"My job as a businessman is to be a profit
center and to maximize return to the shareholder."
Jeffrey Skilling, CEO of Enron (now bankrupt)
Fast Track to Course Calendar
Monday & Wednesday 8:35-9:50
Office hours: TBD
The course in corporate finance describes the corporation and its operating environment, the manner in which corporate boards and management evaluate investment opportunities and arrange for financing such investments, create (or, alternatively, destroy) value for shareholders by planning and managing the transformation of a set of inputs (labor-time, including the time it takes to come up with innovations, raw materials, components and other forms of technology consumed in production processes) 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 results from 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 calendar (revision in progress)
|Sept.9||Intro to Finance|
We begin with the long introduction to corporate structures and value creation. Read the following introductory questions on finance: Questions to Ponder. Also, read the following Intro to Finance. The questions and introduction will help us in our discussion of the role of finance in society. We will use a heuristic diagram of a firm and discuss various component parts of the overall social and technical processes that determine the success or failure of the firm: financing and access to tangible and intangible assets, nexus with labor markets and access to necessary skill-sets, the immediate process of production, transportation of products, marketing of products, final sales by which cash flows are generated, the receipt and distribution of the surplus value flows necessary to meet the demands of claimants. Click on "Intro to Finance?" above to read the introduction to the course. Read chapter one of text. Read the following short introductory essays on cash flow issues (click here) and cash flows, more generally, (click here).
|Sept. 14-16||Present Value:
The Text, chapters 1 & 2
This week we will explore some of the critical concepts at the foundation of corporate finance, generally, and valuation, specifically. You will want to make certain that you understand the meaning of present value and the related concepts of discounting, time value of money, and opportunity cost. Do not hesitate to ask lots of questions.
Stock and Bond Valuation (Perpetuities and Annuities)
: The Text, chapter 3
Always remember that the value of assets, including companies, is ultimately derived from the ability to generate cash and that the timing of receipt of cash is important to the magnitude of the contribution that cash payments make to intrinsic value. Cash payments.
|Sept. 28-30||Introduction to Capital Budgeting : The Text, Chapter 4|
The Yield Curve: The Text,
A bond is a financial contract. This contract stipulates that, in exchange for the purchase price of the bond, the holder has a right to receive specific cash payments. These cash payments are usually in the form of coupon payments (interest payments) and the repayment of principal. The dates for the periodic coupon payments and the (usually) single repayment of principal are clearly stipulated in the contract (which is also called a bond indenture). In Europe, the coupon payments are sometimes annual. However, in the United States, these payments are typically made semi-annually (twice a year at six month intervals).
Bonds are liabilities of the issuer. They are a form of a loan made to the issuer by the original purchaser. A marketable bond can be sold by the original purchaser to other economic agents, who then possess the claim to the coupon payments and the repayment of the original principal. Bonds are assets of the purchaser (because they represent claims to positive cash flows in future). The purchase price of a marketable bond need not be equal to the original purchase price of the bond. Indeed, fluctuations in interest rates for similar types of bonds makes it unlikely that the market price and the purchase price of a bond will be equal over the life of the bond (unless the bond has a very short lifespan).
Intro to Statistics, Uncertainty, Default, and Risk: The Text,
Introduction to Investments and Portfolio Theory: The Text, chapters 7 & 8
Scenario, Sensitivity, and Simulation Analysis
|Oct. 19-21||Capital Asset Pricing Model: The Text, chapter 9.
|Oct 26-28||Market Efficiency & Behavioral Finance: The Text, chapters 10 & 11|
|Nov. 2-4||Capital Budgeting, Real Options, & NPV: The Text, chapter 12|
From Financial Statements to Cash Flows:
The Text, chapter 13
|Nov. 16-18||Valuation from Comparables and Financial Ratios:
The Text, chapter 14
Microfinance Models: Gabriel, Hinckley, and Jawaid text.
"Market Models," Chapter 4, from Wall Street by Henwood
|Nov. 23 & 30||Pro Forma Financial Projections & Analysis:
The Text, part VI
|Dec. 2||Mergers, Acquisitions, and Corporate Control: Reading to be determined.||Dec. 9||Review Session|
|Explore the Securities Industry||Corporate Finance Basics||Corporate Finance Hot Links|
|Hypertextual Finance Glossary||Flat World Knowledge Online Textbooks||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|
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