advanced corp. finance.doc

Advance Corporate Finance

MASTER IN BUSINESS ADMINISTRATION

C O U R S E D E S I G N

ADVANCED CORPORATE F INANCE

Course Code: ACFFaculty: Prof. E. B. PerezClass: MBA 2007Sessions: Second Trimester

Course Objective

The course objective is principally to sharpen the analytical skills of participative in valuation, capital structure analysis, real options analysis in capital expenditures, and evaluation of financial distress in a reorganization context.

Course Description

The Advanced Corporate Finance elective is designed for MBA Finance Majors. The orientation is quantitative analyses, with capital markets as arbiter of asset values and hurdle rates. The assumption is that participants have had a fairly thorough orientation in the fundamentals.

Learning Methodology and Approaches Used

Seminar-type class sessions, with analytical fieldworkText on Reserve: Investment Valuation, 2nd Edition, By Damodran

Evaluation and Feedback System

Grading is 50% presentation-discussion-participation; 50% take-home exam.

Class presentation-discussion-participation 50%Take-home Exam 50%

---------Total 100%

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Course Outline:

Session 1 Interest Rate Modelling(Topic is in the Reading)

Session 2 Valuation and Price Volatility of Bonds with Embedded Options

Session 3 Analysis of Mortgage-Backed Securities

Session 4 The Option-Adjusted Spread

Session 5 Foreign Exchange Hedging Strategy at General Motors

Session 6 Cat Bonds at Swiss RE

Session 7 RJR Nabisco 1990 Exchange Offer

Session 8 KMart and Builders Square

Session 9 J C Penney A and B

Session 10 Gaz de France

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Course Outline:

Session

Cases, Readings and Exercises

1 Topic: Valuation

Case: Online Business Valuation: No Banc, No Buck for Orientation.Com

Guide Question: Is the valuation any different from the standard methods?

2 Topic: Understanding the Relationship between Financing and Capital Structure

Guide Questions:1. Assess current capital structure in light of financing needs.2. Estimate the bond rating3. Compare the debt financing alternatives: Will you go for the Yankee?4. If new equity is saleable at $50/share and debt carries Hibor+70bps:

impact?5. Propose a capital structure for Hutchison.

Case: Hutchison Whampoa Ltd.: The Capital Structure Decision

Hutchison Whampoa was considering strategies for its long-term capital structure. The HK$35 billion Hong Kong-based conglomerate had ambitious growth plans in multiple business sectors in different geographies. Traditionally, like many of its domestic peers, Hutchison had relied entirely on short to medium-term bank loans. Its demand for long-term financing, attractive rates in other capital markets (especially the U.S.) and concern about a more diversified investor base had led Hutchison to explore other financing options. In particular, the company was debating the benefits of a Yankee Bond Offering. At the time, Hutchison had already approached Moody's and Standard & Poor's for a bond rating.

SUBJECT: Finance; Capital Budgeting; Financial Strategy; International Finance

COPY YR.: 1999SETTING: Hong Kong

Read: Maturity and Basis Structures in Corporate Financing

This technical note discusses the maturity structure and basis structure of a firm's liabilities as elements of the firm's overall financing policy. Measures of maturity and basis are presented, as is the general rationale for a "much funding" strategy for financing the firm.

SUBJECT: Finance; Financial Policy; Financing; Liability Management; Financial Management; Financial Engineering

COPY YR.: 1991

3Lecture: The Valuation of a convertible; callable, putable, subordinated

security

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4 Topic: The Valuation of convertibles

A learning group will be asked to do a presentation

Case: Flowers Industries, Inc.

The chief financial officer of this diversified baking company must decide whether to issue convertible debt rather than straight debt or equity. In evaluating the proposed terms of the convertible offering, the student must value the securities by valuing the call option (using option-pricing theory) and the bond component. This case is used to introduce the topic of convertible securities. Student and instructor Lotus worksheet files are available on computer diskettes for use with this case and teaching note.

