Financial Decision Making

FIN B386 Financial Decision Making is a one-semester, five-credit course. It is designed for learners seeking a solid foundation in understanding financial decision making by the business firm. The course enables students to evaluate many of the firm's daily and strategic financial decisions in the context of existing theories as they are applied to the Hong Kong setting. The advisory prerequisite of this course is FIN B280 Introduction to Financial Management.

In FIN B386, students will take up the advanced topics of long-term sources of funds, leverage and financial mix, derivatives and risk management, mergers, divestitures and restructuring, financial issues arising from an international operation, and more. The first two units provide some theoretical and conceptual tools that will be useful in the understanding of the firm's long-term financing and capital structure decisions. Unit 3 focuses on derivatives and their use in the risk management of the firm. Unit 4 provides rich descriptions and analysis of corporate mergers and divestitures in the context of corporate restructuring. Unit 5 discusses the general as well as specific international aspects of financial management.

This course aims to expand your knowledge of what a business firm does and how it manages long-term sources of funds, leverage and financial mix, derivatives and risk management, mergers, divestitures and restructuring, financial issues arising from an international operation, and more.

Aims

The course aims to introduce the modern theories and concepts underlying the practice of financial decision-making and equip you with analytical skills to solve problems that involve making investments and seeking funds for such investments.

Course learning outcomes

Upon completion of FIN B386, you should be able to:

• assess the costs and benefits related to the different types of long-term financing and evaluate the impact of foreign exchange and political risks on international financial management;
• analyse a firm's exposure to business and financial risk and examine the relationship between capital structure and stock price; and
• critically discuss how corporate applies derivatives in risk management, and discuss issues arising from mergers, corporate divestitures and restructuring.

Materials

The course materials for FIN B386 Financial Decision Making include the Course Guide, a set of five study units, a set textbook, and two assignments. Apart from the course materials, selected supplementary readings will also be used.

Study units

There are five study units in FIN B386 Financial Decision Making.

FIN B386 builds on the accounting, financial and quantitative skills you have acquired previously. Your accounting background enables you to extract useful information from financial statements on which financial decisions are based. Your financial background enables you to understand the context in which financial decisions are made. Your quantitative background enables you to structure your reasoning analytically in order to arrive at sound decision alternatives.

Read the study units carefully as they focus on the key points of each topic, comment on the textbook and introduce you to additional material not covered by the textbook.

Each study unit contains self-test questions to help you check your understanding of different techniques or principles. By doing these self-tests, you will gain useful feedback on your progress. Suggested answers are included at the end of each unit. Try to answer all the self-test questions before looking at the answers. This will help you better prepare for your assignments and exam.

Some study units contain activities. In many cases, an activity is simply a practice exercise that covers the topic you have just learned. You can find the suggested answers after the activity or at the end of the unit. Like the self-tests, try to think about the activities and do them on your own before you refer to the answers.

Note that you must read both the study units and the textbook — they are not alternatives to each other. In addition to these materials, try to read articles in newspapers and journals. The more widely you read, the better you will appreciate and understand the subject.

Set textbook

You are required to purchase the following set textbook:

Ross, S A, Westerfield, R W and Jordan, B D (2018) Fundamentals of Corporate Finance, 12th edn, International Edition, McGraw-Hill/Irwin.

Audiovisual materials/software

You will need access to a computer with Microsoft Windows XP or above and an Internet browser.

Assignment File

The Assignment File (available on HKMU's Online Learning Environment, OLE) provides you with guidelines for working on your assignments. You can refer to the Course Guide section on assessment that follows, and to the Assignment File itself for more information.

Presentation Schedule

The Presentation Schedule is available on the OLE. This schedule provides you with the dates for completing assignments, attending live online tutorials and surgeries, and so on.

Assessment

This course is designed to assist you in moving easily from the subject material to the assignments and examination. You are expected to apply concepts and techniques introduced during the course in attempting the assignments. Most problems require qualitative and narrative responses.

There are informal and formal assessments in this course. The informal assessment includes self-assessed activities and self-tests stipulated in each unit. The formal assessment includes two assignments and a final examination. Assignments must be submitted to your tutor for formal assessment according to the stated deadlines. The non-assessed activities are not part of your formal assessment, but it is very important that you complete all these activities as you work through the units.

