Jacob Ellis Corporate Finance
Content
Version: September 28, 2010
The Johns Hopkins University
Corporate Finance
Fall 2010 Professor Fabrizio Jacobellis
Course Description
This course is a graduate level introductory level course in finance. It serves two purposes. First it is an introduction to corporate finance and provides a framework for understanding and analyzing investment and financial decisions of corporations. Second, it introduces topics in the investments area of finance that are important for the understanding of how prices are set and markets behave. The course is divided into four parts. The first part provides the basic knowledge and understanding of the firm, its financial statements and working environment together with standard tools to analyze future projects and firm performance. The second part introduces the main modern portfolio theories used as basis to properly price the cost of capital accounting for risk and exploit the risk return trade off. The third part applies the tools acquired in the previous two parts and considers the implications of different capital structures and how they can be used to create value in the firm. In addition, models, principles and measures to evaluate firm’s performance and its ability to create value through time will be discussed. Part IV introduces the main risks the firm faces during its operating activities and project management. It presents basic financial techniques and strategies to hedge risk and ensure stable value creation. The course has a strong applied bias. Theoretical models and tools will be constantly applied using real life examples, and pros, cons together with alternative methods will be discussed. Although the course relies on fundamental principles and quantitative tools of finance to address financial issues, students will gradually build a solid conceptual understanding of the basic ideas of modern financial theory and they will become confident with the quantitative tools commonly used in the modern financial world.
Course Grading
Each student will be responsible for writing two exams, whose dates will be determined later on. Students will also be responsible as part of a study group of 3 to 5 students for completing seven quantitative problem sets. The final grade will be determined by the following weights: Midterm Exam Final Exam Problem Sets/Cases Group/Class Participation 30% 40% 20% 10%
For those who show an exceptional improvement in performance on the final exam (an increase of at least 10% in relative score) the weights will be changed to 20% for the midterm and 50% for the final.
Corporate Finance Fall 2010 p. 1
Auditing
Auditing is generally allowed provided space is available and with the permission of the instructor.
Course Materials
The material for the course consists of textbooks and lecture slides available for download on CIAO. Although the lecture slides are self-contained and they spell out the key issues of each topic, a reading of the textbooks would help deepen the understanding of the material. The main text for the course is: Modern Financial Management, by Ross, Westerfield, Jaffe and Jordan, 8th Edition, McGraw Hill, 2008. (RWJ) There are two other valuable resources, which will be partially used in this course as they treat certain material in more details: Financial Markets and Corporate Strategy, by Grinblatt and Tittman, 2nd Edition, McGraw Hill, 2002. (GT) Finally, it is worth mentioning the most complete and extensive coverage of finance: Corporate Finance, Theory and Practice, By Damodaran, 2nd Edition, Wiley, 2001. This book covers in great detail most of the material a chief financial officer would be dealing with, and contains many examples. This book will not be used as its coverage is beyond the scope of this course. Other useful sources are: Principles of Corporate Finance, International edition, by Brealey and Myers, 9th Edition, McGraw Hill, 2008. (BM) Corporate Finance, by Berk and DeMarzo, Pearson (2008) (BD) Unfortunately, textbooks in finance like many others are expensive, purchasing the book should be thought of as an investment rather than an expense, and most of all in case you are interested in pursuing a career in finance, it would be useful to have one of them in your bookshelf. Many seasoned financial professionals still keep their copy of Brealey and Myers, or Ross Westerfield and Jaffe on the shelf behind their desk. The textbook often comes with a CDRom. This software contains PowerPoint notes for each chapter, spreadsheet templates, and Fin Steps software with interactive problems for students to work through to verify their understanding of the materials, among other interesting items. Additional readings that are assigned are available either on reserve or on the web. Furthermore, students are encouraged to read popular financial press articles during the term.
Website
Course materials such as copies of the lecture slides, occasional class notes, problem sets and case materials will be made available on the intranet: CIAO.
Calculator
In order to carry out quickly the complex calculations often done in modern finance, each student will need to have a financial calculator or be able to use an excel spreadsheet. The use of Excel is strongly recommended for the homework and case studies. TA session will also be based on an understanding of the basic functions of Excel.
Homework: Cases and Problem Sets
Finance is an analytic field, and students should expect to spend a fair amount of study time doing
Corporate Finance Fall 2010 p. 2
calculations and numerical analysis. The problem sets and homework cases are to be handed in by the time and date indicated on the class outline or indicated in class. They will be turned at the beginning of each class when they are due. Late problem sets will not be accepted. Solutions for the problem sets and cases will be provided on CIAO.
