FINN 400 Applied Corporate Finance Spring 2013 Instructor Dr. Fazal Jawad Seyyed, CFA Room No. 208 SDSB Office Hours TBA Email fazal.jawad@lums.edu.pk Telephone 042-3560-8030 Secretary/TA Saleem A. Khan TA Office Hours TBA Course URL (if any) LMS Course Basics Credit Hours 4 Lecture(s) Nbr of Lec(s) Per Week 2 Duration 1:50 Recitation/Lab (per week) Nbr of Lec(s) Per Week Duration Tutorial (per week) Nbr of Lec(s) Per Week Duration Course Distribution Core Elective Open for Student Category Close for Student Category ACF - Core COURSE DESCRIPTION Applied Corporate Finance is a case-based course in intermediate level finance. It provides insights into the role of the financial manager, whose primary responsibility consists of acquiring funds needed by the firm and directing these funds into projects that will maximize the value of the firm for its owners. In reaching this objective, financial managers perform such varied roles/tasks as financial forecasting and analysis, raising capital from most economical sources, channelizing firm s resources to projects with best pay offs, dealing in foreign currency and global financial markets to name a few. As an applied course, the focus is on: (a) application of financial concepts, models, and tools to address typical problems faced by financial managers, (b) examining financial theories and concepts in light of corporate practices and empirical evidence for better understanding of the critical success factors and processes related to financing, investment, and payout decisions of firms, and (c) interaction of financing and investment decisions and how they interface with capital markets and impact firm value. The course is divided into following six modules: Module 1: Financial Analysis, Financial Modeling, and Working Capital Management Policies Module 2: Risk-Return and Valuation of Financial Assets
Module 3: Cost of Capital and Capital Budgeting: Processes and Practices Module 4: Financing, Capital Structure, and Dividend Policy Decisions Module 5: Firm Valuation and Evaluation of Mergers and Acquisitions Module 6: International Finance and Special Topics COURSE PREREQUISITE(S) FINN 200 Intermediate Finance COURSE LEARNING GOALS The course attempts to: Enhance students understanding of the theory and practice of corporate finance in making financial decisions with the key objective of creating value for shareholders. Reinforce students understanding of financing and investment choices faced by financial managers through application of financial concepts and models in solving real life problems. Enhance students understanding by examining empirical evidence and corporate finance practices highlighting the processes and key considerations involved in making financial decisions. Expose students to a variety of perspectives and special topics in finance such as alternative valuation methodologies, applications of real options, issues in international finance, ethics, and behavioral finance providing fresh insights on some of the finance puzzles and anomalies. Develop student skills and competencies in using spreadsheets, financial models, and other financial tools in addressing financial problems in a variety of settings based on case method approach. Motivate students to develop a keen interest in and knowledge of finance and to prepare them for the pursuit of further education and careers in finance. GRADING BREAKUP AND POLICY The course grade is based on the following criteria: Source % of Total Class Participation and Attendance 20 Quizzes and Assignments 25 Mid-Term Exam 25 Final Examination (comprehensive) 30 Total 100
