Fall 2007
"My job as a businessman is to be a profit
center and to maximize return to the shareholder."
Jeffrey Skilling, former CEO of Enron
Monday and Wednesday, 2:30-3:45
meets in 216 Skinner
Satya J. Gabriel
Professor of Economics
e-mail:
sgabrielatmtholyoke.edu
FAX: 413-538-2323
The course in corporate finance describes the corporation and its operating environment, the manner in which corporate boards and management evaluate investment opportunities and arrangements for financing such investments, create (or, alternatively, destroy) value for shareholders by planning and managing the transformation of a set of inputs (human labor, raw materials, and technology) into a more highly valued set of outputs (embodying both the original investment value and any surplus value generated), and develop strategies for meeting the claims of financial market participants who are sought as financiers (and, therefore, residual claimants to the cash flows/surplus value of) such investments. It is understood that the shares of surplus value received by various claimants and retained by corporate boards of directors for investment and other uses is the subject of complex social interactions. Thus, the course provides students with a basic analytical framework for understanding how the various struggles over corporate surplus value (in the form of cash flows) may be understood and resolved. In this context, the course is designed to provide students with analytical tools that allow them to determine the "intrinsic value" of a corporation (or any economic institution, including a state-owned enterprise that is to be privatized) and to assess the effectiveness of corporate management in maximizing that value.
Because the future surplus value/cash flows of any set of corporate investments are sensitive to macroeconomic, competitive, and other conditions, students will be taught analytical techniques for taking into consideration alternative macroeconomic and competitive environments. Simulations will be used to project alternative cash flow streams for firms under varying conditions of aggregate demand, inflation, tax rates, interest rates, and exchange rates, among other variables. While these techniques provide students with the tools for valuing enterprises under a wide range of conditions, one must also recognize that the short-term movements in equity valuations in the various stock markets are even more complexly determined. Such stock price movements are not always determined strictly by intrinsic value, even when intrinsic value is estimated in the context of the aforementioned range of macroeconomic, competitive, and socio-political conditions. As behavioral finance, and even earlier, John Maynard Keynes, has demonstrated, investors in financial markets are capable of emotional buys and sells (rather than the sort of consistently rational behavior dreamed of in neoclassical economic theory), panics, and herd behavior. Thus, at any given moment, certain (and sometimes most) stocks can be and are mispriced. The valuation techniques learned in this course provide students with a means for identifying such mispricing. However, and regretably, the more interesting conversation on why such mispricing occurs will only be touched on at this level of analysis. Students who are interested in this issue are encouraged to pursue the literature on behavioral finance outside of the structure of this course and to read carefully those sections of the supplemental text by Doug Henwood that covers this and related topics. It is also possible for the top students in this course to pursue these topics in the advanced corporate finance course in the spring semester.
In the spring of 1999, the corporate finance class discussed the coming end to the "speculative bubble" in internet stocks (which has now become a reality). More recently, we have discussed the bubble in the housing market. We also discussed the manner in which the U.S. bond market has been bolstered by the decision of the Chinese central bank (the People's Bank of China) to purchase billions of U.S. dollars in U.S. treasury bonds, pushing up the price of those bonds and pushing down the interest rates on those bonds (and all the inter-related interest rates that influence investment and housing construction in the U.S. economy). We correctly predicted a reversal in the direction of interest rate changes and that the housing bubble would begin to deflate in this current period, making use of tools of financial and economic analysis.
What lies ahead? What will happen to stock prices? Bond prices? Housing prices? The U.S. dollar? As we develop our analytical skills, we shall also have occasion to discuss these questions and possibilities in the context of corporate finance. This is fair warning then. This is not a dry course where the professor comes to class and repeats what is in the textbook (I may even disagree with the text from time to time). We'll learn a lot this semester --- the time value of money, the capital asset pricing model, the dividend valuation model, the advantages and disadvantages of restructuring, mergers and acquisitions --- but, in the spirit of a liberal arts education, we shall not restrict our learning to purely technical questions. We will also discuss relevant current topics and controversies. Be prepared for this.