Study Groups
Students are required (except with special permission of the instructor) to work on the problem sets in study groups. Preferably, these groups should consist of three or four individuals enrolled in the course. Study groups should be formed in the first weeks of class and identified to the professor and T.A. in advance of turning in the first problem set. Please email me a list of the members and a memorable name for your group. Once established, groups can only change membership with the pre-notification of the instructor and agreement by all concerned parties. I must be notified in advance of any changes in group membership. If there are problems within a group that cannot be reconciled satisfactorily by all members of the group, they should be brought to my attention. At the end of the course, all students will be required to confidentially evaluate the contribution of their group members. These evaluations will play a role in the class participation portion of the grade.
Exam Policy
Both exams are closed book. Students need only bring a calculator and writing utensils to class. All information other than your own knowledge will be provided with the exams. Absences from exams are allowed only for validated medical reasons. Unexcused absences from exams will result in a zero score in the calculation of the final grade. Dates for both the midterm and final exam will be determined further on.
Contact
I have a walk in policy while I am at the Bologna Center, so feel free to stop by anytime. However, office hours will be announced at the latest at the beginning of the course. Should you need special help or longer contacts, please email me to make an arrangement. I also answer questions via e-mail, if they are not too analytical, i.e. if I do not have to reply using too many formulas. The contact email address for this course is: [email protected] . Also, please refer to the intranet (CIAO) for items of interest such as hints/clarifications about homeworks or other useful material.
Tutorials
There should be a T.A. for this course. Information regarding the time and location of TA sessions will be announced during the first week of the course. TA session are meant to help the understanding of the exercises, homeworks and case studies as well as mastering the use of Excel, fundamental tool in finance.
Corporate Finance
Fall 2010
p. 3
Course Outline
Readings: The readings can be found in the Brealey-Myers textbook (BM), Ross Westerfield and Jaffe (RWJ) and Grinblatt and Titmann (GT) on reserve in the library.
Date Lecture # Title and Readings The Financial System and Financial Statement Basics RWJ: Chpt(s) 2 Time Value of Money - the mathematics of finance RWJ: Chpt(s) 1, 2, 3 Valuing Bonds and Stocks and NPV introduction RWJ: Chpt(s) 4, 5 Risk and Return and Asset Pricing Models RWJ: Chpt(s) 9, 10, 11 Capital Budgeting and Investment Decision RWJ: Chpt(s) 6, 7 Corporate Financing: Equity, Debt and Leasing RWJ: Chpt(s) 14, 19, 20
08 Oct. 2010 1
09 Oct. 2010 2 22 Oct. 2010 3 23 Oct. 2010 4
05 Nov. 2010 5
06 Nov. 2010 6
19 Nov. 2010 7 20 Nov. 2010 8 03 Dec. 2010 9
MIDTERM EXAM (closed book ~ pencil and calculator only)
Capital Structure and Modigliani Miller Theorem RWJ: Chpt(s) 14 Managing Capital Structure and Advanced Valuation Issues RWJ: Chpt(s) 15, 17 Dividend Policy and Capital Structure RWJ: Chpt(s) 18, 20 Risk Management and Derivatives GT: Chpt(s) 7, 20, 21 Options and Option Pricing RWJ: Chpt(s) 22, 23 Source of Positive NPVs and Performance Measures BM: Chpt(s) 10, 11, 12
04 Dec. 2010 10 17 Dec. 2010 11 18 Dec. 2010 12 TBD 13
TBD
FINAL EXAM (closed book ~ pencil and calculator only)
Corporate Finance
Fall 2010
p. 4
Homework Assignments: Problem Set | Case Study Schedule Problem Set Number Problem Set 1 Problem Set 2 Problem Set 3 Problem Set 4 Problem Set 5 Problem Set 6 Problem Set 7 Case Study Number Case Study 1 Case Study 2 Case Study 3 Distributed on the: 08 Oct. 2010
09 Oct. 2010 22 Oct. 2010 23 Oct. 2010 05 Nov. 2010 06 Nov. 2010 18 Dec. 2010
Due on the:
18 Oct. 2010 25 Oct. 2010 01 Nov. 2010 08 Nov. 2010 15 Nov. 2010 06 Dec. 2010 TBD
Distributed on the:
08 Oct. 2010 23 Oct. 2010 20 Nov. 2010
Due on the:
15 Nov. 2010 22 Nov. 2010 TBD
Copies of the lecture slides and materials for the problem sets will be made available on CIAO. Other supplemental news articles may also be distributed.
