FACULTY OF MANAGEMENT DEPARTMENT OF ACCOUNTING, FINANCE & ECONOMICS BA (Hons) Business Studies BA (Hons) Business Studies with Finance BA (Hons) Business and Management Top-up BA (Hons) International Finance Top-up Level 6
CORPORATE FINANCE
UNIT HANDBOOK 2016-17
Unit Tutor: Office: Email:
Spencer Barnett FCA C106, Christchurch House, Talbot Campus sbarnett@bournemouth.ac.uk
Seminar Tutor: Email:
Janine Phillips FCCA janphillips@bournemouth.ac.uk
Disclaimer Information contained within this programme handbook is correct at the time of going to press (January 2017). However, some information may change and Bournemouth University reserves the right to make changes to procedures, regulations and processes subject to maintaining equivalent standards.
Unit Handbook: Corporate Finance
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CONTENTS
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1
Welcome from your Unit Delivery Team
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2
Unit Aim
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3
Learning Outcomes
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4
Learning Environment
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5
Lecture and Seminar Programme
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6
Unit Assessment Strategy
8
7
Assignment Brief
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8
Unit Resources
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Unit Handbook: Corporate Finance
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WELCOME FROM YOUR UNIT DELIVERY TEAM
Hello and welcome to your Corporate Finance unit which was formerly known as Corporate Financial Management. This unit is accredited by the Institute of Chartered Accountants in England and Wales and by the Association of Chartered Certified Accountants. Spencer Barnett is your unit tutor and will deliver your lectures. He is a BU alumnus, a chartered accountant and has a background in investment banking and corporate finance. He is also a PhD student at BU. Janine Phillips is your seminar tutor. She is also a BU alumnus, a chartered certified accountant and has a background in corporate and commercial banking. We hope that you enjoy the unit. Spencer and Janine
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UNIT AIM
This unit critically appraises the importance of financial management to corporate entities. It applies theoretical principles and techniques to inform financial decisionmaking within a complex, dynamic and uncertain environment.
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LEARNING OUTCOMES
3.1
Intended Learning Outcomes
On completion of this unit, students are expected to be able to: 1. Demonstrate a thorough conceptual understanding of the theories and contemporary thinking which relate to the three fundamental financial management decisions: a) the financing decision; b) the investment decision and; c) the dividend decision. 2. Critically evaluate and apply quantitative corporate finance techniques and methodologies to assist with the three fundamental financial management decisions. 3. Compose and effectively communicate analyses and recommendations to assist in financial decision-making throughout the corporate life cycle. 4. Critique information from academic literature and a variety of other sources and explain the extent to which theories and techniques can be applied in practice. 3.2
The AACSB Assurance of Learning
Bournemouth University’s Business School is seeking accreditation by the Association to Advance Collegiate Schools of Business (AACSB) and part of this process, known as Assurance of Learning (AOL), relates to assessment. Through AOL, we are able to capture and evidence some of the many things that our graduates can do well.
