Oregon State University
College of Business
Spring 2013
BA 540
Corporate Finance
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Instructor Name
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John R. Becker-Blease
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Meeting Times
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Thursday
12-2:50
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Phone
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541.737.6061
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Location
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BEXL 415
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Email
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john.beckerblease@oregonstate.edu
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Office
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418B
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Course Website
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Blackboard
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Office Hours
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M (10-11 AM)
T (9:00-10 AM, 12-1PM);
& by appointment
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Course Description
The objective of this course is
the application of finance theory and principles to the analysis of important
business problems. Specific topics will
include capital budgeting, cost of capital, real options, capital structure,
payout policy, and enterprise valuation.
The course is structured around
the Enlightened Shareholder Model or Enlightened Stakeholder Theory. Students are assumed to have basic knowledge
of the concepts of time value of money, valuation, capital budgeting, and cost
of capital.
Course Objectives
- Identify and critique normative theories of
management’s role in the firm and understand the relation between long-term
value maximization and stakeholder relationships.
- Understand accepted techniques for making
capital budgeting decisions and employ financial decision models to select
appropriate projects for a business enterprise.
- Demonstrate how capital structure and
governance decisions can affect firm value.
- Articulate economic rationales for managing
firm growth and change via mergers and acquisitions, corporate
restructuring, and new product development.
Course Materials
Textbooks:
·
Principles of Corporate Finance, by Brealey, Myers, and Allen, McGraw-Hill/Irwin 11th
ed. (BMA)
Other:
·
Course e-packet (see below)
·
Access to current business news
either online or in print form
·
Additional readings as assigned
during the semester
·
Calculator with log and
exponential functions
·
Access to computer for
spreadsheet analysis
The course blackboard website will be the primary
source of communication outside of the classroom and you should consult it on a
regular basis. It can be accessed
through your Blackboard account.
E-Packet
There are several additional readings required for
the course and these will be provided in electronic format. In addition, in
each section I have included a list of additional outside reading that
interested students are encouraged to review as time permits. These additional
outside readings are typically available either through the library website (go to
databases à business
source premier) or through the Social Science Research Network (ssrn.org)
website. If students are unable to have direct access through either of these
sites, I will provide the readings to you either electronically or in hardcopy.
Grading
Each student’s course grade will be calculated
using the following weights:
Case #1 10%
Case #2 10%
Case #3 10%
Case #4 10%
Mid-Term
Exam 30%
Final
Exam 30%
Cases
There are four cases due during the quarter. These
cases will be posted at least one week before their due date. Cases are limited
to 5-typed pages with supporting appendixes. Students may work with one other
student (so teams of two, at most). Additional instructions will be distributed
with each case. Cases will be evaluated on technical merit, insightfulness,
clarity, and professionalism. Each case is worth 10% of the final grade.
Mid-Term Exam
The mid-term exam is during the sixth week of
classes. Students will need access to a scientific calculator for the exam. The
exam is
closed-book, closed-note, so students should prepare accordingly. The exam
accounts for 30% of the final grade.
Final Exam
The final exam is cumulative and comprehensive. It
is intended to challenge the student to apply the material from the course in
both familiar and unfamiliar situations. Similar to the mid-term, it will be
closed-book, closed-note. The exam will be administered during the normal class
meeting time during finals week. It is a three-hour exam. The final exam is
worth 30% of the final grade.
Keys to Success
This course is intended to be quite
challenging. If hearsay can be trusted,
I have succeeded in my intent. Although
no particular topic is unusually difficult, the pace and volume of material, as
well as the cumulative nature of the learning, leads to a course that will require
a steady, but hopefully not overly-burdensome, time-commitment. As graduate students, I expect each of you to
be an active learner in that you will prepare as completely as possible for
every meeting, come to class with questions and notes prepared, and will
contribute to a dynamic classroom environment. Do not hesitate to seek
additional help, as necessary. Although
I do not have specific team-exercises incorporated into this class, I strongly
encourage you to work in teams on assignments and in preparation for exams.
Recognize that this course contains important
quantitative and qualitative elements.
