What is Advanced Corporate Finance? What is finance? What is Corporate Finance? Deciding how to optimally manage a firm s assets and liabilities.

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Robert Merritt
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1 Wat is? Spring 2008 Note: Slides are on te web Wat is finance? Deciding ow to optimally manage a firm s assets and liabilities. Managing te costs and benefits associated wit te timing of cas in- and outflows and ow tese can be influenced by te different financial instruments available to te firm (e.g., assets, liabilities and derivatives). Wat is Corporate Finance? Managing te funds (in and outflows) related to a corporation's activities. It generally involves balancing firm profitability wit te risk of financial distress over te sort- and long-term, wile attempting to maximize stakeolders utility (usually te value of its equity). It includes investing excess funds and raising funds (sort-term or long-term) for new or ongoing uses. It includes edging financial risks. Tese decisions depend on te firm s objectives and constraints suc as institutional or individual goals, time orizon, risk aversion and tax considerations.

Wat is Corporate Finance? Managing te funds (in and outflows) related to a corporation's activities.

2 Wat is? Extension of previous courses to focus on te relationsips between financial factors and firm decisions from te perspective of a financial manager. Financial factors / financial markets and instruments Stocks Bonds, Money market instruments Derivatives Value of financial decisions Determination of te fair value of corporate assets How risky is te asset? Wen is it risky? Wat cas flows will it produce? How valuable are tey to me? How does te market price compare to similar assets? Wat is its intrinsic value? Is it a wortwile use of limited corporate funds? Goal of te Course Expand your financial tool box As global risks and opportunities ave increased, financial markets ave developed tools to elp manage tis risk and exploit tese opportunities. Tis course focuses on identifying and evaluating te risks relevant to managers operating in today s global environment. Wat types of risk do tey face? Sould tese risks be managed? How can te risks be managed? Wat types of opportunities? How can tey be utilized? Wat value do tese bring to te firm? Developing a logical framework linking firms and financial markets to manage te risks and exploit te opportunities. Course Overview PART A Introduction PART B Derivative Securities PART C Financing Strategies PART D Global Valuation and Investing ADVANCED CORP FIN Introduction to financial markets Identifying business and financial risks RISK MANAGEMENT Designing edging strategies Managing international assets GLOBAL CAPITAL RAISING Introduction to global financial markets Global equity and debt financing strategies GLOBAL INVESTING Global capital budgeting International asset allocation

te asset? Wen is it risky? Wat cas flows will it produce? How valuable are tey to me? How does te market price compare to similar assets? Wat is its intrinsic value?

3 Administrative Issues Materials Assigned readings: te case packet, and te class web page. Te materials are selected to complement te lectures, cases and class discussions. Office ours open door, but please or call first Grades Based on case brief (due next Tuesday), final exam and class contribution. Final exam (April 29 t ): 4 our case wit assigned questions Class Contribution Grading Class-by-class record of contribution based on My evaluation of eac student s class-by-class contribution Input from peer evaluation of contribution Aggregation: At te end of te course, te quality and regularity of contributions over te course will be used to arrive at te final grade. Case Analysis: Review Steps to follow: Wo is te decision maker? Wat is te decision? Wat are te criteria? Maximizing sareolders wealt? Corporate wealt? Management s wealt? NGO s? Limiting risk? Wat type of risk(s)? How significant are eac of tese risks? Key alternatives to consider? Analysis and discussion of te alternatives. Decision and action plan.

Final exam (April 29 t ): 4 our case wit assigned questions Class Contribution Grading Class-by-class record of contribution based on My evaluation of eac student s class-by-class contribution Input

4 Wat will we cover in tis course? Identification and management of financial risk and its role in managing business or enterprise risk. Understanding te costs and benefits to raising funds for operations in foreign versus domestic markets. Evaluating te costs and benefits to purcasing and operating financial and non-financial assets in emerging and developed markets (i.e., M&As, JVs or greenfield). Risk Management Firms must manage two types of risk: 1. Business Risk Te risk associated wit manufacturing and marketing te firm s products 2. Financial Risk Te risk associated wit ensuring te firm as adequate casflows to meet its commitments. How do tese risks depend on our actions? Oters actions? Financial markets? Are tey someting we sould try to edge? Wat tools exist to perform te desired function? Source of Financial Risks? Producing goods and services requires one to purcase inputs wose prices are influenced by global market conditions. Commodity prices depend on global supply and demand (i.e., te price of oil) Financing your operations requires one to borrow or lend and tese interest rates are influenced by global market conditions. Interest rates depend on global demand for financial assets (i.e., te current US interest rates?) Selling your goods depends on market conditions in bot your domestic market and international markets. Can we / sould we do anyting about tese risks?

