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Advanced Corporate Finance Study materials

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Study materials Advanced Corporate Finance

Introduction

Module objectives

The module in Advanced Corporate Finance aims to provide students with a deeper understanding of corporatefinance theory and practice. The module involves lectures complemented by class discussion and class questions.These classes allow the students to fully connect with the material and practice using the techniques taught. Themodule includes case studies to further reinforce the learning objectives and ensure students gain a perspectiverelevant to their professional requirements. Finally the topic is examined by an individual case study in which thestudent can apply the module material to analyse a specific problem that is likely to arise in the world of business. Themodule emphasises both intuition and application and delivers various valuation techniques.

Objectives

After completing this module, students will be able to:

Use free cash flows and multiples for equity valuation.

Understand option contracts and basic option valuation methods.

Understand why traditional NPV rules are deficient and evaluate real options examples.

Evaluate a firm's cost of capital and target capital structure.

Discuss different approaches firms use to raise capital.

Understand debt capacity and its role in leverage buyouts.

Discuss payout policy and issues in international corporate finance.

Module pre-requisite

The essential pre-requisite module is the core Accounting and Financial Management. In addition, it is desirable(though not essential) that students complete the Corporate Finance elective in advance of this module.

Page 1 of 1 Warwick Business School

Module outline Advanced Corporate Finance

Monday

Monday 1 June 2015

09.30-10.00 Arrival and coffee

10.00-10.45 Introduction and academic briefing to module

10.45-12.00 Valuation of free cash flows

12.00-12.45 Questions and class discussion

12.45 Lunch

13.45-15.15 Plenary followed by the cost of capital

15.15-15.45 Tea break


16.30-17.45 Plenary followed by the target capital structure(The American Home Products Corporation case will be discussed in this session)

EVENING Practice case (individual work) not assessed(Buckeye Computer, Inc.: valuation exercise)

All sessions will be led by Tao Li


Programme Advanced Corporate Finance

Tuesday

Tuesday 2 June 2015

09.00-09.15 Introduction and academic briefing

09.15-10.15 Case discussion: Buckeye Computer Inc.

10.15-10.45 Coffee break

10.45-11.45 Understanding options: calls and puts


12.30 Lunch

13.30-14.45 Plenary followed by valuing options

14.45-15.15 Tea break


16.00-17.30 Plenary followed by the real options framework

EVENING Practice case (group work) assessed(HBS: Arundel Partners: The Sequel Project)



Wednesday

Wednesday 3 June 2015


09.15-10.30 IPO, IPO puzzles and SEO


11.00-12.30 Expert guest: David Krap

12.30 Lunch

13.30-14.45 Presentationof case (group work): Arundel Partners


15.30-16.00 Tea break

16.00-17.30 Plenary followed by expert guest: Pedro Ramos

EVENING Practice case (group work) assessed(HBS: Eskimo Pie Corp.)



Thursday

Thursday 4 June 2015


09.15-10.15 Presentation of case (group work): Eskimo Pie Corp.


10.45-12.00 Debt financing


12.45 Lunch

13.45-15.00 Plenary followed by debt capacity

15.00-15.30 Tea break


16.15-17.45 Plenary followed by levaraged buyouts

EVENING Practice questions on levaraged buyouts



Friday

Friday 5 June 2015


09.15-10.00 Discussion of practice questions on levaraged buyouts

10.00-11.00 Payout policy


11.30-12.30 International corporate finance

12.30 Lunch

13.30-14.00 Class discussion

14.00-15.00 MBA advanced corporate finance - drawing it all together

15.00-15.30 Module review (MBA program office team)



Module assessment

Assessment is by (1) group presentation of two case studies in class (Arundel Partners: The Sequel Project (10%) andEskimo Pie Corporation (10%)), and (2) an individual case study (2,500 words) (80%).

Group Presentation (20%)In respect of your group case studies, you will be assessed on the basis of your analysis of the cases andapplication to them of what you have learnt on the module (50%), quality of your presentation (30%) andeffective use of group resources (20%). Further details will be provided with the case materials.SUBMISSION DEADLINE: Friday 5th June 2015, 17.30 (UK time). One member from each group, onbehalf of the group, should upload a pdf copy of the submission to my.wbs.

Individual Case Study (80%)Your individual case assignment (2,500 words; +/- 10% excluding references and tables) will give you theopportunity to apply what you have learnt by exploring a high profile corporate finance deal in some depth, andpreparing practical solutions to this. Detailed assignment requirements will be circulated during the module.You will be assessed on the rigour of your analysis and evidence of critical understanding of the issues wehave been discussing in class (75%), and quality of your written work (treat this as a management report)(25%).SUBMISSION DEADLINE: Monday 6 July 2015, 17.30 UK time

The submission deadline is precise and uploading of the document must be completed before 17.30 (UK time) on thesubmission date. Any document submitted even seconds later than 17.30 precisely will be penalised for latesubmission in line with WBS policy. Please consult your student handbook on my.wbs for more detailed information.

