Department of Finance
BMA5312 Advanced Corporate Finance
Prerequisite: BMA5008 Financial Management
Course Contents
Estimating Hurdle Rates for Firms/Projects
· Cost of Equity
· Cost of Debt
· Cost of Hybrid Securities
· Weighted Average Cost of Capital
· Diversifiable Versus Non-Diversifiable Project Risk
· WACC for firms Versus WACC for Projects
· Financing Mix and the Cost of Capital for Projects
Case: Marriott Corporation: The Cost of Capital
Estimating Cash Flows, Investment Decision Rules and Resource Allocation
· Estimating Project Revenues and Expenses
· From Operating Forecasts to Accounting Forecasts
· From Project Earnings to Project Cash Flows
· Cash Flows to Incremental Cash Flows
· Comparing Investment Decision Rules
· What Approaches do Firms use in Investment Analysis
Investment Analysis with Inflation/Exchange rate Risk/Project Interactions
· Dealing with Inflation in Project Analysis
· Analyzing Foreign Projects
· Mutually Exclusive Projects
· Capital rationing
· Opportunity Costs and Product Cannibalization
The Financing Mix: Tradeoffs and Theory
· Debt related Tax benefits and the Managerial Discipline Hypothesis
· Bankruptcy Costs, Agency Costs, Loss of Flexibility/Underinvestment Costs, Personal Tax Disadvantage and Costs to Customers/Suppliers as Costs of Debt
· Optimal Capital Structure (Trade Off and Pecking Order Hypotheses)
· How Firms Choose Capital Structure (Financing Mix and Life Cycle, Comparables, Financing Hierarchy)
Case: E. I. DuPont de Nemours and Company (Debt Policy, Long-Term Financing)
Case: American Home Products Corporation (Debt Policy, Long-Term Financing)
Case: Hospital Corporation of America (Debt Policy, Long-Term Financing)The Optimal Financing Mix
· Operating Income approach
· Cost of Capital Approach
· Leverage and Return Differential Approach
· Adjusted Present Value Approach
· Comparable Firm Approach
Payout Policy
· The Dividend Irrelevance School
· The “Dividends are Bad” School
· The “Dividends are Good” School
· A Cash Flow Approach to Analyzing Dividend Policy
· Interactions Between Dividend and Financial Policies
Acquisitions, Takeovers and Advanced Valuation
· Background on Acquisitions
· Empirical Evidence on the Value of Takeovers
· Valuing Control and Synergy Benefits in Acquisitions
· Restrictions and Acquisitions
· Analyzing Management and Leveraged Buyouts
Case: American Chemical Corporation (Valuation of Project/Business)
Case: Radio One, Inc (Valuation of Project/Business)
Case: Cooper Industries (Valuation of Companies)
Case: Interco (Valuation of Companies/Hostile Takeovers)
Case: Philip Morris and Kraft Inc (Valuation of Targets in Hostile Takeovers)
Case: Pinkerton’s (Integrated Financial Decisions in Acquisitions)
Case: Friendly Cards (Integrated Financial Decisions in Acquisitions)
Valuation of Embedded Real Options in Project Analysis
· Basics of Option Pricing
· Options in Investment Analysis (Delay/Expand/Abandon Projects)
· Option Applications in Valuation (Valuing Patents/Natural Resources)
· Option Pricing in Capital Structure Decisions
Case: Laura Martin: Real Options and the Cable Industry
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