Assignments

There are two assignments for this course. Assignment 1 covers topics in Units 1 and 2 (due at the end of Unit 2) and Assignment 2 covers topics in Units 3 and 4 (due at the end of Unit 4). You can find the assignments in your Assignment File (available on the OLE) along with detailed instructions on how to complete them. You are required to complete the two assignments and submit them to your tutor for evaluation and grading. The two assignments are compulsory and together account for 40% of the total grade for the course.

How to submit assignments

You must use word processing software (such as Microsoft Word) to prepare the assignments, and submit them via the Online Learning Environment (OLE). All assignments must be uploaded to the OLE by the due date.

Failure to upload an assignment  in the required format to the OLE may result in the score of the assignment being adjusted to zero.

How to prepare your assignments electronically

You are expected to prepare clear, accurate, well-structured and grammatically correct work that does not contain spelling errors. Markers have been instructed to take these factors into account when marking all forms of assessment.

File name of your assignment

It is important that you name your file as follows: course code + '_s' + the first eight digits of your student number + the assignment number (a1, a2, etc.). For projects, use the project number (p1, p2, etc.).

Assignment submission extension policy

The assignment policy of the University as stated in the Student Handbook should be observed. You are required to submit assignments for this course in accordance with the dates communicated by your Course Coordinator. You may apply for a submission extension on the grounds of illness, accident, disability, bereavement or other compassionate circumstances.

Applications for extensions must be submitted online via the OLE. Please note the following:

1. Supporting documents must be submitted to justify applications for extensions of over seven days.
2. Applications for extensions should normally be lodged before or on the due date.
3. Applications are considered by:
   
   • your tutor for extensions of up to seven days;
   • the Course Coordinator for extensions of 8 to 21 days; and
   • the Dean for extensions of over 21 days.

After an assignment is submitted via the OLE, it is your responsibility to check that the assignment has been successfully submitted. Extension applications due to any problem with uploading will not be accepted. The University cannot accept any responsibility for assignments that are not received by your tutor due to any problem with submission via the OLE. As a precaution, you are advised to keep a copy of each assignment you submit.

According to the University's policy, no extension of the due date will be allowed for the final assignment. This policy will be strictly enforced. Any late submission of the final assignment will result in the score of the assignment being adjusted to zero.

Final examination and grading

The final examination for FIN B386 Financial Decision Making will be of two hours' duration and has a value of 60% of the total course grade. The examination will consist of essay and quantitative questions that reflect the self-test exercises and assignments that you will have previously encountered.

Course marking scheme

The structure of the course marking scheme is summarized in the following table.

The following table gives a general overview of the course structure. It suggests the amount of time you should allow for completing units and provides a broad schedule for you to plan your work. These times are intended as a guide only and should be adjusted to fit your personal needs more closely. You will need around 30 hours per unit to work through the whole course. This estimation includes time for reading the units, completing activities, self-tests and assignments, attending live online tutorials and preparing for your final examination.

The course materials include a Course Guide, study units, a set textbook, and an Assignment File. You do not have to subscribe to other additional materials, though we do suggest that you keep up-to-date on this topic by reading newspapers often.

There are a total of five units in this course. Each of the five units consists of around three weeks of work and includes specific objectives, directions for study, commentary on the activities, and summaries of key concepts and techniques. The units direct you to work on self-tests and activities related to the material covered. These can both help you gauge your progress and reinforce your understanding of the material covered in the unit. More importantly, they give examples to help you fully understand the concepts presented in the text, and can assist you in applying these concepts and techniques in the working environment. Together with the assignments, these self-tests and activities will assist you in achieving the learning objectives of the individual units of the course. Also, you can read quality journals, websites and newspapers on related issues and events in banking to keep pace with the latest development.

Please note that the biggest temptation that students face, when they are short of time, is just to read the course materials. When they get to a learning activity or self-test, they flip straight to the back of the study unit to see the suggested answer. It saves time and students still know the correct answer, right? Wrong! Terribly wrong! Many contemporary educationists believe that learning is not a process that happens when people listen to a lecture or read a book passively. They think that learning takes place as people actively construct the knowledge. Do not take a shortcut that compromises your learning. Attempt the learning activities and self-tests presented in the study units.

When done properly, working with fellow students on difficult learning activities or assignments can be beneficial. However, doing so without acknowledging the contributions of other students in your own work is plagiarism. It has happened that after enough cosmetic changes had been made, the act of cheating may not be caught by the tutor who is marking the assignment. But in this case, the student's learning will suffer and it will show in the final examination. Be an honest and virtuous student.

