1. FIN 330 Corporate Finance Steven Gallaher
Introduction

2. Contact Information
Dr. Steven T. Gallaher
Office: Webster 119
Phone:
Office Hours:
Tuesday, 9:30 – 12:15, 3:15 – 4:15
Thursday, 11:00 – 12:15
After Class
Fair Game principle

3. What is this course about?
First and foremost, this is a review and extension of many of the ideas from FIN500.
While in FIN500 we look at relatively cut-and-dried situations for which there is a clear answer, here we will look at more complicated situations in which the answers from FIN500 are not necessarily correct.

4. Valuation
The majority of this course will be concerned with “valuation”. Indeed valuation is central to most of what we do in finance.
This includes valuing some internal investment project (capital budgeting) as well as valuing some external acquisition (company valuation).

5. Types of valuation There are three “types” of valuation.
Intrinsic value : The present value of expected cashflows.
Relative value : This includes such things as multiples analysis, etc.
Contingent value : This is just a fancy way to say “options”. The value of the asset changes based on what happens to some other asset.
We will look at each of these (though most of our time will be spent on number 1).

6. “Intrinsic” Valuation
To simplify slightly, intrinsic valuation consists of three steps:
Forecast amount and timing of cashflows.
Estimate a risk-adjusted interest rate.
Discount the cashflows.
You probably recognize these steps from FIN500. We will look much more closely at the complications which can arise in these steps.

7. Risk-adjusted interest rates
An important part of this is the discount rate. That is,
how do we think about risk,
how do we measure it, and
what is the relation between risk and return.
This includes
Risk-free rate
Market risk premium
The Capital Asset Pricing Model
Weighted Average Cost of Capital
… and more

8. Forecasting Cashflows
In FIN500, we mostly talked about expected cashflows and we will certainly visit that again here.
We will also talk about how to think about the underlying sources of risk in a given investment’s cashflows (beyond just adjusting the interest rate).

9. Relative Valuation
We will not spend much time on this, but relative valuation does have a place in finance and we will hit the high points.

10. Real Options
Many corporate investments come with flexibility. That is, we will be able to change course in the future based on information we don’t know now, but will know then. That flexibility has value, and that value can be difficult to quantify.
For example
If a product does better than expected, we can expand production or develop a second generation product.
If a product does worse than expected, we can shut down operations, rather than continuing to operate at a loss.
We may invest a small amount now for the ability to invest a larger amount later.
We will look at valuing these “real options”. That is, we will look at the value that an active management team can add when it responds to a changing environment.

11. Market Efficiency
We will also mention the Efficient Market Hypothesis.
If you are going to claim that a given asset is under- (or over-) priced, you are also claiming that the market is inefficient. We will talk about exactly what you are assuming. (This really only applies to publically traded assets, but it is worth thinking about.)

12. Capital Structure
In addition, we will spend some time discussing how firms can raise capital and what effect their choice can affect the total value of the company.

13. Course materials
Textbook : Valuation: The Art and Science of Corporate Investment Decisions (2nd edition) by Sheridan Titman and John Martin.
Excel

14. Grading
Exams (40%)
Participation (50%)
Simulation (10%)

15. Goal of the Corporation
We will assume through most of this course (and most of finance) that the goal of the corporation is to maximize the wealth of the shareholders, subject to regulatory and ethical constraints.
You may well have other goals and that is perfectly fine. Finance can not tell you whether these goals are worth-while, just how much they will cost.

16. How are decisions made?
The reality is that all valuations are biased. You tell me who is doing the valuation (or who is paying for it to be done) and I will tell you in which direction it is biased.
We hope to suggest a systematic methodology to get a way from the “gut instinct” method of investment decision making, but we will never eliminate the biases.
You should probably think about your own biases for any given analysis you do.

17. Dealing with Complexity – Process & Discipline
The three-phase investment evaluation process: