Fundamentals of Corporate Finance
Revision Lecture
Dr Fangming Xu
University of Bristol
December 12, 2016
Dr Fangming Xu (University of Bristol)
Fundamentals of Corporate Finance
December 12, 2016
1 / 31
Agenda
Guide for exam preparation and topics
Mock E

UNIVERSITY OF BRISTOL
Examination for the Degree of M.Sc. in
Finance and Investment
January 2015
LINKING CODE: ECON-M17 & 234
EXAM PAPER NUMBER ECONM2034J
CORPORATE FINANCE AND FINANCIAL STATEMENTS
(Module No: ECONM2034)
Time allowed: THREE hours
Answer T

Feedback on Corporate Finance and Financial Statement Exam (January 2014)
SCHOOL of ECONOMICS, FINANCE and MANAGEMENT
EXAM FEEDBACK
(INCLUDING ILLUSTRATIVE ANSWERS FOR NUMERICAL SECTIONS)
Corporate Finance and Financial Statements
January 2014 Exam
PLEASE

Feedback on CFFS January 2016 Exam
SCHOOL of ECONOMICS, FINANCE and MANAGEMENT
EXAM FEEDBACK
(INCLUDING ILLUSTRATIVE ANSWERS
FOR NUMERICAL SECTIONS)
Corporate Finance and Financial Statements
January 2016 Exam
PLEASE NOTE THAT ANSWERS ARE FOR ILLUSTRATION

FUNDAMENTALS OF CORPORATE FINANCE
GUIDE FOR EXAM PREPARATION FOR 2016/17 COURSE
EXAM FORMAT
This module is 100% assessed by means of a 3-hour examination in January 2017. You will
be required to answer 3 questions out of 4 in the paper. This handout is in

UNIVERSITY OF BRISTOL
Examination for the Degree of M.Sc. in
Finance and Investment
January 2016
LINKING CODE: ECON-M17 & 234
EXAM PAPER NUMBER ECONM2034J
CORPORATE FINANCE AND FINANCIAL STATEMENTS
(Module No: ECONM2034)
Time allowed: THREE hours
Answer T

Feedback on CFFS January 2015 Exam
SCHOOL of ECONOMICS, FINANCE and MANAGEMENT
EXAM FEEDBACK
(INCLUDING ILLUSTRATIVE ANSWERS
FOR NUMERICAL SECTIONS)
Corporate Finance and Financial Statements
January 2015 Exam
PLEASE NOTE THAT FEEDBACK IS NOT AVAILABLE
ON

Lecture 7
ANSWER SLIDES
Capital Structure 1
FCF (2016/17) ANSWER SLIDES
31
7.1 MM Propositions (Ex. Q7.1)
Total Value of firm = Shares + Debt = 24 + 14 = 38
With no taxes
=
+
+
+
Where = market value of equity, = return on equity, = market
va

Lecture 4
Risk and Cost of Capital
Fundamentals of Corporate Finance (2016/17)
76
Learning objectives
Risk of equity capital & beta
Business risk and financial risk
Adjusting betas for leverage
Determining value via a tracking portfolio
Determining value

Lecture 8
Capital Structure 2
Fundamentals of Corporate Finance (2016/17)
186
Learning objectives
Why different capital structures may suit different firms under the
trade-off theory
Capital structure when earnings are negative
Pecking order theory of

Lecture 7
Capital Structure 1
Fundamentals of Corporate Finance (2016/17)
160
What you should know by the end of this
session
The theory behind Modigliani-Millers (1958) assertion that the
mix of debt and equity does not affect firm value.
How this theo

Lecture 2
ANSWER SLIDES
Investment Mathematics &
Net Present Value
FCF (2016/17) ANSWER SLIDES
2
2.1 Return, present value and future value
A project is currently worth 100 and in one years time it will be worth
108. The rate of return is given by:
10810

Lecture 5
Weighted Average Cost of Capital (WACC) &
Adjusted Present Value (APV)
Fundamentals of Corporate Finance (2016/17)
105
Learning objectives
WACC and APV Introduction
Financing assumptions
More on the WACC
More on the APV
Case study: Project evalu

Lecture 2
Investment Mathematics &
Net Present Value
Fundamentals of Corporate Finance (2016/17)
32
Learnings objectives
Present values and future values
Compound interest and frequencies
Perpetuities and annuities
Inflation and discount rates
Net present

NOTES, EXAMPLES AND
QUESTIONS TO ACCOMPANY
CLASSES
12
Lecture 1 The Objective in Decision Making
1.1 Maximizing Stock Prices: The Best-Case Scenario
There is a scenario in which managers can concentrate on maximizing stock prices to the
exclusion of all o

Solutions to Exercise Lecture 2
Question 1 - NPV and sensitivity analysis
(a)
Only incremental costs are included in analysis. Sunk costs are therefore ignored.
Variable cash flows per unit
Selling price
Wages
4.53
Materials
3.502
Variable OH
Net
35.00
(1

Exercise Lecture 2
Question 1 NPV and sensitivity analysis
Hardy Ltd is considering whether to set up a division to make a new product, the Tess. A
feasibility study recently undertaken (but not yet paid for) at a cost of 85,000 suggests that
the Tess sho

EXERCISE LECTURE &
TUTORIAL QUESTIONS
1
Exercise Lecture 1
Question 1 Discount rates and loans
The mortgage on your house is five years old. It required monthly payments of 1,402, had an
original term of 30 years, and had an interest rate of 10% (APR). In

Exercise Lecture 3
Question 1 WACC
Greystoke plc is a geared company. Its directors have asked you to estimate the weighted
average cost of capital (WACC) of the company and have provided you with the following
information.
A dividend of 11 pence per shar

Solutions to Exercise Lecture 1
Question 1 Discount rates and loans
(a)
First, we calculate the outstanding balance of the mortgage. There are 25 12 = 300 months
remaining on the loan, so the timeline is as follows. To determine the outstanding balance we

Exercise Lecture 4
Question 1 Capital structure
Granby Biotech has no debt financing and an asset beta of 0.7. Assume a risk free rate of 5%
and that the CAPM holds and the expected return on the market portfolio is 13%.
REQUIRED:
(a) There are no corpora

Tutorial 1
Question 1 NPV and IRR
Diggers plc is considering the viability of a contract to supply tractors to a new customer for a
5 year period. The company accountant provides you with the following information.
Immediate capital outlays:
New machinery

Tutorial 2
Question 1 Dividend policy and Lintner model
Notes: Under the Lintner model companies have long-run target dividend payout ratios.
Managers smooth dividends to avoid big changes so that transitory earnings changes dont
affect dividend payouts.