Objective
Logistics
Assessment
Textbooks
Prerequisites
Course outline

1. Introduction, Shareholder Value Models, and the Modigliani-Miller-Theorems Revisited
2. Value Drivers
3. Cost of Capital and Financial Structure
4. DCF Valuation
5. Case 1: tba
6. Capital Structure and APV
7. Case 2: tba
8. Residual Income Valuation and Financial Ratios
9. Case 3: tba
10. Event Studies
11. Case 4: tba
12. Initial Public Offerings (IPOs)
13. Case 5: tba
14. Review Session

Students whishing to take Corporate Finance I must apply for a place in this course. This document outlines the application process. Exchange students should not use the procedure outlined here, but contact Mrs. Selket Gupta (Auslandsbüro der Fakultät BWL, email: gupta(at)bwl.uni-mannheim.de), instead.

Corporate Finance studies how corporations finance their operations. The emphasis of this part of the curriculum is on shareholder value and company valuation. We will also study the cost of capital, introduce theories of capital structure, and initial public offerings. This document provides an overview of the structure and contents of the course.

This document will be updated continuously throughout the term. In particular, lecture notes can be changed up to 24 hours before the beginning of class, so please do not download lecture notes earlier in order to avoid receiving an outdated version.

Organization of the course
The course is organized as an integreated lecture and case course. We will start with a series of four lectures and then alternate between lectures and cases. The lectures provide the conceptual and empirical background and the cases apply the concepts to real-life examples. All lectures and case discussions are in English.

Due to the abolition of tuition fees in Baden-Wuerttemberg there will be some cases participating students have to pay for. You have to purchase the cases during the time period September 3 until September 17, 2012 at secretary's office (Mo-Th, 9am-1pm). The costs will be about 20€ (exact information will follow as soon as all cases are set). Students who haven´t purchased the cases can´t participate in the course and will be unsubsribed from the course by September 17, 2012!

Dates and Venues
All lectures will take place on Thursdays 3:30 – 6:00 pm in lecture theatre SN 169. For cases the class will be divided into two sections. The first section will meet on Thursdays, 3:30 – 6:00 pm in lecture theatre O135 and will be in English. The second section will meet on Thursdays, 6:15 – 8:45pm in lecture theatre O135 and will be in German. 

Exceptions:

3. case discussion will be on Wednesday, October 31, 2012: 

English group: 3.30-6.00pm, lecture theatre O135

German group: 6.15-8.45pm, lecture theatre O135

4. case discussion will be on Tuesday, November 13, 2012:

English group: 3.30-6.00pm, lecture theatre O151

German group: 6.15-8.45pm, lecture theatre O151

Registration and access
To ensure a consistently effective learning environment in our case study discussions, we have to limit the number of participants. Further information on how to register for Corporate Finance I can be found in the following document. If you obtained a place and you do not wish to participate in this course, you are requested to notify us by September 17, 10:00 am. After this deadline you are committed to take this course.

Help
The main source of help during this semester is the discussion board for this course. All questions that are of general interest, regarding content, logistics, and assessment of this course should be posted there. You can write emails to us with specific questions that are of a more personal nature, emails with general questions will be posted to the discussion board. We will normally try to respond to postings on the board within 24 hours.

Tutorials
There will be four voluntary tutorials at the beginning of the semester (the first tutorial takes place September 6, 2012) for those who are not familiar with financial modeling using spreadsheeet programs like Microsoft Excel. The tutorials will take place in lecture theater O148 directly after the lecture (6:15-7:45 pm). We will offer additional materials on our website for those who prefer to study this material by themselves.

Exam
The exam has not been scheduled yet. Since CF I is a master course, those of you who fail the exam or are ill are automatically registered to retake the exam at the end of the semester break in February 2013.

Additionally, we offer two review sessions for each exam. Date and time will be announced on the Homepage. Note that, if you demand a reassessment of your exam, answers to all questions of the exam are reassessed. This can lead to an increase or decrease of your grade.

Students will only receive one final grade on this course for lectures and cases combined. The final grade consists of three components: case write-ups (45%), class participation in case discussions (15%) and a final exam (40%). You need to attend all case discussions in your section. However, in order to obtain a passing grade you must pass the exam. You cannot make up for a failing grade in the exam. There are five cases and you have to hand in a minimum of four cases. The first case (Who is who?) is mandatory and has to be handed in by all students. If you write up five cases we will calculate the case grade based on the "Who is who" case and  best three of the other four write-ups.

