Corporate Finance

2019/2020

Учебный год

ENG

Обучение ведется на английском языке

9

Кредиты

Кто читает:

Международный институт экономики и финансов

Статус:

Курс обязательный

Когда читается:

4-й курс, 1-4 модуль

Course Syllabus

Abstract

The course requires the knowledge in micro and macroeconomics, accounting and banking. The course develops theoretical framework for understanding and analysing major financial problems of modern company in market environment. The course covers basic models of valuation of corporate capital, including pricing models for primary financial assets, real assets valuation and investment projects analysis, capital structure and various types of corporate capital employed, derivative assets and contingent claims on assets. It provides necessary knowledge in evaluating different management decisions and its influence on corporate performance and value. The course is based on lectures, seminars, case studies and selfstudy. “Corporate finance” is a two-semester course designed to prepare students for UOL examination

Learning Objectives

• to provide the conceptual background for corporate financial analysis from the point of corporate value creation.
• to develop theoretical framework for understanding and analyzing major financial problems of modern firm in the market environment.
• to cover basic models of corporate capital valuation, including pricing models for primary financial assets, real assets valuation and investment projects analysis, capital structure, derivative assets and contingent claims on assets
• to develop skills in analyzing corporate behavior in capital markets and the relationship of agent, and principal of raising funds, allocating capital and distributing returns.
• to provide necessary knowledge in evaluating different management decisions and their influence on corporate performance and value.

Expected Learning Outcomes

• Be able to analyse optimal physical and financial investment in perfect capital markets
• Be able to derive the Fisher separation theorem
• Be able to apply the replicating portfolio approach to valuation
• Be able to calculate forward and spot rates
• Be able to analyze yield curves
• Be able to apply replicating and DCF approaches to debt valuation
• Be able to calculate bod yields (YTM, YTC, realized yield)
• Be able to distinguish between different types of stocks
• Be able to value shares using the dividend discount model
• Be able to apply the Gordon growth model
• Be able to value shares using multistage dividend discount model
• Be able to determine the tangency portfolio and the efficient frontier of risky assets
• Be able to compute the minimum variance portfolio of a set of risky assets
• Distinguish between market and firm-specific risks
• Be able to apply CAPM (Capital Asset Pricing Model)
• Be able to compute beta of the particular asset
• Be able to identify the expected return, factor betas of a security
• Be able to describe the pay-off profiles of option
• Be able to distinguish between forms of efficiency
• Be able to derive bounds on option prices
• Be able to price options in a binomial framework using the portfolio replicating and the risk-neutral valuation methods
• Compute and apply the net present value rule to evaluate projects
• Compute and apply the internal rate of return criterion
• Apply the IRR criterion to evaluate projects and be able to distinguish cases for which it is possible to obtain appropriate evaluations with the IRR criterion from those that preclude proper IRR-based evaluations.
• Be able to use scenarios to obtain present values
• Implement the comparison approach with the risk-adjusted discount rate
• Be able to apply risk-neutral and Black-Scholes models to real options valuation
• Be able to use Modigliani&Miller propositions I and II
• Distinguish between financial distress’ direct and indirect costs
• Estimate the impact of agency conflicts on the value of the firms
• Apply the trade-off and pecking order theories
• Be able to estimate the weighted-average cost of capital
• Be able to calculate levered and unlevered (asset) betas
• Be able to calculate the Adjusted present value
• Be able to show the irrelevance of the dividend policy under Modigliani–Miller assumptions
• Eatimate the effects of asymmetric information and agency costs on dividend policy
• Apply the methods of risk management to industrial firms
• Evaluate the advantages and disadvantages of corporate diversification
• Eatimate how the stock prices of bidders and targets react around the time of acquisition announcements
• Distinguish the sources of synergy in restructuring
• Evaluate the empirical research on the effects of corporate governance on the market value of a corporation