In this vein, the course will make occasional use of case studies (some of which will be constructed during the semester based on new developments in the corporate world) and students should be prepared, from the very first class and every class, to engage in discussions, to answer questions, and to participate in simulations. Students who find it "impossible" to answer questions put to them without prior warning (or who suffer lockjaw when it comes to speaking in class) are encouraged to seek alternative courses.
The case studies will be based on actual corporations. Past case studies have included Enron, WorldCom, Microsoft, Google, Dell, Amazon.com, Haier, and WalMart. Students must be prepared to make use of the Internet to gather actual and relatively up-to-date data. Many of these data sources can be accessed from the course's own corporate finance hotlinks page.
Course Objectives:
SyllabusFall 2007 |
|
Course calendar |
|
| Sept. 10-12 | After an introduction to corporate
finance on 11 September, we proceed to lectures on corporate
structure and processes, basic assumptions about corporate
objectives and decision rules (such as the Net Present Value
Rule): Brealey, Myers, & Allen (henceforth BMA), chapters 1 & 2 "Sarbanes-Oxley and the Cascade Effect," by Peter N. Calcara. NB: Your first 15 minute quiz will be held on 12 September at 3:30PM and end promptly at 3:45. If your quiz is turned in late (you continue working after time is called), you will receive a 10% penalty. |
| Sept. 17 | Present Value: BMA, chapter 3 |
| Sept. 19-26 | Valuing
Bonds and Common Stock: BMA, chapter 4
"Instruments," Chapter 1, from Wall Street by Henwood |
| Oct. 1-3 | More on the Net Present Value Rule (including a discussion of alternative decision rules): BMA, Chapters 5 and 6 |
| Oct. 10-17 | Capital
Asset Pricing Model, Arbitrage
Pricing Theory, and the Trade-off Between Risk and Return: BMA,
chapters 7 and 8
"Players," Chapter 2, from Wall Street by Henwood Online Section Objectives Victoria Stepanenko's Website on Risk and Return Calculate Practice CAPM Required Returns Calculate Practice Stock Values using CAPM & DVM Paul Krugman's "Dow 36,000: How Silly Is It?" Online Section Objectives |
| Oct. 22-24 | Capital Budgeting Process: BMA, chapter 9
Graham and Harvey, "How Do CFOs Make Capital Budgeting and Capital Structure Decisions," Journal of Applied Corporate Finance A Few Questions Relating to Corporate Investments |
| Oct. 29-31 | Capital Budgeting, Sensitivity Analysis, Simulation, and Decision Trees: BMA, chapters 10 and 11 |
| Nov. 5-7 | Agency Problems: BMA, chapter 12 |
| Nov. 12-14 |
Overview of Corporate Financing: BMA, chapters 14 and 15
"Ensemble," Chapter 3, from Wall Street by Henwood |
| Nov. 19 | Financing and Valuation: BMA, chapter 19
"Market Models," Chapter 4, from Wall Street by Henwood |
| Nov. 22 | Options: BMA, chapters 20-22 | Nov. 27 | Valuing Government and Corporate Bonds: BMA, chapter 23-25 |
| Nov. 29 | Debt Financing:
BMA, chapters 23-25 |
| Nov. 29 | Risk Management, BMA, chapters 27 and 28 |
| Dec. 4-11 | Mergers, Acquisitions, and Corporate Control:
BMA, chapter 32 Ambiguous Capital: The Restructuring of China's State-owned Enterprise Sector by S.J. Gabriel Optional Reading: Oliver Stone's Wall Street and the Market for Corporate Control by S.J. Gabriel |
| Dec. 13 | Corporate Restructuring: BMA,
chapter 33
Globalization by Satya Gabriel |

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© 1998-2007, Satya Gabriel, Economics Department, Mount Holyoke College.