Quantitative Corporate Finance
B7399-123
Summer 2014
Instructors
Kenneth Kitkowski
Director, Corporate Finance Group
Wells Fargo Securities
Hans Tallis, ht2109@columbia.edu
Managing Director, Corporate Finance Group
Wells Fargo Securities
Course Description
The course provides fundamental techniques for simulation-based quantitative corporate finance and
intuition regarding model-design best practices. We will develop a variety of tools for optimal corporate
financial policy in the following areas: cost-of-capital; debt level and structure; interest rate, exchange
rate and commodity risk management; and shareholder distribution policy.
Computation-intensive techniques have expanded the field of funding design in new directions,
providing better insights about how operating and market risks flow through a firm. Coupled with recent
advances in credit strength measurement and constraint-based optimization, we can now tune a capital
structure while quantitatively trading off the concerns of debt lenders, equity investors, and
management.
Students will produce fully functional simulation models in Excel, allowing Monte Carlo-based company
modeling and risk management. The limitations of quantitative approaches and their relationship to
classical methods will also be discussed.
Course Objectives
This course will enable you to do the following:
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Develop a quantitative framework for evaluating capital structure and corporate financial policy
changes
Integrate diverse and competing stakeholder perspectives into a unified decision model
Build basic Monte-Carlo simulation models
Critically evaluate the output of quantitative simulation models
Make judgments about what assumptions to make when building or evaluating a model
Difficulty
This course is intended to introduce state-of-the-art techniques in quantitative corporate finance. The
entering student should have a firm grounding in a variety of technical areas:
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Fundamentals of quantitative analysis, such as algebra, probability theory and statistics. (An
understanding of the basic concepts of calculus will be helpful but no assignments will require
calculus techniques.)
Statistics (at the level of the B6014 Statistics course)
Optimization and simulation (at the level of the B6015 Decision Models course)
Corporate finance (at the level of Corporate Finance, B7301)
Investing fundamentals (at the level of Capital Markets and Investments, B6302)
Excel
We expect students to finish the course comfortable in applying the learned techniques to new
situations. This will require significant work outside the classroom, as we believe much of the material is
best learned through individual practice.
Software
Excel will be used extensively for modeling work. VBA solutions to common modeling problems will be
mentioned but knowledge of VBA will not be assessed.
Grading
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Attendance and class participation compose 5% of the overall grade
Ten assignments will be set throughout the course. The best nine grades will equally weighted
to compose 60% of the overall grade
The midterm composes 15% of the overall grade
The final team project composes 20% of the overall grade
Administration
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Office hours on request
Email is usually the best way to reach us
Please display your name cards
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Lesson Plan
12 sessions, each comprising 2 lessons:
Lesson
Date
Title
Description
Lesson Reading
Assignment
Due
"How Do CFOs
Make Capital
Budgeting
Decisions"
1 - ratiobased 3statement
modeling
31-May
1
17 May
Introduction
Review of classical, analytic and quantitative
corporate finance. "Quant-light" methods
including peer analysis and regression.
Common metrics including EPS and P/E
2
17 May
Math and
probability
refresher
Convexity. Jensen's inequality. Simulating
random numbers by CDF inversion.
Historical simulation
TBD - Hull
7 - Project
proposal
2-Aug
3
31 May
Modern risk
measures
Review of different risk measures: variance,
value-at-risk and expected shortfall.
Desirable properties of risk measures.
TBD - Hull
2 - VaR and
ETL
7-Jun
4
31 May
Credit ratings
Rating agency scales and methodologies
"Global Retail
Industry"
3 - Regression
analysis
14-Jun
4 - Building a
cash flow
waterfall
21-Jun
5
07 Jun
WACC and
discounting
Different discounting methods. Estimating
WACC. Unlevering and relevering formulas.
WACC approaches to capital structure
"Valuing
Companies by
Cash Flow
Discounting",
"Levering and
Unlevering"
6
07 Jun
Statistics
refresher
Uni- and multi-variable regression.
Connection to maximum likelihood
estimators
"Interpreting OLS
Regression", TBD
- Hull
Modeling
business risks
Modeling business risks including cash flow
waterfalls, capex (and impact of failing to
make capex) and debt maturities. Modeling
firm operations such as sales and EBITDA
and handling seasonality
7
14 Jun
Raising,
allocating and
returning
capital
Fundamentals
of corporate
financial
policy
Required capital Returns on capital. Cost of
capital. Optimal leverage.
"CS and the CoC,
15.A-F", TBD Hull
8
14 Jun
9
21 Jun
10
21 Jun
Sustainable
modeling
Sustainable growth. Sustainable capital
structure.
11
28 Jun
Data
visualization
techniques
Presenting data visually. Common mistakes
Few
Impact of leverage on the firm. Business
disruption costs.
"Designing CS to
Create
Shareholder
Value", "How
Costly is Fin
Distress",
Federated Dept
Stores
12
28 Jun
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Debt capacity
& distress
21-Jun
Core theorems in corporate finance.
Modigliani and Miller. No arbitrage
arguments
5 - Leverage
and Growth
28-Jun
6 - Risky debt
and BDC
12-Jul
Lesson
Date
Title
Description
Lesson Reading
13
12 Jul
Dividends and
share
repurchases
Pros and cons of dividends versus share
repurchases. Technical impact on EPS,
volume and price. Signaling effects
"Dividend Policy"
14
12 Jul
A typical
project
Guest lecture
15
19 Jul
Fundamental
econometrics
techniques
Calibrating and simulating AR(1) processes
"Topics in Time
Series", TBD Hull
16
19 Jul
Midterm
exam
17
26 Jul
Excel
techniques
Simulation techniques in Excel
"Data Tables"
18
26 Jul
More
fundamental
econometrics
techniques
Multiple processes and correlations
19
02 Aug
Optimal debt
structure
Advantages and disadvantages of debt at
different maturities. Changing credit
spreads, market depth
20
02 Aug
Credit
spreads
The term and credit quality structure of
credit spreads. Evolution of spreads over
time
21
09 Aug
Interest rate
risk
Theories of the term structure. The fixedfloating debt decision
TBD - Hull
22
09 Aug
FX rate risk
Approaches to forecasting FX rates,
including various parity arguments. Fitting
and simulating FX rate models
"Managing
International
Risks"
23
16 Aug
Student
Presentations
24
16 Aug
Student
Presentations
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Assignment
Due
[study for
midterm]
"Simulation of
Prices, Rates and
Cash Flows, A and
B", TBD - Hull
TBD - Hull,
Copeland, "CS
and the CoC,
15.K-L"
8 - Simulating
EBITDA
volatility
26-Jul
9 - Correlated
scenario
generation
(new)
9-Aug
10 - Fixedfloating
analysis
16-Aug