FM422 - Corporate Finance

Course Information

This core course provides a broad introduction to the key issues in corporate finance.

The first half of the course, the Financing Module, investigates how companies should finance their activities by issuing securities (debt, equity and convertible claims) and the interaction of business policy with financial policy. The aim is to understand what factors determine optimal capital structure and how the interplay of these factors can affect financing decisions in a way that creates value.

The second half of the course, the Valuation Module, covers firm and project valuation and establishes how companies should select among investable assets. The module focuses on fundamental valuation techniques based on discounting future cash flows. The course goes on to introduce further valuations methods, such as real options analysis, as well as key applications of valuation concepts to major corporate decisions such as mergers and acquisitions and initial public offerings. The course interweaves key conceptual material with a series of cases.

Brief Syllabus

For Financing Module:

• Session 1 Introduction

• Readings:

  ∗ BDM, ch. 2 (sections 2.6-2.7): “Introduction to Financial Statement Analysis”

  ∗ Case Study: “Unidentified Industries”

  ∗ (Higgins, Koski, Mitton, ch. 2: “Evaluating Financial Performance”)

  ∗ (Higgins, Koski, Mitton, ch. 4: “Managing Growth”)

• Session 2 Lecture: Capital Structure 1: Frictionless world

• Readings:

  ∗ BDM, ch. 14: “Capital Structure in a Perfect Market”

• Session 3 Lecture: Capital Structure 2: Debt and Taxes

• Readings:

  ∗ BDM, ch. 15: “Debt and Taxes”

  ∗ BDM, ch. 16: “Financial Distress, Managerial Incentives and Information”

• Session 4 Lecture: Capital Structure 3: Agency

• Readings:

  ∗ BDM ch. 16: “Financial Distress, Managerial Incentives and Information”

• Session 5 Case Study: UST Inc

• Session 6 Lecture: Capital Structure 4: Asymmetric Information

• Readings:

  ∗ BDM, ch 16: “Financial Distress, Managerial Incentives and Information”

• Session 7 Case Study: Williams

• Session 8 Case Study: MCI + Lecture: Hybrid Financing

• Session 9 Lecture: Payout Policy

• Readings:

  ∗ BDM, ch. 17: “Payout Policy”

For Valuation Module:

• Session 1 Free Cash Flow & Callaway Golf

• Session 2 Diamond Chemicals & Firm and Equity Valuation

• Session 3 Interco & Alternative Investment Criteria

• Session 4 Cost of Capital & WACC and APV

• Session 5 Tottenham Hotspur

• Session 6 Mergers and Acquisitions & Cooper Industries

• Session 7 IPOs & Knoll Furniture

• Session 8 Real Options

• Session 9 Arundel Partners & Wrap-up

Prerequisites

For Financing Module:

• Berk and DeMarzo (BDM), ch. 1: “The Corporation and Financial Markets”
• Berk and DeMarzo (BDM), ch. 2 (sections 2.1-2.5): “Introduction to Financial Statement Analysis”
• (Higgins, Koski, Mitton, ch. 1: “Interpreting Financial Statements”)

For Valuation Module:

• Nil, except the Financing Module.