Class Participation and Attendance: Students are expected to attend all classes. If you are not present at the beginning of a class or leave class during the session without instructor s prior permission, you will be considered absent for the day. You must review the assigned materials in advance of the class in order to contribute meaningfully to class discussions. You should plan to spend 5-7 hours for each class preparation. Working in groups to prepare for class discussion cases is highly recommended. Groups comprising 4-5 persons will be formed by session 3. A significant portion of the course grade depends on the quality and level of your involvement and input in class discussions. This is an excellent opportunity for you to enhance your understanding of financial concepts and hone your application skills in corporate finance. Quizzes: Several unannounced quizzes will be given on the assigned material (readings, cases, assignments, etc) during the term. No make-up quizzes will be given. However, the lowest quiz grade including a zero for a missed quiz will be disregarded. Assignments: There will be several spreadsheet-based assignments during the term to sharpen your skills in using spreadsheets to perform financial analysis and build financial models. The format and other requirements will be specified by the instructor. All assignments must be submitted on the due date. Late submissions will not be accepted. Examinations: Both exams (mid-term and final) will comprise a blend of MCQs and open-ended questions/problems or case-like situations. Calculator Requirement: You will need a financial calculator capable of performing present value/future value functions. For example, Texas Instrument BA II meets these criteria. Many other brands are equally suitable for this course. Examination Detail Midterm Exam Yes/No: Yes Combine Separate: Combined Duration: 2 Hours POptionalerred Date: Week 8 Exam Specifications: Final Exam Yes/No: Yes Combine Separate: Combined Duration: 2 Hours Exam Specifications:
COURSE SCHEDULE Module/ Session Topic and Case Reading Material Learning Goals Session Module 1: Financial Analysis, Financial Models, and Working Capital Management Z-Factor Rescue by the Overview of corporate finance Topic: Overview of Corporate Finance Numbers and how finance can be a Session 1 Theory and Practice RWJ Ch 1: Introduction to source of creating competitive Corporate Finance (Optional) 1 advantage for the firm. Session 2 Topic: Financial Analysis & Forecasting Case: *Clarkson Lumber Company RWJ Ch 3: Financial Statement Analysis and Financial Models (Optional) Examine linkages between corporate strategy, growth, profitability and financing requirements of the firm. Session 3 Topic: Free Cash Flows and Building Financial Models Case: Building a Financial Model: The Case of PPG Corporation Calculating Free Cash Flows SB Ch 7: Using Financial Planning Models for Valuation Estimation and forecasting of free cash flows and its applications in building financial models for valuation. Session 4 Session 5 Session 6 Session 7 Session 8 Session 9 Topic: Working Capital Management RWJ Ch 26-28: Short-Term Policies Financing, Cash, Receivable and Inventory Case: *Dell s Working Capital Management (Optional) Module 2: Risk-Return and Valuation of Financial Assets Topic: Portfolio Theory Risk and Return Case: *Beta Management Company Topic: Valuation of Bonds Duration and Convexity Case: Greydanus, Boechk & Associates: The Yield Curve Kink Decision Topic: Stock Valuation Case: Valuing Wal-Mart Stock Topic: Equity Valuation Approaches SB Ch 9: Statistics for Portfolios RWJ Ch 11: Return and Risk: The Capital Asset Pricing Model (Optional) SB Ch 15: Bond Valuation Note on Bond Valuation and Returns SB Ch 16: Valuing Stocks SB Ch 16: Valuing Stocks Case: *Warren Buffet, 1995 Module 3: Cost of Capital and Capital Budgeting: Processes and Practices Topic: Capital Budgeting and Cost of SB Ch 4: Introduction to Capital Evidence from the Field Capital Budgeting Case/Survey: How Do CFOs Make Capital Budgeting and Capital Structure Decisions? Graham and Harvey, Journal of Applied Corporate Finance, Spring 2002. RWJ Ch 6-7: Making Capital Investment Decisions and Risk in Capital Budgeting (Optional) Review working capital policies including short-term financing and its impact on firm profitability. Review of portfolio theory, diversification, CAPM, and estimation of risk measures. Overview of bond markets, valuation, risk management, and bond portfolio strategies. Examine alternative approaches to value stocks. Develop understanding of fundamental valuation approaches. Review survey findings on capital budgeting and capital structure processes and practices of leading corporations.
