Bachelor 2020/2021

Corporate Finance

Category 'Best Course for Broadening Horizons and Diversity of Knowledge and Skills'

Type: Elective course (Economics and Statistics)

Area of studies: Economics

Delivered by: School of Finance

Where: Faculty of Economic Sciences

When: 3 year, 3 module

Mode of studies: offline

Instructors: Irina Ivashkovskaya, Pavel Malyshev, Evgenia Mikova, Yulia Ovanesova, Nikita Pirogov, Veronika Vinogradova

Language: English

ECTS credits: 3

Contact hours: 40

Course Syllabus

Abstract

The course develops theoretical framework for understanding and analysing major financial problems of a corporation operating in market environment. The course covers capital budgeting issues, capital structure theory, payout policy, risk management discussions and M&A motives. The course is based on lectures, classes, groupwork and self-study. Financial Economics is the mandatory prerequisite for Corporate Finance.

Learning Objectives

• Understand and apply principles of modern financial analysis
• Be able to discuss different stakeholders’ goals as a source of agency conflicts
• Understand and apply capital budgeting techniques when making investment decisions
• Be able to discuss the logic of capital structure decisions and understand how market imperfections influence capital structure decisions
• Understand corporate payout decisions and be able to discuss market reaction to dividend payout
• Be able to discuss logic of risk management decisions and sources to increase company value
• Be able to discuss M&A motives and value creation via restructuring

Course Contents

• Introduction: Modern Company and Its Environment
  From accounting to financial approach. Market capitalization and enterprise value. Maximizing the value of the business as a key shareholders’ goal: financing decisions, investment decisions, payout policy and risk management decisions. Financial decisions: changes across the lifecycle. Perfect capital market as environment to develop noncompromising Net Present Value rule. No arbitrage condition on capital markets versus possibility of arbitrage on markets of real assets: the main reason to invest in real assets. Company’s stakeholders: their goals and agency conflicts. Theory of the firm: ownership versus control of corporations. Corporations in emerging and developed markets: does business environment matter? What do equityholders buy: the dividend stream vs. capital gains. Prioritizing investment decision and dividend payout decisions when capital markets don’t offer arbitrage opportunities. The Free Cash Flow concept to determine dividend size. Two stage approach to valuation compared to stable growth case. Positive return spread together with investment decisions as an opportunity to increase equity value.
• Investment decisions: Capital Budgeting
  Investment opportunities of a corporation. Cash flows of an investment project. Project risk, cost of capital and discounted cash flows. Applying net present value (NPV) methodology in capital budgeting. Mutually exclusive projects. Profitability index (PI) as a relative measure of present value. Internal rate of return (IRR): methodology and limitations. Time constraints: discounted payback method. Value creation with efficient investment projects.
• Capital Structure Choice and Corporate Value
  Modigliani and Miller theorem (MM) on capital structure, perfect capital market assumptions and basic MM irrelevance propositions. Weighted average cost of capital (WACC): a portfolio approach to determine the overall opportunity cost of capital. Competing definitions of WACC. Cost of debt, cost of equity and WACC under pure MM. Shareholder reaction to changes in capital structure. MM propositions with corporate income taxes. Income tax shield as motivation to take debt. Motivation of WACC behavior. The effect of personal taxes on capital structure. Miller equilibrium model. Tradeoff theory as a model of optimal capital structure: tax shield vs financial distress costs. Firm value vs WACC under tradeoff theory.
• Agency Cost and Asymmetric Information
  A debtholder – equityholder conflict: debt overhang problem, asset substitution problem, debt covenants and monitoring opportunities as means to agency costs. An equityholder – manager conflict: overinvestment problem, deficient management efforts, aligning the conflicting interests with capital structure. Minimizing the total cost of two agency conflicts with capital structure choice. The information conveyed by capital structure decisions: pecking order theory.
• Payout Policy
  Types of dividends: cash dividend, stock dividend, share repurchase. Payout policy as a financing problem. The Modigliani-Miller payout irrelevance theorem. Neither dividend size nor means of delivery matters under MM. The effect of investor taxes: a preference for capital gains compared to cash distributions. The dividend puzzle. Static clientele theory. Lintner’s stylized empirical facts. Signaling role of dividends. Payout decisions as means to align the interests of managers and shareholders.
• Interrelation of Financing and Investment Decisions
  Adjustments to capital budgeting techniques when evaluating a project under certain financing plan. Adjusted present value (APV), weighted average cost of capital (WACC) approach and free cash flow to equity (FCFE): three classical approaches to account for side effects.
• Valuation and Risk Management Policy
  Risk and the M&M theorem. The motivation to hedge: decrease tax payments, decrease costs of financial distress, improve planning for capital needs. The methods of interest rate risk management. Foreign exchange risk management. Application of risk management to industrial firms.
• M&A and Corporate Restructuring
  Types of M&A. Reasons to acquire: economies of scale, vertical integration, financing side motivation. Hubris hypothesis by Roll. Empirical evidence of inefficient M&As. Value creation via restructuring. Divestitures and bankruptcy as types of corporate restructuring. The sources for synergy in restructuring.
• Group project presentations

Assessment Elements

• Class participation
• Quiz
• Group Project
• Mid-Term Test
• Final Exam
  Экзамен проводится в письменной форме (решение задач, ответы на теоретические вопросы) с использованием асинхронного прокторинга. Экзамен проводится на платформе Экзамус (https://hse.student.examus.net). К экзамену необходимо подключиться за 15 минут до начала. На платформе Экзамус доступно тестирование системы. Компьютер студента должен удовлетворять следующим требованиям: https://elearning.hse.ru/data/2020/05/07/1544135594/Технические%20требования%20к%20ПК%20студента.pdf Для участия в экзамене студент обязан: заранее зайти на платформу прокторинга, провести тест системы, включить камеру и микрофон, подтвердить личность. Во время экзамена студентам запрещено: общаться (в социальных сетях, с людьми в комнате), списывать. Во время экзамена студентам разрешено пользоваться обычным калькулятором (без режима программирования). Кратковременным нарушением связи во время экзамена считается прерывание связи до 10 минут. Долговременным нарушением связи во время экзамена считается прерывание связи 10 минут и более. При долговременном нарушении связи студент не может продолжить участие в экзамене. Процедура пересдачи аналогична процедуре сдачи.

Interim Assessment

• Interim assessment (3 module)
  0.05 * Class participation + 0.5 * Final Exam + 0.15 * Group Project + 0.25 * Mid-Term Test + 0.05 * Quiz

Bibliography

Recommended Core Bibliography

• Principles of Corporate Finance, 11tn global ed., XXVIII, 889 p., AP 1-10, Gl 1-18, I 1-25, Brealey, R. A., Myers, S. C., Allen, F., 2014

Recommended Additional Bibliography

• Study Guide to Accompany Brealey and Myers "Principles of Corporate Finance, 4th ed.", D'Ambrosio, C. A., 1991