In most situations, quantitative questions have a single, “most correct”
response, although the methods of determining this response may be varied. Performance on the qualitative elements of
the course is frequently determined by a combination of knowledge and
insightfulness as well as ability to clearly articulate an argument. Please carefully prepare any written
responses as I can only evaluate what is written, not what you intended to
write.
Contacting Me and Office Hours:
I currently have office hours scheduled during
three one-hour blocks during the week.
In addition, I have provided numbers where I may be reached. I typically check my email throughout the day
and this is an excellent manner in which to contact me. Please note, I tend to be most favorably
disposed to those students who come to office hours prepared (having read the
chapters, attended lectures, and have well thought-out questions), in a timely
manner (the material you are asking about has been lectured on within the past
week), and asking for help, not charity (explaining a concept or examples, for
instance, not asking about “what will be on the exam?” or “is this
important?”). In addition, I tend to be in my office most days from at least
9AM through 4PM. If my door is open, please feel free to drop in.
Students with Disabilities
I am
committed to providing all reasonable assistance to help each of you achieve
your potential in this course.
Reasonable accommodations are available for students with a documented
disability. Please visit the Disability
Resource Center (DRC) during the first two weeks of every semester to seek
information or to qualify for accommodations.
All accommodations must be
approved through the DRC. Please ask the Associate Director of Student
Services, in the Student
Services Building
(Room 203), to forward the appropriate documentation. Parents with potential child-care concerns
should see me during the first week as well (i.e. due to snow-days, illness,
etc.).
Academic Integrity
Your personal integrity is the foundation for your
success and happiness in business and in life; you should treat it as your most
valuable asset. Academic integrity is
also the foundation of our institution’s reputation and success. I will pursue all suspected cases of academic
dishonesty consistent with the policies of the College of Business and Oregon
State University. Academic dishonesty
includes, but is not limited to: copying the work of others (or allowing others
to copy your work) for exams, cases or assignments. I also consider it a violation of academic
integrity for you to refer to case notes from students who previously took this
course either at OSU or at another institution.
Consequences – Please note, these consequences are
different than what you may have encountered in other classes so please read
and understand them well. At a minimum, cheating or academic
dishonesty of any form will result in a failing
grade for this class, and may lead to your expulsion from the college
and/or university. I do not have a
policy of assigning a “zero” for the first infraction and taking more
severe action on the second violation.
Rather, the first incidence of cheating of any form will result in a
failing grade (F) for the course. Please
be aware that I take this issue very seriously and all incidences will be referred to the appropriate
university administrator with my typical recommendation for dismissal from the
university.
Grade Distributions & Expectations
The average grade in this course, based on
historical patterns, is somewhere between a B and a B+. Generally speaking, an
average of 90% or higher results in a letter grade of at least an A (meaning A
or A-), while 75% or higher typically results in a letter grade of at least a B
(meaning B- or higher). Although not always the case, during some
quarters I have curved grades higher (I will not curve grades lower.
Module 1: Review Fundamental Microeconomics
and Financial Management
Learning
Goals
- Review basic concepts of time value, project and firm valuation,
capital budgeting, market efficiency.
- Review market structures, short and long-term equilibrium,
competition, normal and excess profit, barriers to entry, monopolies and monopsonies, and other market failures.
- Understand economic underpinnings of shareholder-primacy argument
and the stakeholder challenge to this argument.
- Articulate Enlightened Wealth
Maximization argument of Jensen and its placement within
shareholder-primacy and stakeholder theories.
Required
Readings
(a)
Jensen, Michael, 2001 “Value Maximization,
Stakeholder Theory, and the Corporate Objective Function” Journal of Applied Corporate Finance Vol
12(3), pp 8-21.
a. A
clear argument in favor of the shareholder-centric objective function for
managers while recognizing its potential limitations. Jensen offers the Enlightened Value Maximization guideline
as an updated form of shareholder primacy.
(b) BMA:
Chapter 1.
Additional
Readings
There
are a large number of additional readings for this module. This reflects my
observation that most finance textbooks give limited coverage to the issues
surrounding shareholder-primacy. The first four or five are perhaps the most
informative, but each article below provides important (and sometimes
competing) perspectives are the appropriateness of a particular corporate
objective function.
