The concepts plopped in this section will be useful for economic decisions making irrespective of whether you intend to specialize in finance or not. Section II is more applied and will equip students with basic techniques that are required for a job as a financial analyst at an investment bank or financial consulting firm. The following topics will be covered. L. The theory of corporate finance 1. 1. Valuation concepts 1. 2. Financial structure decisions 1. 3. Taxes and the costs of financial distress 1. 4. Financial structure and investment decisions II. The practice of corporate finance 11. 1 .

Internal finance, corporate control and merger analysis 11. 2. Private equity and venture capital finance 11. 3. Business analysis and financial analysis Enterprise valuation analyses and discussions. I do believe that a solid knowledge of conceptual frameworks will prove very helpful in practical decisions making. Heavy emphasis is put upon a working understanding of the economic frameworks discussed in class. The learning mode is a combination of lectures and discussion of several real cases. In particular, we will have an extensive business and financial analysis as well as a valuation exercise of Apple Inc. ICC will be particularly interesting to students who consider an analyst Job at a financial services firm. Course Requirements The main course requirements are homework assignments (consisting of five or six problem sets), a midterm exam, and final exam. Grades will be allocated based on the following weights: Problem sets: 20% Midterm exam: 40% Final exam: 40%. It is important that you be regular in preparations for this course. Important concepts will be developed through both lectures and homework assignments. Not all background material will be covered in the lectures.

You are expected to read he textbook on your own to absorb considerable institutional details. Be prepared to participate in class discussions about assigned reading and previous lectures. Please ask questions during the lecture. Critical comments are highly appreciated. Working on the homework assignments is a very important part of this course. You should expect to spend a considerable amount of time working through lecture notes and problems sets. You are allowed to work together on problem sets. However, students must submit their homework individually.

In case of collaboration, the names of students you irked with should be stated on the first page of the solution sheet. I would like to encourage you to read the business and financial press regularly during the course. Examples include the Wall Street Journal, Business Week, Economist. Also, please feel free to talk to me if you need career advice and want to hear my opinion. 2 Readings Textbook Berg, Jonathan and Peter Demeanor: Corporate Finance, Prentice Hall, Second Edition, 2011 (ISBN: 978-0-13-608943-8). Lecture notes (Slides) For each session students will obtain a handout that can be downloaded from Coursework.

Also holds a division operating in the “Contract Services” industry, providing food to health-care and educational institutions. The divisional manager is pressing for an expansion of the Contract Services division through new investments, and claims that the WAC to be used in the valuation of these investments must be computed based on an industry asset beta of 0. 53. You must advise the SCOFF of Hotel Inc. On whether the divisional manager’s proposal is sound.

After enlivening equity betas in the “Contract Services” industry, you find that the industry asset beta is 1. 03. What is your advice to Hotel Inc. ‘s SCOFF? Should he follow the proposal of the Contract Services divisional manager? Motivate your answer. 18 marks Question 2 The Kelly Solar case we considered in class is a clear example of the negative effects of debt overhang. Indeed, the case shows that the possibility to generate a potentially positive payoff (positive NAP) is hindered by the existence of maturing debt.

That is, if Kelly was to inject equity to acquire the additional patents that would tilt upwards the probability of success, the terms of the outstanding debt would make such injection unprofitable, since the lion’s share of the final payoff would to towards paying the developer. Answer the following questions: (a) The case states that the terms of the debt contract do not allow Kelly to issue senior debt. Explain why if Kelly could issue new senior debt, the debt overhang problem would not arise. B) In the case, Kelly obtains debt funding from a single investor. Suppose that instead Kelly obtained debt from several different developers. Do you think that in this way the renegotiation would become easier? Motivate your answer. 18 marks Question 3 “It is a year since investors began a concerted campaign to secure a greater share of impasses’ profits, putting pressure on boards to cut pay and raise dividends. Nowhere was the call more vociferous than among shareholders of Rupee’s banks.

When choosing its capital structure, the firm restricts its choice to the above levels of all-equity capital structure? (b) Calculate the annual and the present value of the tax shield for all the levels of debt above, assuming that debt lasts forever. Are those increasing or decreasing? Find the optimal capital structure when bankruptcy costs are considered. (c) Assuming efficient markets, (I) At which price will the firm be able to repurchase the stock? How many shares will the company be able to repurchase at this price?

What is the number of shares outstanding after the rationalization? It) What is the capital gain implied by the repurchase price? What will the stock price be after the rationalization? 28 marks Question 5 Company A has been trying to acquire company T for some time. Rumors about the potential deal have been spreading in the market and now A proposes a stock swap. Prior to the spreading of rumors, shares in A traded at Ell while shares in T traded at El 5. A has 50 million shares outstanding and the price per share as of today (28/3) is EYE.

T has 30 million shares outstanding and the price per share is EYE. In order for the deal to go through, the board of A is ready to forego part of the value it nutrients to create in the new entity. This is reflected in the decision to exchange each share of T with 1. 6 shares of A. 3 (a) Given the price of the shares in the two firms (which partly reflects the synergies from the merger), what is the contribution the market attributes to each firm in the new entity? (b) Should the shareholders in firm A approve the deal? C) Assuming that, if the deal fails the two companies’ share prices revert to their levels prior to rumors spreading, and given that the market assigns a probability of 0. 7 that the deal goes through, can you infer the synergies implied by the current arrest price? (d) Determine the forecasted share price in the merged firm. Can you determine whether the merger is a positive-NAP investment for A? 4 Section C Answer the following question: Question 6 Delaney Pumps manufactures and distributes an extensive line of agricultural irrigation systems.

In recent years, computerized control systems used to automate end systems. Delaney management, is thus considering investing $160 million to develop a state-of-the-art, computerized controller that promises to leapfrog competition. Development work would be contracted to a software development company on a cost-plus basis. Revenue would come from a new product line featuring the controller and from license fees from selected competitors who elected to include the controller in their products. Projected cash-flows for the investment are given in the following table: Year Expected FCC $(160. ) $50. 0 BIT $150. 0 $80. 0 $30. 0 30. 0 120. 0 60. 0 70. 0 The projections extend for only 4 years because management anticipates that other, more advanced controllers will be available by this time. Two challenges confronted Delaney management as they began their deliberations. 1 . Because the digital controller appeared much riskier than the company’s usual usual 10%. The treasurer reasoned that the digital controller would be an average risk project for software companies, and identified five smaller, publicly traded firms specializing in business automation software.

By enlivening their equity betas, she estimated the industry asset beta to be PA = 2. 41 . 2. Delaney had traditionally financed its business with the goal of maintaining a target timeliness-earned ratio of 3 to 1 (times-interest-earned ratio = BIT/lintiest Expenditure). But since this project consisted almost entirely of intangible computer code and because its cash flows were quite uncertain, Delaney treasurer thought it rodent to target a higher interest coverage of 10 to 1 . Delaney treasurer chooses to evaluate the project using the APP method.