Course Contents

• Introduction to the Course. Why is Finance Corporate? The Foundations for Proper Financial Analysis of the Firm
  The advantages of corporate firm over the sole traders and partnerships. The life-cycle of the corporation at the capital market: funds raising, investing and benchmarks, returning money to investors at the capital market. The functions of corporate financial manager. The role of capital market in explaining corporate performance: main assumptions. The consumption choice and the first Fisher separation theorem. No arbitrage rule and the principle of tracking (replicating) portfolio. Net present value rule of corporate analysis. The sources of NPV. The second Fisher separation theorem. The differences between financial model of corporate analysis and accounting model: the concept of cost and profits, the concept of money measurement, the concept of return and corporate performance measurement. The value creation and building blocks in corporate finance. The mission of Chief Financial Officer of the Corporation (CFO). The role of corporate finance in building financial model of the firm. Corporate Finance and proper financial analysis of any firm in market economy.
• Fundamentals of Corporate Capital Valuation: Corporate Debt Capital
  The yield curve. Spot rates and forward rates. Defining forward rate from the yield curve. The term structure of interest rates: theoretical explanation. The role of term structure of interest rates in constructing tracking (replicating) portfolio for Corporate Bonds. Intrinsic value of stand-alone bond. Discounted cash flow valuation of corporate bonds. Corporate bond's types. Bond’s covenants: assets covenants, dividend covenants, financing covenants. The influence of covenants over bond’s valuation. Bond's yields: promised yield to maturity, realized (horizon yield), promised yield to call. Theorems of bond's pricing. Bond’s rating and yields to maturity
• Fundamentals of Equities Valuation: Preferred and Common Stock
  Types of preferred stock by voting rights, dividend rates and dividend payments. Discounted dividend model (DDM) for preferred (preference) shares. Discounted dividend model for common stock (ordinary shares): the criteria for stable growing company, Gordon constant growth dividend rate model. Multistage DDM: 2 stages dividend growth, negative rate of dividend growth. Growth opportunities value. The limitations of DCF valuation.
• Risk and Expected Return: Principles of Portfolio Analysis
  Principles and assumptions of mean-variance analysis. Mean and variance of returns of a risky asset. Portfolio expected returns. Portfolio risk and assets’s covariances. Feasible set of assets and the efficient frontier. Capital market line. Two-fund separation.
• Capital Asset Pricing Theory: CAPM and its Use in Corporate Finance
  Assumptions for capital asset pricing model. Market portfolio and its derivation. Security market line. Stocks' beta. Empirical evidence and critiques.
• Arbitrage Pricing Theory
  Understanding single-factor and multi-factor model representation. Systematic risk and diversification. Arbitrage price theory. Multi-factor models in practice.
• The role of Efficient Market Hypothesis in Corporate Analysis: Theory and Evidence
  Types of information for investor’s decision-making. The value of information for the investor. The efficient market hypothesis. Weak, semi-strong, strong form efficiency. Implications of Efficient Market Hypothesis.
• Option Pricing Models and Corporate Contingent Claims
  Varieties of derivatives (Futures, Forward, Options, Swaps). Derivative asset payoff profile. Pricing forward contracts. Put-call parity. Option pricing methods.
• Corporate Investing Policies and Value Creation: The Analytical Toolkit for Riskless Projects
  What is risk-free investment project? Competitive advantage and value creation. Incremental cash flows and incremental value. Net present value rule, its assumptions and value additivity rule. The sources for positive net present values. Internal rate of return (IRR) and financial approach to corporate return analysis. The limitations of IRR. Modified IRR. Discounted payback (DPB). Profitability index (PI). Economic value added (EVA) and economic profit generated by the project. EVA versus NPV. Capital budgeting in inflationary environment: nominal approach, real terms approach.
• Corporate Investing Policies and Value Creation: Traditional Analytical Tool Kit for Risky Projects
  What are risky projects? The risk- adjusted discount rate method in capital budgeting decisions. Certainty equivalents cash flows and their use in risky project’s analysis. Valuation of risky projects: sensitivity analysis, simulation, decision trees. Real options approach
• Valuing Corporate Strategic Opportunities and Flexibility: Corporate Real Options