Case write-ups
You can hand in your case write-ups individually or in groups of up to three students. Please note that it is not allowed to cooperate in groups of more than three students or across groups. Also, you are not allowed to obtain or try to obtain solutions from previous years’ students or from students at other universities or from the internet. Please note that we will regard any event of copying, where identical write-ups are turned in or where write-ups overlap or coincide with work from previous semesters or with documents in the public domain, as a breach of the code regulating exams ("Prüfungsordnung"). At a minimum, all group members will receive a failing grade on the respective homework, regardless of whether they provided the original, copied from the original, or had somebody else copying from the original. We keep electronic copies of case write-ups for this purpose (see below).

You are required to hand in a hardcopy of your case write-up (this will be graded and returned) and an electronic version which you have to upload to www.turnitin.com. Please embed your excel sheet (an instruction can be found here). Please follow the steps described here to set up your account and upload your work to Turnitin. The deadline for both, the electronic version and the hardcopy, is always 15 minutes before the beginning of the class where the case is discussed. You can hand in your hardcopy version either during opening hours (9 - 12 am) at our sectretarial office (L9, 1-2, room 4.06), or, alternatively, you can put it into our letterbox (white box on the 4th floor of L 9, 1-2, in front of the glass doors) until 3:15pm on Thursday resp. Wednesday on Oct 31 and Tuesday on Nov 13 (strict deadline).

The write-ups should have a maximum of four A4-pages of text plus numeric exhibits in the appendix. The first name and the family name as well as the student ID number of all group members have to be stated on the first page of your write-up. Please just staple the pages of your print out, since we cannot guarantee you the return of any folder. Please refer to the note on case study write-ups for further information.

Plagiarism Policy
By participating in this course you agree to our plagiarism policy. We are commited to fair-play and will therefore treat any incidence of plagiarism as cheating. There will be absolutely no exceptions to this rule. It is your responsibility to hand in only work which is in compliance with our plagiarism rules. If in doubt, contact us before handing in your work!

Each student has to sign a copy of the plagiarism policy until October 4, 2012, 11:00 am the latest. Copies are available at the secretary's office L9, 1-2, 4.06 (Monday to Thursday, 9.00 am to 1.00 pm). Students who do not sign the plagiarism policy will receive no grade for their case.

There is no textbook that covers all the subjects covered in Corporate Finance I. The following books are particularly useful.

Berk, Jonathan and Peter DeMarzo: Corporate Finance, Second Edition, Pearson, 2009. This is a modern textbook in corporate finance with a good emphasis on valuation.

This book covers the finance background you need for cost of capital, capital structure, options and real options, IPOs, and asset pricing models. If you wish to participate in the whole corporate finance cycle, then I suggest that you buy this book, it is also useful as background reading if you find that you need additional conceptual knowledge in order to do your cases. Other introductory textbooks (e. g.  Ross, Westerfield and Jaffee, Brealey, Myers, and Allen) cover the same territory, but below the level required for this class and are therefore not substitutes.

Grinblatt, Mark and Sheridan Titman, Financial Markets and Corporate Strategy, Irwin/McGraw-Hill, Boston and others, 2nd edition, 2002.

This book offers an alternative to Berk/DeMarzo. Unfortunately, valuation is covered inadequately in this book.

Palepu, Krishna G., Paul M. Healy, Victor L. Bernard, and Erik Peek, Business Analysis and Valuation IFRS Edition – Text and Cases, South-Western Cengage Learning, First Edition, 2007.

This is an accounting text that is particularly strong on financial ratio analysis and valuation using the residual income approach.

Weston, Fred J.; Mark L. Mitchell, and J. Harold Mulherin, 2004, Takeovers, Restructuring, and Corporate Governance, Upper Saddle River, New Jersey (Pearson Prentice Hall).

This text covers mergers, acquisitions, takeovers, leveraged buyouts, and divestitures. It will be the recommended text for Corporate Finance II. However, the valuation chapter introduces value driver analysis and tells you how to set up a spreadsheet model to value a company.

The lecture outline below will refer to selected chapters of these texts. There are other texts on valuation that may be useful for you, especially for specific questions. These include:

Benninga, Simon and Oded Sarig: Corporate Finance - A Valuation Approach, McGraw-Hill, 1996. This is a good book on valuation from a finance perspective. There is a good discussion of the use of multiples and how they relate to DCF. Some views regarding tax adjustments of the cost of capital are not standard.

