FIN 401 Corporate Finance

Berk, Jonathan, DeMarzo, Peter Corporate Finance 4th ed (Pearson, 2017).
ISBN-10: 0-13-408327-X
ISBN-13: 978-0-13-408327-8

Students can obtain this text book from the following source:
http://www.mypearsonstore.com/bookstore/corporate-finance-
9780134083278?xid=PSED

All reading and (optional) homework assignments referenced in this syllabus refer to this text

1) 1) In addition, it is recommended that students have the accompanying study guide by Pearson. This can be accessed here:
http://catalogue.pearsoned.ca/educator/product/Corporate-Finance-Plus-MyFinanceLab-with-Pearson-eText-Access-Card-Package-4E/9780134408897.page

2) The following study guide will be made available upon enrollment:

Berk, Jonathan, DeMarzo, Peter PowerPoint Presentation to
accompany Corporate Finance 4th ed (Pearson, 2017).

Lesson Overview

Lesson 1: The Corporation
Read Chapter 1

In this lesson the students learn about sole proprietorships and partnerships.
The students look at limited liability companies and corporations. The students
learn about the tax implications for corporate entities and look at ownership
versus. The students learn about the role of the stock market for the corporate
manager.

Lesson 2: Introduction to Financial Statement Analysis
Read Chapter 2

In this lesson the students learn about the disclosure of financial information and
the preparation of financial statements. The students learn about the different
types of financial statements such as the balance sheet, the income statement,
and the statement of cash flows, as well as the statement of stockholders equity.
The students look at the issues surrounding accounting manipulation.

Lesson 3 – Financial Decision Making and the Law of One Price
Read Chapter 3

In this lesson the students learn about valuing costs and benefits and using
market prices to determine cash values when competitive market prices are not
available. The students learn about interest rates and the time value of money.
The students examine present value and the NVP decision rule. The students
look at net present value and the NVP decision rule. The students learn about
arbitrage and the law of one price. The students look at how to value a security
and determine a no-arbitrage price. The students look at how to determine the
interest rate from bond prices and how to value a portfolio. The students learn
about the issue of risk and risk premiums. The students learn about arbitrage
with respect to transactions costs.

Lesson 4 – Time, Money, and Interest Rates
Read Chapter 4-6

In this lesson the students learn about the issues surrounding moving cash flows
and time travel. The students learn about the power of compounding and valuing
a stream of cash flows. The students look at perpetuities, annuities, and other
special cases perpetuities. The students learn about annuities and growing cash
flows. The students work on problem solving techniques with respect to present
value or future value, cash flows, internal rate of return, and solving for the
number of periods. The students look at the issues surrounding interest rates
such as the effective annual rate and adjusting the discount rate to different time
periods. The students look at the determinants of interest rates such as inflation.
The students look at real versus nominal rates investment and interest rate
policy. The students examine the yield curve and discount rates. The students
learn about the common mistake using the annuity formula when discount rates
vary the yield curve and the economy. The students look at investment decision
rules with respect to NVP and stand-alone projects. The students learn about
the payback rule and the internal rate of return rule. The students look at IRR
and the incremental IRR rule. The students learn about how to evaluate projects
with different resource requirements and create a profitability index.

Lesson 5 – Valuing Projects and Firms
Read Chapters 7-9

In this lesson the students learn how to forecast earnings and revenue and make
cost estimates. The students look at incremental earnings forecasts. The
students learn about sunk costs and the opportunity cost of idle assets. The
students learn how to determine free cash flow and NVP. The students learn
about project analysis with respect to break-even analysis, sensitivity analysis,
and scenario analysis. The students learn how to value bonds and learn about
bond cash flows, prices, and yields. The students look at the concept of coupon
bonds and learn about discounts and premiums. The students look at clean and
dirty prices for coupon bonds with respect to interest rate changes and bond
prices. The students look at the yield curve and learn about bond arbitrage. The
students examine corporate bonds and corporate bond yields and yield curves.
The students learn how to value stocks with respect to the investment horizon.
The students look at dividend yields, capital gains, and total returns. The
students examine the dividend-discount model with respect to constant dividend
growth and changing growth rates. The students learn about total payout and
look at free cash flow valuation models. The students learn about valuation
based on comparable firms and look at valuation multiples.

