Escolar Documentos
Profissional Documentos
Cultura Documentos
Dr Andrey Golubov
D
Course Structure
3-hour
9
lectures 9 seminars
Numerical
revision session
1-2
Course Syllabus
Session Session Session Session Session Session
1: Intro to Corporate Finance and the Corporate Objective Function 2: The Time Value of Money 3: Valuing Securities and Firms 4: Risk and Return in Capital 5: Evaluating Investment Projects 6: Cost of Capital
1-3
Markets
27/09/2013
Session
10: Revision
1-4
Assessment
Mid-term
Multiple
Exam
Multiple
1-5
Reading List
Preferred Text:
Megginson W., Smart S., Graham, J. (2010) Financial Management: Linking Theory to What Companies Do, 3rd edition, South-Western/Cengage Learning (ISBN: 978-0-538-74558-1)
Alternative Text:
Hillier D., Ross S., Westerfield R., Jaffe J., Jordan B. (2010) Corporate Finance, European Edition, McGraw-Hill (ISBN: 978-0-077-12115-0)
Academic Journal Articles Case Studies (Harvard, Stanford, Darden) Read FT or WSJ, check out Bloomberg or Reuters Always bring a calculator to class!
1-6
27/09/2013
Before we begin
Question:
Why
should we study finance? Didnt the recent financial crisis prove all of the finance theory wrong?
My
Answer:
The
financial crisis has illustrated how badly things can go when those in charge forget the basic finance and economics principles
1-7
Session Outline
What Basic Core
is Corporate Finance Corporate Finance Functions Principles of Finance of Business Organization Conflicts
Forms The
Agency
1-8
27/09/2013
Others Also Include: Risk Management Working Capital Management Corporate Governance
1 - 10
Source: Servaes and Tufano, CFO Views on the Importance and Execution of the Finance Function (Deutsche Bank, 2006).
Internally
Most
Externally
Equity
Venture Initial
capital (VC) or private placements public offering (IPO) Seasoned (follow-on) equity offering (SEO)
Debt
Short-term Long-term
27/09/2013
Capital Budgeting: Selecting the best projects in which to invest the firms resources
1 - 14
1 - 15
27/09/2013
1 - 16
Identifying, measuring, and managing all types of risk exposures Some risks are insurable, and some risks can be reduced through diversification. Financial instruments like forwards, futures, options, and swaps may also be used to hedge market risks such as interest-rate, price, and currency fluctuations.
1 - 17
27/09/2013
Hire qualified and honest managers, and structure their incentives to motivate them to act in the best interests of the firm In practice the incentives of stockholders and managers (and other stakeholders) often diverge Dimensions of corporate governance:
Ownership Board
Risk-Return The
Efficient No
Arbitrage Principle
1 - 20
(economists) answer: opportunity cost English answer: you can invest the dollar today and earn interest We can measure it! Session 2 Applications of this principle range from choosing a mortgage to valuing a whole firm!
1 - 21
27/09/2013
Compensation
Investors
risk
The
1 - 22
Investors
can achieve a more favorable tradeoff between risk and return by diversifying their portfolios.
Markowitz
Implications
1 - 23
Market Efficiency
By
market efficiency we usually mean that prices reflect all publicly available information
Markets
Prices
1 - 24
27/09/2013
No Arbitrage Principle
Arbitrage
Example:
Buy
where its cheap, sell where its expensive your actions push the prices toward equilibrium
Risk-free
No
If
1 - 25
Partnerships
Similar to sole proprietorship, but has two or more owners Joint and several liability Share of profits taxed as partnership income One or more general partners with unlimited personal liability Most owners are limited partners, who are passive investors with limited liability
1 - 26
Limited Partnerships
Corporations
1 - 27
27/09/2013
1 - 28
Anpartsselkab Aktieselskab Societas Europaea Osakeyhti Julkinen Osakeyhti Aktiebolag Publikt Aktiebolag Public Limited Company Societ per Azioni Aksjeselskap Allmennaksjeselskap Sociedad Limitada Limited Incorporated, Corporation
Publicly Listed Private Limited Private Limited Publicly Listed Publicly Listed Private Limited Publicly Listed Private Limited Publicly Listed Publicly Listed Publicly Listed Private Limited Publicly Listed Private Limited Private Limited 1 - 29 Publicly Listed
The Goal of the Corporation is to maximize shareholder wealth. But shareholders are not the only stakeholders in the firm
1 - 30
10
27/09/2013
Most
share
Depends
Profits?
are backward-looking, dependent on accounting principles and susceptible to manipulation Do not fully consider cash flow timing Ignore risk
Maximize
In
public firms shareholder wealth is represented by the market price of stock Unambiguous, constantly updated
1 - 32
11
27/09/2013
some stage, founders have to hire other people to run their firms act as agents of the owners who hired them practice however, self-interest may cause managers to pursue objectives other than shareholder wealth maximization. conflict of goals gives rise to managerial agency problems.
1 - 35
Managers In
This
Agency Costs
Excessive
Empire-building
Remuneration
is often tied to firm size, and it is more prestigious to run a larger firm
Unnecessary
Managers
But
diversification
want job security and diversify the firms activities to smooth out earnings
investors can diversify on their own at a very low cost
1 - 36
12
27/09/2013
activism
threat
Monitoring
Board
and bonding
compensation contracts
Regulation
Sarbanes-Oxley,
1 - 38
nations corporate governance system is the set of laws, regulations, institutions, and practices that determine how a company is to be governed and how control of a company can be contested.
39
13
27/09/2013
The Law and Finance model of economic growth (La Porta, Lopez-de-Silanes, Shleifer, and Vishny studies) states that the most important determinant of capital market development is the degree of legal protection afforded to outside (noncontrolling) investors. This determining factor depends largely on whether a countrys legal system is based on English common law or another legal tradition.
40
common law
Strongest protection for minority investors Has led to an atomistic ownership structure, where a large number of investors each own a small portion of a company.
German
law
Scandinavian French
law
civil law
41
does the Law and Finance research imply for financial managers in different countries?
A
key implication: corporate ownership is likely to be much less concentrated in common-law countries than in other advanced economies. In civil-law and German-law countries, voting blocks overwhelmingly consist of members of a firms founding family, even after the death of the founder.
42
14
27/09/2013
Summary
Corporate
finance deals with the way firms raise capital, invest the proceeds, and distribute earnings on the core finance principles such as the time value of money, risk-return trade-off, diversification, market efficiency, and no arbitrage order to create shareholder value (but beware of conflicts of interest)
1 - 43
Builds
In
Essential: MSG Ch. 1 + Ch.11 part 5 on Law and Finance, or HRWJJ Ch. 1,2. Additional: MSG Ch.2 or HRWJJ Ch. 3 Research papers:
Shleifer, Andrei, and Robert W. Vishny, 1997, A survey of corporate governance, Journal of Finance 52, 737-783. Gompers, Paul, Joy Ishii, and Andrew Metrick, 2003, Corporate governance and equity prices, Quarterly Journal of Economics 118, 107155. Bebchuk, Lucian, Alma Cohen, and Allen Ferrell, 2009, What matters in corporate governance?, Review of Financial Studies 22, 783-827. Daines, Robert M., Ian D. Gow, and David F. Larcker, 2010, Rating the ratings: How good are commercial governance ratings?, Journal of Financial Economics 98, 439-461.
1 - 44
Seminar 1
Ben
Be
prepared to discuss the case In relation to the case you need to read:
Jensen,
M.C. (2001) Value Maximisation, Stakeholder Theory, and the Corporate Objective Function, European Financial Management, Vol. 7 (3), pp. 297-317
1 - 45
15