Corporate Financial Management

ASSESSMENT CRITERIA
 High ability in performing the necessary calculations
 High standard of critical thinking
 High presentation standard
 Good standard in analyzing the relevant literature
DETAILED DESCRIPTION
The coursework consists of two parts.

Part A (60% of the final mark)

Choosing a firm of your choice you are required to prepare a valuation and recommendation report to
present it to the management. In the report you are expected to analyse and comment on the scope and
performance of the business model of the firm and to proceed with recommendations for improvement. In
the report you are expected to discuss at least the issues of:
(a) Corporate governance
(b) Financial performance
(c) Risk profile
(d) Optimality of capital structure choices
(e) Dividend policy
(f) Prospects and fair valuation of the firm using a valuation model

Part B (40% of the final mark)

Assume that a subsidiary of the aforementioned firm, Tires Inc., is considering proceeding with a new
investment, producing and market a new type of tire the SuperTyre.
As a financial analyst, you have been asked by your CFO to evaluate the SuperTyre project and provide a
recommendation on whether to go ahead with the investment. Except for the initial investment that will occur
immediately, assume all cash flows will occur at year-end.
Tires Inc. must initially invest € 200 million in production equipment to make the SuperTyre. This equipment
would be sold for €50 million at the end of four years. Tires Inc. intends to sell the SuperTyre to two distinct
markets:
1. The original equipment manufacturer (OEM) market: The OEM market consists primarily of the large
automobile companies (like General Motors) that buy tires for new cars. In the OEM market, the SuperTyre
is expected to sell for €40 per tire. The variable cost to produce each tire is €20.
2. The replacement market: The replacement market consists of all tires purchased after the automobile has
left the factory. This market allows higher margins; Tires Inc. expects to sell the SuperTyre for €50 per tire
there. Variable costs are the same as in the OEM market.
Tires Inc. intends to raise prices at 1% above the inflation rate; variable costs will also increase at 1% above
the inflation rate. In addition, the SuperTyre project will incur €30 million in marketing and general
administration costs the first year. This cost is expected to increase at the inflation rate in the subsequent
years. Tires Inc. corporate tax rate is 40%. Annual inflation is expected to remain constant at 3%. The
company uses a 15% discount rate to evaluate new product decisions.
Automotive industry analysts expect automobile manufacturers to produce 6 million new cars this year and
production to grow at 3% per year thereafter. Each new car needs four tires (the spare tires are undersized
and are in a different category). Tires Inc. expects the SuperTyre to capture 15% of the OEM market.
Industry analysts estimate that the replacement tire markets will be 10 million tires this year and that it will
grow at 2% annually. Tires Inc. expects the SuperTyre to capture a 10% market share. The appropriate
depreciation schedule for the equipment is straight line and the investment will be fully depreciated during
the four years period. The immediate initial working capital requirement is €10 million. Thereafter, the net
working capital requirements will be 15% of sales. You are required to estimate the payback period, NPV,
IRR and Profitability Index on this project and decide whether to make the investment or not.
 Students are asked to use current theoretical and empirical academic literature to support the analysis of
the above issues.
 Students must provide clear references to all books, journals, or any other publications used in the
project including the use of electronic systems.
SUBMISSION
Students are expected to submit an e-copy in typed form (12 font, 1.5 spaced) of approximately 3,500 to
4,000 words.
Assignments that significantly exceed this word limit will be penalized 10%
NOTE
All sentences or passages quoted in this coursework from other people’s work should be specifically
acknowledged by clear cross-referencing to author, work and page(s). Failure to do this amounts to
plagiarism and will be considered grounds for failure in this coursework. It is on the instructor’s discretion to
contact an oral examination, which will result to the award of the final grade to that particular piece of
coursework.
TURN IT IN REQUIREMENT
Apart from the usual e-copy submission, this piece of coursework is required to be submitted to turnitin

RECOMMENDED TEXTBOOK(S)
Main Textbook:
Hillier, D., Ross, S., R. Westerfield, J. Jaffe and B. Jordan (2013) Corporate Finance.2nd European
Edition. McGraw Hill.
Additional Textbooks:
Brealey A. R., C.S. Myers and, F. Allen (2011) Principles of Corporate Finance. 10th edition. McGraw-
Hill.
Copeland, T.E. and J.F. Weston (1988) Financial theory and corporate strategy. London, Addison-
Wesley.
Damodaran, A. (2001) Corporate finance: Theory and Practice, New York, John Wiley and Sons.
Gitman J. Lawrence (2005) Principles of Managerial Finance. 11th edition. London, Addison Wesley.
Lumby S. and C. Jones (2003) Corporate Finance Theory and Practice. 7th edition. Stamford,
Thomson Learning.
Penman, S.H. (2007) Financial Statement Analysis and Security Valuation. Third Edition, McGraw-
Hill.
Altman, E. (2000) Predicting Financial Distress of Companies: Revisiting the Z-score
and ZETA models, Stern School of Business School, Working Paper, July.
Brounen, D., A. DeJong, and K. Koedijk. (2004) Corporate Finance in Europe:
Confronting theory with practice. Financial Management, 33 (4), p. 71-101.
Demirgüç-Kunt, A. and V. Maksimovic (1998). Law, finance and firm growth”.
Journal of Finance, 53, 6, p. 2107-37.
Graham, G.R., and Harvey, C.R. (2001) The theory and practice of corporate finance:
Evidence from the field. Journal of Financial Economics, 60, 187-243.
Kaplan, S., B. Sensoy and P. Stromberg (2009) Should Investors Bet on the Jockey
or the Horse? Evidence from the Evolution of Firms from Early Business
Plans to Public Companies. Journal of Finance, 64, 75–115.
Shleifer, A., and R.W. Vishny, (1997) A survey on corporate governance. Journal of
Finance, 52 (2), p. 737-783.
Bartram, S.M., G.W. Brown and F.R. Rehle (2009) ‘International Evidence on
Financial Derivatives Usage’, Financial Management, 38 (1), 185–206.
Finnerty, D.J. (1988) Financial Engineering in Corporate Finance: An overview.
Financial Management, 17 (4), p.14-33.
Smithson, C., and Simkins, B.J. (2005) Does risk management add value? A survey
of the evidence. Journal of Applied Corporate Finance, 17 (3), p. 8-17.

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