Week Topics Reading* Class Questions 1 1. Introduction and Corporate Governance 1&2 No Class 2&3 2. Capital Structure: Basic Concepts – Parts I & II 14&15 Icebreaker + Corp Governance 4 3. Capital Structure: Limits to the Use of Debt 16 Cap Structure Basic Cons 5 4. Financial Distress 29 6&7 5. Corporate Debt: Valuation and Capital Budgeting – Parts I & II 17 Debt: Limits + financial distress 8 6. Dividends and Other Payouts 18 Debt: valuation + cap bud 9 7. Practicalities of Debt and Equity Financing 19&20 10 8. Leasing 21 Payout policy + cap structure 11 9. Recap/ MCQ Class Test (Semester 1 Material)   Christmas Break

1&2 10. Risk and Return: CAPM – Parts  I & II 10 No class Leasing 3 11. Risk, Cost of Capital and Capital Budgeting 12 4 12. Efficient Capital Markets and Behavioural Finance 13 CAPM 5 13. Mergers and Acquisitions 28 6&7 14. International Corporate Finance – Parts I & II 30  Cost of Capital and Budgeting 8 15. Ethics in Finance   Mergers & Acquisitions 9 16. Writing an Essay/MCQ Class Test (Whole Syllabus)   Easter Break 10 17. Revision/Preparing for the Exam   International Corporate Finance 11 ‘Drop in’ Clinic/Private Revision

Are Preference Shares Really Debts?The fundamental issue is whether the preference share has predominantly debt (obligated to pay a dividend or has a maturity date) or equity characteristics.When the PS has clear debt and equity components, IFRS --->reported separately in the financial account.

Patterns of FinancingInternal Financing = Internal generated cash flow = net income + depreciation - dividendsExternal Financing = net new debt and new shares of equity net of buybacks.A financial deficit = Total firm spending - internally generated cash flow (to finance the gap)

Long-term Islamic Financing P75Joint Venture ---> MusharakahLeasing --->IjarahProfit Sharing --->MudharabahIslamic Securities that can be traded on exchanges --->SukukAdvanced payment Sale ---> Bai Salam

Capital Structure : Basic ConceptValue of Firm (V) = Market Value of the debt (B) + Market value of the equity (S)Firm should pick the debt-equity ratio that makes the total value (the pie) as big as possible. Changes in capital structure benefit the shareholders if and only if the value of the firm increases. Managers should choose the capital structure that have the highest firm value because this c.s. will be the most beneficial to the firm's shareholders.

MM: The value of the firm is always the same under diff. capital structure.Investors receive same payoffs when 1) buys shares in a Levered firm                                                             2) buys shares in a Unlevered firm and borrows on personal account 1. MM Proposition I (no taxes) : Value (unlevered firm) = Value (levered firm)          Homemade Leverage                 If levered firm priced too high, rational investors will borrow on their personal accounts (plus personal investment) to buy shares in unlevered firm.                         (assumes %IR on the same terms as firms, i.e. individuals can borrow as cheaply as corporations while it's not in reality, P87)2. MM Proposition II (no taxes) : Required return to Equityholders Rise with Leverage.          ∵ Risk to Equityholders Rise with Leverage              Tables 15.2 (P85), this greater range for the EPS of the Levered firm implies greater risk for the levered firm's shareholders (not debt holders.)         Recall:         #1 Rwacc = S/(B+S) × Rs + B/(B+S) × RB               where Rs = Return on Equity = Cost of Equity or Required return on Equity = Expected earnings after interest (net income)                                                                                                                                                      Equity        #2 Rwacc = R0 , where R0 is the cost of capital for an all-equity (unlevered) firm = Expected earnings to Unlevered firm                                                                                                                                                 Unlevered Equity          ∴ Rs = R0 + B/S (R0-RB)

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