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 may 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 argued, 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 discussed the bubble in the housing market and predicted the bursting of that bubble, which has now come to pass with severe consequences for global financial, labor, and goods markets . We also discussed the manner in which the U.S. bond market was bolstered by decisions 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 may make occasional use of case studies (some of which would 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.

Some financial data sources can be accessed from the course's own corporate finance hotlinks page. If you notice dead links or mistakes on the hotlinks page, please bring them to the attention of Professor Gabriel.

Course Objectives:
 
 

• Gain an understanding of financial markets and processes
• Learn techniques for determining the intrinsic value of securities
• Discover the complex interaction between the economy and the financial markets
• Become comfortable engaging in discussion and debate over finance and related issues

Featured Student Websites:
Tzvetelina Ivanova, Mergers and Acquisitions
Denica Koycheva, Behavioral finance

Explore the Securities Industry	Corporate Finance Basics	Corporate Finance Hot Links
Hypertextual Finance Glossary	Reserved for Mirijana Ujkic	Closed End Funds
European Stock Exchanges		The Efficient Market Hypothesis
Yahoo Financial Glossary	Overview of Behavioral Finance	Website on Risk and Return
Why Value a Project?	Case Studies	A Brief Guide to Options 2

click symbol above to search SEC database

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