Professor Kose John
Spring 2003
Corporate Finance
Course Overview
Corporate Finance is an introductory course in finance, specifically designed for MBA participants
with no prior exposure to finance. It provides an overall perspective of finance, both in investments
and corporate finance. In the first part of the course we will develop valuation rules, which are
general methods to determine the current value of risky assets. These assets may be assets that
are traded on financial markets or real assets that include the projects being considered for
investment by corporations. In either case the risky asset may be thought of as a multiplied
sequence of uncertain cashflows. Coming up with a valuation rule involves understanding how
markets price risk and return. Ideas of present value computations, systematic risk and the
capital asset pricing model (CAPM) are components of a very general valuation rule. Notes #1
gets into more details. Methods for pricing options give rise to another valuation rule.
In the second part of the course we will see applications of the valuation methodology to come
up with decision criteria in corporate finance. The net present value rule is a simple application
of the valuation rule to take investment (or capital budgeting) decisions optimally in corporate
finance. Similar ideas will be used to come up with criteria for financing (and dividend)
decisions for the corporation. The valuation rules will be modified to take into account many
real-world features such as corporate and personal taxes, bankruptcy cost, agency cost, and the
possibility that corporate insiders may be better informed than the investors in the market. These
features will affect the optimal debt/equity decisions and the optimal dividend decisions of the
corporation. Notes#2 on Capital Structure gets into details of this application.
These ideas are then used to study some practical issues in investment, capital budgeting, real
options and corporate finance. These topics include valuation of stocks and bonds, valuation of
corporate assets with option features, valuation of companies, capital budgeting, corporate
financing and capital structure issues, agency problems and corporate governance.
Materials Required:
Text: R. Brealey and S. Myers: Principles of Corporate Finance, Seventh Edition, McGraw-Hill
2003
Two Cases:
1. The Super Project
2. Marriott Corporation: The Cost of Capital (Abridged).
A selected set of PowerPoint slides most useful for following my lectures for the five
sessions are available on the course material website.
Three teaching notes will also be used:
Notes #1: Managerial Objectives and Valuation Rules
Notes #2: Capital Structure
Notes #3: Notes on Capital Budgeting
All the lecture notes are available on the web below.
Problem Sets:
Two problem sets (problem set and APV-WACC problems) containing selected questions
from the textbook and practice questions of the studied material are available on the web
below. The student should try and solve the problems without using the solutions. Brief
solutions to the problems sets will be handed to students.
Grading:
The grade in the course will be determined based on the final examination and the case
report.
80% Final Exam Grade
20% Case Report
Outline of Topics
Course Overview
Overview of Finance
1. Financial Markets and Net Present Value Rule, How to Calculate Net Present Values.
Applications: Stock and Bond Valuations.
2. Risk and Return, The Capital Asset Pricing Model, Risk-Adjusted Discount Rate.
Applications: Capital Budgeting.
3. Advanced Issues, Real Options
4. An Overview of Corporate Financing, How Corporations Issue Securities
Capital Structure Issues in Perfect Markets, Corporate Taxes, Personal Taxes, Bankruptcy
Costs, Agency Costs and Corporate Governance.
5. Interactions of Investment and Financing Decisions, Adjusted Present Value.
Corporate Finance
Course Outline and Readings
Topics
Session 1
Course Overview
Overview of Finance,
Financial Markets and Net Present Value Rule
How to Compute Net Present Values
Applications Stock and Bond Values
Valuing a business
Readings
Notes#1
BM Chapters 1,2,3,4
BM Section 4-5
Session 2
Risk and Return, Systematic Risk
Beta, Measuring Beta,CAPM
The Capital Asset Pricing Model
Risk in Capital Budgeting
BM Chapters 7
BM Chapters 8
BM Chapters 9
Session 3
Capital Budgeting Criteria
NPV, IRR, and Equivalence
Capital Budgeting Examples
Real Options, Decision Trees
BM Chapter 5
Chapter 6
BM Chapter 10-3
Session 4
Capital Structures Issues in Perfect Markets
Corporate Taxes, Personal Taxes
Interaction of Investment and Financing Decisions
Adjusted Present Value
BM Chapters 17, 18
Notes on Capital Structure
Discuss Case 1: The Super Project
Session 5
An Overview of Corporate Financing
BM Chapters 14, 15, 34
Corporate Governance in Different Countries
Discuss Case2: Marriott Corporation
How Corporations Issue Securities
Venture Capital, IPOs, International Security Issues
_____________
BM = Brealy and Myers, Principles of Corporate Finance, Seventh Edition (Text book).