This module introduces and develops the concepts and elements of corporate finance including a knowledge of the instruments used by companies to raise finance and manage financial risk, provides an understanding of the role and nature of financial institutions operating in financial markets, introduces the concepts and techniques of financial accounting and enables students to understand and interpret critically financial reports of companies and financial institutions.
Students will be introduced to the use of Excel in financial analysis and of online information sources. This module covers all required material for the Institute and Faculty of Actuaries CT2 syllabus (Financial Mathematics, Core Technical). The module provides in depth knowledge of the financial principles and techniques used in actuarial science. It critically analyses the techniques used from financial institutions regarding capital structure, dividend policy and reporting of financial accounts.
Syllabus
1. Introduction and the key principles of finance
Principal terms use in investment and asset management, outline the relationship between finance and the real resources and objectives of an organisation, the relationship between the stakeholders in an organisation (including lenders and investors), the role and effects of the capital markets, agency theory, and the theory of the maximisation of shareholder wealth [CT2-(i and ii)].
2. Company ownership
Critically outline the distinctive characteristics of sole traders, partnerships and limited companies as business entities, the different types of loan and share capital, distinguish between authorised and issued share capital, discuss the economic advantages and disadvantages of a limited company as a business entity, analyse the main differences between a private and public company, and describe the different types of medium and short term company finance [CT2-(iii)].
3. Taxation
Describe the basic principles of personal taxation, capital gains and company taxation. Explain the different systems of company taxation from the points of view of an individual shareholder and the company, and outline the basic principles of double taxation relief [CT2-(iv)].
4. Financial instruments
Critically analyse financial instruments, use of derivatives and issue of shares. Demonstrate a knowledge and understanding of the characteristics of the principal forms of financial instrument issued or used by companies and the ways in which they may be issued.
More specifically:
- Outline the reasons a company might have for seeking a quotation on the stock exchange.
- Describe the characteristics of: debenture stocks, unsecured loan stocks, Eurobonds, preference shares, ordinary shares, convertible unsecured loan stocks, convertible preference shares, warrants, floating rate notes, subordinated debt and options issued by companies.
- Describe the characteristics and possible uses by a non-financial company of: financial futures, options and interest rate and currency swaps.
- Outline the following methods of obtaining a quotation for securities: offer for sale, offer for sale by tender, offer for subscription, placing and introduction.
- Describe the following types of new issues to existing shareholders: scrip issue and rights issue.
- Describe the role of underwriting in the issue of securities.
[CT2-(v)]
5. Capital structure and dividend policy
Describe the effect that the capital structure used by a company will have on the market valuation of the company, the effect of taxation on the capital structure used by a company, the principal factors that a company should consider in setting dividend policy, alternative ways of distributing profits, such as buybacks, and the effect that the dividend policy will have on the market valuation of a company. Critically analyse and interpret the capital structure and dividend policy of the company [CT2-(vi)].
6. The cost of capital and capital project appraisal
Calculate a company's weighted average cost of capital, discuss the different methods used for project evaluation and evaluate risky investments including probability trees, simulation and certainty equivalents. Discuss the issues in establishing the required rate of return for a capital project and the principal methods that may be used to determine the viability of a capital project. Discuss the factors underlying the choice of discount rate within project assessment including: the assumptions and limitations in the use of the weighted average cost of capital, the allowance for leverage, and the allowance for risk. Discuss methods that may be used for identifying the risks, suitable techniques for ascertaining the probability of occurrence of different risks and distribution of the possible financial outcomes of a capital project. Critically analyse the techniques used for estimating the cost of capital. [CT2-(vii and xi)].
7. Financial Institutions
Describe the main features of the central banks, investment exchanges and investments on the financial markets, and role played in financial market by clearing banks, building societies, investment trusts, unit trusts, investment management companies, self-administered pension fund, life and general insurance companies [CT2-(viii)].
8. Financial reporting and construction of accounts
Annual report and fundamental accounting concepts which should be adopted in the drawing up of company accounts. Construct the statement of financial position, statement of comprehensive income and cash flow statement. Understand the structure and content of insurance company accounts, subsidiary company and associated company, consolidated accounts and explain the depreciation and reserves [CT2-(ix)].
9. Interpretation of accounts
Calculate and explain priority percentages and gearing, interest cover and asset cover for loan capital, price earnings ratio, dividend yield, dividend cover and EBITDA, net earnings per share and accounting ratios. Describe the possible effects of interest rate movements on a highly geared company. Discuss the shortcomings of historical cost accounting, limitations in the interpretation of company accounts and the ways that reported figures can be manipulated to create a false impression of a company's financial position. Critically analyse and interpret the financial accounts [CT2-(x)].