Math Managerial Finance II—AFM372

1. Math Managerial Finance II—AFM372 • AKA: Corporate Finance • Instructor: Alan Huang • Office Hours: HH386E, TR 3:00-4:30 or by appointment • Email: aghuang@uwaterloo.ca • Normally emails are answered within 48 hours (72 hours if received in weekends) • Emails received shortly before midterm and final will only be answered in additional office hours • Use your TAs, course discussion forum, and office hours wisely. Physical presence has priority over phone/emails/electronic posts.

2. Required Text: • Corporate Finance (4th Canadian edition, 2008) by Ross, Westerfield, Jaffe and Roberts • Course Notes • Problem Sets

3. Course Web page http://www.arts.uwaterloo.ca/~aghuang/AFM372 (Also accessible through UWACE) • Syllabus • Announcements • Lecture notes • Chapter solutions • Problem sets • Quizzes & Exams • Case • Discussion Forum: UWACE, discussion forum tab

4. Course Evaluation

5. Important Dates • September 30: Quiz 1 • October 24: Midterm Exam • November 13: Quiz 2 • November 20: Case Due

6. What is Corporate Finance The Classical Objective Function STOCKHOLDERS Hire & fire managers -Board -Annual Meeting Maximize stockholder wealth No social costs Lend $ BONDHOLDERS MANAGERS: -Operation decisions SOCIETY Protect bondholder interests Costs can be traced to firm Reveal information honestly and on time Markets are efficient & assess effect on value FINANCIAL MARKETS

7. What can go wrong? STOCKHOLDERS Have little control over managers Managers put their interests above stockholders Significant social costs Lend $ BONDHOLDERS MANAGERS: -Poor Operation decisions SOCIETY Bondholders can get ripped off Some costs can not be traced to firm Delay bad news or provide misleading information Markets make mistakes and can over- or under-react FINANCIAL MARKETS

8. Advanced topics: Counter actions STOCKHOLDERS • More activist investors • Hostile takeovers Managers of poorly run firms are put on notice Corporate good citizen constraints Protect themselves BONDHOLDERS MANAGERS SOCIETY • Covenants • New type • More laws • Investor/Customer backlash Firms are punished for misleading information Investors and analysts become more skeptical FINANCIAL MARKETS

9. Important concepts from AFM272 • Time value of money • Perpetuities, annuities • Risk adjustments • CAPM: E(Rj) = Rf + βj [E(Rm) – Rf] • Capital budgeting • NPV rule

10. Basic Principles Objective: Maximize the Value of the Firm • Invest in projects that yield a return greater than the minimum acceptable hurdle rate (i.e. that have positive NPV) • The hurdle rate should reflect the (systematic) risk of the project and the financing mix used • Choose a financing mix that minimizes the hurdle rate • If there are not enough investments that earn the hurdle rate, return the cash to the owners of the firm • The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics

11. Another important principle: No-arbitrage • a.k.a. the “law of one price” • arbitrage involves the simultaneous purchase and sale of assets in such a way as to generate risk free profit at zero cost (a free lunch) • in well-functioning capital markets, arbitrage opportunities will be extremely rare and will not last for long • another way of thinking about this idea is that any two assets with identical future cash flows must sell for the same price today (or else there would be an arbitrage opportunity) • though simple, this is a surprisingly powerful idea that is widely used in financial theory and practice

12. What will be covered in AFM372 • Interactions with stock and bond markets: How to raise money? • Chapters 14, 15, 20, 21 • Deciding the right financing mix • Chapters 16—18 • Dividend policy • Chapter 19 • Financial Derivatives & Risk management • Chapters 23—26 • Special topics • Leasing (ch. 20), M&A (ch. 31)