BFC2140 Corporate Finance

How BFC2140 is assessed

What BFC2140 covers

The whole unit → one exam-ready map. Each topic links to its free chapter guide.

It opens with two weeks of financial mathematics (time value of money, annuities, EAR and continuous compounding), applies it to bond and share valuation, then works through capital budgeting in three stages — decision rules (NPV/IRR/payback), incremental cash-flow analysis, and risk analysis with decision trees.

The second half covers working-capital management, risk and return with the CAPM, the cost of capital and WACC, capital structure under Modigliani-Miller, and finishes with market efficiency and payout policy (including the Australian imputation/franking system).

It is assessed by Pearson MyLab post-class exercises (25%), a mid-semester test of 20 MCQ on Weeks 1-5 (25%), and a closed-book, fully invigilated on-campus final e-Exam worth 50% (2 hours 10 minutes, 50 marks, Sections A/B/C, formula sheet provided) covering all twelve weeks with extra emphasis on Weeks 5-12. No single-component hurdle is stated in the unit materials (confirm in your unit outline), but the 50% final is the dominant stake — and it is applied, rewarding students who pick the right valuation or capital-budgeting model under pressure rather than just plugging numbers into a formula.

Worked example · free

Constant-growth dividend-discount model (Section B numerical style)

Key terms

Time value of money (TVM)

The principle that a dollar today is worth more than a dollar later because it can be invested to earn a return. Everything in BFC2140 — bond, share and project valuation — is an application of discounting future cash flows back to a present value at a risk-appropriate rate.

Effective annual rate (EAR)

The true annual return once intra-year compounding is included: EAR = (1 + r/m)^m − 1, where r is the nominal/APR rate and m the number of compounding periods per year. As m rises EAR approaches the continuous-compounding limit e^r − 1, so EAR (not APR) is the rate you compare deposits on.

Net present value (NPV)

The sum of a project's incremental cash flows each discounted to today at the required return, minus the initial outlay. The decision rule is accept if NPV > 0; NPV is the value-maximising criterion and is preferred to IRR whenever the two conflict.

Weighted average cost of capital (WACC)

The blended after-tax required return on a firm's capital: WACC = wₑ·rₑ + w_p·r_p + w_D·r_D(1 − T), using market-value weights. It is the discount rate for projects of average risk and the same financing mix as the firm.

Modigliani-Miller (MM) propositions

In a perfect market with no taxes, capital structure is irrelevant: firm value is unchanged (Proposition I) while the cost of equity rises linearly with leverage (Proposition II) so WACC stays constant. Adding corporate tax makes debt valuable through the interest tax shield: V_L = V_U + T·D.

BFC2140 FAQ

Questions students ask in each BFC2140 chapter

How do I know whether to use the annuity, perpetuity or single-sum formula?

Classify the cash-flow pattern first. One lump sum at a single date → use FV/PV of a single sum. A finite series of equal payments → annuity (ordinary if end-of-period, due if start-of-period). An equal payment forever → perpetuity (C/r), or a growing perpetuity (C₁/(r − g)) if it rises at a constant rate. An irregular mixed stream → discount each cash flow separately and add (value additivity). Drawing a quick timeline before you compute is the fastest way to pick the right tool, which is exactly the model-choice skill the exam rewards. Chapter 01 · Financial Mathematics: Time Value of Money

Why does a bond's price move opposite to its yield?

The bond's cash flows (coupons and face value) are fixed at issue, so the only way the market can re-price the bond to deliver a higher required return is to lower its price today — and to deliver a lower required return, to raise the price. That inverse relationship is the first of the four bond-price laws, and it is why rising market interest rates push existing bond prices down. Chapter 02 · Bond Valuation

When can I use the Gordon (constant-growth) model and when must I go multi-stage?

Use the single-stage Gordon model only when dividends grow at one constant rate forever and that rate is below the required return (rₑ > g). If the firm has a high-growth phase that will slow to a sustainable rate, or different growth in different periods, use the multi-stage model: discount each explicit dividend, then add the present value of a terminal Gordon value computed from the first stable-growth dividend. If g ≥ rₑ in the Gordon formula you get a negative or infinite price — a sign you have the wrong model or an unsustainable growth assumption. Chapter 03 · Share Valuation & the Dividend-Discount Model

Why is NPV preferred to IRR?

NPV measures the actual dollar value a project adds to the firm and assumes cash flows are reinvested at the required return — a realistic, value-maximising assumption. IRR is a percentage that assumes reinvestment at the IRR itself, which can be unrealistically high, and it can give multiple or no solutions with non-conventional cash flows and can rank mutually exclusive projects incorrectly when they differ in scale or timing. When the two rules conflict, always go with NPV. Chapter 04 · Capital Budgeting I: Investment Decision Rules

Why is interest excluded from a project's cash flows?

