FIN 651 Corporate Financing Policy Bachelor of Arts (Business and Management) Fall Semester, 2013/2014 Academic Year

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1 Course leader: Lecturer(s): Department: Office hours: FIN 651 Corporate Financing Policy Bachelor of Arts (Business and Management) Fall Semester, 2013/2014 Academic Year J. CHAN (Ms) J. CHAN (Ms) International Study Programs Faculty of Business Administration To be advised Availability: Phone number: Room: 155 (Main building) address: / Course type: Prerequisites: Credits: Elective This is an advanced course in Finance. You will need to have successfully completed basic and intermediate courses in finance, accounting and statistics. Please approach me if you are unsure as to whether you have met the prerequisites. 3 credits/6 ETCS credits Number of hours per semester Time of class: Venue: The class meets once a week and each session is structured as an 90-minute lecture and 90-minute seminar, for a total of 45 hours per semester. Monday hrs To be advised Aims and objectives and description of the course: This advanced study of corporate financial analysis will provide students with an insight into the spectrum of capital acquisition instruments available in well functioning capital markets as well as understand how financial managers make real world decisions on capital structure and dividend policies. Learning outcomes: Participants should achieve the following learning outcomes: Knowledge and understanding participants will Develop an appreciation of the theory of capital structure and its implications for both perfect and imperfect markets Examine issues relating to information asymmetry, pecking order theory, signaling effects underlying the long term financing decisions that financial managers make Obtain an understanding of how to apply theory to practical situations, and to see the essence of financing problems in reality Intellectual skills participants will Improve analytical skills and critical thinking necessary to evaluate alternative financing decisions available to firms 1

2 Exercise powers of inquiry, logical thinking, and critical analysis of arguments and evidence Interpret and evaluate theoretical arguments and empirical evidence Course description Students will be introduced to a cornerstone of Corporate Financial decision-making: Capital Structure and the proportions of debt and equity financing that companies should adopt. We will begin our study with the famous theoretical propositions of Modigliani and Miller and analyze its applications to real world scenarios. The course will dwell in much detail on the discussion of how companies evaluate the financing process; the financing mix and choices as well as the process of achieving the optimal balance. We will also cover the other important pillar of corporate financial decision-making: the dividend decision and explore the contentious nature of dividends and how they do signal management s intention and firm s prospects, and as a result, are inextricably linked to firm s value. Much of the underlying theme of this course is grounded in real world applications where we would bring to our class discussions, corporate decision-making considerations that financial managers make. Methodology to be used: A combination of problem-solving and case study methodologies is used to illustrate theories and techniques helpful in financial analysis and planning. All students should make an effort to read the required material before class as this would enable you to make the most out of the lecture. All students are responsible for the material covered in class, as well as the material in the handouts and required readings for each class, regardless of whether they were able to attend the class. Attendance is COMPULSORY for seminars and lectures. Missing 25% of the classes will mean that you have failed the course (see ISP rules on class attendance). A problem set or case study will be assigned for home preparation each week. Students are expected to read the assigned material, relevant sections of the textbook and prepare the home assignment for discussion during the seminars. Students are encouraged to participate actively in the discussion of the topics and numerical problems. My teaching is most effective when students actively participate in class. This means that students must think along with me during class sessions. There must be substantial studentteacher interaction-- typically through student questions, comments, and answers to my questions. Students should have a strong impact on the class session. I expect all of us in the class to behave responsibly. Students, who behave irresponsibly, imposing costs on others, should expect to bear the consequences of their action. Laptops and mobile devices cannot be used when class is in session. Only Non-Programmable calculators (either financial or scientific) could be used in this course. 2

3 Detailed class schedule, 1 st 15 th week: Date of class Week 1 9 Sep Week 2 16 Sep Week 3 23 Sep Week 4 30 Sep Week 5 7 Oct Week 6 14 Oct Week 7 21 Oct Week 8 28 Oct Week 9 4 Nov Week Nov Week Nov Week Nov Topics to be discussed, readings required for the class Lecture 1: Overview of Corporate Financing - Patterns of Corporate Financing - Types of Financing Instruments (Ross(MFM) Chapter 13 & 14) Lecture 2: Capital Acquisition I - Equity Financing - Venture Capital - Underwriting and Initial Public Offering - Private Placements (Ross(MFM) Chapter 19); Brigham Chapter 20 Lecture 3: Capital Acquisition II- Debt Financing - Yields to Maturity, Interest Rates and Bond Prices - Convertibles, warrants, hybrid instruments (Ross(MFM) Chapter 20 & 24); Brigham Chapter 19 Lecture 4: Capital Structure I Tradeoffs & Theory - Discipline of Debt - Trade off theory of Debt (Ross(MFM) Chapter 15 & 30); Brigham Chapter 15 Lecture 5: Capital Structure II Theory of Capital Structure - Miller & Modigliani s optimal capital structure (Ross(MFM) Chapter 16); Brigham Chapter 15 Lecture 6: Capital Structure III Value of firm - Optimal capital structure - Financing mix and company life cycle - Hierarchy of financing (Handouts) MID TERM EXAM (Lectures 1-5) Lecture 7: Capital Structure IV Practical applications - Analyzing the capital structure of companies using different techniques - Choosing an optimal capital structure (Handouts) Lecture 8: Dividend Policy I - Information Content of Dividends - Stock Repurchases (Ross(MFM) Chapter 18; Brigham Chapter 14 Lecture 9: Dividend Policy II - The Dividend Debate - Dividend Policy and Firm Value (Ross(MFM) Chapter 18); Brigham Chapter 14 Lecture 10: Dividend Policy III Practical Applications Analyzing the capital structure of companies using different techniques (Handouts) Project Presentation and Submission Deadline for submission (hard copy): In class, Monday 26 Nov 3