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Our graduates possess an array of knowledge, skills, attributes, behaviours and values, which enable them to succeed, but we believe they stand out in 4 key areas in particular. We express these through AOL goals and objectives which are listed in the table below with those reinforced in this unit indicated. Reinforce d
Goal
Description
1
Our graduates will be effective communicators
2
Our graduates will have advanced researcher competencies
3
Our graduates will be prepared for professional employment in the global context
4
Our graduates will have specialist subject knowledge and understanding in their chosen field
During your time with us in the Faculty of Management you will find that a number of your assignments will be assessed using both BU marking criteria and the AOL assessment criteria. The marking scale that we use for AOL is as follows: BU Mark AOL Assessment Rating
0-40%
41-69%
70-100%
Does not yet meet expectations
Meets expectations
Exceeds expectations
Thus, it is possible to pass an assignment under BU Regulations, but to have not yet met the AOL assessment threshold. If this is the case, this is nothing for you to worry about. It is merely a mechanism for us to benchmark students’ achievements against the AOL criteria. Follow this link for a short video to what gaining AACSB Accreditation will mean to you: Bournemouth University’s journey to AACSB accreditation https://www.youtube.com/watch?v=3pVF1rcRdfc If you would like to learn more about the AACSB, you can visit its website at http://www.aacsb.edu/ Alternatively you can contact our Director of Accreditation, Dr Gelareh Roushan at groushan@bournemouth.ac.uk
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LEARNING ENVIRONMENT
This unit employs a learning strategy of lectures, seminars, intranet and internet supported activities together with group and individual learning activities. Indicative Content Introduction to Corporate Finance The role of the corporate financial manager. Corporate objectives. Agency theory and corporate governance. Capital Markets and Securities Determinants of security prices. The efficient market hypothesis. Equity valuation methodologies. Investment Appraisal Traditional and discounted cash flow methodologies. Capital rationing. Real options. Risk and Return Sensitivity and probability analyses. Diversification and modern portfolio theory. The capital asset pricing model. Sources and Cost of Capital Sources of short-term finance and long-term capital. Cost of equity and debt capital. The weighted average cost of capital. Capital Structure Financial gearing. Capital structure theories. Dividend Policy Regular and complementary dividend policies. Dividend theories. Foreign Exchange and Hedging Strategies Foreign exchange markets and risks. Physical and derivative hedging strategies. Corporate Expansion and Contraction Mergers and acquisitions. Divestments. Restructuring. Corporate failure.
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LECTURE AND SEMINAR PROGRAMME
Week
Lecture Topic(s)
30 (w/c 30/01/17)
Unit Overview / Financial Mathematics
31 (w/c 06/02/17)
Introduction to Corporate Finance
32 (w/c 13/02/17)
Capital Markets & Securities
33 (w/c 20/02/17)
Investment Appraisal (I)
34 (w/c 27/02/17)
Investment Appraisal (II)
35 (w/c 06/03/17)
Risk & Return
36 (w/c 13/03/17)
Sources and Cost of Capital
37 (w/c 20/03/17)
Capital Structure
38 (w/c 27/03/17)
Dividend Policy / Foreign Exchange
39 (w/c 03/04/17)
Foreign Exchange Hedging Strategies / Corporate Expansion
43 (w/c 01/05/17)
Corporate Contraction / Revision
44 (w/c 08/05/17)
Revision
Lectures are delivered on a Monday and the seminar relating to the lecture topic(s) will be delivered on the Friday of the same week and the following Tuesday. Students should refer to their online timetables for details of session times and rooms. In addition to the above lectures and seminars, the unit tutor will hold academic surgeries from 12pm to 2pm every Monday and from 1pm to 3pm every Thursday in his office. Any student wishing to book a 20 minute appointment must email the unit tutor by 5pm on the preceding working day.
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UNIT ASSESSMENT STRATEGY
The unit will be assessed through a combination of coursework and a final examination as follows: Examination (70% weighting) Individual performance is assessed by a three-hour closed book examination which tests Intended Learning Outcomes 1 to 4 inclusive. Students should attempt the compulsory question which is worth 40 marks and 3 of the 5 optional questions which are worth 20 marks each. Coursework (30% weighting) Coursework consists of a group assignment which tests Intended Learning Outcomes 1 to 4 inclusive. The deliverable for the coursework is a group report with a maximum word count of 4,000 excluding appendices. Self and peer assessment forms part of the assignment.
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ASSIGNMENT BRIEF
Faculty of Management Assignment Brief Programmes: Business Studies, Business Studies with Finance, Business and Management Top-Up, International Finance Top-Up
Level: 6
Unit Name: Corporate Finance Advice
Unit Tutor: Spencer Barnett
Assignment Title: Corporate Finance
Assignment Weighting: 30% of the overall unit mark
Submission Date: 2nd May 2017 at 12.00pm*
Maximum Word Count: 4,000*
*In accordance with BU Regulations any coursework submitted after the due deadline will be regarded as late and awarded a mark of 0%.
