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Бакалаврская программа «Программа двух дипломов по экономике НИУ ВШЭ и Лондонского университета»

Principles of Corporate Finance

2020/2021
Учебный год
ENG
Обучение ведется на английском языке
10
Кредиты
Статус:
Курс по выбору
Когда читается:
4-й курс, 1-4 модуль

Преподаватели

Course Syllabus

Abstract

The course develops a theoretical framework for understanding and analyzing major financial problems faced by modern companies in today’s market environment. The course covers basic models of real assets valuation and investment projects analysis, capital structure and various types of corporate capital employed, decisions regarding payout policy and mergers and acquisitions, risk management and hedging. It provides the necessary knowledge in evaluating different management decisions and their influence on corporate performance and value. The course requires existing knowledge in micro- and macroeconomics, accounting and banking. It is based on lectures, seminars, case studies and self-study. “Principles of corporate finance” is a two-semester course designed to prepare students for the University of London examination.
Learning Objectives

Learning Objectives

  • The main objective of the course is to provide a conceptual background for corporate financial analysis from the point of corporate value creation. The course develops a theoretical framework for understanding and analyzing major financial problems of modern firms in the modern market environment. The course is focused on developing skills in analyzing corporate behavior in capital markets and the principal/agent relationship at play when raising funds, allocating capital and distributing returns. It provides necessary knowledge in evaluating different management decisions and their influence on corporate performance and value.
  • At the conclusion of the course, students should be able to: • solve problems from the professional sphere based on analysis and synthesis; • work with information: to find, evaluate and use information from various sources, necessary to solve professional problems in the field of corporate finance (capital budgeting, financing policy, payout policy, M&A motives); • communicate, express their thoughts orally and in writing on basic topics of corporate finance; • organize the activities of a small group created for the implementation of a specific project; • use financial, accounting and other information contained in the statements of companies for making management financial decisions (regarding investments, capital structure, payout policy).
Expected Learning Outcomes

Expected Learning Outcomes

  • Understand the differences between financial and accounting models of corporate analysis
  • Understand the principles of Fisher separation theorem
  • Be able to analyse optimal physical and financial investment in perfect capital markets
  • Be able to derive the Fisher separation theorem
  • Understand the role of the no-arbitrage rule in the corporate finance
  • Outline the main features of risky debt and equity
  • Derive and discuss the Modigliani–Miller theorem
  • Analyse the impact of taxes on the Modigliani–Miller propositions
  • Understand the effect of corporate and personal taxes on capital structure
  • Be able to write down the relationship between debt, equity, the unlevered return on the firm, and the levered return on the firm
  • Understand what happens to equity returns, and the weighted average cost of capital as leverage increases with and without taxes
  • Draw a link between Modigliani–Miller’s 1st and 2nd propositions
  • Find the equity beta of a firm by unlevering and relevering the equity beta of a comparable firm with different capital structure.
  • Be familiar with debt overhang and risk-shifting problems
  • Calculate the agency cost of debt in stylised settings
  • Discuss the effects of asymmetric information on capital structure
  • Explain the intuition behind the pecking order theory of finance
  • Be able to calculate the adjusted present value
  • Understand the factors determining optimal leverage
  • Be familiar with the trade-off and pecking order theories
  • Show that dividend policy (and share repurchases) are irrelevant to firm valuation under the Modigliani–Miller assumptions
  • Be able to show the irrelevance of the dividend policy under Modigliani–Miller assumptions
  • Be familiar with the stylized facts of dividend policy
  • Be familiar with the clientele model of dividends
  • Be familiar with the effects of asymmetric information and agency costs on dividend policy
  • Compute present and future values of cash-flow streams and appraise projects using the NPV rule
  • Evaluate the NPV rule in relation to other commonly used evaluation criteria value stocks and bonds via NPV
  • Compute and apply the net present value rule to evaluate projects
  • Compute and apply the internal rate of return criterion
  • Be familiar with payback, discounted payback rules and profitability index
  • Understand the limitations of different investment decision making criteria
  • Understand the concept of Economic Value Added and the relation between EVA and the NPV
  • Apply the IRR criterion to evaluate projects
  • Explain what real options are
  • Explain and calculate the source of option value
  • Understand types of real options
  • Be familiar with real options approach to capital budgeting
  • Be familiar with different types of options
  • Understand how risk-neutral and Black-Scholes models can be applied to real options valuation
  • Be familiar with the elements of corporate governance
  • Be familiar with the empirical research on the effects of corporate governance on the market value of a corporation
  • Understand the advantages and disadvantages of corporate diversification
  • Understand how the stock prices of bidders and targets react around the time of acquisition announcements
  • Be familiar with the empirical evidence regarding the gains from mergers and acquisitions
  • Analyse simple numerical examples of efficient takeover activity
  • Detail the argument of Grossman–Hart (1980) regarding the impossibility of efficient takeovers
  • Explain venture capital and equity issuance in the public market
  • Perform valuation with multiple financing rounds
  • Understand how to calculate ownership structure in initial public offerings and seasoned equity offerings
  • Be able to explain and evaluate the winners’ curse problem
  • Explain why and how companies manage risk
  • Explain and evaluate the cost of hedging
  • Understand covered and uncovered interest rate parity
  • Be familiar with the methods of interest rate risk
Course Contents