  Strategic options of the corporation and the limitations of DCF analysis. Real option valuation: main assumptions, the difference in treatment of parameters between financial and real options. The use of risk neutral approach, binomial and Black-Scholes models in real option valuation. Valuing option to abandon, to postpone, to expand. OPM as a tool of quantifying managerial flexibility. The benefits of real option valuation over DCF project analysis. The use of OPM in corporate valuation. Put-call parity and its application to the corporation: corporate securities as options. The use of OPM in the analysis of corporate cost of capital: warrants and convertibles.
• Capital Structure Choice and Corporate Value
  The assumptions of Modigliani&Miller theorem on capital structure. The arbitrage argument and replicating portfolio of investor in M&M world. The M&M propositions I and II. The cost of capital: traditional and M&M approaches. The propositions I and II with corporate income taxes. The effect of personal taxes on capital structure. Miller equilibrium for the firm and for the investor. Financial distress’ direct and indirect costs. Debt holder - equity holder conflicts: debt overhang problem, shareholder's incentives, the ways to minimize the conflicts. The trade-offs theory of capital structure. The pecking order of financing theory. The stakeholders theory of capital structure. The dynamic capital structure theory versus static. The information conveyed by financing choices decision. Signaling concept of capital structure.
• Capital Market Benchmarking: Corporate Cost of Capital
  Patterns of corporate financing. The many kinds of debt financing. The corporate cost of debt. The debt tax shield. Equity financing. The corporate cost of retained earnings. The issuance of new equity and corporate cost of equity. The weighted average cost of capital (WACC) and corporate hurdle rate. Corporate cost of capital and financial leverage. Asset beta. Levered equity beta. Hamada adjustment to equity beta, its assumptions and limitations. The WACC and the principles of corporate return analysis. Economic profit analysis with corporate hurdle rate: the spread. The volume of financing and the marginal corporate cost of capital.
• Financial Modeling for Optimal Capital Structure
  Adjusted present value (APV): base case value, side effects values, multiple discount rates. Advantages of APV for capital budgeting and valuation. The criteria for optimal capital structure. The rating (WACC) approach to optimal capital structure analysis: the 9 assumptions, the method, the limitations. The adjusted present value approach (APV) to optimal capital structure analysis: the assumptions, the benefits, and implications. The target capital structure. The operating income approach to planning for optimal capital structure. Factors affecting the target capital structure: macroeconomic, microeconomic and firm’s specific factors. The decision-making on capital structure.
• Dividend Policy and Corporate Value: Theory and Evidence
  Types of dividend: cash dividend, scrip dividend, forms of share repurchase. The Modigliani& Miller dividend irrelevance theorem. The effect of market imperfections (taxes and transaction costs) on dividend policy. The effect of market frictions on distribution policy. The dividend controversy. The rightists concepts of dividends. Clientele theory: assumptions, empirical evidence. Signaling theory of dividends: the information content of dividends, dividends as mixed signal, empirical evidence. The leftists on dividend policy. Lintner stylized facts modelling. Empirical research on distribution policies.
• Corporate Risk Management and Value Creation Risk and the M&M theorem
  The motivation to hedge. Hedging and the firm’s stakeholders. The methods of interest rate risk management. Foreign exchange risk management. Application of risk management to industrial firms.
• The Market for Corporate Control: Mergers&Takeovers
  Types of mergers and takeovers. The principles of valuation of mergers and takeovers. Stand - alone value of the target and of the buyer. Efficiency theories of M&A activities: differential efficiency, inefficient management, synergy effects theory. The sources and types of synergy. Agency theories of M&A. Signaling theories of M&A. Hostile takeovers and free - rider problem. Management defences. Valuing synergy on the basis of DCF.
• Strategic and Financial Restructuring
  The methods of corporate restructuring. Corporate divestitures and the problem of control. The sources for synergy in restructuring. Bankruptcy and corporate control. Restructuring distressed companies. LBOs: the effect on stock prices. Financial analysis of efficiency in case of restructuring.
• Corporate Governance and Corporate Value
  Types of corporate governance. Managerial incentives and corporate investing decisions Managerial control and capital structure choices. Management control and performance measurement. The use of economic value added (EVA) in firm’s performance measurement and managerial incentives planning. Empirical research on the effects of corporate governance over the market value of the corporation.