(a) Stout,
Lynn A. 2003, “The Mechanisms of Market Inefficiency” The Journal of Corporate Law Summer 99. 635-669.
o
Although apparently lengthy, much of the space is
taken up by footnotes. The article provides an excellent discussion of the
foundations of market efficiency. Given the vital importance assumptions of
market efficiency are to our current understanding of financial economics and
the allocation of resources, students should be aware of the debate surrounding
this theory.
(b)
Becker-Blease, John R. 2010 “Corporate
Responsibility and Finance” as appears in Mainstreaming Corporate
Responsibility: Cases and Text for Integrating Corporate Responsibility across
the Business School Curriculum. Wiley, 2010.
(c) Winkler,
Adam, “Corporate laws or the law of business?:
Stakeholders and corporate governance at the end of history”.
(d) Stout,
Lynn, 2002, “Bad and not-so-bad arguments for stakeholder primacy”.
(e) Clement
(2005). The lessons from stakeholder theory for U.S. business leaders
(f) Barry,
Norman, 2002. “The stakeholder concept of corporate control is illogical and
impractical”.
(g) Graham,
Harvey, and Rajgopal (2006), “Value Destruction and
Financial Reporting Decisions”
(h) Stout,
Lynn. 2005, “New Thinking on “Shareholder Primacy”
(i) Bird,
Ron, A.D. Hall, F. Momente, and F. Reggiani “What corporate social responsibility activities
are valued by the market?”
(j) Useem and Badaracco “Managerial
Duties and Business Law”
Module
2: Time Value of Money and Basic Valuation of Common Securities
Learning
Goals
- Understand Time Value of Money calculations.
- Apply basic TVM calculations to valuing stocks and bonds.
- Calculate duration and yields of various bonds.
Required Readings
1)
BMA: Chapters 2, 3, and 4.
Additional
Readings:
a)
Cole C. Steven and P.J. Young. 1995. “Modified
Duration and Convexity with Semiannual Compounding”.
b)
Fabozzi,
F. 2006. The Handbook of Fixed Income Securities.
·
Fabozzi’s
textbooks on fixed income securities are widely respected and employed at many
of the top schools.
c)
Sundaresan,
S.2001. Fixed Income Markets and Their Derivatives.
d)
Lundholm,
R. and T. O’Keefe. 2001. “Reconciling Value Estimates from the Discounted Cash
Flow Model and the Residual Income Model”.
·
Provides an interesting illustration of two
sometimes “competing” methods of valuation with a good detailed example.
Module
3: Capital Budgeting and Cash Flow
Estimation
Learning
Goals:
- Estimate project cash flows
- Value projects using DCF analysis
- NPV, IRR, and Payback Methods
Required
Readings:
a)
BMA Chapters 5 & 6.
b) Teaching
Note on Cash Flow Estimation from instructor.
Additional
Readings:
- Graham and Harvey (2001)
“The theory and practice of corporate finance: evidence from the field”
(only read pages 187-209).
- Provides survey evidence of Fortune 1000 CFOs
of what techniques are employed in practice.
- Ferris and Petitt (2002) Valuation: Avoiding the Winner’s
Curse (Prentice Hall publishing)
- Damodaran (2001) The Dark Side of Valuation
(Prentice Hall publishing)
Module
4: Risk-Reward
Learning
Goals
·
Define risk from a financial perspective
·
Distinguish total, unique, and market risks
·
Estimate risk-based required return using CAPM
·
Understand APT & 3-Factor Asset Pricing Models
Required
Readings
a)
BMA Chapters 7, 8, & 9.
Additional
Resources
There is a vast literature on the relation between
risk and reward. The interested student is directed toward several textbooks
that give these topics sufficient treatment such as:
a)
Model Investment Theory 5th
Edition by Robert A. Haugen (Prentice Hall Publisher)
b)
Financial Theory and Corporate Policy 4th
Edition by Thomas E. Copeland, J. Fred Weston, and Kuldeep
Shastri (Pearson Publishing)
c)
Asset Pricing by J.H. Cochrane (Princeton
Publishing).
