CORPORATE FINANCE II 2015-16 Academic Year & Term: 2015-16 Term: 4 Instructor: Prachi Deuskar ( Sessions 1 5) Affiliation: Indian School of Business Email: ISB id: Prachi_Deuskar@isb.edu Instructor: Shashwat Alok ( Sessions 6 10) Affiliation: Indian School of Business Email: ISB id: shashwat_alok@isb.edu Office Hours: Wednesday, 11 am to 1 pm or by appointment AC 6, Office 6104 Office Hours: Friday, 11 am to 1 pm or by appointment AC 8, 8103 I. COURSE OBJECTIVES AND CONTENTS Corporate Finance (CF-I and CF-II) are the core finance courses offered at ISB. The courses serve two purposes. For students interested in studying finance further or those intending to specialize in finance, the courses provide the necessary background to do the advanced classes. For non-specialists, the core gives the essential analytic foundations in finance that you will find useful in your business careers. Our focus will be on the analytic frameworks for modern financial decision-making rather than the institutional issues involved in financing decisions. The main objective of CF-I and CF-II is to develop the quantitative and conceptual tools to help firms decide what investments should be made and how they should be financed. We consider investment and financing decisions from the viewpoint of their effect on market value of the firm. Investment valuation is mainly based on the method of discounted cash flows. This technique involves forecasting the expected future cash flows and discounting them at a rate commensurate with risk. We consider models for implementing these methods in practice. On the financing side, we study models of optimal capital structure, primarily focusing the choice between debt and equity. There are both benefits and costs to using debt and equity. We will explore the conditions under which the benefits of debt exceed the costs. The analysis will help you better understand why firms in different industries or countries finance themselves differently. We also study firms payout policies and provide a basic introduction to the increasingly important topic of risk management. While much of the course focuses on valuing projects or financing decisions faced by corporations, firms must interface with financial markets by issuing financial securities. One portion of the course introduces you to capital markets, the market for financial securities. Stocks, bonds, and options are the most important financial securities. We examine the basics of equity and bond valuation and take an introductory tour of options.
The pedagogic method will comprise lectures and cases. The case classes may have a short theory-type lecture either before or after discussing the case. II. LEARNING GOALS The course will focus on two primary goals--- Critical and Integrative thinking and Interpersonal Awareness and Working in Teams. These goals, among others, have been adopted by ISB (and submitted to AACSB) in teaching of all core courses. In meeting these goals we will use various pedagogies lectures, homework, cases and MyFinanceLab. Your performance in achieving these goals will be assessed by three specific items: individual homework, group cases and individual exams. Each of these is discussed in greater detail later. III. TEXTBOOK AND COURSE MATERIALS Jonathan Berk, Peter DeMarzo and Ashok Thampy, Financial Management, Indian Subcontinent Adaptation, Pearson, 2010 (henceforth referred to as BD), plus MyFinanceLab Student Access kit. We will extensively use the myfinancelab tool in this course. This tool is an excellent resource for practicing end of chapter problems. Course packet consisting of cases. Slides for classes to be posted on the course LMS site. IV. GRADING Individual Homework: These must be completed and submitted online before 8 am on the day specified in the course outline. The course homework is based on the online practice tool in the MyFinanceLab. Group Case Write ups: Cases should be submitted as group work. Hard copies ONLY. Please do not attempt to have the AAs print out your soft copies for you. It is the group s responsibility to submit the hard copies, which will be graded. A case write up that does not follow the length or content guidelines below will get a score of zero. No exceptions. Exams: There will be a mid-term exam and a final exam. More details will be provided in due course. OVERALL GRADE Homework Assignments 20% Case Analyses 20% Mid-term exam 30% Final exam 30%
