CORPORATE FINANCE SYLLABUS AND OUTLINE SPRING 2020 PDF

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Aswath DamodaranCORPORATE FINANCESYLLABUS AND OUTLINESPRING 2020Aswath Damodaran1

General Information2 Office: Room 9-69Phone: 998-0340E-mail: [email protected] Hours Monday 9.30-10.20, 12.00 – 12.30Wednesday 9.30-10.20, 12 – 12.30The “fair game” principle applies.Teaching Assistants1.2.Flavia Sounis, [email protected] Mitidieri, [email protected] Damodaran2

Class structure3Monday- Class- Follow upTuesday- CorporateFinance storyof the weekAswath DamodaranWednesday- Class- Follow upThursday- Projectupdate emailFriday- In practicewebcastSaturday- WeeklyNewsletterSunday- Week aheadpreview3

For each class, please try to.4 Be here and on time: Each class will start on time. I will try to get here afew minutes ahead of class.Announcements: I know that this is one of the few chances you get to talkto almost the entire class. If you want to make an announcement, pleaselet me know ahead of time and try to keep it to under 2 minutes.Bring your lecture note packet with you: These are available in threeparts. They can be bought at the book store or downloaded from my website by going to:http://www.stern.nyu.edu/ adamodar/New Home Page/cflect.htmIf you do miss a class, please catch up: All classes will be web cast. Theweb casts will be online (usually) within a few hours of the class. Thewebcasts will be available in four formats: as a stream (with a high-speed internet connection)as a YouTube video (if you have a lower-speed connection or small screen device)as a downloadable video file (for a computer, a tablet or a smart phone)as a downloadable audio file.Aswath Damodaran4

Information Hubs5 The Website: The central location for everything related to thisclass is on the home page for the class on my website:http://www.stern.nyu.edu/ adamodar/New Home Page/corpfin.htmlI will try to also keep the material on NYU Classes, but I don’t like closed systems.Enough said! The Apple iTunes U version: The class will be carried on AppleiTunes U. If you have an Apple device (an iPad or even an iPhone),you can watch the webcasts and get the class material here. To getthe class, download the iTunes U app to your device and use thecode (FLJ-MLN-XZL) to enroll in the class.YouTube Channel: There is a final option, if your broadbandconnection is not that great and you are watching on aTablet/smartphone. There is a YouTube playlist for this class, whereall class sessions will be loaded.https://www.youtube.com/playlist?list PLUkh9m2BorqlBx7 A0hq8mDJHBudZ25LhWhen you get a chance, check it out.Aswath Damodaran5

More ways that I can harass you!!6 The Google calendar: The Google calendar for theclass is available at:https://calendar.google.com/calendar/embed?src stern.nyu.edu .com&ctz America%2FNew York Blog: I post on finance and valuation on my blog. Ifyou have time on your hands:http://aswathdamodaran.blogspot.com/ Twitter: I have a twitter feed (@AswathDamodaran).I don’t tweet much and you will learn nothing aboutmy personal life, but I hope to keep you posted oncorporate finance and valuation.Aswath Damodaran6

What is corporate finance?7 Every decision that a business makes has financial implications, and anydecision which affects the finances of a business is a corporate financedecision.Defined broadly, everything that a business does fits under the rubric ofcorporate finance.Aswath Damodaran7

Course Objectives8 To give you the capacity to understand the theoryand apply, in real world situations, the techniquesthat have been developed in corporate finance. To give you the big picture of corporate finance sothat you can understand how things fit together. Motto for class: If it cannot be applied, who cares?.Motto for class: You can forget the details, but don’t missthe storyline.To show you that corporate finance is fun. Question for class: Are we having fun yet?Aswath Damodaran8

The Traditional Accounting Balance Sheet9The Balance SheetAssetsLiabilitiesFixed AssetsCurrentLiabiltiesCurrent AssetsDebtDebt obligations of firmInvestments in securities &assets of other firmsFinancial InvestmentsOtherLiabilitiesOther long-term obligationsAssets which are not physical,like patents & trademarksIntangible AssetsEquityEquity investment in firmLong Lived Real AssetsShort-lived AssetsAswath DamodaranShort-term liabilities of the firm9

The Financial View of the Firm10AssetsExisting InvestmentsGenerate cashflows todayIncludes long lived (fixed) andshort-lived(workingcapital) assetsExpected Value that will becreated by future investmentsAswath DamodaranLiabilitiesAssets in PlaceDebtGrowth AssetsEquityFixed Claim on cash flowsLittle or No role in managementFixed MaturityTax DeductibleResidual Claim on cash flowsSignificant Role in managementPerpetual Lives10

