Principles of Corporate Finance

Bachelor 2022/2023

Type: Compulsory course (International Programme in Economics and Finance)

Area of studies: Economics

Delivered by: International College of Economics and Finance

Where: International College of Economics and Finance

When: 4 year, 1-4 module

Mode of studies: distance learning

Online hours: 64

Open to: students of one campus

Instructors: Гач Иван Петрович, Кестнер Ирина Владимировна, Собченко Олег Евгеньевич, Гач Иван Петрович, Кестнер Ирина Владимировна, Elena Naumova, Kristina Romadini, Aziza Erkinovna Ulugova

Language: English

ECTS credits: 10

Contact hours: 112

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Abstract

The course develops theoretical and practical frameworks to analyze, understand and make decisions regarding problems faced by companies and corporations associated with operating, financing and investment activities and focused on the value of a business maximization. The course covers basics of investment analysis, capital structure and valuation, dividend policy decisions and M&A, risk management and hedging, corporate governance. It provides necessary knowledge in evaluating different management decisions and their influence on corporate performance and value. The course requires existing knowledge in micro- and macroeconomics, accounting and banking. It is based on lectures, classes, case studies and self-study. “Principles of Corporate Finance” is a two-semester course designed to prepare students for the University of London examination and future employment with professional financial markets participants.

Learning Objectives

The main objective of the course is to provide a conceptual background for decision making in corporations regarding financial problems (starting with quarterly budgeting and finishing).
Finishing the course, students should be able to: • solve different problems associated with the daily routine of financial officer in corporation; • work with information: to find, evaluate and use information from various sources, necessary to solve professional problems in the field of corporate finance (capital budgeting, financing policy, payout policy, M&A motives); • communicate, express their thoughts orally and in writing on basic topics of corporate finance; • organize the activities of a small group created for the implementation of a specific project; • use financial, accounting and other information contained in the statements of companies for making management financial decisions (regarding investments, capital structure, payout policy).

Expected Learning Outcomes

Analyse simple numerical examples of efficient takeover activity
Analyse the impact of taxes on the Modigliani–Miller propositions
Apply the IRR criterion to evaluate projects
Be able to analyse optimal physical and financial investment in perfect capital markets
Be able to calculate the adjusted present value
Be able to derive the Fisher separation theorem
Be able to explain and evaluate the winners’ curse problem
Be able to show the irrelevance of the dividend policy under Modigliani–Miller assumptions
Be able to write down the relationship between debt, equity, the unlevered return on the firm, and the levered return on the firm
Be familiar with debt overhang and risk-shifting problems
Be familiar with different types of options
Be familiar with payback, discounted payback rules and profitability index
Be familiar with real options approach to capital budgeting
Be familiar with the clientele model of dividends
Be familiar with the effects of asymmetric information and agency costs on dividend policy
Be familiar with the elements of corporate governance
Be familiar with the empirical evidence regarding the gains from mergers and acquisitions
Be familiar with the empirical research on the effects of corporate governance on the market value of a corporation
Be familiar with the methods of interest rate risk
Be familiar with the stylized facts of dividend policy
Be familiar with the trade-off and pecking order theories
Calculate the agency cost of debt in stylised settings
Compute and apply the internal rate of return criterion
Compute and apply the net present value rule to evaluate projects
Compute present and future values of cash-flow streams and appraise projects using the NPV rule
Derive and discuss the Modigliani–Miller theorem
Detail the argument of Grossman–Hart (1980) regarding the impossibility of efficient takeovers
Discuss the effects of asymmetric information on capital structure
Draw a link between Modigliani–Miller’s 1st and 2nd propositions
Evaluate the NPV rule in relation to other commonly used evaluation criteria value stocks and bonds via NPV
Explain and calculate the source of option value
Explain and evaluate the cost of hedging
Explain the intuition behind the pecking order theory of finance
Explain venture capital and equity issuance in the public market
Explain what real options are
Explain why and how companies manage risk
Find the equity beta of a firm by unlevering and relevering the equity beta of a comparable firm with different capital structure.
Outline the main features of risky debt and equity
Perform valuation with multiple financing rounds
Show that dividend policy (and share repurchases) are irrelevant to firm valuation under the Modigliani–Miller assumptions
Understand covered and uncovered interest rate parity
Understand how risk-neutral and Black-Scholes models can be applied to real options valuation
Understand how the stock prices of bidders and targets react around the time of acquisition announcements
Understand how to calculate ownership structure in initial public offerings and seasoned equity offerings
Understand the advantages and disadvantages of corporate diversification
Understand the concept of Economic Value Added and the relation between EVA and the NPV
Understand the differences between financial and accounting models of corporate analysis
Understand the effect of corporate and personal taxes on capital structure
Understand the factors determining optimal leverage
Understand the limitations of different investment decision making criteria
Understand the principles of Fisher separation theorem
Understand the role of the no-arbitrage rule in the corporate finance
Understand types of real options
Understand what happens to equity returns, and the weighted average cost of capital as leverage increases with and without taxes