The online assignment submission system will only accept documents in portable documents format (PDF) files.Please note that we will not accept PDF files of scanned documents. You should create your assignment in yourchosen package (for example, Word), then convert it straight to PDF before uploading. Please place your student IDnumber, NOT YOUR NAME, on the front of your submission as all submissions are marked anonymously.

All the scripts should also have the following paragraph included on the front page:

This is to certify that the work I am submitting is my own. All external references andsources are clearly acknowledged and identified within the contents. I am aware of theUniversity of Warwick regulation concerning plagiarism and collusion.

No substantial part(s) of the work submitted here has also been submitted by me in otherassessments for accredited courses of study, and I acknowledge that if this has been donean appropriate reduction in the mark I might otherwise have received will be made.

PLEASE ENSURE YOU KEEP A SECURITY COPY OF YOUR ASSESSMENT

Please ensure that any work submitted by you for assessment has been correctly referenced as WBS expects allstudents to demonstrate the highest standards of academic integrity at all times and treats all cases of poor academicpractice and suspected plagiarism very seriously. You can find information on these matters on my.wbs, in yourstudent handbook and on the University's library web pages here.

The University's Regulation 11 clarifies that '…'cheating' means an attempt to benefit oneself or another by deceit orfraud. This includes reproducing one's own work…' It is important to note that it is not permissible to re-use work whichhas already been submitted by you for credit either at WBS or at another institution (unless you have been explicitlytold that you can do so). This is considered self-plagiarism and could result in significant mark reductions.

Upon submission of assignments, students will be asked to agree to one of the following declarations:

Individual work submissions:


Assessment Advanced Corporate Finance

http://www2.warwick.ac.uk/services/library/using/guidance-training/referencing

I declare that this work is entirely my own in accordance with the University's Regulation11 and the WBS guidelines on plagiarism and collusion. All external references andsources are clearly acknowledged and identified within the contents. No substantialpart(s) of the work submitted here has also been submitted by me in other assessmentsfor accredited courses of study, and I acknowledge that if this has been done it may resultin me being reported for self-plagiarism and an appropriate reduction in marks may bemade when marking this piece of work.

Group work submissions:

I declare that this work is being submitted on behalf of my group, in accordance with theUniversity's Regulation 11 and the WBS guidelines on plagiarism and collusion. Allexternal references and sources are clearly acknowledged and identified within thecontents. No substantial part(s) of the work submitted here has also been submitted inother assessments for accredited courses of study and if this has been done it may resultin us being reported for self-plagiarism and an appropriate reduction in marks may bemade when marking this piece of work.

By agreeing to these declarations (when the message pops up on submission) you are acknowledging that you haveunderstood the rules about plagiarism and self-plagiarism and have taken all possible steps to ensure that your workcomplies with the requirements of WBS and the University.

You should only indicate your agreement with the relevant statement, once you have satisfied yourself thatyou have fully understood its implications. If you are in any doubt, you must consult with the ModuleOrganiser or Named Internal Examiner of the relevant module, because, once you have indicated youragreement, it will not be possible to later claim that you were unaware of these requirements in the event thatyour work is subsequently found to be problematic in respect to suspected plagiarism or self-plagiarism.


Assessment Advanced Corporate Finance

Teaching faculty

This module will be taught by the following faculty members:

Tao Li - Module Coordinator, Assistant Professor of Finance, Warwick BusinessSchool

Tao is an Assistant Professor of Finance at Warwick Business School. Before joining theSchool in 2013, he was a consultant at Deutsche Asset & Wealth Management in NewYork, advising pension funds and other institutional investors on private real estateinvestment strategies. He has also advised L.E.K. Consulting on corporate governancepractices. Tao's research focuses on corporate finance, corporate governance and realestate economics. His recent work studies how shareholder activism affects firmperformance, as well as the information content of hedge fund trading. Tao's work hasbeen presented at conferences organised by the U.S. Securities and ExchangeCommission, European Commission, Society for Financial Studies, European FinanceAssociation and Columbia Law School. His research has been mentioned in several mediaoutlets, including Bloomberg. Tao has a PhD in Economics and a Master's in Statistics,both from Columbia University. He also holds graduate and undergraduate degrees inArchitecture. He has taught courses in Corporate Finance, Investments, Financial Marketsas well as Macroeconomics.