First Principles & The Big Picture11Maximize the value of the business (firm)The Investment DecisionInvest in assets that earn areturn greater than theminimum acceptable hurdlerateThe hurdle rateshould reflect theriskiness of theinvestment andthe mix of debtand equity usedto fund it.Aswath DamodaranThe returnshould relfect themagnitude andthe timing of thecashflows as welllas all side effects.The Financing DecisionFind the right kind of debtfor your firm and the rightmix of debt and equity tofund your operationsThe optimalmix of debtand equitymaximizes firmvalueThe right kindof debtmatches thetenor of yourassetsThe Dividend DecisionIf you cannot find investmentsthat make your minimumacceptable rate, return the cashto owners of your businessHow muchcash you canreturndepends uponcurrent &potentialinvestmentopportunitiesHow you chooseto return cash tothe owners willdepend whetherthey preferdividends orbuybacks11

Theme 1: Corporate finance is “common sense”12 There is nothing earth shattering about any of the firstprinciples that govern corporate finance. Arguing that taking investments that make 9% with funds that cost10% to raise seems to be stating the obvious (the investment decision)So is noting that it is better to find a funding mix which costs 10%instead of 11% (the financing decision)And positing that if most of your investment opportunities generatereturns less than your cost of funding, it is best to return the cash tothe owners of the business and shrink the business.Shrewd business people, notwithstanding their lack ofexposure to corporate finance theory, have always recognizedthese fundamentals and put them into practice.Aswath Damodaran12

Theme 2: Corporate finance is focused 13 It is the focus on maximizing the value of the businessthat gives corporate finance its focus. As a result of thissingular objective, we can Choose the “right” investment decision rule to use, given amenu of such rules.Determine the “right” mix of debt and equity for a specificbusinessExamine the “right” amount of cash that should be returned tothe owners of a business and the “right” amount to hold back asa cash balance.This certitude does come at a cost. To the extent thatyou accept the objective of maximizing firm value,everything in corporate finance makes complete sense. Ifyou do not, nothing will.Aswath Damodaran13

Theme 3: The focus in corporate finance changesacross the life cycle The End GameThe Midlife CrisisThe Scaling up TestThe Bar MitzvahThe Product TestThe Lightbulb (Idea) Moment Revenues/Earnings14RevenuesEarningsTimeGrowth stageDescriptionStage 1Start-upStage 2Young GrowthStage 3:High GrowthStage 4Stage 5Mature Growth Mature StableHave an idea fora business thatmeets an unmetneed in themarket.Create a businessmodel thatconverts ideasinto potentialrevenues &earningsBuild thebusiness,convertingpotential intorevenues.Grow yourbusiness,shifting fromlosses toprofitsAswath DamodaranDefend yourbusiness fromnewcompetitors &find newmarketsStage 6DeclineScale downyour businessas marketshrinks.14

Theme 4: Corporate finance is universal 15 Every business, small or large, public or private, US or emergingmarket, has to make investment, financing and dividend decisions.The objective in corporate finance for all of these businessesremains the same: maximizing value.While the constraints and challenges that firms face can varydramatically across firms, the first principles do not change. A publicly traded firm, with its greater access to capital markets and morediversified investor base, may have much lower costs of debt and equitythan a private business, but they both should look for the financing mixthat minimizes their costs of capital.A firm in an emerging markets may face greater uncertainty, whenassessing new investments, than a firm in a developed market, but bothfirms should invest only if they believe they can generate higher returns ontheir investments than they face as their respective (and very different)hurdle rates.Aswath Damodaran15

Theme 5: If you violate first principles, you willpay a price, no matter who you are.16 There are some investors/analysts/managers whoconvince themselves that the first principles don’tapply to them because of their superior education,standing or past successes, and then proceed to putinto place strategies or schemes that violate firstprinciples.Sooner or later, these strategies will blow up and createhuge costs. Almost every corporate disaster or bubble has its origins ina violation of first principles. Aswath Damodaran16

Required Material17I. Text: Lecture Notes; They are sold in the book store in two parts. Thelecture notes are also available in pdf format on the web:http://www.stern.nyu.edu/ adamodar/New Home Page/cflect.htmII. Supplementary Text:http://people.stern.nyu.edu/adamodar/New Home Page/ACF4E/appldCF4E.htmApplied Corporate Finance: A User’s Manual (Fourth Edition) by Aswath DamodaranIII. Practice Problems/Exams:Every quiz and final exam that I have ever given is online, with solutions.http://www.stern.nyu.edu/ adamodar/New Home Page/cfprob0.htmlThere are also problems in the supplementary book, and solutions.http://www.stern.nyu.edu/ adamodar/New Home Page/cfprset.htmIV. Spreadsheets and data are accessible on my home page:www.stern.nyu.edu/ adamodar/New Home Page/data.htmlwww.stern.nyu.edu/ adamodar/New Home Page/spreadsh.htmAswath Damodaran17

