Corporate Finance - Course Outline

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BUSA 422

CORPORATE FINANCE
Lecture Times: Venue: 116 Discussion Time: Fri Venue: 217

COURSE OUTLINE
Mon & Wed 08:30 – 10:00 11:50 – 13:20

ASHESI UNIVERSITY COLLEGE DEPARTMENT OF BUSINESS ADMINISTRATION LEVEL 400 BUSINESS ADMINISTRATION FALL SEMESTER, 2012/2013 ACADEMIC YEAR BUSA 422 - CORPORATE FINANCE

Course Lecturer: A. Essel-Anderson Office: Room 207 Office Hours: Mon & Wed 12:00 – 13:00 and 15:00 – 16:00 E-mail: [email protected] Tel (office) +233 30 261 0330 Ext 1009 Tel (mobile) +233 24 280 6155 or +233 20 836 3329

Course Description Preamble This course covers numerous issues of practical relevance to the contemporary corporate finance manager. Although the central focus will be on how corporations make investment and financing decisions, the introductory classes will discuss households’ saving and investment decision-making, and how securities markets and financial intermediaries complement such efforts. Topics to be covered include risk and return, asset valuation, working capital management, mergers and acquisitions, and corporate restructuring. The course focuses on the application of corporate finance concepts to solving real life problems in a typical business environment. Students will learn to appreciate how the timing of and uncertainty about future cash flows and their associated risks combine to determine the current value of those cash flows. It is expected that assignments, class projects, and discussions will provide the needed motivation and enhance students’ understanding of the finance theories to be discussed. The numerous real-life examples and cases are aimed at equipping the students with skills to plug-and-play in a starting finance position in any organization in Ghana and abroad. Pre-requisites It is expected that participants might have taken Financial Accounting, Introduction to Finance and /or Investments before this course. Course Objectives and Learning Outcomes Objectives This course is designed to help students acquire the necessary skills and competencies demanded of a contemporary finance manager. It aims at creating the awareness that an effective financial manager must be abreast with current developments in the financial markets. Learning outcomes By the end of this course, students will be able to –  Identify and assess the impact of governance structures, external environmental factors

including political risk, and potential natural disasters on the performance of investments in securities, projects, and businesses  Appraise and value investments based on their risk-return profile using the CAPM as well as multi-factor asset pricing models. With respect to projects and businesses, students will be able to incorporate risk in the appraisal using sensitivity analysis, scenario analysis, and Monte Carlo Simulation  Generate projected financial statements and determine external financing needed  Take effective capital structure and dividend payment decisions based on analysis of impact of capital structure and dividend policy on the entity’s financial flexibility, cost of capital, and value of stock  Determine optimal levels of inventories and cash, appraise credit policy and policy changes on the entity’s risk and profitability, recommend cost effective ways of speeding up collection of trade receivables, and identify and evaluate short-term financing options for investments in working capital and decide on the best financing option  Assess the benefits and costs associated with mergers and acquisitions. In particular, students will be able to place an appropriate value on the entities involved, identify factors through which synergies might be realised, estimate the value of synergy, estimate the net present value of an acquisition, and assess risks associated with mergers and acquisitions including the risk of incompatibility and the effects of any poison pills

Ashesi Learning Goals  Critical Thinking and Quantitative Reasoning: “An Ashesi student is able to apply critical thinking and quantitative reasoning to approach complex problems” . This goal will be addressed by having students value equities that are unlisted and hence have no objective estimation of the key elements required in determining the discount rates and other projected cash flows. Messy problems will stimulate critical thinking in students.  Communication: “An Ashesi student is an excellent communicator in a variety of forms”. The equity valuation term paper and presentation of it to industrial experts – equity analysts, economists, and financial analysts – will hone the communication skills of the students and prepare them for the real world. Case discussions and class debates will also help improve students’ oral communication skill.  Technology: “An Ashesi student is an effective and flexible user of technology”. Students will learn to use Microsoft Excel tools to undertake the entire equity valuation exercise and other IT tools to enhance the quality of presentation of their final semester papers.  Curious and Skilled: “An Ashesi student is inquisitive and confident, has breadth of knowledge, and has attained high level of mastery in their chosen fields”. This course will expose students to essential finance rules, standards, and relevant laws/regulations, and equip them with the skill of data processing and analysis that is needed to form a firm foundation towards the ultimate aim of becoming a master in their field. Course Themes