Evaluating te costs and benefits to purcasing and operating financial and non-financial assets in emerging and developed markets (i.e., M&As, JVs or greenfield).

5 Were Do Tese Risks Originate? Global trade in goods, services and financial assets as resulted in increased risks and opportunities for firms. Tere are now greater sources of supply and demand. Global trade as increased dramatically over te past 30 years. Some reasons for tis: tecnology, economic growt, decreasing trade barriers, improved transportation... Te most obvious sources of risk: Importing requires buying Euros, or Yen wit Canadian dollars. Exporting our goods and services requires tat people buy Canadian dollars and our prices remain competitive wen converted to te oter currency. Wat about borrowing/lending? Examples of Risks and Opportunities Financial Risk Capital risk debt or equity values Currency risk value of C$ for inputs and outputs Liquidity risk te ability to buy or sell financial securities Political Risks Difficulty enforcing contracts or rule of law. Canges in regulation or differences in regulation, expropriation. Market Imperfections Legal restrictions on market access. Market segmentation. Expanded Opportunity Set Move production overseas. Economies of scale Diversification of market risk. Global investment opportunities and financing alternatives. Wy Face Tese Risks? Comparative advantage. Countries ave different strengts and weaknesses. As barriers to trade ave fallen, firms ave started to take advantage of tese differences to maximize teir performance. Revealed Comparative Advantages US Canada Germany Italy Japan Food, drink & tobacco Raw materials Oil products Cemicals Macinery Oter manufacturing Source: OECD

.. Te most obvious sources of risk: Importing requires buying Euros, or Yen wit Canadian dollars.

6 Identifying te Risks Faced by Firms? Key questions we will examine: Wat are te risks? How serious are te risks? How do tese risks impact management, sareolders, and debt olders? Wat sould we (as managers) do about tem? Some examples to consider: Canadian Banks Auto manufacturing in MI versus ON versus Cina Canadian Tec Companies Identifying te Risks Faced by Firms? Look at te Management Discussion and Analysis (MD&A) section for McDonalds Corporation (MCD NYSE) Managing Foreign Excange Risk To decide about edging: Wat exactly is te risk? Is it a financial or business risk? Is it a cas risk or an accounting risk? Are te risks significant? Are te opportunities large enoug to offset tese risks? Wen are tese risks largest? Wat appens in a worst case scenario? best case? Wat are te indirect costs and benefits? Are tese risks we sould be bearing? How effectively can we manage tem?

Look at te Management Discussion and Analysis (MD&A) section for McDonalds Corporation (MCD NYSE) Managing Foreign Excange Risk To decide about edging: Wat exactly is te risk?

7 Identifying Foreign Excange Risk Foreign excange risk: How do unexpected excange rate movements affect a company s financial performance? Te tree main types of foreign excange risk are: Transaction Risk Translation or Accounting Risk Economic or Operating Risk Transaction and Economic/Operating risks are cas risks, but Translation/Accounting is a paper risk. We will discuss te different risk management strategies required to manage eac of tem, once tey ave been identified. Beyond Hedging: Financing Strategies Global operations allow access to global financial markets. Tere are a wide variety of costs and benefits to using global financial markets to meet capital needs. Decreased cost of capital, diversification of capital sources, edging currency and interest rate risks, managing political risk Alternatives: Te standard coices you sould always consider: Internal versus External? Debt or Equity? But also: International or Domestic? Wat currency? Wat maturity? Private or public? Coosing Global Financing Strategies Formally, we coose te corporate financing strategy tat: Minimizes te expected after-tax cost of financing Maintains te risk witin acceptable levels. Te risks and benefits to different financing strategies are more difficult to assess in an international setting. Currency and interest rate risks Institutional differences across countries Tax laws differ across countries Political risks, regulatory differences, investor preferences

Translation/Accounting is a paper risk. We will discuss te different risk management strategies required to manage eac of tem, once tey ave been identified.

8 Cross-Border Investments Need to determine: is tis an investment wort taking? Standard valuation metodologies from previous courses Are tere differences in te risks and tus valuation between foreign and domestic projects? Business risks? Political risks? Economic risks? Financial risks? How do we account for tese in making our decision? Wat is te required return for tis type of investment? Comparables? Growt rates? Managing (Global) Risks & Opportunities In tis course we will: Identify and caracterize te financial (and business) risks and opportunities faced by a firm to determine ow to best manage its casflows. Determine te significance of te risks associated wit te financial instruments available to improve te firm s competitive position and pursue its opportunities. Evaluate te different alternatives Increase value to te firm s stakeolders! Financial Markets?

Financial risks? How do we account for tese in making our decision? Wat is te required return for tis type of investment? Comparables? Growt rates?

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