Benninga, Simon: Financial Modeling, MIT Press, Third Edition, 2008. This book introduces you to financial modeling using MS Excel. The first few chapters cover valuation and spreadsheet modeling as used in this course. Later chapter cover other financial applications that are not discussed in this course but also useful. The appendix has a good introduction to Macros and programming with Visual Basic.

Copeland, Tom, Tim Koller and Jack Murrin: Valuation - Measuring and Managing the Value of Companies, Third Edition, John Wiley and Sons, 2000. This book is widely used among practitioners. It is particularly strong on the value-driver framework and the link between valuation and strategy. The discussion is mostly verbal and intuitive and below the formal level required in this lecture.

Damodaran, Aswath: Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, John Wiley and Sons, Second Edition, 2006. Damodaran has a number of books on valuation that seem to overlap in content. His website has a wealth of materials relating to cost of capital and downloadable data on the US.

Every student participating in this course should have completed basic courses in economics or business administration. The lectures generally assume basic knowledge in accounting (balance sheets, income statements, financial ratios), finance (present value methods, portfolio theory, CAPM), mathematics (calculus, optimization) and statistics (mean, variance, standard deviation, simple and multiple regressions).

This class is divided into two sessions as follows:

Session I (3:30 – 4:15): Introduction to the curriculum

This lecture introduces the Corporate Finance-cycle for 2011/12 and provides an overview of the subjects studied, the teaching methods and also explains the method of evaluation.

Session II (4:30 – 6:00): The Modigliani-Miller-Theorems revisited

We will revisit the Modigliani-Miller Theorems and introduce the concept of capital structure policy. Finally, we will introduce the notion of shareholder value and discuss the objective of the firm.

Downloadable Files: Introduction to the course, Lecture notes on shareholder value

Readings: Berk/DeMarzo, chapter 14 discusses the Modigliani-Miller-Theorems, we will cover the material on taxes later in the term. Chapter 16 provides a more extensive analysis of the relationship between capital structure and managerial incentives. Chapter 16.6 discusses the free cash flow theory.

Further Readings:  Karen Hopper Wruck, Financial policy, internal control, and performance - Sealed Air Corporation's leveraged special dividend, Journal of Financial Economics 36 (1994), pp. 157-192.

Grinblatt / Titman, chapter 14.1-14.3, chapter 17.1-17.3 and chapter 18.4 offers an alternative to Berk/DeMarzo.

We analyze the channel through which managerial decisions and the company’s strategy affect shareholder value. We identify value drivers as the key link between strategy and the main components of value, cash flows, and the cost of capital. We will also see how value drivers can be identified from balance sheet information using financial ratios.

Downloadable files: Lecture notes on value drivers, Excel table with statistics on value drivers, Perpetuity model with earnings and cash flow calculations (this spreadsheet includes macros)

Readings: There is no textbook treatment of the subject that is close to the presentation of the lecture, which leans heavily on Rappoport's book (Alfred Rappaport, 1986, Creating Shareholder Value - The New Standard for Business Performance, New York, The Free Press). Weston/Mitchell/Mulherin, chapters 9 and 10 cover value drivers and the percent of sales-approach. Palepu/Healey/Bernard/Peek, chapter 5 cover financial ratios. Berk/DeMarzo cover financial statement analysis in chapter 2 and cash flow projections based on an application in chapter 19.2-19.3.

We will introduce the concept of the cost of capital. We will show that the costs of capital depend on the risk characteristics of projects and can be different across the divisions of a corporation. The analysis will be based on the concept of a tracking portfolio. We will also discuss how to use alternative cost of capital formulae and how to apply the capital asset pricing model (CAPM). These concepts are foundational for many subsequent applications.

Downloadable files: Lecture notes on the cost of capital, Excel table on cost of capital and structural breaks

Readings: The cost of capital is discussed in Berk/DeMarzo, chapter 12. For an application see also Berk/DeMarzo, chapter 19.4. Unlevering and relevering of betas is covered in Berk/DeMarzo, chapter 14.3 and the project-based costs of capital in Berk/DeMarzo, chapter 18.5.

Further Readings: Grinblatt/Titman, chapter 11; this chapter presumes that you are familiar with portfolio theory and the capital asset pricing model at the level of an intermediate finance course. If you need to review these materials, then you should consult Grinblatt/Titman, chapters 4 and 5.