Course contents are designed and will be delivered around the following themes: 1. The financial environment, financial analysis, and financial planning (3 weeks) 2. Returns, variability of returns, and asset pricing (2 weeks) 3. Valuation of securities, projects, and businesses (3 weeks) 4. Long-term financing decisions (2 weeks) 5. Working capital management (2 weeks) 6. Mergers and acquisitions, control, and governance (2 weeks)

Textbooks and Reading Materials Required Textbook

1. Corporate Finance, 8th Edition, International Edition, Brealey A. R., A. S. Myers, and F. Allen,
McGraw-Hil Companies, 2006 (BMA1) or 2. Principles of Corporate Finance, Global Edition, Brealey A. R., A. S. Myers, and F. Allen, McGraw-Hill Companies, 2006 (BMA2) Recommended Textbooks 1.Fundamentals of Financial Management , 12th Edition, Van Horne, J. C. and J. M. Wachowicz, Jr., Prentice Hall Inc., Pearson Education Limited, England, 2005 (VHW)

2. Essentials of Managerial Finance, 12th Edition, Besley, S. and E.F. Brigham, SouthWestern/Thomson Learning, United States, 2000 (BB)

3. Fundamentals of Corporate Finance, 5th Edition, Ross, S.A., R.W. Westerfield, and B.D. Jordan,
The McGraw-Hill Companies, United States, 2001 (RWJ) Recommended Newspapers, Journals, and Reports

1. The Business & Financial Times 2. The Economist 3. Global Financial Stability Report, published by of the IMF 4. World Economic Outlook, published by IMF
Research Papers and Other Articles 1. Coase, R.H. (Nov 1937), “The Nature of the Firm” Economica, New Series, Vol. 4, No. 16, pp. 386-405 2. Coase, R.H. (Spring 1988), “The Nature of the Firm: Origin”, Journal of Law, Economics, and Organisation, Vol. 4, No. 1, pp. 3-17 3. Fama, E.F (Apr 1980), “Agency Problems and Theory of Firm” Journal of Political Economy, Vol. 88, No. 2, pp. 288-307 4. Fama, E.F and K.R. French (1995), “Size and Book-to-Market Factors in Earnings and Returns”, Journal of Finance Vol. 50, No. 1, pp. 131-155 5. Freshfields Bruckhaus Deringer (Jan 2006), “Islamic finance: basic principles and structures”, Freshfields Bruckhaus Deringer 6. Maurer, B. (2002) “Anthropological and Accounting Knowledge in Islamic Banking and Finance: Rethinking Critical Accounts”, Royal Anthropological Institute 8, pp. 645-667

7. Servaes , H. and P. Tufano (Feb 2006), “The Theory and Practice of Corporate Debt Securities”, Deutsche Bank AG 8. DeAngelo, H, L. Deangelo, and D. Skinner (2008), “Corporate Payout Policy”, Foundations and Trends in Finance 3, pp. 95-287 9. Getting the Deal Through (2011), Mergers and Acquisitions

Recommended Websites  Bank of Ghana http//www.bog.gov.gh  Mergers and acquisitions http//www.reuters.com/finance/deals/mergers  The International Monetary Fund http//www.imf.org  Ghana Stock Exchange http//www.gse.com.gh  Bloomberg http//www.bloomberg.com

Evaluation Criteria Your performance will be evaluated this way: 1. Attendance and participation 2. Quizzes and take-home assignments 3. Semester project 4. Mid-semester examination 5. Final examination Total 40% 100% 20% 10% 10% 20%

