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Corporate Finance MBA. Course outline. Introduction. Contact. Nisan Langberg Email nlangberg@uh.edu Office: 210E. “big picture”. Assume you are familiar with basic financial tools Time value of money, accounting for risk, CAPM, portfolio theory
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Course outline Introduction
Contact • Nisan Langberg • Email nlangberg@uh.edu • Office: 210E
“big picture” • Assume you are familiar with basic financial tools • Time value of money, accounting for risk, CAPM, portfolio theory • I offer a theoretical approach to decisions of CFO • Investing/financial (will talk more in a few minutes) • Problem-based learning with applications to real-life examples through cases and mini cases
Class overview • What you can find on the web • Syllabus • class notes (incomplete…the gaps together in class) • Homework assignments • Announcements • Handouts
Text books • I will teach and assign problems using the book Corporate Finance by Jonathan Berk and Peter DeMarzo, Addison-Wesley, 1st/2nd editions • There will be two/three HBS cases we will cover in class
Syllabus • I recommend buying the book • The course is closely built around the text book • Very good reference book to have handy if one plans to work in corporate finance • Taught in leading business schools in the world • All course material is covered in class notes.
Alternative reading • Further/alternative reading is Brealey, Myers & Allen, Principles of Corporate Finance, McGraw-Hill Irwin, 8thedition or higher
Group Assignments • I encourage work in groups • The idea… • You can learn a lot from each other • Exposure to different approaches • No student left behind
Course grade • Homework (4 assignments) 55% • Case presentation 35% • Discussion questions 10%
Office hours and help • Approaching me • Fridays are devoted to problem solving in groups and I will have plenty of opportunities to address difficulties then. • You are welcomed to stop by my office anytime or alternatively set an appointment with me to make sure I am in my office
Course outline • Class 1 Introduction • Class 2 Capital budgeting (DB Chapter 7) • How to evaluate an investment opportunity • Calculating free cash flows • Predicting future free cash flows • Estimating the project’s risk • Calculating the NPV of the project
Course outline • Class 3 Modigliani Miller (DB Chapter 14) • First theory of capital structure • Capital structure doesn’t matter for value! • Leverage and firm value • Leverage, risk, and the cost of capital
Course outline • Class 4 Interest tax shield (DB Chapters 15) HW2 due • Interest tax deduction • Valuing the interest tax shield • Recapitalizing • Personal taxes • Optimal capital structure with taxes
Course outline • Class 5 Capital budgeting with leverage (DB Ch. 18) • WACC, APV • Project based cost of capital • Class 6 Whirlpool Europe Case • Estimating cash flows • Project valuation
Course outline • Class 7 Financial distress, and the asset substitution problem (DB Chapter 16) • Bankruptcy cost • Optimal capital structure • The agency cost of leverage • The agency benefit of leverage • Asymmetric information and capital structure
Course outline • Class 8 Stock valuation exercise • Class 9 American Chemical Corporation HBS case
The corporation • Four types of firms • Sole proprietorships • Partnerships • Limited liability companies • corporations
Flow of funds in the public corporation corporate investments Chief financial officer Investors: banks, individuals, corporations, pension funds, mutual funds, …… revenues
Separation of ownership and control • Rather than the owner the board of directors and the chief executive officer possess direct control of the corporation • Shareholders elect board of directors • Google and one-share-one-vote • Board of directors make set the rules and policies for how the corporation is run • The manager (CEO) is elected by the board of directors to run the firm according to the guidelines set by the board
CFO’s goal • What is the CFO’s goal? • Maximizing firm value • Maximizing share holder value • Maximizing employee satisfaction • Maximizing profits • All/some of the above
Who’s company is it? ** Survey of 378 managers from 5 countries Source: Chapter 2, Brealey, Myers and Allen 8/e
What is more important dividends or jobs? ** Survey of 399 managers from 5 countries. Which is more important...jobs or paying dividends? Source: Chapter 2, Brealey, Myers and Allen 8/e
Maximizing shareholder value • In sole proprietorship the owner has control and sets the goal of the firm • Corporations can have thousands of owners/shareholders • Shareholders’ interests and priorities • What if some investors are more risk loving? • How does it affect the firm’s decisions?
Corporate Governance…”how can investors make sure that the manager acts in their best interest?” • Board of directors • replacement of management • Market for corporate control • mergers and acquisitions • Manager’s compensation • Bonus payments, equity, (vesting) options • Communication with Investors • Audited financial reports
Cash flow valuation • Valuation of cash flows: PV and FV • Annuity • A stream of “n” periodic payments “CF” • Perpetuity • An annuity that continues forever • Growing Annuity/Perpetuity • Payments grow at rate “g” every period
Investment decision rule • NPV = PV (benefits) – PV (costs) • Any positive NPV project should be adopted to increase firm value • When we need to choose among projects we will adopt the project with the highest NPV • Can a trading strategy be a positive NPV project?
CAPM • ri = rf + βi x(rm – rf) • Expected return depends on the asset’s return beta