*Excluding appendices and list of references. A penalty of 10 percentage points will be applied if this is exceeded.
Submission Method: Electronic
Feedback method: Electronic
It is your responsibility to be aware of University Regulations relating to academic offences and to avoid committing them. The BU definitions and the penalties are listed in: Academic Offences: Policy & Procedure for Taught Awards If you are unable to submit your assignment on time due to medical or other mitigating circumstances you must complete a Mitigating Circumstances Form PRIOR to the deadline and submit it for approval.
Rationale The rationale for this assignment is to assess whether you, as a randomly selected group of four, can:
Apply the taught financial management theories and techniques to a complex listed company and;
Articulate and present your findings and recommendations in a professional manner.
The learning outcomes being assessed This assignment assesses Intended Learning Outcomes 1 to 4 inclusive, as set out in the unit specification.
Overview of assignment Your group is the financial management department of the listed company that has been allocated to you. Your task is to prepare a report for the board of directors which covers the following issues:
The primary reasons for the performance of the company’s share price from 1 st April 2016 to 31st March 2017 and your opinion on whether it was fairly valued at the end of this period;
The company’s weighted average cost of capital and level of financial gearing at 31 st March 2017 on the assumption that all of the company’s borrowings are in the form of the bonds detailed in appendix 1;
Your advice on whether the company should proceed with the facility expansion proposal detailed in appendix 2;
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Your opinion on whether the company’s level of financial gearing at 31 st March 2017 is optimal or could be improved on the assumption that the average level for its sector is 20%; and
The company’s current dividend policy and your opinion on whether this is optimal or could be improved.
You should assume that all board members are knowledgeable about the sector(s) in which your company operates but only have a basic understanding of financial management terminology, theories and techniques.
Assessment Marking Criteria and Weightings Your report will be marked based on BU’s generic assessment criteria for Level 6 undergraduates, per appendix 3. There is no pre-determined weighting of the issues listed in the overview and the mark awarded will reflect the level of quantitative and qualitative skills demonstrated together with the quality of presentation of the report. Each report will receive a group mark. This group mark will be adjusted upwards or downwards based on self- and peer-assessment so that each member of the group will receive an individual mark for this assignment. Self-assessment Each group member will have to award themselves a mark out of 5, indicating how much they think they have contributed to the assignment relative to other group members. They should reflect on both the quality and quantity of their contribution, using this scale:
5 out of 5: I contributed much more than all other group members 4 out of 5: I contributed more than other group members 3 out of 5: My contribution was about the same as other group members 2 out of 5: I contributed less than other group members 1 out of 5: I contributed much less than all other group members
Peer assessment Each group member will also have to award each fellow group member a mark out of 5, indicating how much they think each group member has contributed to the assignment relative to themselves and other group members. They should reflect on both the quality and quantity of each member’s contribution, using this scale:
5 out of 5: Student X contributed much more than all other group members 4 out of 5: Student X contributed more than other group members 3 out of 5: Student X’s contribution was about the same as other group members 2 out of 5: Student X contributed less than other group members 1 out of 5: Student X contributed much less than all other group members
Please note the following important points:
A self- and peer-assessment form, which can be found in the Coursework section of myBU, must be completed by each group member and emailed to your unit tutor by the report deadline. If you fail to submit the form by this deadline you will receive an individual mark of zero for the assignment;
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Self- and peer-assessment marks are confidential and will not be shared with other group members;
The maximum range of individual marks compared to the group mark will be 20 percentage points (e.g. if the group mark is 60% then the minimum individual mark will be 50% and the maximum individual mark will be 70%); and
The unit tutor reserves the right to require any student to justify their self-assessment and/or peer-assessment marks and to disapply the maximum mark range noted above in exceptional circumstances.
