FNCE 201

Corporate Finance

Instructor: Konstantin N. Kontor, MBA

Goals of this Course

The main goal of this course is to provide the students with a basic understanding of the principles of finance (the opportunity cost of capital, the net present value concept, risk and return trade-off, portfolios and diversification,) as well as to discuss theoretical basis for processes and practices of financial analysis. It also includes comparisons of U.S. and Russian financial systems.

Another goal of the course is to expose the students to the Western standards and terminology used by capital markets and financial institutions worldwide.

The final goal is to expose the students to real processes of financial decision-making and financial analysis. The course is heavily based on problem solving. It also covers certain issues from the Western financial history in the form of case studies.

Course Materials

Selected chapters from the textbook:

Richard A. Brealey and Stewart C. Myers. Principles of Corporate Finance, (hereinafter referred to as B&M.)

Notes, handouts, and cases.

Grading

Grading will be based on assignments, examinations and class participation.

Because the course is heavily discussion-based attendance is mandatory. Failure to attend 40% of classes leads to immediate failure in the course and loss of credit.

During the course the students will have to submit 5 homeworks, one case write-up, and take the midterm and the final examinations. Failure to take the exams or to hand in the case report is tantamount to failure in the course.

The course will be graded in accordance with the following schedule:

Homeworks / 20%
Case / 10%
Midterm / 30%
Final / 40%
Total / 100%
Course Outline
  1. Introduction: Why Finance Matters. Net Present Value. How to Calculate NPV

Investing Vs. Financing. Value maximization. The Net Present Value (NPV) concept. The capital investment tradeoff. Opportunity cost of capital – examples

Formulas to calculate NPV. Shortcuts: perpetuities and annuities. Examples. Fixed rate mortgage as an example

  1. Applications of NPV (I): Measuring Bond Yields and Valuing Bonds

Measuring bond yields. Yield to maturity, yield to call

The term structure of interest rates

Spot and forward rates

How to calculate forward rates

  1. Applications of NPV (II): Valuing Common Stocks

Rate of return for common stock. The role of dividends in stock returns. DCF formula for common stock

Constant growth case. Gordon’s formula

Payout and plowback ratios. EPS and ROE. Present Value of Growth Opportunities (PVGO.) Examples

  1. Making Investment Decisions with the NPV Rule

Internal rate of return

Payback period. What to discount. Project interaction

Equivalent annual cost. Making decisions when resources are limited

Discussion of the case

  1. Case Presentation and Discussion
  2. Midterm Exam
  3. Risk, Return and the Opportunity Cost of Capital

How risk affects investments

Mathematics of risk

Expected return, standard deviation. Correlation coefficients

Calculating portfolio returns. How diversification works

  1. Market Risk and Asset Pricing. Capital Asset Pricing Model (CAPM)

Market risk. Beta. Risk-return tradeoff

Capital Asset Pricing Model (CAPM)

The role of CAPM in financial analysis. Empirical evidence

  1. Capital Budgeting

CAPM and company cost of capital. The case of equity financing

Problems with the company cost of capital rule. Across-the-board expansion

Company cost of capital and required return on project

Estimating cost of capital with CAPM

The case of debt financing. Betas for equity, debt and assets

Weighted average cost of capital (WACC)

  1. Introduction to Options

What is an option? Values at expiration. Determinants of option value

Examples of options

The option to make follow-up investments. Options and risk

An option as a quantum of finance

Discussion of the final exam

  1. Review Session

A Final Word: What we know and what we do not know about finance

How do financial concepts apply to Russia?

Course review. Strategies to follow during the final

  1. Final Exam

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