Corporate Financial Management
Course Number 1416
Associate Professor Lucy White
Associate Professor Yuhai Xuan
Fall; Q1Q2; 3 credits
Corporate Financial Management (CFM) is an advanced corporate finance course. The course's goal is to build the analytical and practical tools essential for value-based management. The course is designed for all students who want to develop the skills necessary to evaluate a corporation's major strategic and investment decisions from a financial perspective. Hence it is ideal for students who intend to pursue a career in finance - such as in the finance area of a corporation, or servicing corporate clients in a financial institution, or in private equity or as an analyst or portfolio manager - and for students who want to launch a senior general management career from a finance specialization. But the course also serves students who simply want to develop a broader view of the financial landscape and obtain a deeper understanding of major corporate financial decisions - such as the decision to undertake a leveraged buyout, or to buy back large quantities of shares from the market.
The theme of the course is how mangers can create value through integrated financial, strategic, and operating decisions. Students build the knowledge and skills that are essential to the main responsibilities of a Corporate Financial Officer: evaluating investment decisions; proposing, assessing and implementing financial decisions; evaluating and managing risk. The course introduces advanced valuation techniques and stresses a rigorous understanding of what creates value and why. Throughout the course we consider interactions between a firm's financial decisions and its business strategies.
Course Content and Organization
CFM is organized into five modules:
Module I. Extending the Valuation Framework. In this module we begin by reviewing the basic framework for valuation and capital structure decisions that was learned in Finance 1 and Finance 2. We examine the strengths and weaknesses of this framework and introduce students to a new valuation tool - the equity cash flow method - to address some of the weaknesses.
Module II. Valuing and Exercising Real Options. Students will learn to recognize where the optionality of an investment creates additional value, above and beyond what would appear in a standard "net present value" framework. For example, sometimes an investment that looks unprofitable now may become profitable in the future, so the option to wait to make the investment is valuable. We introduce and use the appropriate tools for estimating how much value such growth options can add to firm value. We then establish rules for when to invest in such discretionary investment projects now, and when to defer the investment until later.
Module III. Project Finance. Here we explore the issues that arise when a firm must finance a large, self-contained project. We consider issues such as the choice between bank and bond finance, the valuation of projects in emerging markets and the incentive conflicts between a firm and the bank arranging its financing.
Module IV. Mergers, Acquisitions, Governance and Corporate Restructuring. In this module we examine the motivation behind the financial structures of some complex deals and we highlight some important features of the financial landscape - some familiar and some less so. Students will gain a deeper understanding of familiar institutions such as M&A, bankruptcy and leveraged buyouts. And they are introduced to less familiar issues that have arisen as a result of financial crises and financial innovation. For example, we will study the use of asset-backed securities in firm financing; the valuation of businesses such as banks, real estate and insurance which have financial assets on the left-hand side of their balance sheet; hybrid securities used as "capital" by banks; and the governance issues arising from the "empty voting" of shares which have been divorced from cash flow rights using derivatives.
Module V. Review. We close the course with a summary and review of material covered, including a valuation case to aid students in preparing for the final examination.