BAFI502 CAPITAL STRUCTURE
Instructor:
Kai Li
HA-853
kai.li@sauder.ubc.ca
Office Hours: by appointment
Teaching Assistant:
Charles Gaa
HA-873D
charles.gaa@sauder.ubc.ca
Office Hours: Tuesday/Thursday 16:00-17:00
Syllabus
Course Objective:
This course focuses on the considerations that enter the capital structure and payout policy choices of a
firm. A review of the basic principles of capital structure and payout policy is provided followed by a
detailed discussion of specific considerations. The topics covered include the impact of taxes on the use
of debt and on payout decisions (dividends versus share repurchases), the use of hybrid securities to
address information asymmetry between managers and shareholders, the impact of capital structure on
managerial incentives, the role of capital structure on industry competition, financial distress and
restructuring. The course concludes with an overview of latest topics in corporate financing decisions.
Business cases and real world applications are used extensively throughout the course. This course will
be useful to students considering careers in corporate finance, investment banking, commercial banking
and consulting.
Teaching methods: I will present the basic insights of corporate finance theory, but emphasize the
application of theory to real business decisions. Each session will involve class discussion. In some
instances, discussion will be centered on lectures; in others it will be centered on a business case. Your
participation is critical to the success of the course. You are expected to read all cases, come to class, and
participate in class discussion. I welcome comments from you to improve the course.
Prerequisites: BAFI500 Corporate Finance and BAFI511 Investments. It will also help if you know
some basic economics and accounting.
Readings/Books:
• R. Brealey, S.C. Myers, and F. Allen, Principles of Corporate Finance, 2006, 8th ed., Irvin, McGrawHill (BMA)
• R.C. Higgins, Analysis for Financial Management, 2006, 8th ed., Irvin, McGraw-Hill
• Course package: Contains the case studies, and some supplementary readings for the course. Get it
from the Duplication Services Center in the basement of the Henry Angus building.
• Additional reading material will be distributed in class and posted on the WebCT.
Requirements/Grading:
• Case Write-ups: 85 %
- Students should form teams of 4 to 5, and hand in a single write-up per team.
- Both hardcopy and email-version of the write-ups are due on the day that the case is
discussed in the beginning of the class (make copies to refer to during the class). Please hand
in the hardcopies in class, and email the same write-ups to Charles.gaa@sauder.ubc.ca.
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- All cases require handing in write-ups.
Class participation: 15 %
Team formation:
Teams will be 4-5 students each. The first case write-up is due at the beginning of the second class. You
should email your team information (member names and IDs) to Charles Gaa, the teaching assistant of the
course before the second class.
Further details:
This course is designed to be time-consuming and challenging. The course is a combination of lectures
and cases.
Each group is required to submit ONE two-page memorandum on the cases.
The memorandums should be typed. They should be written as if your were presenting it to your business
colleagues. The two-page limit is for text only. You may attach as many numerical calculations as you
wish. Memorandums will not be accepted after the class has met.
Class attendance and participation in case discussions is critical to the learning process. While the
Brealey-Myers-Allen textbook is required, this book will often only provide a background for us. We will
cover material that is not actually in the book.
My teaching assistant is Charles Gaa. His main responsibility will be grading case write-ups and
answering questions during office hours.
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Course Outline
Objective: The aim of the course is to develop a framework to think about how firms finance their activities. We
will go back and forth between developing theories and confronting them to specific practical cases.
1 – Introduction
• Background readings:
- BMA, ch. 14: “An Overview of Corporate Financing”
- Higgins, ch. 1: “Interpreting Financial Statements”
- Higgins, ch. 2: “Evaluating Financial Performance”
2 – Case Study: Wilson Lumber Company
• Readings:
- BMA, ch. 29: “Financial Analysis and Planning”
- Higgins, ch. 3: “Financial Forecasting”
- Higgins, ch. 4: “Managing Growth”
3 – Lecture: Capital Structure 1
• Readings:
- BMA, ch. 17: “Does Debt Policy Matter?”
- BMA, ch. 18: “How Much Should a Firm Borrow?”
- Graham, “Estimating the Tax Benefits of Debt”
• Background reading:
- Higgins, ch. 5: “Financial Instruments and Markets”
- BMA, ch. 15: “How Corporations Issue Securities”
- Higgins, ch. 6: “The Financing Decision”
4 – Case Study: UST Inc.
5 – Case Study: Massey-Ferguson, 1980
6 – Lecture: Capital Structure 2: Informational and Agency Considerations
• Reading:
- Barclay, Smith, “The Capital Structure Puzzle: The Evidence Revisited”
- Bortolotti, Megginson, Smart, “The Rise of Accelerated Seasoned Equity Underwritings”
7 – Case Study: MCI Communications Corp., 1983
• Reading:
- BMA, ch. 25.6: “Convertible Bonds and Warrants”
• Background reading:
- Loncarski, Horst, Veld, “Why Do Companies Issue Convertible Bonds? A Review of Theory and
Empirical Evidence”
8 – Case Study: Intel Corporation, 1992
• Readings:
- BMA, ch. 16: “Payout Policy”
- BMA, ch. 26: “Leasing”
• Background reading:
- Fama, French, “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?”
- Grullon, Ikenberry, “What Do We Know About Stock Repurchases?”
- Opler, Pinkowitz, Stulz, Williamson, “Corporate Cash Holdings”
9 – Lecture: Frontier Topics in Capital Structure
• Background readings:
- BMA, ch. 33.3: “Conglomerates”
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BMA, ch. 34: “Governance and Corporate Control Around the World”
Broshko, Li, “Playing by the Rules”
Harford, Li, Zhao, “Corporate Boards and the Leverage and Debt Maturity Choices”
Hall, “The Six Challenges of Equity-Based Pay Design”
10 – Wrap-up of Financing
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