SUBJECT: Finance; Bonds; Capital Structure; Debt Policy; Financial Policy; Liability Management; Option

COPY YR.: 1989

Read: The Effects of Debt-equity Policy on Shareholder Return Requirements and Beta

This note outlines the link between shareholder return requirements and a firm's use of debt. It explores the theoretical arguments concerning how the cost of equity changes with the use of debt and discusses the limitations of each view. It also provides conceptual and practical guidance on the use of "levered" and 'unlevered" betas.

SUBJECT: Finance; Corporate financial strategy; Capital structure; Debt policy

COPY YR.: 1997

A learning group will be asked to make a presentation

5 Topic: Undertaking a change in capital structure with convertibles

Case: Building a Strategy-Based Culture at Bank of Tokyo-Mitsubishi A major global enterprise--no matter how stunning its success--cannot run for long without a well-articulated strategy. Executives at Bank of Tokyo-Mitsubishi's Headquarters for the Americas (BTMHQA) knew that. They also knew the bank urgently needed to enhance its corporate governance framework and performance evaluation system. One year after adopting the Balanced Scorecard, BTMHQA has made remarkable progress in fortifying and integrating these systems--and the head office has taken note.

SUBJECT: Finance; Accounting & control, Balanced scorecard, Bank management, Banking, Banking industry, Competitive strategy, Corporate strategy, Finance & accounting, Financial services, General management, Performance measurement, Strategy formulation, Strategy implementation.

COPY YR.: 2002SETTING: Greenwich, CT / US

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A learning group will be asked to make a presentation.

6 Lecture: The Valuation of MBS and ABS

7 Topic: Collateralized Mortgage Obligations

Case: Shearson Lehman CMO, Inc.

This case examines the decision of an investment bank to issue a collateralized mortgage obligation. Sufficient detail is provided to allow a broad discussion of the CMO market or a detailed look at Shearson's decision to include a floating rate tranche.

SUBJECT: Finance; Investment Banking Institutions; Mortgage Finance; Banking; Investment banking

COPY YR: 1998SETTING: United States


8 Topic: Mortgage Backed Securities

Case: Mortgage Backs at Ticonderoga Ticonderoga is a small hedge fund that trades in mortgage backed securities (MBS)--securities created from pooled mortgage loans. They often appear as straightforward so-called "pass-throughs", but can also be pooled again to create collateral for a mortgage security known as a collateralized mortgage obligation (CMO). CMOs allow cash flows from the underlying pass-throughs to be directed, allowing the creation of different classes of securities--tranches--with different maturities, coupons, and risk profiles. In April 2005, the general managers of Ticonderoga are looking at the market data, trying to construct a trade given their view on the prepayment speed of mortgages, vs. the implied prepayment speed they derive from the CMOs in the market.

SUBJECTS: Finance, Derivatives, Finance, Hedging, Over the counter trading, Securities, Trade.

COPY YR.: 2005SETTING: London

9 Topic: Recapitalizations

Case: Sealed Air Corporation's Leveraged Recapitalization (A) and (B)

(A)

Less than a year after Sealed Air embarked on a program to improve manufacturing efficiency and product quality, the company borrowed almost 90 percent of the market value of its common stock and paid it out as a special dividend to shareholders. Management purposefully and successfully used the leveraged recapitalization as a watershed event, creating a crisis that disrupted

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a status quo and promoted internal change, which included establishing a new objective, changing compensation systems and reorganizing manufacturing and capital budgeting processes.

TEACHING PURPOSE: Provides a context in which to explore how financing decisions affect organizational structure, management decision making, and firm value. Can be used as an introductory finance case in which the students apply basic cash flow forecasting techniques to explore alternative dividend and capital structure decisions. For more advanced finance classes, the concept of free cash flow, its effect on stock market prices and firm value, and the disciplinary role of high leverage can be analyze.

