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Regular version of the site
Bachelor 2022/2023

Principles of Corporate Finance

Language: English
ECTS credits: 10
Contact hours: 112

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

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

Course Contents

  • Introduction to the Course. Why is Finance Corporate? The Foundations for Proper Financial Analysis of the Firm
  • Сapital Structure Choice and Corporate Value
  • Leverage and WACC, Corporate Value
  • Dividend Policy and Corporate Value: Theory and Evidence
  • Corporate Investing Policies and Value Creation
  • Valuing Corporate Strategic Opportunities and Flexibility: Corporate Real Options.
  • Corporate Governance
  • Equity Financing
  • The Market for Corporate Control: Mergers&Takeovers
  • Corporate Risk Management and Hedging
Assessment Elements

Assessment Elements

  • non-blocking Quizzes
  • non-blocking Home Assignments
  • non-blocking Midterm exam
  • non-blocking Winter exam
  • non-blocking Quizzes
  • non-blocking Home Assignments
  • non-blocking Final exam
  • non-blocking Group assignment
Interim Assessment

Interim Assessment

  • 2022/2023 2nd module
    0.17 * Home Assignments + 0.28 * Midterm exam + 0.45 * Winter exam + 0.1 * Quizzes
  • 2022/2023 4th module
    0.1 * Home Assignments + 0.1 * Quizzes + 0.45 * Final exam + 0.1 * Group assignment + 0.25 * 2022/2023 2nd module
Bibliography

Bibliography

Recommended Core Bibliography

  • Financial markets and corporate strategy, Hillier, D., 2012
  • Principles of corporate finance, Brealey, R. A., 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., 2007
  • Financial theory and corporate policy, Copeland, T. E., 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.