Assessment Elements

• Exam in December
• Class Participation (activity and attendance)
• Home assignments
• Midterm exam
• Final Exam
  Экзамен проводится в письменной форме с использованием асинхронного прокторинга. Экзамен проводится на платформе https://hse.student.examus.net). К экзамену необходимо подключиться за 10 минут до начала. Проверку настроек компьютера необходимо провести заранее, чтобы в случае возникших проблем у вас было время для обращения в службу техподдержки и устранения неполадок. Компьютер студента должен удовлетворять требованиям: 1. Стационарный компьютер или ноутбук (мобильные устройства не поддерживаются); 2. Операционная система Windows (версии 7, 8, 8.1, 10) или Mac OS X Yosemite 10.10 и выше; 3. Интернет-браузер Google Chrome последней на момент сдачи экзамена версии (для проверки и обновления версии браузера используйте ссылку chrome://help/); 4. Наличие исправной и включенной веб-камеры (включая встроенные в ноутбуки); 5. Наличие исправного и включенного микрофона (включая встроенные в ноутбуки); 6. Наличие постоянного интернет-соединения со скоростью передачи данных от пользователя не ниже 1 Мбит/сек; 7. Ваш компьютер должен успешно проходить проверку. Проверка доступна только после авторизации. Для доступа к экзамену требуется документ удостоверяющий личность. Его в развернутом виде необходимо будет сфотографировать на камеру после входа на платформу «Экзамус». Также вы должны медленно и плавно продемонстрировать на камеру рабочее место и помещение, в котором Вы пишете экзамен, а также чистые листы для написания экзамена (с двух сторон). Это необходимо для получения чёткого изображения. Во время экзамена запрещается пользоваться любыми материалами (в бумажном / электронном виде), использовать телефон или любые другие устройства (любые функции), открывать на экране посторонние вкладки. В случае выявления факта неприемлемого поведения на экзамене (например, списывание) результат экзамена будет аннулирован, а к студенту будут применены предусмотренные нормативными документами меры дисциплинарного характера вплоть до исключения из НИУ ВШЭ. Если возникают ситуации, когда студент внезапно отключается по любым причинам (камера отключилась, компьютер выключился и др.) или отходит от своего рабочего места на какое-то время, или студент показал неожиданно высокий результат, или будут обнаружены подозрительные действия во время экзамена, будет просмотрена видеозапись выполнения экзамена этим студентом и при необходимости студент будет приглашен на онлайн-собеседование с преподавателем. Об этом студент будет проинформирован заранее в индивидуальном порядке. Во время выполнения задания, не завершайте Интернет-соединения и не отключайте камеры и микрофона. Во время экзамена ведется аудио- и видео-запись. Процедура пересдачи проводится в соотвествии с нормативными документами НИУ ВШЭ.
• Group assignment
• UoL exam
  UoL exam is not counted towards the final grade.

Interim Assessment

• Interim assessment (2 module)
  0.1 * Class Participation (activity and attendance) + 0.45 * Exam in December + 0.25 * Home assignments + 0.2 * Midterm exam
• Interim assessment (4 module)
  0.1 * Class Participation (activity and attendance) + 0.3 * Final Exam + 0.15 * Group assignment + 0.15 * Home assignments + 0.3 * Interim assessment (2 module)

Bibliography

Recommended Core Bibliography

• Vernimmen, P. (2017). Corporate Finance : Theory and Practice (Vol. Fifth edition). Hoboken: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1606902

Recommended Additional Bibliography

• Asquith, P., & Mullins, D. W., Jr. (1983). The Impact of Initiating Dividend Payments on Shareholders’ Wealth. The Journal of Business, (1), 77. https://doi.org/10.1086/296187
• Financial markets and corporate strategy, Grinblatt, M., Titman, S., 2002