Lesson 6 – Capital Markets
Read Chapters 10-12

In this lesson the students learn about risk and return and how they are
measured. The students look at probability distributions with respect to expected
return and learn how to interpret variance and standard deviation. The students
look at average annual returns and the variance and volatility of returns. The
students learn how to use past returns to predict the future. The students look at
the importance of diversification in stock portfolios in terms of firm-specific versus
systematic risk. The students learn how to estimate the expected return by
measuring systematic risk and estimating the risk premium. The students learn
about how to make the optimal portfolio choice with respect to the expected
return of a portfolio and volatility. The students learn about how to compute a
portfolio’s covariance and correlation and learn about their meaning. The
students look at risk-free saving and borrowing and the value of investing in risk-
free securities. The students learn how to use the capital asset pricing model
and determine the risk premium. The students learn about market risk and beta
and how to estimate beta from historical returns using linear regression. The students learn how to extend the CAPM to account for investor information and rational expectations.

Lesson 7: Investment Behavior and Market Efficiency
Read Chapter 13

In this lesson the students learn about alternative models of systematic risk by
looking at market capitalization and past returns. The students learn about the
implication of positive alphas with respect to proxy error and non-tradable wealth.
The students look at multifactor models of risk in terms of constructing the
efficient portfolio. The students examine how to build a multifactor model and
calculate the cost of capital using the Fama-French-Carhart factor specification.
The students look at the variable models of expected returns and how these
methods used in practice.

Lesson 8: Capital Structure
Read Chapter 14

In this lesson the students learn about equity versus debt financing with respect
to leverage on risk and return. The students look at the Modigliani-Miller model
with respect to leverage, arbitrage, and firm value. The students learn about
Modigliani-Miller with respect to mm and the law of one price. The students look
at Modigliani-Miller with respect to leverage and the equity cost of capital and to
capital budgeting and the weighted average cost of capital. The students learn
about levered and unlevered betas with respect to cash and net debt.

Lesson 9: Debt and Taxes
Read Chapter 15

In this lesson the students learn about the interest tax deduction and how to
value the interest tax shield. The students learn about the benefits of
recapitalizing to capture the tax shield. The students learn about personal taxes
with respect to the interest tax shield and how to calculate the actual tax
advantage of debt cutting. The students learn about the dividend tax rate and
what is the optimal capital structure with taxes.

Lesson 10: Financial Distress, Managerial Incentives, and Information
Read Chapters 16-17

In this lesson the students learn about default and bankruptcy with respect to
capital structure. The students look at the bankruptcy code and the direct costs
of bankruptcy as well as the indirect costs of financial distress. The students look
at the tradeoff theory in terms of the determinants of the present value of distress
costs. The students look at the agency costs of leverage in terms of debt
maturity and covenants. The students learn about asymmetrical information and
capital structure in terms of issuing equity and adverse selection. The students
learn about the implications for equity issuance and for capital structure. The
students look at payout policy in terms of distributions to shareholders. The
students distinguish between dividends and share repurchases. The students
examine the Modigliani-Miller model with respect to dividend policy. The
students look at the tax disadvantage of dividends with respect to taxes on
dividends and capital gains. The students learn about dividend capture and tax
clienteles. The students learn about payout versus retention of cash with respect
to signaling. The students learn about signaling with respect to look at stock
dividends, splits, and spin-offs.

Lesson 11: Advanced Valuation
Read Chapters 18-19

In this lesson the students learn about capital budgeting and valuation with
leverage. The students learn the weighted average cost of capital method and
how to use the WACC method. The students learn to use the adjusted present
value method and the flow-to-equity method. The students learn to calculate the
value of equity cash flows. The students look at how to estimate the unlevered
cost of capital in terms of project leverage and the equity cost of capital. The
students learn to determine the incremental leverage of a project. The students
look at periodically adjusted debt with respect to leverage and the cost of capital.
The students learn to use the WACC and the FTE method with respect to
changing leverage personal taxes. The students learn about how to make a
valuation using comparables with respect to operational improvements and
capital expenditures. The students learn about how to build a financial model
and forecast earnings with respect to working capital requirements and free cash
flow. The students learn about how to make a CAPM-based estimation and to
unlever using Ideko’s unlevered cost of capital. The students learn about the
multiples approach and the discounted cash flow approach to continuation value.
The students look at the APV valuation of Ideko equity. The students also take a
look at sensitivity analysis.