We will introduce and discuss discounted cash flow methods for company valuation: The dividend discount model, the discounted cash-flows method, and the flow to equity method. We will distinguish these approaches and highlight their advantages and pitfalls. We will also discuss why DCF and the DDM are the correct methods for valuing companies.

Downloadable files: Lecture notes on DCF, Excel table on DCF, Excel-spreadsheet with Three-Stage-Model

Readings: The dividend discount model is covered in Berk/DeMarzo, chapter 9.2, and the basics of DCF valuation are covered by Berk/DeMarzo, chapter 9.3. Berk/DeMarzo discuss the Modigliani-Miller dividend irrelevance proposition in chapter 17.2 and the Flow-to-Equity method in chapter 18.4.

Further Readings:  Grinblatt/Titman have a chapter on this (chapter 9), which is somewhat disappointing for an advanced course. Weston/Mitchell/Mulherin (chapters 9 and 10) is better. A more practical ("cookbook") approach is offered by Damodaran, who wrote various books on valuation (Damodaran on Valuation, Wiley) and also provides many materials (overheads, spreadsheets, data) on his website (follow links to "Valuation"). The book by Benninga and Sarig (Corporate Fiance - A Valuation Approach, McGraw Hill) is good on pro forma forecasting and some other details of valuation, but has an idiosyncratic take on taxes.

tba.

Downloadable files: Case Seminar Introduction

Taxes change some of the results from the previous units and introduce additional complications because the Modigliani-Miller irrelevance results need to be modified. In principle, there are two alternative ways to incorporate the impact of taxes into valuation analysis. The first approach adjusts discount rates and modifies the weighted average cost of capital (WACC). The second approach adjusts cash flows and is referred to as adjusted present value (APV). We will discuss a tax perspective on optimal capital structure and analyze how WACC formulas, formulas for unlevering betas and DCF-calculations need to be adjusted to properly take into account taxes.

Downloadable files: Lecture notes on Capital Structure, Excel table with APV valuation

Readings: Berk/DeMarzo discuss the WACC-method in chapter 18.2 and the APV-approach in chapter 18.3 and chapter 18.6.

Further Readings: Grinblatt/Titman, chapter 13.

tba.

This unit discusses how accounting numbers can be used in a different way to value companies. The residual income approach to company valuation relies on the book value of equity and the concept of residual (abnormal) earnings. In addition, multiples or financial ratios sometimes provide a useful shortcut where the implicit forecasts of the market for comparable companies are transferred to the company to be valued. We will discuss the issues in using multiples and their comparative strengths and shortcomings.

Downloadale files: Lecture slides on Residual Income, note on Residual Income, lecture slides on Financial Ratios, Excel table on Multiples.

Readings: Palepu/Healy/Bernard/Peek, chapter 5, 6 & 7.

Further Readings: Financial Ratios are discussed in Berk/DeMarzo, chapter 9.4, and chapter 19.1.

tba.

In an event study, the reaction of the stock price to a specific event is analyzed with statistical tools. This method is frequently used in corporate finance research. The unit presents the event study methodology in detail. It should enable participants to understand and properly interpret the results of event studies and to conduct event studies on their own.

Afterwards students have the opportunity to ask questions about the material of the entire term.

Downloadable files: Lecture slides on Event Studies, Excel tabel with Event Studies

Readings: Event study methodology relies on the notion of (semi-strong form) market efficiency and the discussion presumes that you are familiar with that concept, otherwise consult Brealey/Myers/Allen, chapter 13 or an equivalent treatment. Grinblatt/Titman, chapter 19 offers a discussion of the economic intepretation of event studies, but does not discuss the practical problems and statistical issues at all. Weston/Siu/Johnson chapter 6 Appendix B provides a good discussion including an application example.

Further Readings: Campbell/Lo/McKinlay, chapter 4 covers the relevant statistical tools, but this is a PhD-level text that goes beyond the requirements of this class.

tba.

The decision to go public and issue capital in public equity markets is one of the most complex decision in corporate finance. We discuss some institutional features as well as some basic models to understand the IPO-process. The valuation of IPOs still puzzles financial researchers and we will address these puzzles and some of the answers.

Downloadable files: Lecture slides on IPOs.

Readings: Berk/DeMarzo, chapter 23.2.

Further Readings: Grinblatt/Titman, chapter 3.

tba.

Students have the opportunity to ask questions about the material of the entire term.