Live online tutorials and surgeries

Attendance in live online tutorials and surgeries is optional but you are urged to take advantage of them. You can get the most from tutorials by attending the supplementary lectures, pre-studying the relevant materials, making comments and asking questions. Remember that learning does not happen passively. Your active participation in tutorials is crucial.

Your assignments will be marked and commented on by your tutor, who will keep an eye on your progress and assist you if you encounter problems during the course. Marked assignments will be returned to you as soon as possible.

It is good practice to keep a copy of each assignment submitted for marking, so that you can always refer to queries with the tutor during discussion. Please contact your tutor should the following arise:

1. You do not understand any part of the study units or the assigned readings.
2. You have any difficulty with self-tests.
3. You have a question or problem with the assignment, or with your tutor's comments on or grading of an assignment.

Apart from self-study, live online tutorials and surgeries will also be organized to assist you in your learning process. Details of the dates, times and location will be sent to you in due course.

It is strongly recommended that you attend all the sessions, which will provide considerable assistance in your study of this course. Moreover, you will have the chance to meet fellow students and be with other distance learners who are studying at HKMU.

Online Learning Environment

This course is supported by the Online Learning Environment (OLE). You can find course materials and the latest course information from the OLE. Through the OLE, you can also communicate with your tutor, the Course Coordinator and other students. For details about the OLE and how to access it, please refer to the Online Learning Environment User Guide.

Case studies are a useful and increasingly popular form of learning and assessment in HKMU's School of Business and Administration. In this section we will look at why case studies are used and then suggest some learning strategies that you can use to approach case studies. We will also briefly discuss some problems that you may encounter as you learn from case studies.

What is a case study approach to learning?

One main purpose of a case study is to explore an issue or a number of issues in relation to an organization. The intention is to get you to carefully diagnose an organization; to focus on key problems, and to suggest how these might be resolved. Often the case is a real-life account of an organization which you are required to analyse in order to focus on a problem. Usually, the information that is provided is incomplete and you are often expected to observe developments in the organization over a period of time. The case study approach is an excellent opportunity to actively apply material that you have read and conceptual knowledge to the reality of an organization.

At HKMU, case studies may be used as part of assignments, exams, study units, or day-school exercises. You normally are given some information about a company (this could be both text and graphical information, such as figures and tables). You are then asked to think about some problems related to the company and to use concepts and apply theories that you have learned in your course to propose possible solutions for the company.

Let's have a look at two kinds of case study questions that you might be asked to work through in your courses. The first example is quite structured, while the second is much more open-ended.

Two examples of case study questions

1. Read the case study entitled 'ABC Consultants' and consider the following issues:
   • Using your understanding of the resource-based model, what measures could be taken to improve ABC's returns?
   • Drawing on your broad understanding of the consultancy industry, assess ABC's relative competitiveness and its profit potential.
   • To what extent do internal factors account for ABC's financial weaknesses?
   • Based on your assessment of ABC's financial weaknesses, formulate a new strategic intent and develop a mission statement for ABC.
2. Read the case study entitled 'XYZ Industries'.
   • Identify the key problems that are currently faced by XYZ's management.
   • Propose viable solutions to these problems.

Why case studies?

As you can see from the above examples, a case study approach to learning requires a great deal of thinking and often will not easily yield a quick 'wrong' or 'right' answer. However, case studies are also good preparation for dealing with real-life business problems. Cases may be short and relatively simple, or longer and complex. The purpose is the same for both types: to give you an opportunity to develop your skills in analysing the strengths and weaknesses of the organization under examination, to consider the processes at work within the organization, and to make decisions about future actions.

Case studies are not meant to replace textbooks, but rather to ask you to draw connections between theories and practice and to apply abstract ideas, concepts, and principles to specific concrete situations. Consequently, case analysis develops a number of skills that are crucial in business. In particular, they help you to:

• analyse complex, unstructured, sometimes ambiguous situations;
• identify critical issues and problems;
• question your own and others' assumptions;
• improve your problem-solving skills;
• develop your ability to find alternatives and make informed decisions;
• make decisions with incomplete information and think strategically;
• self-educate yourself and draw on a broad range of resources and knowledge; and
• present and justify recommendations in writing.