Module 5: Capital Budgeting,
Project Analysis, and Risk
Learning Goals
- Conduct sensitivity,
scenario, and break-even analyses for projects.
- Identify valuable managerial
flexibility
- Identify economic
underpinnings of valuable projects
Required Readings
a) BMA
Chapters 10 and 11.
Additional Readings
- Porter, M. “What is Strategy?” Harvard
Business Review, November-December 1996, p 61-78.
- McAfee, R. Preston, Hugo M. Mialon, and Michael A. Williams, 2004, “What is a barrier
to entry?”, American
Economic Review Vol 94(2), pp. 461-465.
- This short essay describes
some of the difficulties in universally defining a ‘barrier to entry’ in
economics. It offers insights into some potential considerations by
managers of what might constitute a barrier to entry and thus a potential
source of value.
- Goodwin, Neva. “The
limitations of markets” Background essay”.
- This introduction provides
a very lucid discussion of some of the underlying assumptions of
classical economics and the functioning of markets. It provides a
fair-handed review of some of the criticisms.
Module
6: Agency Theory, Governance, Monitoring,
and Compensation
Learning
Goals
- Understanding the nature of a principal-agen
t conflict and identify the various conflicts that exist among the
stakeholder of a firm.
- Understand the role of contracting and monitoring in addressing the
agency issue and the challenges that exist for efficient contracting.
Required
Readings
- BMA Chapters 12 & 33.
- Hall (2003), “Six challenges in designing equity-based pay”.
- Jensen (2003) “Paying people to lie: the truth about the budgeting
process.”
Additional
Readings
- BMA Chapter 33.
- Jensen, M., K.J. Murphy, and E.G. Wruck,
2004 “Remuneration: Where we’ve been, how we got to here, what are the
problems, and how to fix them” SSRN paper.
- Bryne, John “The best and worst
boards” Businessweek
Dec, 1997.
- McCafferty, Joseph 2008 “Building an exceptional board” BusinessWeek 4-17-2008.
- Stout, Lynn. 2007. “The
mythical benefits of shareholder control”
- Brewer, Chandra, and Hock (1999) “Economic Value Added (EVA): Its
uses and limitations”
Module
7: Capital Structure
Learning
Goals
- Cover limitations of adjusted weighted average cost of capital
- Introduce APV technique
- Miller-Modigliani capital structure irrelevance theory
- Understand static trade-off, pecking order, and signaling theories
of capital structure
Required
Readings
Additional
Readings:
- BMA CH 16
- Provides an introduction to
Miller-Modigliani’s irrelevance constructions. This chapter focuses on
payout policy (sometimes referred to as dividend policy). The question at
hand is whether and how dividend policy might affect firm value.
- Luehrman, Timothy A., “Using APV: A
better tool for valuing operations”.
- Describes the benefits of
the APV method of valuation.
- Ruback, Richard, 2002 “Capital
Cash Flows: A Simple Approach to Valuing Risky Cash Flows” Financial Management Summer, pp.
85-103.
- Demonstrates a method for
valuing tax shields under constant dollar debt-level assumption.
- Booth, Laurence 2007 “Capital Cash Flows, APV and Valuation” European Financial Management Vol 13(1), pp. 29-48.
- Provides a reconciliation
of various valuation techniques and the assumptions underlying them.
- Wruck, Karen (1990) “Financial distress,
reorganization, and organizational efficiency”.
- This is a classic article
that I would normally require students to read. However, given its
length, I have made it optional. This describes some of the important
underpinnings of the static trade-off theory and describes the practical
truths surrounding corporate bankruptcies and reorganizations.
- Hertzel, M., Z. Li, M.S. Officer,
and K.M. Rodgers, 2008, “Inter-firm linkages and the wealth effect of
financial distress along the supply chain”
- Provides evidence of
whether and how corporate financial distress affects other stakeholders.
- Noronha and Singal (2004) “Financial
Health and Airline Safety”
- An additional perspective
on the impact of financial distress on stakeholders.
- Patrick, Steven C. “Three
pieces to the capital structure puzzle: The cases of Alco Standard,
Comdisco, and Revco”.
- Another classic paper
providing real-world illustrations of how capital structure decisions are
made.