Attendance and participation Attendance is required; students who absent themselves from class will lose points. In addition, sanctions prescribed in College regulations regarding truancy and tardiness will be applied. Every student is expected to participate fully in class activities, particularly class presentations, case and article discussions, and class debates. Quizzes and take-home assignments There are 5 quizzes in all, one on each of the first five themes. Quizzes are computation problems – both algorithmic and messy problems. There are 3 take-home assignments, all of which are writing assignments (1 – 2 page report). Semester project This is a semester long valuation assignment. It involves application of concepts and best practices learned in this course in valuing a project or unlisted entity. A 15-20 page technical report is expected from students. Mid-semester examination This is a 90-minute sit-in examination. Student will be given problems to solve. Final examination

This comprises case study (10 percent) and problems (30 points). Final examination is a sit-in examination. Course Outline Weeks Week 1 Lectures The Financial Environment Day 1: Introduction to the course Day 2: Goals of a firm, decision areas in finance, role of financial manager, agency problems and corporate governance [Required reading - CH1 and CH23 of BMA2; Recommended reading - CH1 of RWJ] Financial Environment (cont) and Financial Analysis Day 1: Efficient markets and behavioural finance, corporate financing, how corporations issue securities [Required reading - CH13, CH14, and CH15 of BMA2] Day 2: Assessment of profitability, liquidity, solvency, efficiency, and market value using ratio analysis, the DuPont Identity, limitations of financial analysis [Required reading - CH28 of BMA2, Recommended reading - CH3 of RWJ] Financial Planning Day 1: Importance of financial planning, elements of financial plans, financial planning modelling, preparation of projected financial statements [Required reading - CH29 of BMA2; Recommended readings - CH4 of RWJ and CH4 of BB] Day 2: Growth and financing, understanding internal growth rate and sustainable growth rate, and determination of external financing needed [Required reading CH29 of BMA2; Recommended readings - CH4 of RWJ and CH4 of BB] Quiz 1: The financial environment, financial analysis, and financial planning Returns, Variability of Returns, and Market Risk Day 1: Estimation of rate of returns, assessment of risk using standard deviation of returns and coefficient of variation, portfolio theory [Required reading: CH7 and CH8 of BMA2] Day 2: Market risk, risk and cost of capital [Required reading: CH7 and CH8 of BMA2] Asset Pricing Day 1: Role and validity of the capital asset pricing model [CH8 of BMA2] Day 2: Multifactor asset pricing models – arbitrage pricing theory and the Fama and French Three-factor Model [Required reading - CH8 of BMA2] Quiz 1: Risk, return, and asset pricing Valuation of Bonds and Ordinary Stock Day 1: Application of the concept of present value, valuation of bonds [Required reading - CH3 of BMA2] Day 2: Valuation of ordinary stock [Required reading - CH4 of BMA2] Project Appraisal Day 1: Project appraisal techniques [Required reading - CH5 and CH6 of BMA2; Recommended reading - CH9 and CH10 of RWJ, CH8 of BB] Day 2: Assessment of project risk [Required reading - CH10 of BMA2; Recommended reading – CH11 of RWJ, CH9 of BB] Quiz 3: Valuation of bonds and ordinary stock, and project appraisal Valuation of Business Day 1: Valuation bases and valuation techniques [Required reading - CH19 of BMA2] Mid-semester Examination Mid-semester Break Capital Structure and Dividend Policy