SUBJECTS: Finance; Capital Structure; Control Systems; Crisis Management; Debt Policy; Dividend Policy; Employee Stock Ownership; Management of Change; Recapitalization

COPY YR.: 1994SETTING: New Jersey, USA

(B)

Less than a year after Sealed Air embarked on a program to improve manufacturing efficiency and product quality, the company borrowed almost 90 percent of the market value of its common stock and paid it out as a special dividend to shareholders. Management purposefully and successfully used the leveraged recapitalization as a watershed event, creating a crisis that disrupted a status quo and promoted internal change, which included establishing a new objective, changing compensation systems and reorganizing manufacturing and capital budgeting processes.

TEACHING PURPOSE: Provides a context in which to explore how financing decisions affect organizational structure, management decision-making, and firm value. Can be used as an introductory finance case in which the students apply basic cash flow forecasting techniques to explore alternative dividend and capital structure decisions. For more advanced finance classes, the concept of free cash flow, its effect on stock market prices and firm value, and the disciplinary role of high leverage can be analyzed.

SUBJECTS: Finance; Capital Structure; Control Systems; Crisis Management; Debt Policy; Dividend Policy; Employee Stock Ownership; Management of Change; Recapitalization

COPY YR.: 1994SETTING: New Jersey, USA

The (B) case will be distributed and discussed in class

10 Topic: The Valuation of a Closely – Held Private Company

Case: Kohler Co.

Kohler Co., best known for its plumbing fixtures, is a large, private family firm. As part of a recapitalization aimed at preserving family ownership of Kohler Co., nonfamily shareholders, who held 4% of common stock, were required to sell their shares to the company. A group of dissenting shareholders filed a lawsuit claiming that the buyout price undervalued their shares by a factor of five. In

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April 2000, Herbert V. Kohler, Jr., chairman and CEO, has to decide whether to settle with the dissenters and, if so, at what share price. The decision calls for a detailed valuation of the company at the time of the recapitalization. Provides the necessary data for students to value the company using both a discounted cash flow approach and a multiples (comparable companies) approach. Students must identify and understand the different valuation assumptions that can lead to a wide range in price, including the applicability of discounts for lack of marketability and lack of control. Exhibits are available in electronic form to facilitate analysis of the data (HBS courseware 9-205-707).

SUBJECTS: Finance, Corporate governance, Entrepreneurship, Family owned businesses, Finance, Legal aspects of business, Public relations, Recapitalization, Restructuring, Shareholder relations, Stockholders, Valuation.

COPY YR.: 2005


11 Topic: Understand the Transfer of Value when a Parent Firm Issues a Guarantee

Case: KMART and Builders Square

In 1997, Kmart received an offer from retail buyout specialists Leonard Green & Partners for the purchase of its ailing 162-store home improvement chain, Builders Square. Green's offer included a $10 million cash payment, a warrant to purchase a 28% stake in the new entity in the future, and the assumption of approximately $1.5 billion in non-cancelable Builders Square lease obligations. Kmart would remain contingently liable for the lease payments if the new entity were to fail. In the midst of the fiercely competitive home improvement retail industry, the questions posed include: 1) what is the value of the Builders Square subsidiary? 2) is the Green offer a good deal for Kmart? and 3) should Kmart accept the offer or hold out for a higher offer or additional buyers?

TEACHING PURPOSE: To incorporate off-balance-sheet financing of operating lease guarantees into a valuation exercise (using multiples and the APV approach) focused on a money-losing subsidiary.

SUBJECTS: Finance; General Management; Building materials industry, Capital structure, Corporate reorganization, Debt management, Discount department stores, Distribution channels, Divestiture, Financial management, Financing, Industrial goods, Investments, Leasing, Legal aspects of business, Liability, Manufacturing industry, Options, Organizational change, Restructuring, Retailing industry, Securities, Valuation.