Submission One electronic copy of your group’s report must be submitted via the Final Submission box in the Coursework section of myBU by 12:00pm on Tuesday 2nd May 2017. No hard copy is required. Please note the following regarding your e-submission: Only one member of your group should make an e-submission. Your e-submission must consist of only one file and must not include your assignment control sheet. Your e-submission must consist of a PDF file of less than 20MB. Allow enough time for your e-submission to go through – problems with e-submissions are NOT valid mitigating circumstances for late submissions. If you experience technical problems with the submission system then you must contact BU IT Services immediately. Phone 01202 965515 (support available 24/7) and explain that you have an online submission issue which will ensure that your issue is dealt with as quickly as possible. Your report will be scanned through Turnitin anti-plagiarism software to ensure good academic practice in terms of referencing sources used in your work. The originality report generated by Turnitin highlights any matches with other sources but does not recognise whether or not these have been referenced appropriately. If there is a high percentage match, the originality report and your assignment will be examined by a member of staff and a decision will be taken on whether an academic offence may have been committed. This could lead to convening an Academic Offences Panel. The BU Student Policies, Procedures and Regulations documents available from the BU website provide further details on academic offences and the procedures for dealing with these. The Final Submission box in myBU will close exactly at 12.00pm on 2 nd May 2017. If your final submission is successful you will receive an acknowledgement email within a few minutes. Please keep the email safe just in case you are required to prove your submission. If you miss this deadline or you are given an extension you submit your report in the Late Submissions box in the Coursework section of myBU. This box will be open from 12.01pm on 2nd May 2017. In addition to your report, you must also email the following documents as attachments in Word format to your unit tutor (sbarnett@bournemouth.ac.uk): a) A completed assignment control sheet from each group (please note that this must NOT be submitted via myBU); and b) A completed self and peer assessment form from each group member. The assignment control sheet and self and peer assessment form can be downloaded from the Coursework section of myBU. Unit Handbook: Corporate Finance
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Feedback Feedback on your report together with your group mark will be provided by email on your group’s assignment control sheet. Students will be informed of their individual marks separately via myBU. This will occur within the standard three week period starting from the submission date.
Other Important Information Group Composition Each group will include 4 members, exceptionally 5 members depending on the cohort size. The members of each group and their allocated company will be selected on a random and transparent basis. Groups are subject to change by the unit tutor if students join or leave the unit but changes will not be permitted for any other reason. Referencing You must acknowledge your source every time you refer to others’ work, using the Harvard Referencing system (Author Date Method). Failure to do so amounts to plagiarism which is against University regulations. Please refer to http://libguides.bournemouth.ac.uk/bu-referencing-harvardstyle for the University’s guide to citation in the Harvard style. Word Count A penalty of 10 percentage points will be applied to the group mark (before self and peer assessment) if the maximum word count is exceeded.
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Assignment Queries Questions about this assignment may only be asked via the relevant section of the myBU discussion board until 12pm on Friday 7th April 2017. The unit tutor will respond via the discussion board to questions that are, in his opinion, clear, reasonable, relevant and original. For the avoidance of doubt, the unit tutor will not answer questions about the assignment that are posed verbally or via email. Further, and in the interest of fairness to all students, draft reports will not be reviewed. Conflict Resolution If you are having inter-group issues which you are unable to resolve yourselves then you must contact the unit tutor promptly by email providing an outline of the issue(s) being encountered and the steps that you have taken as a group in an attempt to resolve these. All members of the group must be party to this email and the unit tutor will intervene if he deems this to be necessary.
Disclaimer: The information provided in this assignment brief (version number 1) is correct at time of publication. In the unlikely event that any changes are deemed necessary, they will be communicated clearly via e-mail and/or myBU and a new version of this assignment brief will be circulated.
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Appendix 1 Corporate Bonds The company’s bonds were issued five years ago and carry a 5% coupon which is paid semi-annually on 31st March and 30th September. They are redeemable at par on 31 st March 2037 and were trading at £114.95 ex-interest per £100 nominal on 31st March 2017.