Module
8: Mergers and Acquisitions and the Market for Corporate Control
Learning
Goals
- Understanding the disciplinary and economic nature of the market
for corporate control
- Articulate economic rationales for mergers and challenges faced.
- Identify various stakeholders affected by mergers and the nature of
contested mergers.
- Articulate the various forms of corporate restructuring and the
economic rationale associated with each.
- Understand the costs and benefits of diversification and the nature
of the evidence regarding its economic wisdom.
- Describe various defenses that can impede corporate takeovers and
the nature of the evidence on whether entrenched boards and managers are
good for shareholders or other stakeholders.
Required
Readings
Additional
Readings
- Jensen (1986), “Agency costs
of free cash flow, corporate finance, and takeovers”
- Fee and Thomas (2004)
“Sources of gains in horizontal mergers: evidence from customer, supplier,
and rival firms”.
- Holmstrom and Kaplan (2001) “Corporate governance and
merger activity in the United States: Making sense of the 1980s and
1990s”.
- Strine (2002), “The social responsibility of boards
of directors and stockholders in change of control transactions: is there
any ‘there’ there?”.
- Harford (2003) “Takeover
bids and target directors’ incentives: the impact of a bid on directors’
wealth and board seats”.
References
Assessing the impact of societal issues: A McKinsey
global survey” conduct in 2007.
(available online).
Barry, Norman, 2002. “The stakeholder concept of
corporate control is illogical and impractical”, The Independent Review v.VI(4),
pp.541-554.
Bird, Ron, A.D. Hall, F. Momente,
and F. Reggiani, 2007 “What corporate social
responsibility activities are valued by the market?”, Journal of Business Ethics 76: 189-206.
Brav, A., J.R. Graham, C.R. Harvey, and R. Michaely
(2005) “Payout policy in the 21st century” Journal of Financial Economics 77, pp
483-527.
Brewer, Peter C., Gyan
Chandra, and Clayton A. Hock, 1999 “Economic Value Added (EVA): Its Uses and
Limitations” SAM Advanced Management
Journal Spring, 4-11.
Bronars,
S. and D. Deere, 1991. “The threat of unionization, the use
of debt, and the preservation of shareholder wealth” Quarterly Journal of Economics 56, 231-254.
Byrne, John. “The Best and Worst Boards”, BusinessWeek December, 1997.
Clement, Ronald W., 2005. The lessons from stakeholder theory for U.S. business leaders, Business Horizons, 48, 255-264.
Cole C. Steven and P.J. Young.
1995. “Modified Duration and Convexity with Semiannual Compounding”. Journal of Economics and Finance 19(1),
1-15.
Copeland, Tom and Peter Tufano,
“A Real-World Way to Manage Real Options” in Harvard Business Review, March 2004, 90-100.
Eisenberg, Melvin A., 1998 “Corporate conduct that
does not maximize shareholder gain” Legal conduct, ethical conduct, the
penumbra effect, reciprocity, the prisoner’s dilemma, sheep’s clothing, social
conduct, and disclosure”, Stetson Law
Review XXVIII.1, 1-27.
Fee, C.E and S. Thomas, 2004, “Sources of gains in
horizontal mergers: evidence from customer, supplier, and rival firms”, Journal of Financial Economics 74,
423-460.
Goodwin, Neva. “The limitations of markets: Background essay” from CasePlace.org.
Gompers, P., J. Ishii, and A. Metrick.
2003, “Corporate governance and equity prices”
Quarterly
Journal of Economics 118. 107-155.
Graham, John R. and C.R. Harvey.
2001. “The theory and practice of corporate finance: evidence from the field” Journal of Financial Economics 60,
187-243.
Graham, J.R., C.R. Harvey, and S. Rajgopal, 2006. “Value Destruction and Financial
Reporting Decisions” Financial Analysts
Journal 62(6) 27-39.
Greenbaum, Stuart I., 2006, “Corporate governance and the reinvention of
finance”, Journal of Applied Finance,
16(2), 5-11.
Hall, Brian J. “Six Challenges in Designing
Equity-Based Pay” in Journal of Applied
Corporate Finance V.15 #3, Spring 2003.
