BPA434: ADVANCED TOPICS IN CORPORATE FINANCE
Spring, 2003
class time: TTh 2:00-3:30
e-mail: [email protected]
office/voice mail: (253) 879-3471
Lynda Livingston
office: McIntyre 111-J
office hours: WF 1:00-2:30
TTh 12:30-2:00
and by appointment
COURSE OUTLINE
DESCRIPTION: Corporate finance is concerned with a corporation’s acquisition and
allocation of capital. In this course, we consider these interrelated issues, building on the
foundation laid in BPA315.
In 315, our consideration of the acquisition of capital revolved around calculation of the
weighted average cost of capital (WACC), using the assumptions that the firm’s project risk and
financing risk remained unchanged. What if those assumptions are violated? Even if they’re
not, how do we determine the optimal degree of leverage? Should we use retained earnings or
new stock issues for new equity funds? What sorts of options should we consider for our debt?
We consider these more advanced questions about capital acquisition in this class.
Once we have our capital, how do we deploy it? We discussed the basic net present
value approach to capital budgeting in 315. Here, we extend our analysis to consider project
interrelationships and abandonment options. We evaluate alternative methods of capital
budgeting. We consider the valuation not only of projects, but also of whole firms, when we
discuss mergers and acquisitions. After our discussion of these and related issues, you should
have a much better understanding of how corporations productively employ their resources to
create value.
PREREQUISITE: As discussed above, our analysis will draw extensively on the background
you received in BPA315. You will be expected to be thoroughly conversant with WACC,
capital budgeting, and valuation techniques. If you need supplemental resources to bolster your
knowledge (or simply your confidence), please see me.
OBJECTIVES:
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When you leave this class, you should be able to:
create a marginal cost of capital schedule for a firm
incorporate decision tree analysis, including abandonment options, into standard NPV
methodology
understand the advantages and disadvantages of the using internal rate of return for capital
budgeting
evaluate a bond refunding opportunity
appreciate both the lessee’s and the lessor’s rationale for leasing assets
apply valuation techniques to target firms for analyzing merger and acquisition opportunities
understand the applications of option theory to corporate finance
address the theoretical and practical difficulties of the capital structure and dividend
decisions
BPA434/SPRING, 2003/SYLLABUS
TEXT:
2
Principles of Corporate Finance, 6th edition, Richard A. Brealey
and Stewart C. Myers, Irwin/McGraw-Hill, 2000.
This is the best finance book ever written. It can also help you in the following classes:
International Finance (BPA435):
Financial Statement Analysis:
Investments (BPA432):
Financial Markets (BPA431):
Introductory Corporate (BPA315—too late!):
Ch.28
Ch. 29-32
Chs. 7, 8, 13, 20, 21, 27
Chs. 14, 15, 23
Chs. 1-12
COURSE REQUIREMENTS
EXAMS:
There will be two exams during the semester and a comprehensive final. (The
exams may contain some take-home parts.) For each in-class exam, you may bring one 8 1/2 x
11" sheet of paper with whatever essential trivia you desire. This sheet must contain hand-written
notes ONLY. No make-up exams will be given without a written excuse (such as a doctor's
note) for the original absence. You must inform me ON OR BEFORE the exam date that you
will need a make-up. All make-ups must be completed within one week of the original exam
date. The same material will be covered on a make-up, but the format may be different.
HOMEWORK:
There will be homework assignments required throughout the semester.
Homework will be handed out in class. Different assignments will have different preparation
times and point totals; some will be due the class period following their distribution, and some
will be due later. The exact number of assignments will vary according to my interpretation of
your degree of comfort with the material. Some of these homework assignments will be old test
questions, so that you can get an idea of what the tests are like.
Homework is due at the beginning of class on the due date. NO LATE HOMEWORK
ASSIGNMENTS WILL BE ACCEPTED. I will be handing out homework answers on the
same day that the assignments are due, and I obviously cannot accept homework handed in after
answers have been given out.
You will be allowed to drop one homework score. The homework assignments will
have different point totals. Your homework grade will be determined by forming the following
ratio: (points earned on kept assignments)/(total points available on kept assignments). (Any
extra credit points earned are simply added into the NUMERATOR only.) For example, say you
had the following homework scores:
ASSIGNMENT
1
2
3
TOTAL POINTS
100
55
200
YOUR POINTS
93
50
150
BPA434/SPRING, 2003/SYLLABUS
3
COURSE RQEUIREMENTS: HOMEWORK (continued)
Say you chose to drop HW#1. Then, the total points available on the assignments you kept (#2
and #3) would be 255, out of which you earned 200. Your ratio would therefore be 200/255 =
.7843. I would therefore use a grade of 78 for you homework grade. If, on the other hand, you
dropped HW#3, your score would be (93+50)/(100+55) = .9226, or 92. You are responsible for
determining which homework assignment to drop. You'll tell me on the last day of the quarter.