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Week 16

Day 1: Capital structure theories and practices [Required reading - CH17 and CH18 of BMA2] Day 2: Payout Policy [Required reading - CH16 of BMA2] Cost of Capital Day 1: Cost of debt and cost of equity [Required reading - CH9 of BMA2] Day 2: Weighted average cost of capital [Required reading - CH19 of BMA2] Quiz – 4: Capital structure, dividend policy, and cost of capital Management of Inventories and Cash Day 1: An overview of working capital management, management of inventories [Required reading - CH30 of BMA2] Day 2: Management of cash inflows, outflows, and balances [Required reading CH30 of BMA2] Management of Trade Receivables Day 1: Credit policy and the effects of policy changes [Required reading - CH30 of BMA2] Day 2: Credit policy evaluation techniques [Required reading - CH30 of BMA2] Quiz 5: Working capital management Mergers and Acquisition Day 1: Pros and cons of internal and external growth strategies, motives for mergers and acquisitions, estimating merger gains and costs [Required reading – CH31 of BMA2] Day 2: The market for control, defences against hostile takeover, and mergers and the economy [Required reading – CH31 of BMA2] Corporate Restructuring, Governance, and Control Day 1: Ownership, control, and governance around the world [Required reading CH33 of BMA2] Day 2: Corporate restructuring – leverage buyouts, privatisation, nationalisation, private-equity partnerships, and bankruptcy [Required reading - CH32 of BMA2] Final Examination

Semester Project: Aim

Equity Valuation

The aim of this assignment is to offer students a hands-on experience of applying fundamental finance concepts especially concepts of value, risk, and returns in appraising a project or an unlisted entity to aid investors and financiers in making investment and financing decisions. An objective of this assignment is to test students’ ability to make cash flow projections with respect to projects and an existing business, compute relevant taxes and capital allowances, identify and measure potential risks associated with the project or business, and apply appropriate valuation techniques to place a value on a share of equity in the project or the unlisted entity. Students are required to submit a report of 15-20 pages. Another objective, therefore, is to assess students’ ability to produce a well-structured technical report of this kind. Delivera Students are expected to submit a 15-20 page report together with copies of bles secondary data used. Structur Title page e of the Executive summary Report  Objective of the project  Brief description of the project or business  Methodology

 Results of appraisal  Recommendations
Table of contents Table of figures and exhibits Body of the report – should include but not limited to the following:  An overview of the project or unlisted entity  Review of business and financial environment  Potential risks – identification, impact assessment, response, and financial implications  Operational, investment, and financing plans  Financial summary  Results of valuation(s)  Conclusion(s) and recommendation(s) Acknowledgement of sources of ideas, data, and references for works cited Appendices – should include but not limited to the following:  Historical financial statements used as base for projected statements  Schedule of assets on hand and to be acquired with estimated costs  Schedule of operating income items with expected amount of inflow  Schedule of operating expense items with expected amount of outflow  Schedule of taxes to be paid and outstanding  Schedule of projected financial statements – statement of comprehensive income, statement of financial position, and statement of cash flows  A schedule of free cash flows  Value computation spreadsheet(s) October 30, 2012 - Submission of the following for review and comments:  An overview of the project or unlisted entity  Review of business and financial environment  Potential risks – identification, impact assessment, response, and financial implications  Operational, investment, and financing plans  Financial summary November 9, 2012 – Submission of first draft for review and class presentations for class comments November 20, 2012 – Submission of final report November 27 and 30, 2012 – Final class presentations with faculty, experts, and practitioners in attendance (presentations will be graded)

Timeline s

Class Conduct Ashesi rules concerning classroom conduct and academic work (presentations, quizzes, takehome assignments and examinations) apply fully in this course (for details of what is acceptable and what is not acceptable refer to student handbook and any other college documents containing such rules). For the avoidance of doubt, conducts that shall not be tolerated include, but not limited to, the following:  Absenteeism, lateness and unwarranted walk-outs  Using a mobile phone or allowing your phone or alarm set to ring while class is in session, and using a computer in class for browsing or for purposes other than authorised class activities

 Late submission of assignments  Academic dishonesty including, but not limited to, plagiarism, cheating in class exercises, quizzes or examination, and other forms of academic irregularities (refer to Ashesi Student Handbook, Honour Code and any other relevant documents for more on academic dishonesty) Instructors (faculty and faculty intern) reserve the right to dismiss you from a session or several sessions, decline to accept or grade your work and/or refer you to the college’s disciplinary committee for misconduct.

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