Session 10 Session 11 Session 12 Session 13 Session 14 Session 15 Session 16 Session 17 Session 18 Session 19 Session 20 Topic: Estimating Firm s Cost of Capital Lahore University of Management Sciences Case: *Marriot Corporation Topic: Making Capital Investment Decisions Case: *Diamond Chemicals Topic: Evaluating Capital Projects as Real Options Case: Real Options Exercises Topic: Corporate Financing and Capital Structure Case: *Debt Policy at UST, Inc., 2001 Topic: Lease Financing RWJ Ch 13: Risk and Cost of Capital (Optional) SB Ch 5: Issues in Capital Budgeting RWJ Ch 22: Options and Corporate Finance (Optional) A Real-World Way to Manage Real Options, Copeland and Tufano, HBR, 2004 Module 4: Financing, Capital Structure, and Dividend Policy Decisions RWJ Ch 17: Capital Structure (Optional) Case: AMG Lease Versus Buy Decision Topic: Dividends and Alternative Payouts Case: *Dividend Policy at FPL Topic: Raising Capital Through Public Offerings RWJ Ch 21: Leasing (Optional) RWJ Ch 19: Dividend and other Payouts (Optional) RWJ Ch 20: Issuing Securities to the Public (Optional) Case: *Netscape IPO Module 5: Firm Valuation and Evaluation of Mergers and Acquisitions Topic: Valuation of the Firm Case: Mercury Athletic: Valuing the Opportunity Topic: Adjusted Present Value (APV) Approach to Valuation Case: Using APV: A Better Tool for Valuing Operations. Topic: Merger and Acquisition Evaluation What s it worth? A General Manager s Guide to Valuation SB Ch 7: Using Financial Planning Models for Valuation Note on Adjusted Present Value RWJ Ch 29: Mergers, Acquisitions, and Divestitures (Optional) Case: *Radio One, Inc. Module 6: International Finance and Special Topics Topic: International Corporate Finance RWJ Ch 31: International Corporate Finance (Optional) Examine various approaches and issues in estimating cost of capital of a firm. Review issues in estimating cash flows for evaluating capital projects. Introduce real options, valuation, and applications to capital investment projects and other corporate finance decisions. Examine and evaluate various financing choices available to modern corporations. Evaluate pros and cons of leasing as an alternative to corporate borrowing. Review and evaluate corporate dividend polices in light of finance theory and business practices. Provide overview of the processes, procedures, and requirements of going public. Using free cash flows to value a firm. Introduce adjusted present value (APV) and its applications as an alternative to WACC based valuation. Discuss issues in valuation of merger and acquisition candidates. Examine various issues and complexities in evaluating
Session 21 Session 22 Session 23 Session 24 Lahore University of Management Sciences Case: Innocents Abroad: Currencies and International Stock Returns Topic: : International Corporate Finance Case/Field Survey: Emerging Markets Finance, Bekaert and Harvey, Journal of Empirical Finance, 2003 Topic: Behavioral Finance Insights for Corporate Finance Decisions Case/Field Survey: Behavioral Corporate Finance: A Current Survey, 2012 Topic: Value Creation and Ethical Behavior Case: Ethics in Finance Final Exam Review Final Examination (Comprehensive) RWJ Ch 31: International Corporate Finance (Optional) RWJ Ch 14: Efficient Capital Markets and Behavioral Challenges (Optional) Financial Measures of Value Creation cross border investing and financing alternatives. Focus on special issues and problems relating to financial decisions in emerging markets. Review findings of a recent comprehensive survey of behavioral finance and its insights in understanding some of finance puzzles and anomalies. Discuss various measures of value creation and review the implications of ethical behavior on financial decisions. 1 Note: Reading material designated as Optional is not part of the study pack. You may use any standard Corporate Finance textbook of your choice to review the session topic. Textbook(s)/Supplementary Readings Textbook: No specific textbook is required for this course. You may use any standard corporate finance textbook to review the assigned topic. A number of corporate finance textbooks are listed below. The course schedule refers to relevant chapters from Corporate Finance by Ross, Westerfield, and Jaffe (RWJ) for your reference (indicated as Optional ). Material indicated as Optional is not mandatory reading. You can substitute this material with any textbook of your choice. The study pack does not contain readings designated as Optional. Reference Books: Ross, Westerfield and Jaffe, Corporate Finance, 9 th Edition, McGraw Hill, 2010. (RWJ) Benninga, Simon, Principles of Finance with Excel, 2 nd Edition, Oxford University Press, 2011. (SB) Brigham, Eugene and Daves, P., Intermediate Financial Management, 8 th (or a later edition), Thomson, South Western. Brealey, Myers, and Allen, Principles of Corporate Finance, 8 th Edition, McGraw-Hill/Irwin, 2006. Additional Recommended Readings: Students are encouraged to read financial publications such as The Wall Street Journal, Financial Times; Business Recorder to stay abreast of developments related to this course.