4 Week 13 2 Dec Week 14 9 Dec Week 15 (Date to be advised) Lecture 11: Bankruptcy, Reorganization and Liquidation - Financial distress and consequences - Reorganization & Liquidation in bankruptcy Brigham Chapter 22 Final Review session Final exam Assignments: Group Project (30%) A group assignment will be handed to you in week 2 and you will be required to work in groups of 4 and submit the findings in a hard-copy report submission as well as a group presentation in Week 12. This report and presentation will comprise of 25 points and 5 points respectively of your total grade. Each member of the group may be asked to assess each other s contribution to the group project and hence, the report grades may be scaled depending on peer assessment. Presentation grades, however, will be individually assessed by the instructor. Proper referencing and plagiarism rules are strictly enforced for all written assignments. Assessment, grading: The assessment for the course comprises of 4 parts, with the weightage of each mode given as follows: 10% Coursework 30% Project & Presentation (see above) 30% Mid term 30% Final exam * Grading is based on the total score in line with standard grading patterns in the ISP. * You will need to pass the final exam in order to pass the course. Mid term (30%) & Final Exam (30%) The dates for the exams are in accordance with the ISP academic calendar. This course has ONLY one mid term and one final exam. The final exam is a closed-book cumulative exam, covering the material expounded during the whole course. The grade obtained for the course is marked against the standards of the ISP and as such, is final and non-negotiable. No s/conversations on trying to better your score will be entertained after the exam. You must take the exams during the allotted timeslots. Exams are scheduled well in advance so that you can plan around these dates. Do not ask to be excused from exams for matters of personal convenience. An unexcused absence without supporting documentation (e.g., doctor s note or police report) will result in an F grade. According to Corvinus University regulations, there may be a second final exam. Do note that you will have to take the FIRST SCHEDULED FINAL EXAM, and upon failing will you be permitted to take the second exam. The second exam that you take is comprehensive in its 4

5 coverage and, incrementally tougher (and it will replace all your earlier grades). The best grade you could receive for the second exam is a Grade C-. The course grades will be curved based on relative performance if the class average is below Hungarian Grade 3/ISP Grade C- (this is not likely). Otherwise a straight scale will be used with the +/ system. You will be treated fairly in all matters pertaining to your grade. Class participation (10%) The grade for the coursework comprises of 5% for attendance and 5% for class participation. You will obtain 5% if you have attended 75% of the seminars punctually, or 0% otherwise. There is no in-between score. Class participation means contributing to the learning of your fellow students and maintaining a respectful learning environment. Asking and answering questions in class, and participating in class discussions and volunteering to solve problems in class are excellent methods of class participation. Almost all participation noted by the instructor will increase the student s class participation grade, but negative class participation includes disrupting class (e.g. by coming in late), not paying attention during a student presentation, other forms of rudeness toward your fellow students, and a lack of cooperation with methods to ensure that no cheating occurs during exams. Grading class participation is necessarily subjective and no subdivision of the grade will be available to students. You will work in teams of 3-4 persons. Class assignments will be divided between respective student groups where you will be expected to discuss and address the questions prior to each class session. Students present their discussions/findings/calculations during the seminar sessions. Each group member should stand ready to present where they will be randomly called upon to do so. Do note that this component is a bonus to you and can significantly improve your overall score. Do note that every point is earned, not negotiated. Compulsory readings: There are two textbooks recommended for this course: S.Ross, R. Westerfield, J.Jaffe & B.Jordan, Modern Financial Management 8 th edition (2008), McGraw-Hill (ISBN ) (indicated as Ross (MFM) in the detailed course schedule) Brigham, Eugene F. and Michael C. Ehrhardt, Financial Management, Theory and Practice, Cengage (South-Western), 13th edition (2011) (indicated as Brigham in the detailed course schedule) Recommended readings: Students could also use, as reference, R. Brealey and S. Myers, Principles of Corporate Finance -7th edition (2003), McGraw-Hill, which is abbreviated B&M in the outline below. This 5

6 is a classic textbook that everyone serious about a career in finance should own. It does an excellent job explaining institutional details and established theories. As the course investigates new theories and goes into much more detail than B&M in some areas, there will be other readings that will be required, and class handouts will be used to supplement the material when necessary. Class handouts are required reading. Students should read The Wall Street Journal Europe, Financial Times, The Economist or other business publications every week, and look for real world examples that relate to class topics. Note: This syllabus is subject to revision before or during the course at the discretion of the instructor. Hungarian and ECTS grading scale Percentage Hungarian ECTS Explanation for the Hungarian achieved grade equivalent grade A Excellent B Good C Satisfactory D Pass F Fail Nem jelent DNA Did not attend (no credit) meg Nem vizsgázott I Incomplete (no credit) Aláírva S Signed (no credit) Megtagadva R Refused (no credit) International grading scale Percentage International grade achieved A A A B B B C C C D D D F 6