-to-maturity approach and the debt-rating approach
- Computation of the cost of non-callable and nonconvertible preferred shares
- Computation of the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk- premium approach
- Computation of the beta and cost of capital for a project
- Uses of country risk premiums in estimating the cost of equity
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Capital structure
- Sources of capital
- Factors to consider when selecting source of funds
- Capital structure of a firm
- Factors influencing capital structure
- Evaluation of financing proposals and determination of operating profit/EPS at the point of indifference, range of combined operating profit within which to recommend the financing option, lease vs. buy decisions
- Capital structure theories: traditional theories; net income (NI) approach; net operating income (NOI) approach; Franco Modigliani and Merton Miller (MM) propositions-MM without taxes, MM with corporate taxes, MM with corporate and personal taxes, and MM with taxes and financial distress costs; trade-off theory and pecking order theory.
- Target capital structure; reasons why a company’s actual capital structure may fluctuate around its target
- Measures of leverage: Overview of leverage; importance of business risk, sales risk, operating risk, and financial risk in leverage; classification of a risk; degree of operating leverage, the degree of financial leverage, and the degree of total leverage; breakeven quantity of sales and determination of the company’s net income at various sales levels; computation of the operating breakeven quantity of sales, evolution of financing options and determination of operating profit (EBIT)/EPS at the point of indifference, range of combined operating profit (EBIT) within each financing.
Capital investment decisions
Capital investment decisions under certainty
- Nature of capital investment decisions under certainty
- Classification of capital budgeting decisions
- Ideal features of a capital budgeting technique
- Categories of capital projects
- Basic principles of capital budgeting; evaluation and selection of capital projects: mutually exclusive projects, project sequencing, and capital rationing.
- Capital budgeting techniques under certainty
- Estimating project cash flows
Capital investment decisions under uncertainty
- Nature and measurement of risk and uncertainty
- Investment decision under capital rationing :multi period; investment decision under inflation ,investment decision under uncertainty/risk
- Techniques of handling risk: sensitivity analysis; scenario analysis; simulation analysis; decision theory models; certainty equivalent; risk adjusted discount rates; utility curves
- Special cases in investment decision: projects with unequal lives; replacement analysis; abandonment decision
- Real options in investment decisions: types of real options ;evaluation of a capital project using real options
- Common capital budgeting pitfalls
- Computation of accounting income and economic income in the context of capital budgeting
- Evaluation of a capital project using economic profit, residual income, and claims valuation models for capital budgeting.
Management of working capital
- Factors influencing working capital requirements of a firm
- Distinction between working capital and management of working capital
- Working capital concepts; gross and net working capital; seasonal and permanent working capital
- Primary and secondary sources of liquidity; factors that influencing a company’s liquidity position
- Company’s liquidity measures in comparison to those of peer companies
- Evaluation of working capital effectiveness of a company based on its operating and cash conversion cycles; comparison of the company’s effectiveness with that of peer companies
- Effect of different types of cash flows on a company’s net daily cash position
- Computation of comparable yields on various securities; evaluation of a company’s short-term working capital investment and financing policy guidelines
- Company’s management of accounts receivable, inventory, cash and accounts payable over time and compared to peer companies
- Evaluation of the choices of short-term funding available to a company
- Profitability- liquidity tradeoff
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Mergers and acquisitions
- Classification of merger and acquisition (M&A) activities based on forms of integration and relatedness of business activities
- Common motivations and demotivations behind mergers and acquisitions; mergers and acquisition in global context
- Bootstrapping of earnings per share (EPS); computation of a company’s post-merger EPS
- The relation between merger motivations and types of mergers based on industry life cycles
- Contrast merger transaction characteristics by form of acquisition, method of payment and attitude of target management
- Pre-offer defence mechanisms and post-offer takeover defence mechanisms
- Computation of Herfindahl-Hirschman Index, and the likelihood of an antitrust challenge for a given business combination
- Discounted cash flow analysis, comparable company analyses, and comparable transaction analyses for valuing a target company, including the advantages and disadvantages of each
- Computation of free cash flows for a target company, and estimation of the company’s intrinsic value based on discounted cash flow analysis
- Estimation of the value of a target company using comparable company and comparable transaction analyses
- Evaluation of a takeover bid; computation of the estimated post-acquisition value of an acquirer and the gains accrued to the target shareholders versus the acquirer shareholders
- Effect of price and payment method to the distribution of risks and benefits in M&A transactions
- Characteristics of M&A transactions that create value
- Reasons for failed mergers
Analysis of corporate growth and restructuring
- Measurements of growth: methods of determining growth rates, sustainable versus non sustainable growth analysis of potential growth, franchise value and the growth process
- Return on assets (ROA) and return on capital (ROC)
- Common reasons for restructuring
- Relative company return analysis
- Valuation and analysis of corporate restructuring; leveraged buyouts (LBO); divestitures; strategic alliances; liquidation; recapitalisation
- Financial distress, predicting organisational failure, solutions to financial distress
- Financial restructuring; restructuring via capital reorganisation, the impact of financial restructuring on shareprice and WACC; forms of financial restructuring
- Portfolio restructuring; divestment, demergers, spinoffs, liquidation, equity carve- outs, MBO and management buy in Organisational restructuring
Dividend policy
- Forms of dividends: Regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits: their expected effect on shareholders’ wealth and a company’s financial ratios
- Dividend payment chronology: Declaration date, holder-of-record date, ex-dividend date, and payment dates
- Theories of dividend policy
- Types of information (signals) that dividends convey
- Clientele effects and agency issues: their effect on a company’s payout policy
- Factors that affect dividend policy
- Dividend payout policies; stable dividend, constant dividend payout ratio, and residual dividend
- Choice between paying cash dividends and repurchasing shares
- Calculation and interpretation of dividend coverage ratios under net income and free cash flow
Islamic finance
- Justification for Islamic Finance; history of Islamic finance; capitalism; halal; haram; riba; gharar; usury
- Principles underlying Islamic finance: principle of not paying or charging interest, principle of not investing in forbidden items e.g alcohol, pork, gambling or pornography; ethical investing; moral purchases
- The concept of interest (riba) and how returns are made by Islamic financial securities
- Sources of finance in Islamic financing: muhabaha, sukuk, musharaka, mudaraba
- Types of Islamic financial products: -sharia-compliant products: Islamic investment funds; takaful the Islamic version of insurance Islamic mortgage, murabahah; Leasing- ijara; safekeeping-Wadiah; sukuk-Islamic bonds and securitisation; sovereign sukuk; Islamic investment funds; joint venture – Musharaka, Islamic banking, Islamic contracts, Islamic treasury products and hedging products, Islamic equity funds; Islamic derivatives
- International standardisation/regulations of Islamic Finance: Case for standardisation using religious and prudential guidance, National regulators, Islamic Financial Services Board