You may find that there are many possible 'right' answers to the questions in a case study. This illustrates that there is often no single best way to responsibly manage and solve real-life business problems.

Some guidelines for analysing case studies

The following strategies should help you to successfully analyse case studies:

1　Read the case and become familiar with the facts

First, skim read the case to obtain a general understanding of the main point(s). Highlight or underline the pertinent points as you read.

Read the case again, and this time note down critical facts (such as names, time sequences, and where events occurred). Try to understand how events have influenced decisions. Identify the important individuals or stakeholders, and try to assess the importance of supporting information in the case. How reliable is this supporting information? Are there any gaps in the information that is given?

Make a note of any questions that you have as you read the case.

2　Assess the context of the case

Try to understand the environment of the organization and the wider context of the case.

Ask yourself questions about:

• The state of the organization: What is the state of this organization: good, bad or in-between? Usually this involves thinking about interpersonal relationships, and assessing production or financial problems.
• Key players and systems: How do systems and people operate in this organization? Why do they operate like this? Are the systems undergoing change? How successful are the changes? Is there someone who could sabotage any future strategy? Is there someone who can ensure the success of a future strategy?
• Significant trends: How does this industry operate? What are the main or unique characteristics of the industry? What were they five or ten years ago, and what are they likely to be in the future? What impact are trends likely to have on the organization under investigation? How does this organization's performance compare with that of competitors?
• Constraints: Clearly identify all constraints in the case. A constraint may be viewed as anything (usually beyond the control of the organization) that may prevent an otherwise feasible course of action from becoming a success. What is outside the control of individuals in the case study? For example, it is unlikely that any company or individual in Hong Kong could prevent a foreign government from imposing tariff barriers on imports.

A SWOT analysis is a good way to get a better understanding of the organization and the context or environment in which it is operating. A SWOT analysis considers the Strengths and Weaknesses of the organization, and the Opportunities and Threats which the organization faces in the external environment.

3　Recognize the case's symptoms

Read the case again and as you read, try listing all the symptoms of the case. The symptoms of a case are not the problems, but they may help you to identify the problems. Symptoms are all the things that are undesirable or that are not as expected. For example, falling sales could be a symptom of several problems such as poor market segmentation, poor product quality, or problems in a supply chain. At this stage of your analysis, you should just try to observe all the symptoms, and avoid prematurely identifying problems or suggesting solutions. Like a doctor who consults a patient, you first need to observe and note all the symptoms before you can give a definite diagnosis of the problem. Think about how the symptoms may be interrelated. Relationship diagrams, like the one below, may help you to see the relationships between symptoms.

4　Diagnose the case's problems

After you have a good sense of the symptoms, you're ready to determine key issues that need to be analysed more closely. You are now diagnosing the situation, like a doctor diagnosing a patient's symptoms. Ask yourself 'what seems to be the trouble in this organization?' and make a list of what you now perceive to be the key problem(s). You will probably need to go back to the details of the case and as you do this, you may add to or refine your list of potential problems.

If there are several problems, you need to order and prioritize them. You might want to number problems according to how you perceive their importance, or make a matrix, like the one below, which shows relationships between various criteria and each problem.

Also try to establish if there are relationships or themes in common among the various problems. Perhaps different problems in your list are actually variations of a broader central problem.

Ask yourself what assumptions you have made about the case. Are these assumptions reasonable, and are they supported by the facts? Would other people objectively suggest the same problems, based on the facts that you have? Are you suggesting problems that are not supported by the facts of the case?

After you have considered and put into order the possible problems and questioned your assumptions relating to these problems, you should write a statement of the problems as you perceive them. Avoid suggesting solutions at this stage.

Once you have a problem statement, you need to find evidence in the case to support your problem diagnosis. Also, try to identify ideas, concepts and theories from your textbook and course units which help to explain what is happening in the case.

5　Formulate criteria for a 'good' solution and identify possible constraints to solutions

Before you propose a solution, you need to consider the characteristics of a 'good' solution. Obviously, your solution should bring benefits such as improved productivity, reduced costs or greater profits. However, it also needs to be viable and to accommodate the constraints that you have already identified, i.e. Is the solution legal? Is there a budget for this solution? Does it conflict with the organization's culture?

Try to brainstorm alternative solutions. Aim to generate a broad and creative range of options and then try to rate each according to various criteria.

The following matrix demonstrates how this can be done.