Course Contents

Introduction to the Course. Why is Finance Corporate? The Foundations for Proper Financial Analysis of the Firm
Сapital Structure Choice and Corporate Value
Leverage and WACC, Corporate Value
Dividend Policy and Corporate Value: Theory and Evidence
Corporate Investing Policies and Value Creation
Valuing Corporate Strategic Opportunities and Flexibility: Corporate Real Options.
Corporate Governance
Equity Financing
The Market for Corporate Control: Mergers&Takeovers
Corporate Risk Management and Hedging

Assessment Elements

Quizzes
Home Assignments
Midterm exam
Winter exam
Quizzes
Home Assignments
Final exam
Group assignment

Interim Assessment

2022/2023 2nd module
0.17 * Home Assignments + 0.28 * Midterm exam + 0.45 * Winter exam + 0.1 * Quizzes
2022/2023 4th module
0.1 * Home Assignments + 0.1 * Quizzes + 0.45 * Final exam + 0.1 * Group assignment + 0.25 * 2022/2023 2nd module

Bibliography

Recommended Core Bibliography

Financial markets and corporate strategy, Hillier, D., 2012
Principles of corporate finance, Brealey, R. A., 2017

Recommended Additional Bibliography

Asquith, P., & Mullins, D. W., Jr. (1983). The Impact of Initiating Dividend Payments on Shareholders’ Wealth. The Journal of Business, (1), 77. https://doi.org/10.1086/296187
Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research (Wiley-Blackwell), 6(2), 159–178. https://doi.org/10.2307/2490232
Bradley, M., Desai, A., & Kim, E. H. (1988). Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms. Journal of Financial Economics, 1, 3.
Corporate finance, Berk, J., 2007
Financial theory and corporate policy, Copeland, T. E., 2005
Healy, P. M., & Palepu, K. G. (1988). Earnings information conveyed by dividend initiations and omissions. Journal of Financial Economics, 2, 149.
Healy, P. M., Palepu, K. G., & Ruback, R. S. (1992). Does corporate performance improve after mergers? Journal of Financial Economics, 2, 135.
Jarrell, G. A., & Poulsen, A. B. (1989). The Returns to Acquiring Firms in Tender Offers: Evidence from Three Decades. FM: The Journal of the Financial Management Association, 18(3), 12–19. https://doi.org/10.2307/3665645
Jarrell, G. A., Brickley, J. A., & Netter, J. M. (1988). The Market for Corporate Control: The Empirical Evidence Since 1980. Journal of Economic Perspectives, 1, 49.
Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review, 2, 323.
Jensen, M. C., & Ruback, R. S. (1983). The market for corporate control : The scientific evidence. Journal of Financial Economics, 1–4, 5.
Masulis, R. W. (1983). The Impact of Capital Structure Change on Firm Value: Some Estimates. Journal of Finance, 1, 107.
Michael C. Jensen, & William H. Meckling. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.608A4D5A
Miles, J. A., & Ezzell, J. R. (1980). The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification. Journal of Financial and Quantitative Analysis, 03, 719.
Miller, M. H. (1977). Debt and Taxes. Journal of Finance, 2, 261.
Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=bsu&AN=8798249
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. American Economic Review, 53(3), 433.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 2, 147.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 2, 187.
Poterba, J. M., & Summers, L. H. (1988). Mean reversion in stock prices : Evidence and Implications. Journal of Financial Economics, 1, 27.
Sanford J. Grossman, & Oliver D. Hart. (1980). Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation. Bell Journal of Economics, 1, 42.
Shleifer, A., & Vishny, R. W. (1986). Large Shareholders and Corporate Control. Journal of Political Economy, 3, 461. https://doi.org/10.1086/261385
Shleifer, A., & Vishny, R. W. (1989). Management entrenchment : The case of manager-specific investments. Journal of Financial Economics, 1, 123.
Stephen A. Ross. (1977). The Determination of Financial Structure: The Incentive-Signalling Approach. Bell Journal of Economics, 1, 23.
Sudipto Bhattacharya. (1979). Imperfect Information, Dividend Policy, and “The Bird in the Hand” Fallacy. Bell Journal of Economics, 1, 259.
Travlos, N. G. (1987). Corporate Takeover Bids, Methods of Payment, and Bidding Firms’ Stock Returns. Journal of Finance, 4, 943.
Warner, J. B. (1977). Bankruptcy Costs: Some Evidence. Journal of Finance, 2, 337.

Presentation

Principles of Corporate Finance

Authors

SOBCHENKO OLEG EVGENEVICH
ULUGOVA AZIZA ERKINOVNA

Course Syllabus