Please note that code #2N-b is applicable for all submissions in this course. V. CASE WRITE UP GUIDELINES Two pages of text or less plus any supporting exhibits, written in minimum 12 point font with adequate spacing and margins. Write the analysis as a professional consulting assignment presented to a client. Do not write it as a set of answers to case questions. Doing so will result in a zero grade for the case. Do not use exhibits to park what does not fit in the text. Exhibits should contain only peripheral material or computations to support the main analysis. The reader should be able to assess your analysis without reading the exhibits. Format the exhibits well so they are readable. Do not submit exhibits that are not referenced in the text. Grading All group members will receive the same grade for a case All group members must individually be prepared to discuss the case in class. Discussions of Cases You are not allowed to discuss cases with students outside your group until all sections have turned in their case assignments. Any violation will be treated as a violation of the ISB honor code. VI. LMS We will use the course management system LMS as a course aid. You should refer to LMS for announcements, course information and supplementary course material. The Academic Associates will be able to help you with any problems in accessing the LMS. VII. ATTENDANCE As per ISB s policy, attendance will be mandatory in this course. Absence is only appropriate in cases of extreme personal illness, injury, or close family bereavement. Voluntary activities such as job interviews, business school competitions, travel plans, joyous family occasions, etc. are not valid reasons for missing class. The Academic Associate will keep track of attendance. Absences of more than two sessions will attract grade penalties. For instance, if a student misses three sessions in one course, s/he will obtain a letter grade lower than what would be otherwise awarded. For four missed sessions, the letter grade will be two levels lower. 5+ missed sessions will result in an 'F' grade for the course. If a student does not meet the minimum attendance requirement for health reasons or for grave personal exigencies, the student may receive an adjusted grade for the course depending on the number of sessions missed. This will be based on
submission of necessary documentary evidence. Any deviations will be referred to the Academic Committee for a final decision. Due Dates for Submission of Homeworks and Case Write Up Case Write Up: Facebook, Inc: The Initial Public Offering: September 7, 2015, 1 pm Homework 1: September 11, 2015, 11 pm Homework 2: September 17, 2015, 11 pm Case Write Up: Sealed Air Corporation s Leveraged Recapitalization: September 21, 2015, 8 am Homework 3: September 25, 2015, 8 am Homework 4: September 30, 2015, 8 am Outline for CF-II Class 1: Equity Valuation 1 Discounted Dividends Model Dividend Yield Total Payout Model Readings: BDT, Chapter 9, 9.1-9.3 Class 2: Equity Valuation 2 Free cash flow valuation. Enterprise, and equity value Valuation using comparable firms Readings: BDT, Chapter 9: 9.3-9.5 Case: Facebook, Inc. The Initial Public Offering Class 3: Options 1 Option basics: calls and puts Option payoffs at expiration Combinations of options for complex payoff structures. Readings: BDT, Chapter 20: 20.1-20.3 Class 4: Options 2 and Bond Valuation 1 Valuing calls: the Black-Scholes formula. Treasury bond strips and their cash flows The strip yield curve Readings: BDT, Chapter 21: 21.2, Chapter 8: 8.1 Class 5: Bond Valuation 2 No-arbitrage: Valuing treasury bonds using strip prices. Yield to maturity
Interest rate risk: duration Readings: BDT, Chapter 8: 8.2-8.3 Class 6: Payout policy How firms return money to shareholders: dividends, repurchases Executing payouts: episodic vs. periodic dividends, open market repurchases. Trends in payout: the shift to repurchases. Payout irrelevance 1: payout versus retaining cash Payout irrelevance 2: diluting shares versus giving cash to shareholders Real world factors: taxes, signaling, agency, and issuance costs Readings: BDT, Chapter 17 Class 7: Topics in Corporate Finance 1: Value creation through payouts Designing payout and leverage strategy to handle free cash flow problems Leveraged recapitalizations versus LBOs: dividends versus repurchases Identifying sources of value: APV method revisited. Readings: BDT, Chapter 17, 18.3 Ch. 28 (pp. 887 and 890-2) Case: Sealed Air Corporation s Leveraged Recapitalization Class 8: Topics in Corporate Finance 3: Value Creation Through Real Options What is a real option? Option to delay investment Option to grow Option to abandon Readings: BDT, Chapter 22 Class 9: Topics in Corporate Finance 2: Value Creation Through M&As Brief background on M&As: methods and market reactions Identifying sources of value in targets Who captures the source of value in M&As? Free Rider Problem Anti-takeover defenses and shareholder value Readings: BDT, Chapter 28 Class 10: Topics in Corporate Finance 4: Value Creation Through Risk Management Sources of risk in the corporation Should firms manage risk? An irrelevance perspective When should firms manage risk? How should firms manage risk? Readings: BDT, Chapter 30.1 30.2
Readings: Why Manage Risk? Peter Tufano; Jonathan S. Headley, HBS Publishing