MNGT8521 Financial Strategy

6 Units of Credit

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Classical Finance takes the view that (i) the interests of the owners of an organization and its management are aligned - so the management is working only for the owners - and (ii) the creditors of an organization will be repaid their funds with an appropriate return for risk unless a system-wide catastrophe overtakes the organization. Yet we observe in the capital markets, organizations investing a great deal of time and effort and real resources trying to protect the investments of the owners and of the creditors, as if the two views of Classical Finance do not hold. This observation suggests we need to modify our Classical Finance model. The main modifications are to recognize that management and ownership are often separated, and that asymmetric information prevents all capital market participants being able to know fully about the risks they face so stops them from insuring against them. The Financial Strategy course starts with these modifications to give a framework for empirical analysis. We then study a wide range of actual financial market activities adopted by organizations to meet the requirements of their worried investors, using a life-cycle approach to organizations from their inception to their death. We examine many examples of success and failure that financial investors have encountered in organizations both in Australia and overseas, and we learn about the driving forces behind financial innovation and the potential future for corporate financial strategies as markets change.