David Krap - Principal, Centerview Partners

David has more than a decade of experience advising clients across a range of sectors oncritical strategic issues. Recent transactions include advising United Biscuits on its YildizHoldings. Unilever on the $3.2 billion voluntary tender offer for Hindustan Unilever; Apaxon the sale of LR Health & Beauty Systems; advising shareholders on the $875 millionsale of Concern Kalina (Russia) to Unilever; advising Unilever on the $3.7 billionacquisition of Alberto Culver; and advising Candover on the sale of Ontex to TPG Capitaland GS Capital Partners, amongst other transactions.

Prior to joining Centerview as a Principal based in London, David was an ExecutiveDirector in the UBS EMEA Consumer Products & Retail Group and previously was also amember of the UBS EMEA M&A team. He has worked in London, Chicago, Hong Kongand Singapore.

David is a trustee of Urban Music Development Foundation a charity based in east London.

David is a German national and holds a first class degree (BA Hons.) in InternationalBusiness Administration with Spanish and Mandarin Chinese from EBS London.

Pedro Ramos - Associate, Bain Capital Private Equity

Pedro joined Bain Capital Private Equity in 2013 as part of the European deal team. Histransaction highlights include the acquisitions of EWOS and Intermedica and the IPO ofAtento at NYSE. Prior to joining Bain Capital, he spent 2.5 years at Boston ConsultingGroup, working mainly in Corporate Development projects across Europe, Africa and LatinAmerica.

Pedro received an MSc in Business Analytics and Consulting from WBS and a BSc inEconomics from Nova SBE. He's a keen mountaineer pursuing the 7 summits and anadvocate for child empowerment and education.


Teaching Faculty Advanced Corporate Finance

Readings

The textbooks provided for the module are:

Berk, J. and DeMarzo, P. (2014)Corporate Finance, Global Edition (3rd edn)Pearson

Arzac, E. (2008)Valuation for Mergers, Buyouts and Restructuring (2nd edn)Wiley & Sons

You may find the following optional book useful:

Rosenbaum, J.; Pearl, J. and Perella, J. R. (2009)Investment Banking: Valuation, Leveraged Buyouts, and Mergers and AcquisitionsWiley & Sons

All students should be familiar with the content of the following textbook which was provided for the CorporateFinance module. However, you may wish to review its contents before the module starts.

Brealey, R.A.; Myers, S.C. and Allen, F. (2011)Principles of Corporate Finance (10th edn)New York: McGraw-Hill

The readings in this module are divided into pre-readings, essential readings and further readings.

Completing as much of the pre-reading and essential reading as possible before you attend will provide you with awider understanding of the topics to be discussed during the module and therefore enhance your contribution to theclass.

However, we understand that many of you will find it difficult to complete all of the reading due to other commitments,so have classified the readings as follows:

Pre-readings are included in the online materials; you should read these in advance of the session to whichthey relate. Unless specified, you should treat ALL case studies as required pre-reading.

Essential readings are also included in the online materials. In order to complete the module and theassignment successfully you should complete this reading when you have time, either during or after themodule.

Further readings are intended for those who may wish to widen and deepen their understanding of particularissues now or in the future. You will have to use your own library skills to obtain these.

Case studies

We are providing links to case studies which have been purchased from the Case Centre and are providedfor your personal use on this module, for which you are registered. You may download and print one copy ofeach for your personal use.

The case studies will expire on 6th July 2015 and will not be available to you after this. We recommend that youdownload them immediately. When you have taken your copy of a case study you may not make further copies, sharethem with or sell the materials to any other person or use them for any purpose not connected with your studies forthis MBA module. Failure to follow these terms and conditions of use may result in disciplinary action.

Copyright

Please note that the readings provided are intended for your own individual study for this module and they are not tobe copied, sold, or used for purposes other than personal study. In each instance the copyright resides with thepublisher or author as stated and not with the University of Warwick.


Readings Advanced Corporate Finance

Monday readings

Monday 1 June 2015

Valuation: a comprehensive review

On the first day of this intensive module we conduct a comprehensive review of valuation. First, we begin by reviewingcore valuation tools like free cash flow and multiples analyses, and discuss whether they yield consistent results. Wereview the basic portfolio theory and efficient market hypothesis and their relation to the seminal Capital Asset PricingModel (CAPM). We then discuss the limitations of the CAPM and introduce alternative models for estimating equitybetas: the Fama-French factor models. We review the practicalities of measuring beta using regression techniques.We then proceed to the estimation of levered betas and the cost of capital. Finally, we discuss how to determine afirm's target capital structure (optimal capital structure). This day provides students with the core applied andtheoretical grounding to understand valuation using the free cash flow method. The material on this day will be thefoundation to all HBS cases studies included as part of this module.

Case studies: Buckeye Computer, Inc.Details of this case will be distributed on the day.