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Appendix 2 Facility Expansion Proposal Your company owns a facility in the UK which has a current capacity of 100,000 units per annum. You have been asked to evaluate whether it is financially advantageous to increase the capacity of the facility to 150,000 units per annum and to evaluate the key sensitivities of this course of action. The sales director has provided you with annual demand forecasts for the output of the facility over the next 8 years on the assumption that the selling price per unit remains at its current level: Year Units per annum (‘000)
1
2
3
4
5
6
7
8
100
120
140
150
160
140
120
70
The operations director has provided you with the following information about the existing facility:
It currently employs 90 staff. 80 are classed as non-management and their average annual employment cost is currently £25,000 per person. 10 are in management grades and their average annual cost of employment is currently £40,000 per person;
Staff costs are expected to rise in line with general inflation;
Its output currently sells for £120 per unit;
Its directly attributable unit cost is currently £40 but this is expected to decrease by 2% per annum; and
Its annual overhead cost is currently £15 million (£12 million of directly attributable overhead and a £3 million allocation of head office costs) and these costs are expected to increase at twice the rate of general inflation.
The operations director has also provided you with the following information about the proposed expansion of the facility:
The cost of expanding the facility will be £50 million, all of which will attract capital allowances at 25%;
The expanded facility is expected to have a useful economic life of 8 years when its residual value is expected to be £10 million (in money terms);
The company’s depreciation policy for non-current assets of this nature is to write off cost on a straight line basis to their expected residual value;
Working capital of £3 million will be required if the expansion proposal goes ahead and this will be released at the end of the facility’s expected useful economic life;
The processes within the expanded facility will be more efficient than in the existing facility and thus staffing levels and overheads are expected to be half of current levels; and
Surplus staff in management grades can be transferred to another part of the group but those staff in non-management grades will have to be made redundant. The average redundancy package received by staff is 25% of their annual employment cost.
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The following information will also be relevant to your evaluation of the proposed expansion of the facility:
The company’s marginal rate of UK corporation tax is 20% and is paid/rebated in the year following the year of trading; and
General inflation in the UK is expected to average 2% per annum for the foreseeable future.
The finance director has advised you that the company has historically only invested in projects which have a payback period of half of their expected life.
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Appendix 3 BU Generic Assessment Criteria for Level 6 Undergraduates Grade Range
Subject knowledge and understanding
Intellectual skills including analysis, evaluation, and critical judgement
Subject-specific skills including applications and problem solving
Transferable skills including communication and presentation
High First
The work demonstrates outstanding knowledge and understanding of the subject through wide reading. Significant up-todate sources have been explored analytically. Conceptual understanding is highly developed, showing deep insight. The work is advanced, very original and imaginative.
The work demonstrates a very high level of critical appraisal and judgement in analysis, evaluation and synthesis of data and abstractions. The work demonstrates a wide range of techniques of analysis and a very high level of awareness of limitations and contradictions. The work is cogently argued/reasoned using a body of evidence which is very well selected, collated and presented.
The work demonstrates an ability to diagnose and apply appropriate and selective conceptual knowledge to a practical problem/situation to produce valid, creative/original solutions which are logical, meaningful and effective. The work shows exceptional evidence of critically evaluating the existing view of the subject and synthesis of ideas. Exemplary problem solving skills are evident.
Presentation and organisation is of a very high standard, likely to be highly stimulating and at the upper limits of what may be expected at undergraduate level. A tightly structured, rigorous argument showing flow and progression is presented.
The work demonstrates a very thorough knowledge and understanding of the subject through wide reading. Significant up-todate sources have been effectively explored. Conceptual understanding is highly developed.
The work demonstrates a high level of critical appraisal and judgment in analysis, evaluation and synthesis of information. A wide range of analysis techniques are demonstrated with a high level of awareness of limitations and contradictions. It is clearly argued or reasoned using a well selected, collated and presented body of evidence.
