Corporate Finance

Bachelor 2020/2021

Type: Elective course (HSE/NES Programme in Economics)

Area of studies: Economics

Delivered by: School of Finance

Where: Faculty of Economic Sciences

When: 4 year, 3, 4 module

Mode of studies: offline

Instructors: Sergey Stepanov

Language: English

ECTS credits: 6

Contact hours: 64

Full Syllabus

Abstract

The main objective of the course is to present the modern approach to the financial analysis of a company and to teach the principles and techniques of evaluating the most important corporate decisions. The core of the course is the analysis of investment (capital budgeting) and financing (capital structure) decisions of a firm. We will first discuss the principles and techniques of selecting investment projects. Secondly, we will examine the determinants of the capital structure choices by firms as well as the notion of the optimal capital structure. We will then discuss how to value a company, taking into account its capital structure. We will also analyze how firms decide on their payouts to shareholders and what the optimal payout policy should be. Finally, time permitting, we will cover some special topics, such as initial public offerings, corporate governance, mergers and acquisitions, behavioral corporate finance.

Learning Objectives

To present the modern approach to the financial analysis of a company
To teach the principles and techniques of evaluating the most important corporate decisions: investment, capital structure, payout policy.
To provide understanding of factors/forces that affect firm value
To develop fundamental valuation skills

Expected Learning Outcomes

Understanding of the concept of real options, knowledge of techniques of real option valuation
Understanding of the basic principles and concepts of accounting
Understanding of firms’ motives to go public, IPO mechanisms, IPO pricing and performance.
Comprehension of various approaches to assess the value of a company, ability to compare these approaches.
Ability to build valuation models.
Understanding of the payout policy choices of firms, ability to evaluate payout policies
Understanding of the key corporate governance mechanisms and their effect on the cost of external capital and value of companies
Understanding the motives, sources of value creation/destruction, and negotiation aspects of M&A transactions.
Understanding of the Modigliani-Miller theorem and the effect of leverage on the cost of equity.
Ability to compute tax advantage of debt, understanding of the trade-off theory of capital structure.
Comprehension of the effects of agency problems and asymmetric information on capital structure
Understanding of the impact of managers’ and investors’ behavioral biases on corporate policies.

Course Contents

Introduction to corporate finance. Notion of corporation, financial statements and financial ratios
2. Fundamentals of capital budgeting
2.1. Refresher on time value of money, discounting, stocks and bonds valuation, risk and return, CAPM 2.2. Basic investment decision rules (NPV, IRR, payback period, etc.) 2.3. Projects with unequal lives: matching cycle, Equivalent Annual Cost (Benefit) method, replacement problem 2.4. Evaluating a project: forecasting earnings, determining cash flows, computing NPV 2.5. Sensitivity analysis, scenario analysis
Advanced capital budgeting: real options
3.1. Financial options: notion, properties, pricing (binomial model, Black and Scholes formula, Monte-Carlo simulations) 3.2. Real options: types and examples, valuation of projects with real options
Capital structure
4.1. Sources of long-term financing, types of equity and debt financing 4.2. Capital structure in a perfect market (Modigliani-Miller propositions) 4.3. Impact of taxes and costs of financial distress 4.4. Impact of agency costs of equity and debt 4.5. Impact of information asymmetries 4.6. Firms’ choices of capital structure: empirical evidence
Initial public offerings
5.1. Motives for going public 5.2. Short- and long-run performance of IPOs
Capital budgeting and valuation with leverage
6.1. Establishing required rates of return. WACC, APV and FTE (ER) methods 6.2. Valuing a firm: building the financial model, estimating the cost of capital, using DCF to value the firm 6.3. Valuation by comparables (multiples)
Payout policy (dividends and stock repurchases)
7.1. Payout policy in a perfect market 7.2. Effects of taxes, agency problems and information asymmetries on payout policy
Corporate governance
Mergers and Acquisitions
9.1. Motives for M&A 9.2. Hostile and friendly takeovers, takeover defenses, bidding strategies 9.3. Announcement returns and long-run performance of M&A
Behavioral corporate finance

Assessment Elements

Problem sets
5-6 problem sets to be solved individually.
Cases
3-4 cases to be solved in groups of 3 to 4 people, with subsequent student presentations in class. Cases are real-life situations in which you will have to put yourselves in the shoes of managers taking real-life decisions.
Midterm test
There will be no re-take for the midterm. If you have to skip the midterm due to a valid documented reason, the final will automatically carry 56% weight. If you skip the midterm for no valid reason, you simply get 0 points for it.
Final test

Interim Assessment

Interim assessment (4 module)
0.22 * Cases + 0.34 * Final test + 0.22 * Midterm test + 0.22 * Problem sets

Bibliography

Recommended Core Bibliography

Corporate finance, Berk, J., 2014

Recommended Additional Bibliography

Baker, M., & Wurgler, J. (2013). Behavioral Corporate Finance: An Updated Survey. Handbook of the Economics of Finance, 357. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.h.eee.finchp.2.a.357.424
Financial markets and corporate strategy, Hillier, D., 2012
Financial theory and corporate policy, Copeland, T. E., 2005
Malmendier, U., 2018. Behavioral corporate finance. In Handbook of Behavioral Economics: Applications and Foundations 1 (Vol. 1, pp. 277-379). North-Holland.

Course Syllabus