“Learning never exhausts the mind”

Corporate Finance is about maximising shareholder value 

When invited to teach e.g. Corporate Finance in your online Master or MBA program (english), our course guide aligns with your course syllabus. If required we may add topics such as Capital Budgeting, and/or Corporate Valuation and/or Portfolio Theory and/or Capital Structure, and/or Advanced Valuation. Moreover, each online lecture is complemented by PowerPoint presentations, concept checks, and "Problem & Solutions".  We offer at least two live online lectures weekly for full-time students and one for part-time students, along with supervised weekly assignments. This comprehensive approach aims to provide students with a robust understanding of Corporate Finance concepts and applications in real-world scenarios.

Course description

Corporate Finance is about maximising shareholder value, doing so by raising money (i.e., financing) and making money (i.e., investing). As a result, investment and financing decisions are at the heart of corporate finance. A CFO is confronted with the universe of investment opportunities when deciding which real and financial assets to purchase and projects to undertake, and which ones to forego. This choice is followed by deciding how to fund such investments, whether to raise cash from lenders or from shareholders, and what constitutes the best mix of debt and equity financing.

Objective

The objective of this course is for the student to learn how to apply modern financial theory to the investment and financing decisions of a corporation.

Content

The course examines the theory and practice of corporate finance to provide students with knowledge related to the three main tasks of a financial manager: investment decisions, financing decisions, and cash management.

Online Lectures

Our online lectures, hosted on Zoom, adhere closely to "your" course syllabus while potentially incorporating the following;

Part 1 - Introduction

Lecture 1 

The Corporate Finance Environment, The Financial Statements Analysis*,  The law of one price, The additivity analysis and Working Capital Management 

We begin the course by analysing the balance sheet and income statement to determine profitability, risk, and rate of return; preparation of pro forma financial statements, strategic cost decision making for pricing and resource allocation. We then introduce the concept of the absence of arbitrage or Law of One Price that allows us to use market prices to determine the value of an investment opportunity to the firm. Notably, the Law of One Price is the one unifying principle that underlies all of financial economics.  Net working capital is the capital required in the short term to run the business. Thus, working capital management involves short-term asset accounts such as cash, inventory, and accounts receivable, as well as short-term liability accounts e.g. accounts payable. Given that there are opportunity costs associated with investing in inventories and accounts receivable, we study how firms can manage their working capital efficiently and thereby minimising these opportunity costs.

* We will exert our utmost effort to adapt - this segment of the lecture - to align with the Financial Reporting Standards established by the regulatory authorities in your country.

Part 2 - Capital Budgeting

Lecture 2  

Time value of money  and NPV & IRR & Payback

The time value of money (TVM) is a basic concept that holds that money in the present is worth more than the same sum of money to be received in the future, because money that you have now can be invested and earn a return, thus creating a larger amount of money in the future. Studying TVM and how to calculate the Net Present Value of cash flows will allow us to determine the value of projects and to understand the basic rules for investment decisions. In addition, we study how the Payback and the Internal Rate of Return can be applied to determine the economic feasibility of a capital investment.

Lecture 3   

Interest rates & Valuing Bonds & Debt Financing

Interest rate changes are among the most significant factors affecting bond return. Interest rates are paid to the bond holders in the form of coupons, and interest rates are central to the present value concept used for pricing, valuation, and risk measurement. In this lecture you will first be introduced to basic terms of bonds: coupons, face value, coupon rate, maturity, yield to maturity and duration, followed by valuing coupon bonds and zero-coupon bonds.  In addition, we will also study how companies can raise capital by using debt. In the advanced corporate finance course, we will dig deeper and study among others the Macaulay duration and the modified duration. The Macaulay duration calculates the weighted average time before a bondholder would receive the bond's cash flows while the modified duration measures the price sensitivity of a bond when there is a change in the yield to maturity.

Lecture 4   

Investment analysis and Valuing Stocks

The responsibility for a CFO is to decide which projects or investments a firm should undertake. As we learned above (lecture 2), the NPV is the most accurate and reliable method for allocating the firm's resources, to maximize its value. In this lecture we implement the NPV method and study investment opportunities to decide which ones to accept and which ones to forgo, including forecast the project's revenues and costs, and from these forecasts, estimate the project's expected future cash flows. To value stocks we apply the dividend-discount model followed by the free cash flows generated by the firm. Thus, to value a stock, we need to know the expected cash flows an investor will receive and the appropriate cost of capital with which to discount those cash flows. We will also discuss - why value investors like Warren Buffett often beat not only the stock market, but other money managers as well.

Lecture 5   

Derivatives -  Financial options, Real options, Futures and Forwards

A finance option is based on the value of an underlying asset e.g. stock. An options contract provides the buyer the opportunity to buy or sell the underlying asset. In this lecture we discuss how finance options works and show the various techniques for calculating the price of an option - The Binomial Option Pricing Model, the Black-Scholes formula, and risk-neutral probabilities. These techniques changed the course of financial economics and gave birth to a new profession: financial engineering. We apply these techniques to show how to value stock options and quantify their risk and return. In the advanced corporate finance course, we go further and study Real Options and how they are applied in capital budgeting including: the option to wait for the optimal time to invest, the option to grow in the future, and the option to abandon a poorly performing project.  In addition we study - futures and forwards - contracts as essential tools for hedging against exchange rate risk. These contracts play a crucial role in mitigating uncertainty regarding future movements in exchange rates, offering businesses and investors effective strategies to control their exposure to currency fluctuations. By employing forward and futures contracts, entities can proactively manage the risks associated with fluctuating exchange rates, thereby safeguarding their financial positions and optimizing their decision-making processes in global markets.