Corporate Finance
Fall 2010
p. 5
The Johns Hopkins University
Corporate Finance
Fall 2010 Professor Fabrizio Jacobellis
Course Description
This course is a graduate level introductory level course in finance. It serves two purposes. First it is an introduction to corporate finance and provides a framework for understanding and analyzing investment and financial decisions of corporations. Second, it introduces topics in the investments area of finance that are important for the understanding of how prices are set and markets behave. The course is divided into four parts. The first part provides the basic knowledge and understanding of the firm, its financial statements and working environment together with standard tools to analyze future projects and firm performance. The second part introduces the main modern portfolio theories used as basis to properly price the cost of capital accounting for risk and exploit the risk return trade off. The third part applies the tools acquired in the previous two parts and considers the implications of different capital structures and how they can be used to create value in the firm. In addition, models, principles and measures to evaluate firm’s performance and its ability to create value through time will be discussed. Part IV introduces the main risks the firm faces during its operating activities and project management. It presents basic financial techniques and strategies to hedge risk and ensure stable value creation. The course has a strong applied bias. Theoretical models and tools will be constantly applied using real life examples, and pros, cons together with alternative methods will be discussed. Although the course relies on fundamental principles and quantitative tools of finance to address financial issues, students will gradually build a solid conceptual understanding of the basic ideas of modern financial theory and they will become confident with the quantitative tools commonly used in the modern financial world.
Course Grading
Each student will be responsible for writing two exams, whose dates will be determined later on. Students will also be responsible as part of a study group of 3 to 5 students for completing seven quantitative problem sets. The final grade will be determined by the following weights: Midterm Exam Final Exam Problem Sets/Cases Group/Class Participation 30% 40% 20% 10%
For those who show an exceptional improvement in performance on the final exam (an increase of at least 10% in relative score) the weights will be changed to 20% for the midterm and 50% for the final.
Corporate Finance Fall 2010 p. 1
Auditing
Auditing is generally allowed provided space is available and with the permission of the instructor.
Course Materials
The material for the course consists of textbooks and lecture slides available for download on CIAO. Although the lecture slides are self-contained and they spell out the key issues of each topic, a reading of the textbooks would help deepen the understanding of the material. The main text for the course is: Modern Financial Management, by Ross, Westerfield, Jaffe and Jordan, 8th Edition, McGraw Hill, 2008. (RWJ) There are two other valuable resources, which will be partially used in this course as they treat certain material in more details: Financial Markets and Corporate Strategy, by Grinblatt and Tittman, 2nd Edition, McGraw Hill, 2002. (GT) Finally, it is worth mentioning the most complete and extensive coverage of finance: Corporate Finance, Theory and Practice, By Damodaran, 2nd Edition, Wiley, 2001. This book covers in great detail most of the material a chief financial officer would be dealing with, and contains many examples. This book will not be used as its coverage is beyond the scope of this course. Other useful sources are: Principles of Corporate Finance, International edition, by Brealey and Myers, 9th Edition, McGraw Hill, 2008. (BM) Corporate Finance, by Berk and DeMarzo, Pearson (2008) (BD) Unfortunately, textbooks in finance like many others are expensive, purchasing the book should be thought of as an investment rather than an expense, and most of all in case you are interested in pursuing a career in finance, it would be useful to have one of them in your bookshelf. Many seasoned financial professionals still keep their copy of Brealey and Myers, or Ross Westerfield and Jaffe on the shelf behind their desk. The textbook often comes with a CDRom. This software contains PowerPoint notes for each chapter, spreadsheet templates, and Fin Steps software with interactive problems for students to work through to verify their understanding of the materials, among other interesting items. Additional readings that are assigned are available either on reserve or on the web. Furthermore, students are encouraged to read popular financial press articles during the term.
Website
Course materials such as copies of the lecture slides, occasional class notes, problem sets and case materials will be made available on the intranet: CIAO.
Calculator
In order to carry out quickly the complex calculations often done in modern finance, each student will need to have a financial calculator or be able to use an excel spreadsheet. The use of Excel is strongly recommended for the homework and case studies. TA session will also be based on an understanding of the basic functions of Excel.
Homework: Cases and Problem Sets
Finance is an analytic field, and students should expect to spend a fair amount of study time doing
Corporate Finance Fall 2010 p. 2
calculations and numerical analysis. The problem sets and homework cases are to be handed in by the time and date indicated on the class outline or indicated in class. They will be turned at the beginning of each class when they are due. Late problem sets will not be accepted. Solutions for the problem sets and cases will be provided on CIAO.
