ADVANCED FINANCIAL MANAGEMENT (AFM) - P4

List of Topics
CAPITAL INVESTMENT APPRAISAL
1. Net Present Value
NPV with annuity and perpetuity cash flows
NPV with inflation
NPV with Working Capital adjustment
NPV with relevant costing
NPV with Taxation
NPV with Capital Rationing Single period and Multi period capital
rationing
NPV with risk and uncertainty - sensitivity analysis, Value at risk
NPV with underlying assumptions about timing of cash flows, inflation,
working capital, taxation
NPV strengths and weaknesses
NPV with real options analysis using Black Scholes option pricing model
NPV for International investments
2. Internal Rate of Return (IRR)
3. Modified Internal Rate of Return (MIRR)
4. Simple Payback period
5. Discounted Payback period
6. Project duration (Macaulay duration)
WEIGHTED AVERAGE COST OF CAPITAL (WACC) & FINANCING DECISION
1. Cost of equity
Using Dividend model without growth and with growth
Using CAPM
Using MM Proposition II
2. Cost of debt after tax
Using the nature of debt Irredeemable, Redeemable, Convertible etc.
Using CAPM
Using credit spread using RF and using spot Yield curve rates
3. WACC
Current WACC
Risk adjusted WACC (Project specific discount rate)
4. Capital structure theories
5. Sources of Finance
Local sources of finance Equity and debt
International sources of finance Equity and debt
Islamic sources of finance
6. Adjusted Present Value (APV)

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BUSINESS VALUATION AND MERGER & ACQUISITION

1. Valuation of Debt
2. Valuation of Equity (Type I Acquisition)
Market based methods
Market Capitalisation method
P/E Ratio Method
Earning Yield Method
Dividend Yield Method
Market to book ratio Method
Asset Based Methods
Net assets without intangible assets
Net assets with intangible assets using Calculated Intangible value
Cash Flow based Methods
Dividend valuation without growth and with growth
Free Cash Flows to firm method Direct and Indirect Method
Free Cash Flow to equity method
Economic Value Added Method
Value of equity using Black Scholes option pricing model
Limitations of equity valuation methods
3. Type I Acquisition, Type II Acquisition (APV Method) and Type III Acquisition
(Iterative Process theory)
4. Evaluation of Merger Gains For Acquiring Co. and For Target Co.
5. Merger & Acquisition types, motives, consideration and Financing
RISK MANAGEMENT
1. Types of Foreign currency risks
2. Hedging Foreign Currency Risk
Matching
Forward rate agreement
Money market hedge
Netting
Currency Futures
Currency Options Traded and Over the counter options
Currency Swaps
FOREX Swap
3. Hedging Interest Rate Risk
Interest rate FRA
Interest Rate Guarantee
Interest Rate Futures
Interest Rate Options (Options on interest rate futures)
Interest Rate Swap Between counter parties as well as via bank

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MISCELLANEOUS TOPICS
1. Option pricing Theory
Value of call option using Black Scholes option pricing model
Value of put option using put call parity relationship
Delta hedging
2. Bond duration and Modified duration
3. Probability of default and Calculation of credit spread
4. Reconstruction and Reorganization
Effect of reconstruction scheme on financial statements and ratios
Evaluation of reconstruction scheme
5. Dividend Policy
Forms of dividend policies
Evaluating dividend capacity of company (Free Cash Flow to equity)

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