Harford, Jarrad, 2003,
Takeover bids and target directors’ incentives: the impact of a bid on
directors’ wealth and board seats, Journal
of Financial Economics 51-83.
Hertzel, M., Z. Li, M.S. Officer, and K.M. Rodgers, 2008, “Inter-firm linkages
and the wealth effect of financial distress along the supply chain” Journal of Financial Economics 87(2),
374-387.
Holmstrom, B. and S.N. Kaplan, 2001. “Corporate governance and merger
activity in the United
States: Making sense of the 1980s and 1990s”
Journal of Economic Perspectives
15(2), 121-144.
Jensen, Michael, “Agency Costs of Free Cash Flows,
Corporate Finance, and Takeovers” in AEA Papers
and Proceedings, May 1986. pp:323-329.
Jensen, Michael, 2003, Paying People to Lie: the
Truth about the Budgeting Process, European
Financial Management Vol 9 (3) 379-406.
Jensen, Michael, 2001 “Value Maximization,
Stakeholder Theory, and the Corporate Objective Function” is widely available
online. Journal of Applied Corporate
Finance Vol 12(3), pp
8-21.
Luehrman,
Timothy A. “Using APV: A Better Tool for Valuing Operations” in Harvard Business Review May-June, 1997,
145-154.
Luehrman,
Timothy A., “Investment Opportunities as Real Options: Getting Started on the
Numbers” in Harvard Business Review
July-August 1998, 51-67.
Lundholm, R. and T. O’Keefe. 2001. “Reconciling Value
Estimates from the Discounted Cash Flow Model and the Residual Income Model”. Contemporary Accounting Review 18(2),
311-335.
Luehrman, Timothy A.. “Strategy as a portfolio of real
options” Harvard Business Review,
Sep/Oct98, Vol. 76 Issue 5, p89-99.
McCafferty,
Joseph, 2008. “Building an Exceptional Board” BusinessWeek 4-17-2008.
Mendonca,
Lenny T. and Jeremy Oppenheim, “Investing in sustainability: An interview with
Al Gore and David Blood”, The McKinsey
Quarterly May, 2007. (available online).
Noronha, Gregory and V. Singal,
2004, “Financial health and airline safety” Managerial
and Decision Economics 25, pp. 1-16.
Opler,
Tim. and S. Titman, 1994, “Financial Distress and Corporate Performance” Journal of Finance 49(3), 1015-1040.
Steffens, Paul R. and Evan J. Douglas, 2007.
“Valuing technology investments: Use real options thinking but forget real
options valuation” International Journal
of Technoentrepreneurship 1(1), 58-77.
Patrick, Steven C. “Three pieces to the capital
structure puzzle: The cases of Alco Standard, Comdisco, and Revco” Journal of Applied Corporate Finance
Vol. 7, No. 4 (Winter 1995), pp. 53-61.
Stout, Lynn, 2002, “Bad and not-so-bad arguments
for shareholder primacy”, Southern
California Law Review, 75, 1189-1209.
Stout, Lynn A. 2007. “The Mythical Benefits of
Shareholder Control”, Virginia Law Review
93, 789-809.
Stout, Lynn. “New Thinking on ‘Shareholder
Primacy’”,
http://www.law.ucla.edu/docs/bus.sloan-stout.pdf
Strine,
Leo E., Jr. 2002. “The social responsibility of boards of directors and
stockholders in change of control transactions: is there any ‘there” there?”, Southern California
Law Review v.75, 1169-1188.
Tirole,
Jean, 2001. “Corporate Governance”, Econometrica 69(1), 1-35.
Useem, Jerry and J. Badaracco, Managerial Duties
and Business Law, HBS-Case-9-395-244 (note).
Winkler, Adam, “Corporate law or the law of
business?: Stakeholders and corporate governance at
the end of history”, Law and Contemporary
Problems v.67, pp.109-133. https://www.law.duke.edu/journals/lcp/downloads/lcp67dautumn2004p109.pdf
Wruck, Karen, “Financial Distress, Reorganization, and Organizational
Efficiency” in Journal of Financial
Economics, Vol 27, 1990.
pp:419-444.
