CORPORATE VALUATION AND FINANCING

Transcription

1 Prof. Hugues Pirotte SOLVAY BRUSSELS SCHOOL UNIVERSITÉ LIBRE DE BRUXELLES 50 AV. F. D. ROOSEVELT, CP145/ BRUXELLES CORPORATE VALUATION AND FINANCING COURSE OUTLINE 2014 GEST-D-408 (INGEST+Sciences) Brussels, September 15 th, 2014 COURSE SUMMARY Course Objectives The learning outcome of this course is to provide you with an advanced approach on the assessment of investment and financing decisions to be taken by corporations, bearing in mind their intimate relationship with financial markets and the links with the assessment of their exposures. This course is intended to students wishing to work in the financial community or aiming at jobs with financial responsibilities within large corporations. The course is divided in two parts. First, we examine the toolbox of financial evaluation of assets and the structuring of the liability side. Second, we focus on events of the entrepreneurial financial life of the company to apply the elements learned in the first part: IPOs (going public vs. going private), M&As & other restructuring operations, specialized debt financing & credit risk. Corporate governance, and the lessons learned from the financial crisis are an inherent part of the various developments of the course. Risk management, whilst an important part of the Treasury operations of multinationals, will be approached more deeply within the elective course Risk Management and Governance, taught in the second semester. Material The material comprises: available immediately on the shared dropbox with the students and through its final update: The slides: an additional copy of the slides with notes is saved after each course. The Excel complementary teaching notes. The Exercises (Travaux Pratiques TP) [see the session dates below] Mini-cases. 1

2 The readings: these pdf files are compulsory to read. Extra: facultative readings and additional elements of comprehension. Reference One of the two following references can be used together with the slides of the course, although you should be self-sufficient with the material distributed through the slides and articles: [modern reference in the same style than Brealey and Myers, or Ross, Westerfield and Jaffe] Berk & DeMarzo (2014), Corporate Finance, Pearson Education, 3 rd edition, ISBN: (BdM). Be careful about not buying the version called The Core. This version is an excerpt of the global one. If you already own the reference of one of the following groups of authors, keep it! Brealey and Myers (BM) Ross, Westerfield and Jaffe (RWJ). [more theoretical but deep and sound] Copeland, Weston & Shastri (2014), Financial Theory and Corporate Policy, Pearson Education, 4 th edition, ISBN: (CWS). For those who would want a concise complement and exercises in French (facultative): Farber, M. Laurent, K. Oosterlinck, H. Pirotte, Finance, 3 rd edition, Collection Synthex, Pearson Education, ISBN13: (3 rd edition to be published soon). For those of you willing to deepen even more their background, here are some additional references: Grinblatt, M. & Titman, S., Financial Markets and Corporate Strategy, Irwin/McGraw- Hill, Weston, Chung & Hoag, Mergers Restructuring and Corporate Control, Prentice Hall, For those who would like easy but exciting readings on the subjects covered here, I would suggest: Bernstein, Peter, Capital Ideas Evolving: The Improbable Origins of Modern Wall Street, John Wiley & Sons, Burrough & Helyar, Barbarians at the Gate, Harper & Row, Nora Dominique, Les possédés de Wall Street, Paris, Deno 1, Assistant Teaching assistant: Nicolas Degive will be providing support through the exercise sessions and through his availability at confirmed hours. Please be aware that support relates to the comprehension of the material, the principles and philosophy of the course, not to matters of precision in calculations or semantic details. 2

3 Pre-Requisites The previous course of Financial Theory or equivalently, the following topics that I consider you must be familiar with: 1. Present value, the term structure of interest rates, bonds valuation, and basic stock valuation. 2. Financial Statements Analysis 3. Capital budgeting (Net Present Value and Internal Rate of Return) & the Free Cash Flow Model (FCFM) 4. Portfolio theory & the Capital Asset Pricing Model (CAPM) 5. Option valuation (binomial model) ECTS The course has 5 ECTS which means that you should devote at least 125 hours to it: Classes: 25h. Exercise sessions (TPs): 25h. Cases to prepare, additional exercises and readings: 50 h Preparation exam: 25 h Exercise Sessions (TPs) 5 sessions + 1 review session will be organized. Please verify the scheduling on GeHol (ULB) and the update of the present outline. Simulation Game (contributed by GLG partners) Coordinator: Niels Pécriaux (GLG partners) Kickoff date: TBD All specifications of the game will be announced on that day, during one hour. All necessary documents and website will be updated accordingly. Exams and Grading Final grade = Final exam (70%) + Simulation Game (30%) + Bonus points (2) for class participation (You MUST bring a nametag with both firstname and LASTNAME on it). You will be requested to fill in your registration to this course additionally through the website of the course in the week from Monday September 30 th to Monday October 14 th included (compulsory). For the Solvay-GLG Challenge, you will need to define groups of 4-5 people using the same links provided on the website of the course for your registration. The final exam is a closed-book exam, with a personal summary of max. 5 full pages (rectoverso, 10 faces in total) handwritten allowed. Grades are carried-over to the second session according to the rules set by Solvay Business School. 3

4 Contact & Website Please follow strictly the following convention when sending an to us: the subject of your should be composed in the following way: MA1 > CoValFi > [subject]. or at Take a frequent look at your dropbox or at for news: 4

5 OUTLINE All sessions will comply with the following time schedule: 12h10 13h Theory 13h00 13h10 Break 13h10 14h Case, applications. Extensions on Theory THE ASSET SIDE Theme 1 : Introduction 1 session Presentation of the outline and the spirit of the course The firm and its environment Asset Pricing (review) Valuation in certainty vs. uncertainty Asset pricing fundamentals: from the general equilibrium to the no-arbitrage pricing principle. The 3 layers of financial valuation. Evolutions, shortcomings and need for further development. Reference: CWS 1,2,3,4 BdM 3,4 Readings: Farber (2002), Binomial Option Pricing, Teaching Note Others might include: o Malkiel (2003), The Efficient Markets Hypothesis, Journal of Economic Perspectives, Volume 17, Number 1, Winter 2003, pages Theme 2 : Valuation: from DCF to Real Options 2 sessions Very quick review of valuation techniques Free cash flows, DCF valuation and IRR Limits? Using option pricing theory for corporate valuation. Examples of uses From the binomial model to the Black & Scholes model Simulations and cash flows at risk Reference: CWS 2 Investment Decisions: The Certainty Case CWS 7 Pricing Contingent Claims CWS 9 Multiperiod Capital Budgeting under Uncertainty BdM 20 Financial options BdM 21 Option valuation BdM 22 Real options BM 20 Spotting and Valuing Options BM 21 Real options RWJ 22 Options and Corporate Finance: Basic concepts RWJ 23 Options and Corporate Finance: Extensions Readings: Luehrman (1998), Investment Opportunities as Real Options Getting 5

6 Started on the Numbers, Harvard Business Review. Luehrman (1998), Strategy as a Portfolio of Real Options, Harvard Business Review. Grullon, Leandres & Zdhanov (2012), Real Options Volatility and Stock Returns, The Journal of Finance. Others might include: o Saenz-Diez (2008), Real Options Valuation - A Case Study of an E- commerce Company, Journal of Applied Corporate Finance. THE IMPACT OF THE LIABILITY SIDE Theme 3 : Principles of Investment Decision-Making (quick review) 2 sessions Criteria The FCF model: the DCF method applied. The Cost of Capital: a generalised approach ALM and the cost of capital: an introduction The various versions of WACC Modigliani-Miller (MM 1958, 1961, 1963) Miles-Ezzel (ME) Harris-Pringle (HP) References: CWS 15 Capital Structure and the Cost of Capital BdM 14 Capital Structure in a Perfect Market BdM 15 Debt and Taxes BdM 18 Capital Budgeting and Valuation with Leverage BM 14 An Overview of Corporate Financing RWJ 14 Long-Term Financing: An introduction RWJ 15 Capital Structure: Basic concepts RWJ 12 Risk, Cost of Capital and Capital Budgeting RWJ 17 Valuation and Capital Budgeting for the Levered Firm Readings: Miller (1998), The MM Propositions 40 years later, European Financial Management. Ruback, R. (2002), Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows, Financial Management. 6

