Corporate Finance

Introduction

This course is to provide students with a conceptual framework and a set of technical tools for making corporate investment decisions. The focus will be maximizing the value of the firm. Various ethical issues will be highlighted throughout the course.

Course content

1 The Objective of Corporation.

What is a corporation? What is the objective of a corporation? Who are responsible for achieving such objective? What are the issues that can arise when a corporation is publicly owned? How can financial decisions be made in accordance to social and ethical norms?

Readings: Notes.

2. Accessing Financial Performance

What are the drivers of financial performance? We will discuss the basics of evaluating financial performance based on financial statements.

Readings: Higgins Chapter 1, 2

3. Managing Growth

How should the firm manage its short term cash flow? How can a firm sustain its growth?

                Readings: Higgins Chapters 3, 4.

4. The Time Value of Money and Discounted Cash Flow.

A dollar today is more than a dollar tomorrow. The concepts of future value of money (compounding) and present value of money (discounting) will be introduced to make money of different periods comparable. We will also look at two special types of cash flows of multiple periods: annuity and perpetuity, and their applications.

                Reading: Higgins, pp. 250-254

5. Financial Markets and Instruments.

We will discuss the basic features of bond, common stock and preferred stock. We will introduce Discounted Dividend Model for valuations of stocks, and in particular, we will emphasize the relationship between dividend growth rate and stock price. How firms raise capital. We will focus on equity financing, and in particular IPO.

                Readings: Higgins Chapter 5, 6.

6. Risk Analysis & Cost of Capital.

We will discuss the concept of risk and characterize the relationship between risk and expected return by using Security Market Line. We will also look at the history of capital markets. We will discuss how to estimate the cost of equity and debt, and we will show the cost of a firm’s capital is the weighted average of the costs of its debt and equity. We will find the cost of capital and the expected return on capital are the two sides of the same coin.

Readings: Higgins Chapter 8.

7. Net Present Value and other Investment Criteria.

We will introduce Net Present Value as the basic investment criterion. We will also lay out a few alternative criteria and compare their strengths and weaknesses. We will see NPV in action by examining a few cases of investment decisions. Some practical details in using NPV will also be discussed.

                Readings: Higgins Chapter 7.

2 of the teaching hours in this course are dedicated to CSR, ethics, social and environmental issues, including in

1. The objective of corporation
2. Accessing financial performance
3. Net present value and other investment criteria