Corporate Finance MBA Course outline Introduction Contact Nisan

Corporate Finance MBA

Course outline Introduction

Contact • Nisan Langberg • Email nlangberg@uh. edu • Office: 210 E

“big picture” • Assume you are familiar with basic financial tools – Time value of money, accounting for risk, CAPM, portfolio theory • I offer a theoretical approach to decisions of CFO – Investing/financial (will talk more in a few minutes) • Problem-based learning with applications to reallife examples through cases and mini cases

Class overview • What you can find on the web – Syllabus – class notes (incomplete…the gaps together in class) – Homework assignments – Announcements – Handouts

Text books • I will teach and assign problems using the book Corporate Finance by Jonathan Berk and Peter De. Marzo, Addison-Wesley, 1 st/2 nd editions • There will be two/three HBS cases we will cover in class

Syllabus • I recommend buying the book – The course is closely built around the text book – Very good reference book to have handy if one plans to work in corporate finance – Taught in leading business schools in the world • All course material is covered in class notes.

Alternative reading • Further/alternative reading is Brealey, Myers & Allen, Principles of Corporate Finance, Mc. Graw-Hill Irwin, 8 th edition or higher

Group Assignments • I encourage work in groups • The idea… – You can learn a lot from each other – Exposure to different approaches – No student left behind

Course grade • Homework (4 assignments) 55% • Case presentation 35% • Discussion questions 10%

Office hours and help • Approaching me – Fridays are devoted to problem solving in groups and I will have plenty of opportunities to address difficulties then. – You are welcomed to stop by my office anytime or alternatively set an appointment with me to make sure I am in my office

Course outline • Class 1 Introduction • Class 2 Capital budgeting (DB Chapter 7) – How to evaluate an investment opportunity – Calculating free cash flows – Predicting future free cash flows – Estimating the project’s risk – Calculating the NPV of the project

Course outline • Class 3 Modigliani Miller (DB Chapter 14) – First theory of capital structure – Capital structure doesn’t matter for value! – Leverage and firm value – Leverage, risk, and the cost of capital

Course outline • Class 4 Interest tax shield (DB Chapters 15) HW 2 due – Interest tax deduction – Valuing the interest tax shield – Recapitalizing – Personal taxes – Optimal capital structure with taxes

Course outline • Class 5 Capital budgeting with leverage (DB Ch. 18) – WACC, APV – Project based cost of capital • Class 6 Whirlpool Europe Case – Estimating cash flows – Project valuation

Course outline • Class 7 Financial distress, and the asset substitution problem (DB Chapter 16) – Bankruptcy cost – Optimal capital structure – The agency cost of leverage – The agency benefit of leverage – Asymmetric information and capital structure

Course outline • Class 8 Stock valuation exercise • Class 9 American Chemical Corporation HBS case

Introduction

The corporation • Four types of firms – Sole proprietorships – Partnerships – Limited liability companies – corporations

Firm distribution

Flow of funds in the public corporation corporate investments Chief financial officer Investors: banks, individuals, corporations, pension funds, mutual funds, …… revenues

Separation of ownership and control • Rather than the owner the board of directors and the chief executive officer possess direct control of the corporation • Shareholders elect board of directors – Google and one-share-one-vote • Board of directors make set the rules and policies for how the corporation is run • The manager (CEO) is elected by the board of directors to run the firm according to the guidelines set by the board

CFO’s goal • What is the CFO’s goal? a. b. c. d. e. Maximizing firm value Maximizing share holder value Maximizing employee satisfaction Maximizing profits All/some of the above

Who’s company is it? ** Survey of 378 managers from 5 countries Source: Chapter 2, Brealey, Myers and Allen 8/e

What is more important dividends or jobs? ** Survey of 399 managers from 5 countries. Which is more important. . . jobs or paying dividends? Source: Chapter 2, Brealey, Myers and Allen 8/e

Maximizing shareholder value • In sole proprietorship the owner has control and sets the goal of the firm • Corporations can have thousands of owners/shareholders • Shareholders’ interests and priorities – What if some investors are more risk loving? – How does it affect the firm’s decisions?

Corporate Governance…”how can investors make sure that the manager acts in their best interest? ” • Board of directors – replacement of management • Market for corporate control – mergers and acquisitions • Manager’s compensation – Bonus payments, equity, (vesting) options • Communication with Investors – Audited financial reports

Methodological background

Cash flow valuation • Valuation of cash flows: PV and FV • Annuity – A stream of “n” periodic payments “CF” • Perpetuity – An annuity that continues forever • Growing Annuity/Perpetuity – Payments grow at rate “g” every period

Investment decision rule • NPV = PV (benefits) – PV (costs) • Any positive NPV project should be adopted to increase firm value • When we need to choose among projects we will adopt the project with the highest NPV • Can a trading strategy be a positive NPV project?

CAPM • ri = rf + βi x(rm – rf) • Expected return depends on the asset’s return beta