FNCE20005 Corporate Financial Decision Making
The Complete Exam Bible · S1 2026FNCE20005 Overview
- University of Melbourne
- S1 2026
- 7 chapters
- Finance
Corporate Financial Decision Making is UniMelb's core second-year corporate-finance subject — the Australian-flavoured sequel to Principles of Finance.
- Assessed by Final exam 60% · Mid-semester test 25% · Tutorial participation & assignments 10% · Individual homework (Canvas) 5%
- Key terms Net present value (NPV), Weighted average cost of capital (WACC), CAPM, Dividend imputation
- How to prepare Treat the subject as a small set of calculation chains applied to new numbers, and drill the chains — not the prose.
- Most asked What is on the FNCE20005 exam?
How FNCE20005 is assessed
| Component | Weight | Format |
|---|---|---|
| Final exam | 60% | End of semester · cumulative · formula sheet provided |
| Mid-semester test | 25% | Week 6 · 1 hr · covers Lectures 1–5 · formula sheet provided |
| Tutorial participation & assignments | 10% | Across the semester · pass/fail on serious attempt, lowest dropped |
| Individual homework (Canvas) | 5% | Online MCQs — confirm the exact split in your subject guide |
What FNCE20005 covers
Seven exam topics → one exam-ready map. Each links to its free chapter guide.
Time Value of Money
Discounting · compounding · annuities · perpetuities · bond & share valuationThe time value of money is the engine under every valuation in FNCE20005: a dollar today is worth more than a dollar tomorrow, so you must discount a future cash flow back to a present value before you can compare or add cash flows.
- 1.1 Single sums — present and future value
- 1.2 Nominal vs effective rates, and the after-tax rate
- 1.3 Annuities — ordinary, due, and the future value of an annuity
- 1.4 Perpetuities and growing perpetuities (need r > g)
- 1.5 The growing annuity
- 1.6 Bond valuation and yield to maturity
Capital Budgeting
Free cash flow · NPV · IRR · payback · profitability indexCapital budgeting is the heart of corporate investment: deciding whether a project adds value. The dominant rule is NPV — accept if positive, because it measures dollars of value created, which is exactly what shareholders want.
- 2.1 The four decision rules — NPV, IRR, payback, profitability index
- 2.2 NPV-vs-IRR conflict and the IRR pitfalls (scale, timing, multiple IRR)
- 2.3 Estimating cash flows — the five inclusion/exclusion rules
- 2.4 Free cash flow to the firm and the depreciation tax shield
- 2.5 Terminal value as a growing perpetuity
- 2.6 A full NPV worked example, every cash-flow rule in one problem
Risk and the CAPM
Expected return · variance · beta · the SML · cost of equityEvery valuation in this subject discounts risky cash flows, and the discount rate has to compensate for risk. This chapter builds the machinery to set it.
- 1 Expected return, variance and standard deviation of one asset
- 2 Covariance and correlation — how two assets move together
- 3 Portfolio return (weighted average) and portfolio risk (the covariance term)
- 4 Diversification — systematic vs unsystematic risk
- 5 Beta as the surviving, priced risk measure
- 6 The CAPM, the cost of equity, and the security market line (SML)
Cost of Capital and WACC
Cost of debt · WACC · dividend imputation · the effective tax rateA firm is financed by a blend of debt and equity, each demanding its own return, and the weighted average cost of capital (WACC) blends them into the single hurdle rate the firm must clear on same-risk projects: WACC = kd(1 − te)(D/V) + ke(E/V), using market-value weights and the after-tax cost of debt (interest is deductible; dividends are not).
- 1 The cost of debt k<sub>d</sub> — risk-free rate plus a default spread, after tax
- 2 The WACC — market-value weights, target structure, same-risk rule
- 3 Dividend imputation and franking — grossing up a dividend, the franking credit
- 4 The effective tax rate t<sub>e</sub> = t<sub>c</sub>(1 − λ) under imputation
- 5 Worked example — WACC under imputation
Capital Structure
MM irrelevance · MM with tax · levered beta · trade-off · pecking orderCapital structure is the mix of debt and equity that funds the firm, and the deep question is whether that mix changes firm value at all.
- 1 Modigliani-Miller without tax — irrelevance and the pie theory
- 2 MM with corporate tax — V<sub>L</sub> = V<sub>U</sub> + t<sub>e</sub>D and the imputation kill-switch
- 3 Levered beta — financial risk on top of business risk
- 4 Financial distress costs — direct vs indirect
- 5 Trade-off theory — the interior optimum and the U-shaped WACC
- 6 The three views side by side
Payout Policy
Dividends · drop-off · imputation · rights issues · buybacksPayout policy is the decision of how much cash to return to shareholders, in what form (dividend or buyback), and when.