7 Theme 4 : Optimal capital structure: theories and empirical studies 1 session Agency theory Asymmetric information & the pecking order hypothesis Signalling Review of recent studies on the optimisation of the capital structure by corporate firms. References: Previous+ BdM 16 Financial Distress, Managerial Incentives and Information BM 17 Does Debt Policy Matter? BM 18 How Much Should a Firm Borrow? ( ) RWJ 16 Capital Structure: Limits to the use of debt BM 19 Interactions of Investment and Financing Decisions BM 25 Leasing Readings: (Review): Harris, M. and A. Raviv (1991), The Theory of Capital Structure, The Journal of Finance, vol. 46, 1, (March 1991). Myers, S. (2001), Capital Structure, Journal of Economic Perspective, 15, 2 (Spring 2001) Myers & Majluf (1984), Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics. Others might include: o The Economist, Debt is good for you, Jan 25th THE FIRM AND ITS (FINANCIAL) MARKET Theme 5 : Risky debt 2 sessions (3/ /11) Financial distress and bankruptcy Merton s model vs. binomial model and the implementation by KMV Risky debt and the optimal capital structure paradigm, Leland s approach Reference: CWS 15 D The Cost of Capital with Risky Debt BdM 24 Debt Financing BM 23 Valuing Debt BM 24 The Many Different Kinds of Debts RWJ Options and Corporate Finance RWJ 20 Long-Term Debt Readings: Collin Dufresne, P., Goldstein, R. S., & Martin, J. S. (2001), The determinants of credit spread changes, The Journal of Finance, 56(6), Others might include: o Krishnaswami & Yaman (2007), The role of convertible bonds in alleviating contracting costs, The Quarterly Review of Economics and Finance. 7

8 Theme 6 : Convertible bonds and warrants 1 session (17/11+24/11) Issuing hybrid forms of securities to the market. Why? Understanding convertibles and warrants Reference: BM 22 Warrants and Convertibles RWJ 24 Warrants and Convertibles Readings: Mayers, D. (1998), Why firms issue convertible bonds: the matching of financial and real investment options, Journal of Financial Economics, 47(1), If time permits Theme 7 : Raising Capital, Going Public and IPOs 1 session From seed capital to going public The IPO process The undervaluation of IPOs IPOs and long run performance Reference: CWS 11 F Semi-strong form anomalies BdM 23 The Mechanics of Raising Equity Capital BM 13 Corporate Financing and the Six Lessons of Market Eff. BM 15 How Corporations Issue Securities RWJ 13 Corporate-Financing Decisions and Eff. Cap l Markets RWJ 19 Issuing Securities to the Public Readings: Ritter, J. and I. Welch (2002), A Review of IPO Activity, Pricing and Allocations, Journal of Finance, 57(4), August 2002, Theme 8 : Mergers and Acquisitions 1 session Ownership, control and restructuring Forms Theoretical explanations Special cases Protection & Shareholder value Reference: CWS 18 Acquisitions, Divestitures and Corporate Governance BdM 28 Mergers and Acquisitions BM 33 Mergers RWJ 29 Mergers and Acquisitions Readings: Hackbarth & Morellec (2008), Stock Returns in Mergers and Acquisitions, The Journal of Finance, vol. LXIII, no. 3, June Cases: RJR Nabisco 8

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