AC 517 Special Topics in Finance

Topics:
I. Financial Planning and Forecasting
A. Steps of creating a financial plan
B. Creation of sales forecast using the percent of sales method
C. Creation of forecasted income statement and balance sheet using pro-forma
financial statement method.
D. Computation of Additional Funds Needed (AFN).
E. Key assumptions when using the AFN equation method rather than the pro-
forma financial statement method.
F. Other techniques for forecasting items in financial statements
G. Effect of excess capacity on forecasted financial ratios; effect of changes in
financial statement items on AFN.

II. Capital Structure and Leverage

A. Target capital structure and stock price maximization.
B. Business risk versus financial risk.
C. Effect of debt financing on a company’s expected return and measure of risks.
D. Computation of target or optimal capital structure.
E. Capital Structure Theories.
F. Symmetric versus Asymmetric Information (Signalling Theory)
G. Factors influencing capital structure decisions
H. Variations of capital structure across industries and across firms.

III. Distribution to Shareholders: Dividends and Share Repurchases

A. Importance of dividend policy.
B. Theories of dividend policy.
C. Different effects of stock price and cost of equity when dividends are paid by
the company via graphical analysis.
D. Issues influencing optimal dividend policy.
E. Importance of dividend stability and its role in increasing shareholder wealth.
F. Factors determining the optimal payout ratio and dividend policy decisions.
G. Steps in setting the dividend policy.
H. Computation of dividend payout ratio using the residual dividend model.
I. Various advantages and disadvantages of the residual dividend model.
J. Changes in dividend payout when investment opportunities change.
K. Dividend payment procedures and Dividend dates
L. Types of Dividend Reinvestment Plan.
M. Advantages and disadvantages of stock repurchases and stock splits.
N. Effects of repurchases and splits in numerical and theoretical terms.
O. Comparison between stock dividends and stock splits.

IV. Mergers and Acquisition

A. Types of mergers.
 B. Friendly merger versus hostile merger.
C. 1968 Williams Act.
D. Valuation of target firms.
E. Classifications of mergers.
F. Graphical analysis of mergers.
G. Issues that have to be resolved in merger analysis.
H. Methods of acquiring the target firm:
I. Payment methods for M&As.
J. Taxable events versus non-taxable events in the viewpoint of the acquirer and
the target company.
K. Methods of financial reporting for mergers:
L. Merger of equals.
M. Role of investment banker in aiding both the acquirer and the target company
when a merger or acquisition takes place.
N. Responsibility of creating shareholder value.
O. Challenges and hardships the consolidated firm may experience after mergers
and acquisitions.
P. Kinds of strategic alliances, how they differ from mergers and acquisitions:
Q. Types and motivations of divestitures.
R. Leveraged Buyouts.

V. Working Capital Management

A. Effect of net working capital on firms’ profitability and stock prices.
B. Working Capital Investment Policies.
C. Current Asset Financing Policies.
D. Cash Conversion Cycle and related computations.
E. Preparation of Cash Budget.
F. Procedures in working capital investment policies.
G. Policies affecting the firm’s sales and profitability.
H. Computation of cost of trade credit, (free trade credit and costly trade credit),
bank loans, and commercial paper.
I. Secured Loan versus Unsecured Loan

VI. Derivatives and Risk Management

A. History and importance of, and reasons for risk management.
B. Risk management and shareholder value.
C. Chronological process for managing risks.
D. Definition, purpose, and common underlying assets of financial derivatives.
E. Types of derivatives.
F. Broad groups of derivatives.
G. Common kinds of derivatives in the local setting.
H. Characteristics, kinds of, common underlying assets, risks, settlement,
termination, end users and dealers of forward and futures contracts, swaps,
and options.
 I. Computation of settlement price and the gain(loss) for a bond forward
contract, equity index forward contract, LIBOR based loan, and currency
forward contract on the sides of both the short and the long.
J. Forward Rate Agreements.
K. Hedging risks using futures.
L. Computation for savings from long hedging and short hedging, margin
account balances for any given day required, gain (loss) and variation margin.
M. Computation of settlement price and gain (loss) for interest, equity, and
currency swaps.
N. Valuation of options using riskless hedge and Black-Scholes Option Pricing
Model.
O. Definition and characteristics of structured notes, inverse floaters, and other
exotic contracts.
P. Benefits and criticisms of derivatives as a whole.

VII. Multinational Financial Management

A. Multinational financial management – its relevance and importance in today’s
business world.
B. Reasons why companies expand overseas.
C. Major factors that complicate financial management in multinational firms
and if possible, real world applications, preferably local ones, are to be given.
D. Cross exchange rates and why USD is most often the basis for computing
cross rates.
E. Exchange rate quotations.
F. Computation for profit or loss when company facilities and functions are
located and operated in different countries
G. Monetary policies
H. Fixed exchange rate system versus floating exchange rate system.
I. Spot rates versus forward rates.
J. Discount on forward rate versus premium on forward rate.
K. Interest rate parity.
L. Currency at a forward premium versus currency at a forward discount.
M. Purchasing power parity
N. Impact of inflation on interest rates and exchange rates.
O. International money and capital markets.
P. International bond and stock markets.
Q. Multinational Capital Budgeting and International Capital Structure.
R. Impact of multinational operations, with an emphasis on Cash Management,
Capital Budgeting Decisions, Credit Management, and Inventory
Management.

VIII. Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

A. Reasons why companies are offering hybrid securities to investors, in

addition debt and equity securities.
B. Differences between hybrid securities and debt and equity securities.
C. Common kinds of hybrids.
D. Characteristics of preferred shares and their risk profile before and after tax.
E. Advantages and disadvantages of preferred issuing preferred shares
F. Parties in a lease and the two forms of leases.
G. Effect of leasing decisions to a company’s leverage.
H. Criteria when a lease must be classified as a capital lease.
I. Computations that help decide whether it is better to lease or to borrow and
buy.
J. Factors that affect leasing decisions.
K. Nature of warrants, why they are issued, and when investors are likely to
exercise warrants.
L. Valuation of warrants.
M. Computation of the effects on old shareholder wealth if warrants are
mispriced; dangers when warrants are mispriced.
N. Opportunity cost of capital for bond with warrants package.
O. Nature of convertibles, why they are issued, and when investors are likely to
exercise the convertibles.
P. Computation for conversion ratio, conversion price, conversion value, straight
debt value, and component cost of convertibles.
Q. Advantages and disadvantages of issuing convertibles.
R. Warrants versus convertibles