The work demonstrates a high level of ability to diagnose and apply appropriate and selective conceptual knowledge to a practical problem or situation in order to produce valid, creative or original solutions which are logical, meaningful and effective and which demonstrate synthesis of ideas.
The presentation and organisation of work is of a very high standard, likely to be stimulating, showing a high level of academic skill and originality. A tightly structured, rigorous argument showing flow and progression is demonstrated.
The work demonstrates a very good knowledge and understanding of the subject through wider reading. Significant and up-to-date sources have been identified and used effectively.
The work demonstrates a very good conceptual understanding with good skills of critical appraisal and evaluation of ideas. A range of techniques of analysis is applied with a good awareness of limitations and contradictions, and good evidence of independent thinking and synthesis of ideas.
The work demonstrates a very good ability to diagnose and apply conceptual knowledge to a new practical problem or situation and generate responses which are logical and meaningful and are likely to offer some originality and creativity.
The work has a logical structure showing flow and progression. Presentation and organisation of work is likely to show few mistakes or limitations. The appropriate academic style is demonstrated.
80% + Exceptional work overall
First 70 - 79%
Excellent work overall
Upper Second 60 - 69% Very good work overall
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Lower Second 50 - 59% Good work overall
Third Class 40 - 49% A basic level of work overall
Fail 30-39% Insufficient level of work overall Poor Fail 0-29% A very insufficient level of work overall
The work demonstrates the development of some good understanding of the subject or discipline. Reading of key texts may be limited. The ability to review and consolidate a basic knowledge base is present.
The work demonstrates a fair ability to analyse and evaluate the significance and meaning of information and its relevance to the argument. Some evidence of synthesis of ideas and independence of thought and some awareness of limitations and contradictions shown.
The work demonstrates a reasonably sound ability to apply diagnostic skills to a range of practical situations but does not demonstrate creativity and innovation. Problem solving is still stronger when applied to routine or standard problems previously encountered.
There is an overall structure evident but it does not offer strong or consistent flow and progression. Presentation style and grammar may show limitations.
The work demonstrates a sufficient knowledge base of the subject/discipline. Some important or current writings and issues have not been explored. The work presents a limited depth of knowledge / understanding in an area of specialisation.
The work demonstrates some critical appraisal and evaluation of new information, though with limited techniques of analysis, and limited awareness of any limitations and contradictions. Unsubstantiated opinions may be evident with limited logical development of an argument.
The work may show limited applications and a limited ability to apply diagnostic and creative skills to a range of practical situations. Problem solving is more successful when applied to routine or standard problems, previously encountered. Logical and effective novel solutions are not present.
Structure of work is weak or inconsistent. Presentation details may be basic and show limitations, for example sentence structure and grammar require development.
The work shows an insufficient level of factual and conceptual understanding of the subject. There is little or no evidence of reading or research.
The work is too descriptive, and needs to demonstrate critical analysis, backed up with the use of appropriate literature.
The link between theory and practice is poor or absent and the work needs to make stronger links between the two.
The structure is weak and/or inconsistent with mistakes in grammar or sentence structure. References are poorly or inconsistently presented.
The work shows limited or no evidence of factual and conceptual understanding, or of reading/research.
The work shows no evidence of appropriate analysis. Unsubstantiated opinions are present in the work.
The work shows little or no evidence of relating theory to practice.
The work is poorly structured using poor English and/or an inappropriate style. References may be presented inaccurately or missing. The work may be incomplete or too brief.
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UNIT RESOURCES
Click on the ‘Reading List’ e-link for this unit in myBU for a full and updated list of resources. All lecture slides and seminar materials will be made available in the unit materials section of myBU. Your unit tutor manages a Twitter account which is specifically used for the dissemination of topical articles and other useful and contemporary information relating to the unit. If students wish to follow this feed, the account name is @SBarnettBU.
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