American Home Products CorporationRef: 9-283-065

Essential reading: Berk and DeMarzo, Chapters 2, 8, 11, 12, 13 and 18

Further reading: Copeland, T.E.; Weston, J.F. and Shastri, K. (2004)Financial Theory and Corporate Policy (4th edn)Boston, MA: Pearson/Addison WesleyChapters 2, 5, 6 and 14



http://www.thecasecentre.org/programmeAdmin/courses?id=561797&pdid=47467&opid=444186

Tuesday readings

Tuesday 2 June 2015

Financial and real options

Today we begin with a discussion of the case Buckeye Computer, Inc. This exercise allows students to review keyelements in equity valuation using free cash flows: the WACC, residual value and FCFF. Subsequent to this weexplore options. We first introduce basic types of financial options, and how to value these options using the binomialand Black-Scholes option pricing models. Students will then learn to apply the concept of options in dynamic capitalbudgeting decisions, recognizing where the optionality of an investment creates additional value, above and beyondwhat would appear in a standard net present value framework. For example, sometimes an investment that looksunprofitable now may become profitable in the future, so the option to wait to make the investment is valuable. Weintroduce and use the appropriate tools for estimating how much value such real options can add to firm value. Wethen establish rules for when to invest in such discretionary investment projects now, and when to defer theinvestment until later.

Case study: Arundel Partners: The Sequel ProjectRef: 9-292-140

Essential reading: Berk and DeMarzo, Chapters 20, 21 and 22

Further reading: Copeland, T.E.; Weston, J.F. and Shastri, K. (2004)Financial Theory and Corporate Policy (4th edn)Boston, MA: Pearson/Addison WesleyChapters 7 and 9




Wednesday readings

Wednesday 3 June 2015

Raising equity capital

Today we discuss long-term financing decisions, starting with how companies raise equity capital. We cover the initialpublic offering (IPO) process and IPO puzzles, as well as seasoned equity offerings. An expert guest will then speakabout his own experience in IPO, with a focus on capital market perspectives and how IPO works in practice. Weproceed to group presentations of the case Arundel Partners. This case allows students to go beyond the simpleinsight that a project is like a call option, and actually see how much the option value differs from a DCF value. Arepresentative from each group will present this work to the rest of the class (all groups will be obliged to submit theirpresentations ahead of time). The final lecture of the day will be given by another expert guest, who will brieflyintroduce students to private equity, focusing on the general market conditions of private equity, as well as differentindustry segments within the space.

Case study: Eskimo Pie Corporation(Ref: 5-293-084)

Essential reading: Berk and DeMarzo, Chapter 23




Thursday readings

Thursday 4 June 2015

Debt financing and levaraged buyouts

Today we begin with group presentations of the case Eskimo Pie Corp. This case presents students with a corporatedecision - IPO versus leveraged buyout - that depends on a simple valuation. It provides an opportunity to explore avariety of different multiples and their relative merits. A representative from each group will present this work to the restof the class (all groups will be obliged to submit their presentations ahead of time). We then proceed to discuss thesecond part of long-term financing decisions, debt financing. We first provide an overview of debt markets, discussingvarious types of debt instruments, including convertible bonds and their relation to warrants. This session concludeswith a brief overview of the subprime mortgage crisis. We then present concepts and techniques to assess the debtcapacity of a company. The final lecture of the day will deal with the financial structure and valuation of leveragedbuyouts (LBOs). Students learn how to compute the returns to investors, and understand the concept of mezzaninefinancing.

Essential reading: Berk and DeMarzo, Chapter 23

Arzac, Chapters 7 and 13

Further reading: Fabozzi, F. J., (2011)The Handbook of Fixed Income Securities (8th edn)New York: McGraw-Hill



Friday readings

Friday 5 June 2015

Payout policy and international corporate finance

Today is one of the most important days of this intensive module. We begin by discussing the practice questions onleveraged buyouts. We then explain how managers decide on the amount and form of payout, and we discuss thecontroversial question of how payout policy affects shareholder value. We compare dividends and share repurchases,and explore the Modigliani-Miller theory on dividend policy irrelevance. Following this, we briefly introduce students tofactors a firm faces when making foreign investments, with a focus on valuation of foreign currency cash flows. Thelast lecture concludes the module and brings the wide array of material together. We give a 'big picture' perspective onhow firms finance themselves, how they value the opportunities they have, and how they in turn are valued. Finally theprogram office conducts a module review to allow students to fully feedback their views on this intensive MBA module.

Essential reading: Berk and DeMarzo, Chapters 17 and 31

Further reading: Copeland, T.E.; Weston, J.F. and Shastri, K. (2004)Financial Theory and Corporate Policy (4th edn)Boston, MA: Pearson/Addison WesleyChapters 15 and 18



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