Because the cost of financing the project is already captured in the discount rate (the required return or WACC). If you both deducted interest in the cash flows and discounted at a financing-inclusive rate, you would double-count the cost of capital. Project FCF is deliberately 'unlevered' — it measures the cash the project generates for all investors, and the discount rate then accounts for how that cash is split between debt and equity holders. Chapter 05 · Capital Budgeting II: Cash Flow Analysis

What is the difference between sensitivity and scenario analysis?

Sensitivity analysis changes one input at a time, holding everything else constant, to isolate which single variable the NPV is most sensitive to. Scenario analysis changes a coherent group of inputs together — for example a recession scenario with lower sales, lower price and higher costs all at once — to value plausible joint outcomes. Sensitivity tells you where the risk is concentrated; scenario analysis tells you what a realistic combination of bad (or good) news does to the project. Both are descriptive: they show the spread of NPV outcomes but do not by themselves change the accept/reject rule. Chapter 06 · Capital Budgeting III: Risk Analysis & Decision Trees

How do I calculate the cash conversion cycle?

Add the inventory days (how long stock sits before sale) to the receivable days (how long customers take to pay), then subtract the payable days (how long the firm takes to pay suppliers): CCC = inventory days + receivable days − payable days. A positive CCC means the firm funds the gap between paying suppliers and collecting from customers; reducing inventory or receivable days, or extending payable days, shortens the cycle and cuts the financing requirement. Chapter 07 · Short-Term Financing & Working Capital Management

What is the difference between systematic and unsystematic risk?

Unsystematic risk is specific to a firm or industry — a product recall, a lawsuit, a management change — and can be diversified away by holding many different assets, because such shocks tend to offset across a large portfolio. Systematic (market) risk comes from economy-wide factors like interest rates, recessions and inflation that affect nearly all assets at once, so it cannot be diversified away. The key implication is that the market only rewards systematic risk: since unsystematic risk can be eliminated for free through diversification, investors are not paid to bear it. Chapter 08 · Risk and Return

Why is the cost of debt the YTM and not the coupon rate?

The coupon rate is a historical, contractual figure fixed when the bond was issued; it does not reflect what lenders require today. The yield to maturity is the market's current required return on the firm's debt — the rate that prices the existing bonds — so it is the true cost of raising new debt of similar risk. After applying the tax shield, the WACC uses r_D(1 − T), the after-tax YTM. Plugging the coupon rate into WACC is a classic error that misstates the cost of debt. Chapter 09 · Cost of Capital

What does MM Proposition I actually say, and why?

In a perfect capital market with no taxes, transaction costs or bankruptcy costs, the total value of a firm does not depend on how it is financed: V_L = V_U. The intuition is that capital structure only divides the firm's cash flows between debtholders and shareholders — it does not change the total cash the assets generate. Investors can replicate or undo any corporate leverage themselves (homemade leverage), so they will not pay a premium or accept a discount for the firm's particular debt-equity mix. The pie is the same size however it is sliced. Chapter 10 · Capital Structure

What are the three forms of market efficiency?

They are defined by the information already in prices. Weak-form efficiency means prices reflect all past price and trading-volume data, so technical analysis cannot consistently earn excess returns and prices follow a random walk. Semi-strong efficiency means prices reflect all publicly available information (financial statements, news, announcements), so analysing public data cannot beat the market once costs are considered. Strong-form efficiency means prices reflect all information including private/insider information. The forms are nested — strong implies semi-strong implies weak — and most evidence supports weak and semi-strong efficiency more than strong. Chapter 11 · Market Efficiency & Payout Policy

How to study for the exam

Treat BFC2140 as one big discounting engine applied to different assets, not as a list of disconnected formulas. (1) Keep up with the weekly MyLab post-class exercises — they rehearse exactly the skill the MST and final reward, and they are 25% of your mark for steady effort.

(2) Build a 'name-the-model' reflex: for every question first classify what you are valuing (a single cash flow, an annuity/perpetuity, a bond, a share, a project, or the whole firm) and which decision is being made, then reach for the matching formula — the final is explicitly applied, so model choice earns the marks.

(3) Drill the two-decimal Section B discipline: pure numeric answers, no $/%/commas, two decimal places unless told otherwise. (4) Practise the Section C ritual — state the method, write the formula in symbols, substitute the numbers, compute, then interpret in one sentence — because every line of correct working earns marks.

(5) Master the recurring computational set: bond pricing and YTM, the DDM (constant and multi-stage), NPV/IRR ranking conflicts, the incremental FCF table, decision-tree roll-back, the full multi-component WACC build, and dividend tax under imputation/franking. (6) The MST is your dress rehearsal for Weeks 1-5 — review it carefully, because time value of money and valuation underpin everything in the Weeks 5-12-heavy final.

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