Also refer to ideas, concepts and theories from your course materials as you consider and assess each possible solution.

It's often wise to propose a solution that allows for plausible alternatives if it should fail. Managers use the term satisfice when they are considering acceptable alternative solutions, that is, the solution is able to satisfy the situation while also making some realistic sacrifices to existing constraints. Therefore, it is a satisficing rather than a maximizing solution.

Finally, don't forget to consider the possibility of taking no action. What will actually happen if no action is taken? Are any (or all) of the solutions less viable than taking no action at all?

6　Recommend a viable solution

After you have assessed the merits and pitfalls of each alternative solution, select the best solution for the situation.

Remember that the solution needs to be viable. Can the recommended solution be introduced? Are there the resources and the willingness to implement it? Be realistic about what may work. Explain why it is the best solution within the constraints of the existing context and explain how it can be applied to the organization. Suggest a time-frame for the solution's implementation.

Outline possible strategies for implementing your solution, either partially or completely. As many feasible courses of action as possible should be considered before you choose the one that seems the most likely to succeed. The more ideas you have, the greater your chance will be of finding a solution that will work well. The complexity of most organizational problems means that it is highly unlikely that one idea alone will correct the situation. Usually a combination of actions is required, and these need to be funded differently, timed carefully and staffed as necessary.

7　Present your solution as a written recommendation

Review your final solutions and then prepare a set of written recommendations. These should clearly outline your proposed solution in relation to the problems that you have identified. Your recommendations should also include details of why these solutions are the most appropriate given the circumstances and constraints of the case. Finally, you need to clearly state how and when your proposals will be implemented.

Your tutor and your course Assignment File can provide some guidelines on how to present your recommendations.

Some mistakes to avoid as you analyse cases

When you first tackle case studies, you should be careful to guard against the following mistakes:

1. One of the most common mistakes made in case analysis is repeating or simply summarizing the facts of the case. Your tutor is already very familiar with the case details, so you do not have to restate them. You are required to use and analyse the facts, not repeat them. Your analysis should contain only enough case material to support your arguments. Therefore, be analytical!
2. You may often be tempted to just deal with symptoms and ignore the causes of the problem. It is very important to analyse the background of the case (and the climate in which the events of the case unfold).
3. Avoid discussing problems in isolation and do not overlook their interrelatedness. If you try to think in terms of 'systems' rather than in terms of individual problems, you are more likely to avoid this pitfall.
4. Students often fail to state the assumptions underlying their analysis. If any important assumptions have been made, have you questioned them and are they reasonable and appropriate? Avoid selectively using and interpreting case material in order to justify a preconceived solution.
5. Practical limitations and constraints may sometimes be overlooked. For example, a recommendation that a whole team be fired is probably unrealistic.
6. A very common mistake is poor integration of the facts in the case with the concepts, principles, and theories in the textbook. Such integration is vital. Ask yourself if relevant theories from your course have been fully and constructively applied.
7. Finally, recommendations are too often not spelled out in detail or are unrealistic. A timetable for implementing them is also often not given.

Analysing cases poses many challenges, and this is one reason the case study method is so rewarding. It is a very active form of learning. It offers you a risk-free opportunity to gain managerial and organizational experience and should greatly increase your confidence to make informed decisions in the real world.

Good luck and we hope you enjoy working through the cases that you encounter!

FIN B386 Financial Decision Making attempts to cover many aspects of financial decision making in business firms. Specifically, it involves questions about what kinds of long-term financing to secure; an understanding of leverage and financial mix; and consideration of mergers, divestitures, corporate restructuring, innovative securities and international financial management. The tools required for developing sound financial decisions are a basic knowledge of financial and managerial accounting; an understanding of value; and knowledge of risk-return trade off, as observed in the capital market. Moreover, this course strongly emphasizes conceptual foundations, applications to actual problems and relevance to the business environment in Hong Kong. The topics covered here are complex and controversial, and are issues faced by large corporations in their daily operation.

After completing this course, you should be better able to evaluate many of a firm's daily and strategic financial decisions in the context of existing theories as they are applied to a local setting.

If you wish to defer your studies of this course until a later date, you should apply for deferment of studies. For the regulations governing deferment of studies, please refer to your Student Handbook. If you have applied for deferment of studies, you should continue with your studies of this course and submit the required assignments until formal approval is given by the University.

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