- 2.1 The payout measures — DPS, dividend yield, payout and retention ratios
- 2.2 The dividend drop-off ratio and the implied tax wedge
- 2.3 Modigliani-Miller dividend irrelevance and homemade dividends
- 2.4 Dividend imputation — gross-up, franking credit, and who wins
- 2.5 Rights issues — ex-rights price and the value of a right
- 2.6 Share buybacks — on-market vs off-market, and the EPS illusion
Real Options and M&A
Defer / expand / abandon · APV · takeover valuation · restructuring & distressA standard NPV is now-or-never: it discounts one fixed cash-flow path. But managers can wait for news, expand a winner, or abandon a loser — discretionary flexibility that is itself valuable.
- 6.1 The real-option valuation identity (with vs without flexibility)
- 6.2 The four option types and their call/put analogues — abandon is a put
- 7.1 Adjusted present value (APV) vs WACC valuation
- 7.2 Three valuation approaches — DCF, multiples, contingent-claim
- 8.1 Synergy and the NPV of a cash vs scrip bid; the maximum exchange ratio
- 8.2 EPS bootstrapping and the earnings-weighted combined P/E
It drills the method behind every examinable model: discount a cash flow, value a project with NPV and IRR, price risk with the CAPM, find the WACC under Australia's dividend-imputation system, weigh how much debt to carry, set payout policy, and value real options and takeovers.
Both the final and the mid-semester test provide a formula sheet, so memorising formulae earns nothing — marks come from knowing which formula a question wants, plugging the right inputs (market not book values, after-tax not pre-tax), and finishing the arithmetic. 85% of your grade sits on these two timed papers.
FNCE20005 cheatsheet for exam revision
AskSia publishes a free FNCE20005 cheatsheet for exam revision, an exam cheat sheet that follows the official permitted-materials rule for this assessment and condenses the topics in this guide. Open the FNCE20005 cheatsheet.
Worked example · free
Capital budgeting — the NPV decision, mark by mark
- +1Lay out the cash flows on a timeline: −$100,000 at t=0, then +$40,000 at t=1, 2 and 3.
- +2Discount each inflow: 40,000/1.10 = 36,364; 40,000/1.10² = 33,058; 40,000/1.10³ = 30,053.
- +1Sum the present values of the inflows: 36,364 + 33,058 + 30,053 = $99,475.
- +1NPV = PV(inflows) − outlay = 99,475 − 100,000 = −$525.
- +1Decide: NPV < 0, so reject — the project does not cover its 10% cost of capital.
Key terms
- Net present value (NPV)
- The value a project adds today: the present value of its free cash flows discounted at the required return, minus the initial outlay. Accept if NPV > 0, reject if NPV < 0.
- Weighted average cost of capital (WACC)
- The blended after-tax return a firm must earn to satisfy both debt and equity holders — the hurdle rate used to discount a project of average firm risk. Inputs are market weights, the after-tax cost of debt, and the cost of equity.
- CAPM
- The capital asset pricing model: required return = risk-free rate + beta × the market risk premium. It prices the cost of equity off a single risk measure, beta, read along the security market line (SML).
- Dividend imputation
- The Australian tax system that attaches franking credits to dividends so company tax already paid is credited to resident shareholders — it lowers the effective tax rate on equity and reshapes WACC, payout and capital-structure decisions.
- Capital structure
- The mix of debt and equity a firm uses to finance itself. Modigliani-Miller shows the mix is irrelevant in a frictionless world; adding tax, distress and information makes it matter.
FNCE20005 FAQ
Is FNCE20005 hard?
It is procedural rather than conceptually deep: a small set of calculation chains — discount a cash flow, value a project, find the WACC, weigh the capital structure — applied to fresh numbers. The difficulty is precision under time pressure, since 85% of the grade sits on two timed papers and a wrong input (book instead of market values, pre- instead of after-tax) costs the marks even when the method is right.
How is FNCE20005 assessed?
The final exam is 60% and the mid-semester test (Week 6, covering Lectures 1–5) is 25% — 85% on two timed papers, both with a formula sheet provided. The rest is tutorial participation and assignments (about 10%, marked pass/fail on serious attempt) and individual Canvas homework (about 5%); confirm this year's exact split in your subject guide.
What is on the FNCE20005 exam?
Time value of money, capital budgeting (NPV, IRR, free cash flow), risk and the CAPM, the cost of capital and WACC under dividend imputation, capital structure (MM, trade-off, pecking order), payout policy, and real-options and takeover valuation. The recurring spine is one chain: estimate after-tax free cash flow, pick the right discount rate, discount, decide.