If you do not tell me, I will arbitrarily drop HW#1.
You may work with others in developing answers to homework problems, but you must
write up your assignments yourself. Any suggestion of scholastic dishonesty will result in a
NONDROPPABLE grade of 0 for that assignment for both the author of the original and
the copy.
QUIZZES:
I reserve the right to give any number of unannounced quizzes during the semester.
These quizzes may count as extra credit, or they may count as homework. The number of
quizzes will be negatively related to the class’s level of preparation and participation.
CASE ANALYSES: Case analyses throughout the semester will allow you the opportunity to
think critically, to demonstrate your grasp of relevant concepts, and to present a cogent
argument both written and orally. Several cases are specified in the syllabus; others will be
added as appropriate. We will discuss your requirements thoroughly as we get to each case.
However, all cases will require preparation outside of class; many will benefit from exposure to
small-group discussion.
PRESENTATION: There is a great body of literature in corporate finance. To enrich your
appreciation for the topics covered in your textbook, and to introduce you to empirical and
theoretical studies as they are conducted in finance, you will be required to read one article from
the attached list. Note that some of these articles represent state-of-the-art applications and
empirical analyses, while others are “classic,” often theoretical papers, that for decades have
defined the scope of the discourse on a particular topic. You will then lead a 10- to 20-minute
discussion on your paper, first giving a summary (covering its research question, empirical
methods or theoretical model, and major findings), then explaining its practical applicability to
the topics we have discussed. You also will provide each of your classmates with a 1-page
summary of your paper on the day of your presentation. This summary may be all your
classmates will know about the important work you have read, so create it carefully as a teaching
tool for them.
At least a week before your presentation, you will provide me with a copy of your paper.
(You may also give me a copy of your summary sheet, if you would like comments.) I will be
happy to discuss your papers with you: there may be parts of them that are especially relevant,
and that we would want to emphasize; there may also be parts best left for a doctoral program.
We can go over your papers together to identify these areas. However, be sure that you have
thoroughly read your paper before requesting such a meeting.
BPA434/SPRING, 2003/SYLLABUS
4
COURSE REQUIREMENTS: PRESENTATION (continued)
Although you will not be required to read all of the papers that are presented, you will be
expected to be conversant with them (read: you may be tested on them). (This is why the
summary sheets are so important.) You will also be expected to ask relevant questions of the
presenters: they are you best line to clarity on their paper’s issues.
Some of the possible paper choices are listed at the end of this syllabus. You will receive
additional choices during the second week of class. You may also choose your own paper—just
see me if you think you’ve found a suitable candidate. We will make our choices final by the
fourth week of class.
TERM PROJECT: You will participate in the creation of a corporate finance case, suitable for
use in future sections of BPA 434. This case will be submitted for possible presentation at the
October, 2003 annual meeting of the North American Case Research Association (assuming that
we finish it—we may not). Details on this project to follow.
MISSED HANDOUTS:
All handouts will be put into a box outside of my office door after their original handout
class period. I will not be bringing old handouts to class. You may pick up any handouts you
need at any time.
DO NOT PUT YOUR HOMEWORK ASSIGNMENTS IN THIS BOX!
Many of our handouts and class materials will be available on line. I encourage you to
become familiar with the retrieval of documents from our BPA432 website:
http://www.ups.edu/bpa/Llivingston.html (then choose the document you want).
GRADING:
The total points you earn in the course will be determined according to the
schedule below. At the end of the course, I will rank all students in the class and determine
grades by starting with top grades for the top students and working my way down. I do not
target an average grade. You should understand that your grade is determined by your relative
class standing and not by any particular number of points. If the average score on a given exam
were 50 (we shall hope that won't happen), and you received a 50, you'd have an average score,
which would then translate into an average grade (NOT a failing grade). Don't be overly
concerned with points! Also, realize that I cannot estimate your grade during the course-- I
need all the scores before making any such determination.
Course grades will be determined as follows:
SEMESTER EXAMS
FINAL EXAM
HOMEWORK/CASES
PRESENTATION
TERM CASE PROJECT
20% for better score; 15% for lower score
20%
15%
10%
20%
I reserve the right to award extra credit for superior class participation.
BPA434/SPRING, 2003/SYLLABUS
5
TENTATIVE CLASS SCHEDULE:
PLEASE NOTE THAT THIS SCHEDULE IS TENTATIVE. We will address the
topics in the order described below, but our timing may be off a bit, as we adjust the pace
of the class to your needs. We will not sacrifice thoroughness or clarity simply to remain
on this schedule. Please be ready for minor scheduling adjustments that will be announced
in class. (Note: we will NOT change the exam days, however; if necessary, we will simply
adjust an exam’s coverage.)