• Black, F., Scholes, M., 1973. The Pricing of Options and Corporate Liabilities. Journal of Political Economy, May – June, pp. 637-654.

• Black, F., 1989. How we came up with the option formula. Journal of Portfolio Management, Volume 15, No. 2, pp. 4-8.

Part 3 - Risk & Return and Portfolio Theory

Lecture 6 & 7

Risk & Return & Diversification & Markowitz (1952) & CAPM & APT

Portfolio theory is a method for selecting financial assets to get an optimal level of return given an acceptable level of risk. Those portfolios that satisfy this requirement are called efficient portfolios. Markowitz's theory explains how this should be done. Markowitz made certain assumptions regarding the behaviour of investors. These are as follows: 1) Investors choose portfolios on the basis of their expected mean and variance of return. 2) Investors are risk-averse expected utility maximisers 3) Investors have a single-period time horizon, and it is the same for all investors. 4) Investors have identical expectations about expected returns, variances, and covariances for all risky assets. Thus, we will study; risk & return, diversification, Markowitz (1952) mean-variance optimization, capital asset pricing model (CAPM) and the arbitrage pricing theory (APT). Knowledge about portfolio management will give you an understanding on how to apply standardised portfolio selection techniques into optimal investment portfolios.

• Markowitz, H. Portfolio Selection. The Journal of Finance, Vol. 7, No. 1, pp. 77-91. March. 1952.

• Sharpe, W.F., Capital asset prices: A theory of market equilibrium under conditions of risk, Journal of Finance 19, 425–442, 1964.
  

Lecture 8

WACC and The Efficient Markets Hypothesis (EMH)

Companies raise various forms of capital for running the business and these funds comes with a cost. The optimal capital structure of a firm is often defined as the proportion of debt and equity that results in the lowest weighted average cost of capital (WACC) for the firm. Unless the returns earned from the business is greater than or equal to cost of capital, no business can sustain / grow, thus setting a benchmark that a new project has to meet.  The Efficient Markets Hypothesis (EMH) states that share prices reflect all information (consistent alpha return is impossible). According to Fama (1970), stocks are always trading at their current fair market value. The conclusion is that since stocks always trade at their fair market value, then it is virtually impossible to either buy undervalued stocks at a bargain or sell overvalued stocks for extra profits. If that’s true, then the only way investors can generate superior returns is by taking on much greater risk.

• Fama, E, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance, 25, 383-417, 1970. 

Part 4 - Capital Structure theory

Lecture 9  

Capital Structure  - Miller & Modigliani (1958, 1963)

Dividend Policy - Miller & Modigliani (1961)

Financial Distress, Trade-Off Theory and Pecking Order Theory  

Capital structure refers to the amount of debt and equity employed by a firm to fund its operations and finance its assets. There are tradeoffs to make when deciding whether to use debt or equity, so the CFO must balance the two to find the optimal capital structure. Wrong decisions in capital structuring may spoil the business which otherwise would have plenty scope for growth.  Moreover, does it matter whether firms pay dividends or repurchase shares? In this lecture we show that payout decisions may in fact be irrelevant: How much cash the firm returns to shareholders and how that cash is distributed does not matter. Moreover, if shareholders have different payout preferences, they can implement such "payout policies" on their own with homemade dividends.

• Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 261-296.
• Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: a correction. The American Economic Review, 433-443
• Modigliani, F., & Miller, M. H. (1961). Dividend Policy, Growth and the Valuation of Shares. J. Business 34 (34), 411-433.

Part 5 - Advanced Valuation & Corporate Valuation (M&A)

 Lecture 10

Valuation with leverage and a Corporate Valuation Case Study

In the advanced corporate finance course, we conclude with a corporate valuation case study. We begin with the three main methods for capital budgeting with leverage and market imperfections i.e. WACC, APV and the flow-to-equity (FTE) method – which results in the same estimate of the firm value.   We then apply the financial tools we have developed thus far when we value a company using the discounted cash flow model (DCF). We will estimate the company’s intrinsic value, which will tell us whether the current stock price is undervalued or overvalued. The intrinsic value, also known as the fair value, is key when pursuing an M&A. To find the intrinsic value of a business, we use a DCF valuation to calculate the asset’s expected cash flows over its lifetime, and the uncertainty on receiving these cash flows. We will estimate the company's intrinsic value by building a financial pro forma model that includes Net Working Capital (NWC) and Capital Expenditures (CAPEX), and covers the following steps: Free Cash Flow, Weighted Average Cost of Capital (WACC), Perpetual Growth Rate, Terminal Value, Shares Outstanding, Discounting Back to Present Value, and determining the Intrinsic Value and Margin of Safety. Knowing the intrinsic value of the company help us estimate the return on our investment. Finally, we explore the sensitivity of the valuation estimates to our main assumptions.

Welcome to the course!

Katarina Eriksson & Mikael Keskitalo