corporate finance mba. course outline introduction
Post on 30-Dec-2015
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“big picture”
• Assume you are familiar with basic financial tools– Time value of money, accounting for risk, CAPM,
portfolio theory • I offer a theoretical approach to decisions of CFO
– Investing/financial (will talk more in a few minutes)• Problem-based learning with applications to real-
life examples through cases and mini cases
Class overview
• What you can find on the web– Syllabus– class notes (incomplete…the gaps together in class)– Homework assignments– Announcements– Handouts
Text books• I will teach and assign problems using the book
Corporate Finance by Jonathan Berk and Peter DeMarzo, Addison-Wesley, 1st/2nd editions
• There will be two/three HBS cases we will cover in class
Syllabus
• I recommend buying the book– The course is closely built around the text book– Very good reference book to have handy if one
plans to work in corporate finance– Taught in leading business schools in the world
• All course material is covered in class notes.
Alternative reading
• Further/alternative reading is Brealey, Myers & Allen, Principles of Corporate Finance, McGraw-Hill Irwin, 8th edition or higher
Group Assignments
• I encourage work in groups• The idea…
– You can learn a lot from each other– Exposure to different approaches– No student left behind
Office hours and help
• Approaching me– Fridays are devoted to problem solving in groups
and I will have plenty of opportunities to address difficulties then.
– You are welcomed to stop by my office anytime or alternatively set an appointment with me to make sure I am in my office
Course outline
• Class 1Introduction
• Class 2 Capital budgeting (DB Chapter 7)– How to evaluate an investment opportunity – Calculating free cash flows– Predicting future free cash flows– Estimating the project’s risk– Calculating the NPV of the project
Course outline• Class 3
Modigliani Miller (DB Chapter 14)– First theory of capital structure– Capital structure doesn’t matter for value!– Leverage and firm value– Leverage, risk, and the cost of capital
Course outline• Class 4
Interest tax shield (DB Chapters 15) HW2 due– Interest tax deduction– Valuing the interest tax shield– Recapitalizing– Personal taxes– Optimal capital structure with taxes
Course outline• Class 5
Capital budgeting with leverage (DB Ch. 18)– WACC, APV– Project based cost of capital
• Class 6Whirlpool Europe Case– Estimating cash flows– Project valuation
Course outline• Class 7
Financial distress, and the asset substitution problem (DB Chapter 16)– Bankruptcy cost– Optimal capital structure– The agency cost of leverage– The agency benefit of leverage– Asymmetric information and capital structure
• Four types of firms– Sole proprietorships
– Partnerships
– Limited liability companies
– corporations
The corporation
Flow of funds in the public corporation
Investors: banks, individuals, corporations, pension funds,
mutual funds, ……
corporate investments
revenues
Chief financial officer
Separation of ownership and control
• Rather than the owner the board of directors and the chief executive officer possess direct control of the corporation
• Shareholders elect board of directors– Google and one-share-one-vote
• Board of directors make set the rules and policies for how the corporation is run
• The manager (CEO) is elected by the board of directors to run the firm according to the guidelines set by the board
CFO’s goal
• What is the CFO’s goal?a. Maximizing firm valueb. Maximizing share holder valuec. Maximizing employee satisfactiond. Maximizing profitse. All/some of the above
Who’s company is it?
24
29
78
83
97
76
71
22
17
3
0 20 40 60 80 100 120
United States
United Kingdom
France
Germany
Japan
% of responsesThe Shareholders
All Stakeholders
** Survey of 378 managers from 5 countries
Source: Chapter 2, Brealey, Myers and Allen 8/e
What is more important dividends or jobs?
11
11
59
60
97
89
89
41
40
3
0 20 40 60 80 100 120
United States
United Kingdom
France
Germany
Japan
% of responsesDividends
Job Security
** Survey of 399 managers from 5 countries. Which is more important...jobs or paying dividends?
Source: Chapter 2, Brealey, Myers and Allen 8/e
Maximizing shareholder value
• In sole proprietorship the owner has control and sets the goal of the firm
• Corporations can have thousands of owners/shareholders
• Shareholders’ interests and priorities– What if some investors are more risk loving?– How does it affect the firm’s decisions?
Corporate Governance…”how can investors make sure that the manager acts in their best interest?”
• Board of directors – replacement of management
• Market for corporate control– mergers and acquisitions
• Manager’s compensation– Bonus payments, equity, (vesting) options
• Communication with Investors– Audited financial reports
Cash flow valuation
• Valuation of cash flows: PV and FV• Annuity
– A stream of “n” periodic payments “CF”• Perpetuity
– An annuity that continues forever• Growing Annuity/Perpetuity
– Payments grow at rate “g” every period
Investment decision rule
• NPV = PV (benefits) – PV (costs)• Any positive NPV project should be adopted to
increase firm value• When we need to choose among projects we
will adopt the project with the highest NPV• Can a trading strategy be a positive NPV
project?
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