Class Structure & Chapter references18Session 2-4, 24-25Maximize the value of the business (firm): Chapter 2 & 12The Investment DecisionInvest in assets that earn areturn greater than theminimum acceptable hurdlerateThe hurdle rateshould reflect theriskiness of theinvestment and themix of debt andequity used to fundit.Chapters 3,4Sessions 5-12Aswath DamodaranThe Financing DecisionFind the right kind of debtfor your firm and the rightmix of debt and equity tofund your operationsThe returnshould relfect themagnitude andthe timing of thecashflows as welllas all side effects.Chapters 5,6The optimalmix of debtand equitymaximizes firmvalueChapters 7,8Sessions 13-15Sessions 16-19The right kindof debtmatches thetenor of yourassetsChapter 9Session 20The Dividend DecisionIf you cannot find investmentsthat make your minimumacceptable rate, return the cashto owners of your businessHow muchcash you canreturndepends uponcurrent &potentialinvestmentopportunitiesChapter 10Session 21How you chooseto return cash tothe owners willdepend whetherthey preferdividends orbuybacksChapter 11Sessions 22-2318

And it will be applied 19DisneySector: EntertainmentIncorporated in: USOperations: MultinationalSize: Large market capValeSector: Mining/MetalsIncorporated in: BrazilOperations: MultinationalSize: Large market capOther: Government stakeApplied Corporate FinanceTata MotorsSector: AutomotiveIncorporated in: IndiaOperations: MultinationalSize: Mid market capOther: Family GroupAswath DamodaranBookscapeSector: Book RetailIncorporated in: USOperations: New YorkOther: Privately ownedDeutsche BankSector: Bank/ Investment BankIncorporated in: GermanyOperations: MultinationalSize: Large market capOther: RegulatedBaiduSector: Online SearchIncorporated in: Cayman IslOperations: ChinaSize: Mid market capOther: Shell company (VIE)19

Grading Distribution20Aswath Damodaran20

Grading Basis21 Group Work: Each group will be required to work on one case(you will get it in class in the fourth week) and onecomprehensive project (See attached description). Case: Due session 15 (April 1 before class)Group Project: Due Session 26 (May 11 at 5 pm)10%30%Individual Work: Quizzes: There will be three open-book and open-notes quizzes worth10% each.n Quiz 1: Session 10 - Covers sessions 1-9 (March 9)n Quiz 2: Session 16 - Covers sessions 10-15 (April 6)n Quiz 3: Session 23- Covers session 16-22 (April 29)Final Exam: This will also be an open-book and open-notes cumulativeexam, worth 30%. It will be on May 15, from 10 am – 12pm.Aswath Damodaran21

Exam Ground Rules221.2.3.4.5.6.7.8.9.10.Quizzes will be on the designated days in the first 30 minutes of the class.Exams are open book, open notes.Exams are NOT group work. You cannot consult with, talk to, communicate with or pass telepathic (or text)messages to anyone else in or out of the classroom. There are no cultural exceptions.When time is called on the quiz, please stop writing.Each quiz is worth 10%.If you have to miss a quiz for good reason, you will have to let me know (by email) at least 15 minutes before thequiz that you will be missing the quiz.If you miss a quiz for good reason, the 10% weight on that quiz will be reallocated across your remaining exams(quizzes and final). You cannot weight prior quizzes more.If you take all three quizzes, the score on your worst quiz will be pushed up to the average score across all of yourother exams (the other two quizzes and the final exam) (Note: It will not be thrown out). If you miss a quiz, youwill not have this option, even if you miss the quiz for good reason.I grade all of your quizzes and I give partial credit. So, please show all work. If you have a beef with the grading(and I do make mistakes), please come to meYou can bring in a calculator, but no computers. You can use your tablet but only to review notes.Good reasons for missing quiz: Physical or mental sickness (you, spouse or child), Stalled subway train, Importantinterview (and you cannot change time), Tickets to Yankee Opening day.Not good reasons for missing quiz: Did not have time to prepare, Feeling overwhelmed, Not quite ready, Tickets toRed Sox or Mets opening day.Aswath Damodaran22

Rules of Engagement for class and group work23 Rules of group work Pick your own groups. (If you have trouble getting picked, I willhelp)All group work will be self policed, except in extremecircumstances.There will be one grade per group, no matter how the work loadis distributed among the group membersRules for class I do not enforce attendance, but I would really like you to behere. Of course, if you have to miss a class, you can always usethe webcast as a fallback.Cell phones (Please, ne

What is corporate finance? Aswath Damodaran 7 ¨ Every decision that a business makes has financial implications, and any decision which affects the finances of a business is a corporate finance decision. ¨ Defined broadly, everything that a business does fits under the rubric of corporate finance.