Syllabus and Outline
General Information
What is corporate finance?
Every decision that a business makes has financial
implications, and any decision which affects the finances of a business is a
corporate finance decision.
Defined broadly, everything that a business
does fits under the rubric of corporate finance.
Course Objectives
- To give you the capacity to understand the theory and apply, in real world situations, the techniques that have been developed in corporate finance.
Motto for class: If it cannot be applied, who cares?.
- To give you the big picture of corporate finance so that you can understand how things fit together.
Motto for class: You can forget the details, but doní' miss the story.
- To show you that corporate finance is fun.
Motto for class: Are we having fun yet?
Finance versus Accounting: Laying the Groundwork
The traditional accounting balance sheet
The financial balance sheet
Tale of two companies
First Principles
- Invest in projects that yield a return greater than the minimum acceptable hurdle rate.
- The hurdle rate should be higher for riskier projects and reflect the financing mix used - ownersí funds (equity) or borrowed money (debt)
- Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects.
- Choose a financing mix that minimizes the hurdle rate and matches the assets being financed.
- If there are not enough investments that earn the hurdle
rate, return the cash to the owners of the firm.
- The form of returns - dividends and stock buybacks - will depend upon the stockholders' characteristics.
Objective: Maximize the Value of the Firm
Outline for Class
- Understand the objective function: Session 1-3
- The Investment Principle
- Risk and Hurdle Rates Sessions 4-8
- Measuring Returns Sessions 9-13
- The Financing Principle
- The Optimal Financing Mix Session 14-18
- The Right Kind of Debt Session 19-20
- The Dividend Principle
- How much to return to owners Session 21-23
- How to return cash Session 23
- Linking financial decisions to value Sessions 24-25
- Review Session: 26
Class Material
I. Text: Lecture Notes; They are sold in the book store in two parts. The lecture
notes are also available in pdf format on the web.
II. Supplementary Text: Applied Corporate Finance: A User's Manual, Second
Edition, by Aswath Damodaran. See the material
on my web site.
III. Practice Problems/Exams: Every midterm and final exam that I have ever
given will be available
on my web site. There are also problems in the supplementary
book, and solutions.
IV. Spreadsheets and data are available on my web site..
Other Readings
- The New Corporate Finance Reader, edited by Donald H. Chew.
- This book has a number of readings on topics in corporate finance, which are both readable and informative.
- Capital Ideas by Peter Bernstein
- This book looks back at the development of many of the most important ideas in corporate finance.
- A Random Walk down Wall Street by Burt Malkiel
- This is not a corporate finance book, but it provides a 'skeptic's' view of Wall Street and its ways.
- Sense and Nonsense in Corporate Finance by Louis Lowenstein
- This book contests much that is taken as accepted wisdom in corporate finance. I agree with very little in this book, but it is worth reading for a contrary viewpoint.
Grading Distribution
- All corporate finance sections are governed by the same distribution.
Grading Basis
Group Work: Students should work in groups of
four to eight. Each group will be required to work on three cases
(and turn in an analysis on each) and one comprehensive project (See
attached description).
Case: Due Session 16 (March 30)
Group Project: Due Session 26 (May 4 at 5 pm)
30%
- Individual Work:
- Quizzes: This will be three open-book and open-notes quizzes worth 10% each.
- Quiz 1: Session 9 - Covers sessions 1-8 (March
2)
- Quiz 2: Session 17 - Covers sessions 9-15 (April
1)
- Quiz 3: Session 23 - Covers session 16-22 (April
22)
- Final Exam: This will also be an open-book and open-notes
cumulative exam worth 30% on May 6 from 11.15 - 1.15.
Rules of Engagement
- Rules of group work:
- Pick your own groups. (If you have trouble getting picked, I will help)
- All group work will be self policed, except in extreme circumstances.
- There will be one grade per group, no matter how the work load is distributed among the group members
- Rules on individual work
- All exams and quizzes are strictly individual work.
- There will be no make-up quizzes. If you miss a quiz due to ill health, the grade will be redistributed over the remaining part of the course.
- I will be the grader, and I do make mistakes. If I screw up, bring it to my attention and I will fix it.
- Rules on Participation
- All participation is welcome.
Google calendar for the class