Do I get a formula sheet in FNCE20005?
Yes — both the mid-semester test and the final exam provide a formula sheet (rights-issue drop-off, imputation grossing-up, WACC, CAPM, Gordon growth, levered beta and the MM-with-tax relations). This is why memorising formulae earns nothing: the marks are in choosing the right formula, using the right inputs, and finishing the arithmetic.
Is using AskSia for FNCE20005 cheating?
No. AskSia is a study reference written in our own words — we host none of your lecturer's files, and Sia teaches you the method to earn the marks; it does not complete or sit your assessments.
Questions students ask in each FNCE20005 chapter
- Is time value of money examined on its own in FNCE20005?
- Rarely. The subject assumes you learned discounting in Principles of Finance, so it is never re-taught as a standalone topic. Instead these formulae are buried inside bigger problems: a capital-budgeting answer is a string of single-sum discountings, a terminal value is a growing perpetuity, a lease is an annuity, and a share price is a growing perpetuity of dividends. Master the five building blocks and you can assemble any valuation in the course. Chapter 01 · Time Value of Money
- Which decision rule should I trust when they disagree?
- NPV. It measures dollars of value created, which is directly what shareholders want. On mutually exclusive projects the exam loves a setup where Project A has the higher IRR but Project B has the higher NPV (B is bigger, or its cash arrives later); the wealth-maximising choice is the higher NPV. IRR ranks by percentage and ignores scale and timing; payback ignores the time value of money entirely. Never let payback or accounting return override a positive NPV. Chapter 02 · Capital Budgeting
- Why is beta, not standard deviation, used in CAPM?
- Because only non-diversifiable (systematic) risk earns a return. A stock can have a huge SD from firm-specific noise yet a small beta, so the market pays little for it. Investors can shed firm-specific risk for free by diversifying, so a competitive market commands no premium for bearing it. CAPM rewards the contribution to a diversified portfolio's risk — beta — not standalone SD. Plugging total SD into a required-return equation is the most-baited trap in this topic. Chapter 03 · Risk and the CAPM
- Why use market-value weights, not book values, in WACC?
- Book values are stale accounting figures that understate the market value of equity, so book weights give the wrong blend. WACC should weight each source by its market-value share of total capital V = D + E, ideally the gearing the firm is moving toward (its target structure), not a one-off snapshot. Using book weights is one of the two killers the exam plants. Chapter 04 · Cost of Capital and WACC
- Why is MM irrelevance the right starting point if it isn't realistic?
- Because it is the benchmark. MM-no-tax tells you capital structure can only matter through a named market imperfection. Everything that follows — corporate tax, distress costs, asymmetric information — is a specific imperfection that breaks irrelevance in a known direction. Starting from irrelevance forces you to identify exactly which friction is driving any value effect. Chapter 05 · Capital Structure
- What does the dividend drop-off ratio tell you?
- How heavily the marginal investor is taxed on dividends relative to capital gains. The ratio equals (1 − td)/(1 − tcg): equal to 1 means dividends and gains are taxed equally (the perfect-market case); below 1 means dividends are taxed more heavily (the classical world), so a dollar of dividend is worth less than a dollar of price; above 1 means dividends are taxed less — exactly what franking credits deliver to Australian residents, who can see a drop bigger than the cash dividend. Read which rate is higher, then read the direction; don't mistake a ratio below 1 for mispricing. Chapter 06 · Payout Policy
- Why is the option to abandon a put and not a call?
- Because it pays off when the project's value falls below the salvage value: you walk away and collect salvage, a payoff of X − V (strike minus underlying), which is exactly a put. Defer, expand and switch all pay off on the upside, V − X, which is a call. Getting the direction wrong flips the sign of the whole valuation. A second trap is double-counting flexibility: if you have already lowered the discount rate to reflect a manager's ability to bail out, do not also add an abandonment-option value. Chapter 07 · Real Options and M&A
How to study for the exam
Treat the subject as a small set of calculation chains applied to new numbers, and drill the chains — not the prose. The recurring spine is: estimate after-tax free cash flow → pick the discount rate that matches the risk → discount → decide.
The single most-repeated warning in the subject is to match the discount rate to the risk of the cash flow (don't use the firm WACC for a project of different risk, or the project return to discount a lease). The mid-semester test (Lectures 1–5) lives on imputation grossing-up, rights issues, WACC and capital structure; the final adds capital budgeting, real options, takeover valuation and distress.
Because the formula sheet is provided, practise recognising which formula a question wants and plugging the right inputs (market not book values, D1 not D0, after-tax not pre-tax) under exam time.
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