In addition to the textbook chapters listed below, you will have journal articles and
excerpts from other books to address each of the topics below. You will be given a detailed list
of these additional sources at the beginning of each section of the course.
BACKGROUND READING:
I expect you to be familiar with the material in the following chapters. If you find
anything about which you’re unclear, please tell me as soon as possible so that we can create a
refresher for the class.
Chapters 1, 2, 3, 4 (p. 58-70), 25 (p. 701-713), 35 (p. 994-998)
SCHEDULE IN BRIEF:
TOPIC
WEEK(S)
DATES
I: CAPITAL BUDGETING
1-4
1/21-2/14
TEXT READING
Chs. 5, 6, 9, 10-12
II: DIVIDEND AND CAPITAL STRUCTURE POLICY
5-6
2/17-2/28
Chs. 16-19
III: DEBT AND OPTIONS
7-10
3/3-4/4
Chs. 22-26
IV: MERGERS, ETC.
11-15
Ch. 27, 33, 34
4/7-5/6
BPA434/SPRING, 2003/SYLLABUS
6
READING LIST/PRESENTATION PAPERS
Jensen, Michael C., “Value Maximization, Stakeholder Theory, and the Corporate Objective
Function,” Journal of Applied Corporate Finance, Fall 2001, Vol 14, No 3, 8-21.
CAPITAL BUDGETING:
Samuel C. Weaver, “Measuring Economic Value Added: A Survey of the Practices of EVA
Proponents,” Journal of Applied Finance, Vol. 11, No. 1, 2001.
LEASING:
Lawrence D. Schall, “The Evaluation of Lease Financing Opportunities,” Midland Corporate
Finance Journal, Spring 1989.
MERGERS AND ACQUISITIONS/CORPORATE CONTROL:
Harry DeAngelo and Edward M. Rice, “Antitakeover Charter Amendments and Stockholder
Wealth,” Journal of Financial Economics, Vol. 11, 1983, p. 329-360.
C.G. Holderness and D.P. Sheehan, “Raiders or Saviors? The Evidence on Six Controversial
Investors,” Journal of Financial Economics, Vol. 14, 1985, p. 555-579.
Koeplin, John, Atulya Sarin, and Alan C. Shapiro, “The Private Company Discount”, Journal of
Applied Corporate Finance, Winter 2000, Vol 12, No 4 94-101
DIVIDENDS:
Franco Modigliani and Merton Miller, “Dividend Policy, Growth, and the Valuation of Shares,”
Journal of Business, October 1961.
CAPITAL STRUCTURE:
Franco Modigliani and Merton Miller, “The Cost of Capital, Corporate Finance, and the Theory
of Investment,” American Economic Review, June 1958.
Titman, Sheridan, “The Modigliani and Miller Theorem and the Integration of Financial
Markets,” Financial Management, Spring 2002, 101-115
D’Souza Julia and John Jacob, “Why Firms Issue Targeted Stock,” Journal of Financial
Economics, June 2000, Vol 56, No 3, 459-483
OPTIONS:
Mark Rubinstein and Hayne E. Leland, “Replicating Options with Positions in Stock and Cash,”
Financial Analysts Journal, July/August 1981.
C.R. Narayanaswamy, David Schirm, and Ravi Shukla, “Financial Distress and the StockholderBondholder Conflict: Application of Binomial Option Pricing Methodology,” Journal of Applied
Finance, Vol. 11, No. 1, 2001.
BPA434/SPRING, 2003/SYLLABUS
7
1
introduction/
review of bond and stock valuation
Chs. 1-3
(this should be a review)
2
corporate financing: basics
Chs. 13, 14
3
dividend policy
Ch. 16
4-6
7-9
leverage and WACC
capital budgeting: alternatives to NPV
NPV
(application: bond refunding)
incorporating uncertainty
Chs. 17-19
Ch. 5
Ch. 6
EVA
Ch. 10
Chs. 9 and 11
(excerpts)
Ch. 12
(excerpts)
10
leasing
Ch. 25
11-12
mergers and
corporate control
Ch. 33
Ch. 12
(excerpts)
Ch. 34
BPA434/SPRING, 2003/SYLLABUS
SCHEDULE IN BRIEF (continued)
WEEK(S)
DATES
TOPIC
13-15
options: basics
real options
warrants and convertibles
8
TEXT READING
Ch. 20
Ch. 21
Ch. 22
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BPA434: ADVANCED TOPICS IN CORPORATE FINANCE