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. The sources of NPV. The differences between financial model of corporate analysis and accounting model. The role of corporate finance in building financial model of the firm.
  • Сapital 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.
  • Leverage and WACC, Corporate Value
    The WACC and the principles of corporate return analysis. 2nd proposition of Modigliani&Miller theorem on capital structure. The arbitrage argument 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 dynamic capital structure theory versus static. The information conveyed by financing choices decision. Signaling concept of 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.
  • Dividend Policy and Corporate Value: Theory and Evidence
    Types of dividend: cash 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 Investing Policies and Value Creation
    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. Multiples approach. Using present value techniques to value stocks and bonds.
  • 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. Decision trees. 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.
  • Corporate Governance
    Separation of ownership and control. Financial architecture. Management incentives; management shareholdings and firm value. Corporate governance.
  • Equity Financing
    Private equity financing. Venture capital and equity issuance in the public market. Valuation with multiple financing rounds. Ownership structure in initial public offerings and seasoned equity offerings. IPO underpricing and winners’ curse problem
  • 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. Payment methods. 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. Empirical evidence.
  • Corporate Risk Management and Hedging
    The motivation to hedge. Hedging and the firm’s stakeholders. Bankruptcy costs and costs of financial distress. The methods of interest rate risk management. Foreign exchange risk management. Application of risk management to industrial firms. Financial instruments for hedging.
Assessment Elements

Assessment Elements

  • non-blocking Midterm exam
    Для студентов она дистанте 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 соответствии с нормативными документами НИУ ВШЭ.
  • non-blocking Class participation
  • non-blocking Home assignments
    Includes written and online home assignments
  • blocking Exam in December
  • non-blocking Final Exam
  • non-blocking Group assignment
Interim Assessment

Interim Assessment

  • Interim assessment (2 module)
    0.1 * Class participation + 0.44 * Exam in December + 0.17 * Home assignments + 0.29 * Midterm exam
  • Interim assessment (4 module)
    0.1 * Class participation + 0.45 * Final Exam + 0.1 * Group assignment + 0.1 * Home assignments + 0.25 * Interim assessment (2 module)
Bibliography

Bibliography

Recommended Core Bibliography

  • Financial markets and corporate strategy, Hillier, D., Grinblatt, M., 2012
  • Principles of corporate finance, Brealey, R. A., Myers, S. C., 2017

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
  • Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research (Wiley-Blackwell), 6(2), 159–178. https://doi.org/10.2307/2490232
  • Bradley, M., Desai, A., & Kim, E. H. (1988). Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms. Journal of Financial Economics, 1, 3.
  • Corporate finance, Berk, J., DeMarzo, P., 2007
  • Financial theory and corporate policy, Copeland, T. E., Weston, J. F., 2005
  • Healy, P. M., & Palepu, K. G. (1988). Earnings information conveyed by dividend initiations and omissions. Journal of Financial Economics, 2, 149.
  • Healy, P. M., Palepu, K. G., & Ruback, R. S. (1992). Does corporate performance improve after mergers? Journal of Financial Economics, 2, 135.
  • Jarrell, G. A., & Poulsen, A. B. (1989). The Returns to Acquiring Firms in Tender Offers: Evidence from Three Decades. FM: The Journal of the Financial Management Association, 18(3), 12–19. https://doi.org/10.2307/3665645
  • Jarrell, G. A., Brickley, J. A., & Netter, J. M. (1988). The Market for Corporate Control: The Empirical Evidence Since 1980. Journal of Economic Perspectives, 1, 49.
  • Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review, 2, 323.
  • Jensen, M. C., & Ruback, R. S. (1983). The market for corporate control : The scientific evidence. Journal of Financial Economics, 1–4, 5.
  • Masulis, R. W. (1983). The Impact of Capital Structure Change on Firm Value: Some Estimates. Journal of Finance, 1, 107.
  • Michael C. Jensen, & William H. Meckling. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.608A4D5A
  • Miles, J. A., & Ezzell, J. R. (1980). The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification. Journal of Financial and Quantitative Analysis, 03, 719.
  • Miller, M. H. (1977). Debt and Taxes. Journal of Finance, 2, 261.
  • Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=bsu&AN=8798249
  • Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. American Economic Review, 53(3), 433.
  • Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 2, 147.
  • Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 2, 187.
  • Poterba, J. M., & Summers, L. H. (1988). Mean reversion in stock prices : Evidence and Implications. Journal of Financial Economics, 1, 27.
  • Sanford J. Grossman, & Oliver D. Hart. (1980). Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation. Bell Journal of Economics, 1, 42.
  • Shleifer, A., & Vishny, R. W. (1986). Large Shareholders and Corporate Control. Journal of Political Economy, 3, 461. https://doi.org/10.1086/261385
  • Shleifer, A., & Vishny, R. W. (1989). Management entrenchment : The case of manager-specific investments. Journal of Financial Economics, 1, 123.
  • Stephen A. Ross. (1977). The Determination of Financial Structure: The Incentive-Signalling Approach. Bell Journal of Economics, 1, 23.
  • Sudipto Bhattacharya. (1979). Imperfect Information, Dividend Policy, and “The Bird in the Hand” Fallacy. Bell Journal of Economics, 1, 259.
  • Travlos, N. G. (1987). Corporate Takeover Bids, Methods of Payment, and Bidding Firms’ Stock Returns. Journal of Finance, 4, 943.
  • Warner, J. B. (1977). Bankruptcy Costs: Some Evidence. Journal of Finance, 2, 337.