Joint HSE/NES BA in Economics Program
Corporate Finance
Spring Semester, 2014
TENTATIVE SYLLABUS
Professor: Sergey Stepanov ()
Summary
The objective of the course is to discuss the most important financial decisions of a firm (capital budgeting and capital structure decisions) and to learn how to value companies. The capital budgeting topics will cover various techniques of evaluating and comparing projects. The capital structure topics will examine the choice of sources of financing for a firm; in particular, the choice between debt and equity financing. We will then discuss valuation of a firm, taking into account its choice of the capital structure. Other topics include payout policy (dividends and stock repurchases), short-term financing, risk management and international aspects of corporate finance.
Prerequisites: microeconomics, calculus, probability theory, introduction to finance
Course outline
1. Introduction to corporate finance. Notion of corporation, financial statements and financial ratios (4 classes).
2. Fundamentals of capital budgeting (3 classes)
2.1. Refresher on basic investment decision rules (NPV, IRR, payback period, etc.)
2.2. Projects with unequal lives: matching cycle, Equivalent Annual Cost (Benefit) method, replacement problem
2.3. Evaluating a project: forecasting earnings, determining cash flows, computing NPV
2.4. Sensitivity analysis, scenario analysis
3. Advanced capital budgeting: real options (4 classes)
3.1. Financial options: notion, properties, pricing (binomial model, Black and Scholes formula, Monte-Carlo simulations)
3.2. Real options: types and examples, valuation of projects with real options
4. Capital structure (6 classes)
4.1. Sources of long-term financing, types of equity and debt financing
4.2. Capital structure in a perfect market (Modigliani-Miller propositions)
4.3. Impact of taxes and costs of financial distress
4.4. Impact of agency costs of equity and debt
4.5. Impact of information asymmetries
5. Capital budgeting and valuation with leverage (6 classes)
5.1. Establishing required rates of return. WACC, APV and FTE (ER) methods
5.2. Valuing a firm: building the financial model, estimating the cost of capital, using DCF to value the firm
5.3. Valuation by comparables (multiples)
6. Payout policy (dividends and stock repurchases) (2 classes)
6.1. Payout policy in a perfect market
6.2. Effects of taxes, agency problems and information asymmetry on payout policy
7. Short-term financing (2 classes)
7.1. Working capital management
7.2. Short-term financial planning
8. Risk management (2 classes)
9. International corporate finance (2 classes)
Time permitting, we may also cover some of the following topics:
- Mergers and acquisitions
- Corporate governance
Grading:
Home assignments will include problem sets and cases. Cases are real-life situations in which you will have to put yourselves in the shoes of managers taking real-life decisions. Cases are supposed to be solved in groups of maximum 4 people. The overall grade will be based on your problem sets, case write-ups, perhaps a midterm exam (to be decided) and the final exam.
Course Materials
The main textbook that covers almost all the topics well enough is Jonathan Berk and Peter DeMarzo (BD), Corporate Finance (precise edition yet to be decided on). Additionally you can use some of the following textbooks:
- Welch, Ivo, 2011, Corporate Finance, 2nd edition, available for free at http://book.ivo-welch.com/. It is a good complement to Berk and DeMarzo.
- Hillier, David, Mark Grinblatt, and Sheridan Titman (HGT), Financial Markets and Corporate Strategy: European Edition, 2008, McGraw-Hill. Very useful for the topics on the impact of agency problems and asymmetric information on capital structure
- Ross, Stephen A., Westerfield, Randolph W., and Jeffery F. Jaffe (RWJ), Corporate Finance, 2002.
- Shapiro, Alan C., and Sheldon D. Balbirer (SB), Modern Corporate Finance: A Multidisciplinary Approach to Value Creation, Prentice-Hall, 2000.
- Copeland, Thomas E., Weston, J. Fred, and Kuldeep Shastri, Addison Wesley, Financial Theory and Corporate Policy (4th edition), 2004.
- Megginson, William L., Corporate Finance Theory, Addison & Wiley, 2001.
- Бригхем Ю., Гапенски Л. Финансовый менеджмент: полный курс. В 2-х т. СПб.: Экономическая школа, 1997.
- Trigeorgis, Lenos, Real Options: Managerial Flexibility and Strategy in Resource Allocation, MIT Press, 1999.
Extra materials and lecture slides will be available at my.nes.ru
- In addition there is a useful website of Aswath Damodaran http://pages.stern.nyu.edu/~adamodar/ with materials on valuation and corporate finance.