Lesson 12: Options
Read Chapters 20-22

In this lesson the students look at options and options contracts. The students
learn how to interpret stock options quotations as well as interpret options on
other financial securities. The students look at how to value the long and short
positions in an option contract and how to value options at expiration. The
students learn about put-call parity and factors affecting options prices. The
students learn about exercising options early for non-dividend-paying and
dividend-paying stocks. The students look at options with respect to equity and
debt in corporate finance. The students learn to calculate the value of an option
using the binomial option pricing model and the Black-Scholes option pricing
model. The students learn about risk-neutral probabilities and the implications of
the risk-neutral world. The students learn about versus financial options and
making a decision tree analysis. The students learn how to value the growth
potential of a firm with respect to staged investment and abandonment options.

Lesson 13: Long-Term Financing
Read Chapters 23-25

In this lesson the students learn about the mechanics of raising equity capital for
private companies and public offerings. The students learn about the mechanics
of an IPO and the cost issuing an IPO. The students look at the seasoned equity
offering and the mechanics of an SEO. The students look at debt financing with
respect to corporate debt for both public and private debt. The students learn
about the use of sovereign debt, agency securities, and municipal bonds. The
students examine bond covenants with respect to repayment provisions, call
provisions, and convertible provisions. The students learn about the basics of
leasing with respect to lease payments and residual values. The students learn
about leases versus loans and end-of-term lease options. The students learn
about the accounting, tax, and legal consequences of leasing and how to make
the leasing decision. The students look at the valid arguments for leasing and
why not to lease.

Lesson 14: Short Term Financing and Financial Planning
Read Chapter 26-27

In this lesson the students learn about working capital management with respect
to the cash cycle and the operating cycle. The students learn about trade credit
terms and trade credit management. The students look at receivables
management and payables management. The students learn about inventory
management with respect to the benefits and costs of holding inventory. The
students look at cash management and the motivations for holding cash. The
students look at short-term financial planning and forecasting. The students
learn about the effects of seasonalities and positive and negative cash flow
shocks. The students look at the matching principle and learn about short-term
financing with bank loans, commercial paper, and secured financing.

Lesson 15: Mergers and Acquisitions
Read Chapter 28

In this lesson the students look at mergers and acquisitions and the reasons to
acquire. The students learn about economies of scale, integration, and
diversification as well as monopoly and efficiency gains. The students learn
about the takeover process and how to determine the value added from a
takeover. The students look at the free rider problem and toeholds. The
students learn about the leveraged buyout and the freezeout merger.

Lesson 16: Corporate Governance
Read Chapter 29

In this lesson the students learn about corporate governance with respect to
agency costs. The students learn about the concept of the board of directors and
board independence. The students look at different compensation policies such
as stock options and examine pay and performance sensitivity. The students
learn about conflict and management entrenchment. The students learn about
government regulation with respect to the Sarbanes-Oxley act and the Cadbury
Commission. The students learn about the problem of insider trading. The students look at corporate governance around the world in terms of the
protection of shareholder rights, controlling owners, and pyramids. The students
examine the stakeholder model and cross-holdings.

Lesson 17: Risk Management
Read Chapter 30

In this lesson the students learn about insurance with respect to risk
management. The students learn how to calculate the value of insurance and
make the insurance decision. The students look at commodity price risk with
respect to hedging. The students learn about vertical integration and storage
with respect to long-term contracts and futures contracts. The students look at
exchange rate risk and hedging with forward contracts. The students learn how
to calculate the price of currency forwards and how to hedge using options. The
students look at interest rate risk and how it can be measured. The students look
at duration-based hedging and swap-based hedging.

Lesson 18: International Corporate Finance
Read Chapter 31

In this lesson the students look at international corporate finance in terms of
integrated capital markets. The students learn how to calculate the value of
foreign currency cash flows using WACC valuation methodology in domestic
currency. The students learn about valuation and international taxation. The
students learn about internationally segmented capital markets and differential
access to markets. The students look at macro-level distortions and their
implications. The students learn about foreign exchange risk with respect to
capital budgeting,

The student’s final grade will be based on a final examination. Examination questions will cover all topics covered in the readings. Students will have two hours to complete the final examination.  Students will be assigned a number grade from 0-100. A letter grade will also be issued in accordance with the following scale:

90-100 – A
80-89 – B
70-79 – C
0-69 – non passing