Study Groups
Students are required (except with special permission of the instructor) to work on the problem sets in study groups. Preferably, these groups should consist of three or four individuals enrolled in the course. Study groups should be formed in the first weeks of class and identified to the professor and T.A. in advance of turning in the first problem set. Please email me a list of the members and a memorable name for your group. Once established, groups can only change membership with the pre-notification of the instructor and agreement by all concerned parties. I must be notified in advance of any changes in group membership. If there are problems within a group that cannot be reconciled satisfactorily by all members of the group, they should be brought to my attention. At the end of the course, all students will be required to confidentially evaluate the contribution of their group members. These evaluations will play a role in the class participation portion of the grade.
Exam Policy
Both exams are closed book. Students need only bring a calculator and writing utensils to class. All information other than your own knowledge will be provided with the exams. Absences from exams are allowed only for validated medical reasons. Unexcused absences from exams will result in a zero score in the calculation of the final grade. Dates for both the midterm and final exam will be determined further on.
Contact
I have a walk in policy while I am at the Bologna Center, so feel free to stop by anytime. However, office hours will be announced at the latest at the beginning of the course. Should you need special help or longer contacts, please email me to make an arrangement. I also answer questions via e-mail, if they are not too analytical, i.e. if I do not have to reply using too many formulas. The contact email address for this course is: [email protected] . Also, please refer to the intranet (CIAO) for items of interest such as hints/clarifications about homeworks or other useful material.
Tutorials
There should be a T.A. for this course. Information regarding the time and location of TA sessions will be announced during the first week of the course. TA session are meant to help the understanding of the exercises, homeworks and case studies as well as mastering the use of Excel, fundamental tool in finance.
Corporate Finance
Fall 2010
p. 3
Course Outline
Readings: The readings can be found in the Brealey-Myers textbook (BM), Ross Westerfield and Jaffe (RWJ) and Grinblatt and Titmann (GT) on reserve in the library.
Date Lecture # Title and Readings The Financial System and Financial Statement Basics RWJ: Chpt(s) 2 Time Value of Money - the mathematics of finance RWJ: Chpt(s) 1, 2, 3 Valuing Bonds and Stocks and NPV introduction RWJ: Chpt(s) 4, 5 Risk and Return and Asset Pricing Models RWJ: Chpt(s) 9, 10, 11 Capital Budgeting and Investment Decision RWJ: Chpt(s) 6, 7 Corporate Financing: Equity, Debt and Leasing RWJ: Chpt(s) 14, 19, 20
08 Oct. 2010 1
09 Oct. 2010 2 22 Oct. 2010 3 23 Oct. 2010 4
05 Nov. 2010 5
06 Nov. 2010 6
19 Nov. 2010 7 20 Nov. 2010 8 03 Dec. 2010 9
MIDTERM EXAM (closed book ~ pencil and calculator only)
Capital Structure and Modigliani Miller Theorem RWJ: Chpt(s) 14 Managing Capital Structure and Advanced Valuation Issues RWJ: Chpt(s) 15, 17 Dividend Policy and Capital Structure RWJ: Chpt(s) 18, 20 Risk Management and Derivatives GT: Chpt(s) 7, 20, 21 Options and Option Pricing RWJ: Chpt(s) 22, 23 Source of Positive NPVs and Performance Measures BM: Chpt(s) 10, 11, 12
04 Dec. 2010 10 17 Dec. 2010 11 18 Dec. 2010 12 TBD 13
TBD
FINAL EXAM (closed book ~ pencil and calculator only)
Corporate Finance
Fall 2010
p. 4
Homework Assignments: Problem Set | Case Study Schedule Problem Set Number Problem Set 1 Problem Set 2 Problem Set 3 Problem Set 4 Problem Set 5 Problem Set 6 Problem Set 7 Case Study Number Case Study 1 Case Study 2 Case Study 3 Distributed on the: 08 Oct. 2010
09 Oct. 2010 22 Oct. 2010 23 Oct. 2010 05 Nov. 2010 06 Nov. 2010 18 Dec. 2010
Due on the:
18 Oct. 2010 25 Oct. 2010 01 Nov. 2010 08 Nov. 2010 15 Nov. 2010 06 Dec. 2010 TBD
Distributed on the:
08 Oct. 2010 23 Oct. 2010 20 Nov. 2010
Due on the:
15 Nov. 2010 22 Nov. 2010 TBD
Copies of the lecture slides and materials for the problem sets will be made available on CIAO. Other supplemental news articles may also be distributed.
Corporate Finance
Fall 2010
p. 5
