Advanced Corporate Finance

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Jamal Munshi PhD, All rights reserved

The course
The mission of corporate managers is to maximize the wealth of shareholders. To carry out this function they must understand the fundamental concepts of valuation in Finance and be able to apply them in managing the cost of capital, the optimal capital budget, and growth. They do this in the context of long term policy decisions involving capital structure and dividend payout. Financial managers of corporations must understand financial statements and be able to use the information in those statements to gain insight into the financial performance of the firm. This course is designed to prepare the student for this role. Students are expected to have completed courses in the fundamentals of finance, accounting, and statistics. The course is quantitative in nature and it requires proficiency in mathematics and in Microsoft Excel. Proficiency in written English is also important.
Textbook
Brigham and Ehrhardt, Financial Management Theory and Practice
Thompson South-Western, ISBN 0324259689
Classroom activities
There are 8 class meetings on 8 consecutive weeks, one day per week, and one scheduled final examination period.
There may be up to three activities per meeting
Activity #1: Quiz on previous topic: 1 hour
Activity #2: Lecture on new topic: 1.5 hours
Activity #3: Workshop on new topic: 1.5 hours
Workshops and quizzes utilize selected problems from the assigned problem set. Students are requested to complete the reading assignment for Workshop #1 prior to the first class meeting.
Assignment due dates
Workshops are due at the end of the workshop period but may be turned in later at any time prior to the next quiz for half credit. Quizzes are due at the end of the quiz period but may be turned in later at any time prior to the next quiz for comments but not for credit. The term project may be turned in at any time prior to the scheduled final examination.
Meeting #1
Workshop #1: Risk and return
Reading assignment: Chapter 4, investment returns, stand-alone risk, probability distributions, expected rate of return, standard deviation, portfolio returns, portfolio risk, diversifiable risk, market risk, beta risk, covariance
Assigned problem set: Problems 4.1 - 4.13 (answers on page 943)
Meeting #2
Quiz #1: Risk and return
Workshop #2: Stock valuation
Reading assignment: Chapter 7, common stock definition, common stock valuation, the constant growth model, non-constant growth models, market multiples, market equilibrium, the efficient market hypothesis, preferred stock
Assigned problem set: Problems 7.1 - 7.14 (answers on page 944)
Meeting #3
Quiz #2: Stock valuation
Workshop #3: Cost of capital and capital budgeting
Reading assignment: sections Chapter 9, weighted average cost of capital, cost of debt adjusted for taxes, cost of preferred stock, cost of common stock, the CAPM approach, the DCF approach, WACC computation, use, and mgt, estimating WACC for divisions and projects, flotation costs, Chapter 10, NPV, IRR, unequal lives, OCB, capital rationing
Assigned problem set: Problems 9.7 - 9.15 and 10.2,4,7,8,12,14(answers on page 944 and 945)
Meeting #4
Quiz #3: Cost of capital and capital budgeting
Workshop #4: Capital budgeting topics
Reading assignment: Chapter 11, relevant cash flows, estimating cash flows, project risk analysis, simulation and scenario analysis methods.
Assigned problem set: Problems 11.1 - 11.8 (answers on page 945)
Meeting #5
Quiz #4: Capital budgeting topics
Workshop #5: Analysis of financial statements
Reading assignment: Chapter liquidity ratios, asset mgt ratios, debt mgt ratios, profitability ratios, market value ratios, DuPont analysis
Assigned problem set: Problems 13.1 - 13.11 (answers on page 945)
Meeting #6
Quiz #5: Analysis of financial statements
Workshop #6: Financial planning
Reading assignment: Chapter 14, percent of sales method with constant balance sheet ratios, pro-forma financial statements, additional funding needs, changing balance sheet ratios
Assigned problem set: Problems 14.1 - 14.9 (answers on page 945)
Meeting #7
Quiz #6: Financial planning
Workshop #7: Valuation of the firm
Reading assignment: Chapter 15, free cash flow, value of operations, price per share, value based management, maximize shareholder wealth,
Assigned problem set: Problems 15.1 - 15.10 (answers on page 945 and 946)
Meeting #8
Quiz #7: Valuation of the firm
Workshop #8: Working capital management
Reading assignment: sections Chapter 22, cash budget, cash management, inventory management, receivables management, methods of short term financing
Assigned problem set: Problems 22.1 - 22.13
Scheduled final examination period
Quiz #8: Working capital management
Semester project
Presentation and report on a Spreadsheet Problem of your choice.
Assignment types
The class is divided into groups. Workshops and semester projects are group assignments. They are carried out cooperatively by group members working as a team. The instructor serves as an ex-officio member of each group. Quizzes and examinations are individual assignements. Please do these on your own. You are expected to complete your quiz without using your book or notes. For group assignments submit one paper per group. For individual assignments submit one paper per student.
Missed workshops and quizzes
Once per term, the student may carry the weight of a missed workshop forward to the next workshop. Once per term, the student may carry the weight of a missed quiz forward to the next quiz. There is no provision for make-up workshops or quizzes.
Evaluation of learning
8 Workshops x 4 points each = 32 points
8 In-class short quizzes x 8 points each = 64 points
Semester project = 4 points
Total = 100 points
Letter grade: 90-100 = A, 80-90 = B, 75-80 = B-, 60-75 = D, else F
Outcomes
After completing this course you should be able to
  • Use ratio analysis to evaluate the firm's ability to meet its debt obligations
  • Use DuPont analysis to evaluate operating and financing decision-making.
  • Use pro-forma financial statements to forecast financing requirements of the firm.
  • Use the sustainable growth model to analyze growth problems and suggest remedies.
  • Estimate the cost of capital for the firm and apply this cost in decision-making.
  • Compute NPV and IRR of new projects and use these measures to make investment decisions.
  • Use optimal capital budgeting and capital rationing to choose among a slate of independent projects
  • Explain the supremacy of optimal capital budgeting in terms of shareholder wealth maximization.
  • Estimate the appropriate cost of capital for non-expansion projects by using risk analysis.
  • Know when to use each of the three levels of project risk when making capital budgeting decisions.
  • Explain the difference between standard deviation risk and covariance risk be able to use these measures of risk.
  • Apply the risk adjusted discounted cash flow technique for estimating the value of the firm.
  • Compare and contrast alternative techniques for the estimation of the value of the firm.
  • Estimate firm value from the venture capital perspective.
  • Optimize the firm's financing activities in the context of financial markets and the efficient market hypothesis.
  • Make capital structure and dividend payout policy decisions in terms of financial theory.

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