COPY YR.: 2000

Read: Valuing the option component of debt and its relevance to DCF-based valuation methods

The flows-to-equity or equity cash flows valuation method is a discounted cash flow method used to estimate the equity portion of the capital structure. It is closely related to the venture capital/buyout valuation method, which estimates the IRR of the stream of cash flows accruing to equity holders. Both of these methods are likely to result in an estimate of equity value that is too low when the firm's debt is risky (or, equivalently, an IRR that is too high, depending on

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the method used to estimate terminal value.) This note describes a method for estimating the size of this bias, drawing upon insight from option-pricing. Teaching Purpose: Can be used in conjunction with cases involving direct estimation of equity value, using a discounted cash flow technique, and with cases employing the venture capital/buyout fund valuation method.

SUBJECT: Finance; Capital structure; Cash flow; Entrepreneurial finance; Leveraged buyouts; Option pricing; Risk; Valuation; Venture capital

COPY YR.: 2001

12 Topic: Corporate Hedging Policy


Case: Foreign Exchange Hedging Strategies at General Motors

How should a multinational firm manage foreign exchange exposures? Examines various types of exposures and alternative responses to these exposures by analyzing three specific hedging decisions by General Motors. Describes General Motors' corporate hedging policies, their risk management structure, and how accounting rules impact hedging decisions. Although the overall corporate hedging policy provides a consistent approach to the foreign exchange risks that General Motors must manage, there are also situations where the company has to consider different hedging strategies. Describes three such situations: a large exposure to the Canadian dollar with adverse accounting consequence, the company's exposure to the Argentinean currency when devaluation is widely anticipated, and a competitive exposure to the Japanese yen. Additionally, forces students to analyze the financial costs and accounting treatment of alternative derivative transactions for hedging purposes. Also has students evaluate the risks General Motors faces in each situation and consider what hedging strategy--if any--might be appropriate. Teaching Purpose: To analyze foreign exchange hedging decisions, the appropriate design of risk management policies, and multinational financial management.

SUBJECT: Finance, Currency, Derivatives, Financial instruments, Financial management, Foreign exchange, Globalization, Hedging, Interest rates, International business, International finance, International trade, Automotive, Multinational corporations, Risk management, Securities.

COPY YR.: 2004SETTING: New York

ExamTopics for paper to be given out

13 Topic: Real Option Valuation

Case: Bidding for Antamina

In June 1996, executives of the multinational mining company RTZ-CRA are contemplating bidding to acquire Antamina copper and zinc mine in Peru. The Antamina project is being offered for sale by auction as part of the privatization of Peru's state mining company. RTZ-CRA has to determine what the time is

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worth, and to recommend whether and how RTZ-CRA should bid in the upcoming auction. The bidding rules put in place by the Peruvian government dictate that each company's bid contain two components: an up-front cash amount and the amount the bidder will invest to develop the property, if developments warranted after further exploration is completed.

TEACHING PURPOSE: Introduces students to real option valuation of a natural resource project. This is underscored by the auction rules in place, which force firms to approach the problem as a real option. Designed to be used as an introduction to the real option valuation, and can also be used in an advanced course in negotiation or corporate finance to discuss the incentive effects of different auction procedures. Maybe used with Copper and Zinc Markets--1996.

SUBJECT: Finance; Bids; Capital budgeting; Mining; Privatization; South America; Valuation

COPY YR.: 1996SETTING: Peru

Background reading for the case: Copper and Zinc markets 1996

Provides background information on copper and zinc markets as of mid-1996. Discusses supply and demand conditions, forecasts of the spot prices of the metals, and contracts for future delivery (forwards, futures, and options).

SUBJECT: Finance, Commodity markets, Macroeconomics, Manufacturing industry, Metals, Mining, Securities markets, Supply & demand.

COPY YR.: 1997

Read: Real Options Valuation When Multiple Sources of Uncertainty Exist

Describes how multiple sources of uncertainty can be incorporated into a real-options-based analysis. Works through an example of a two-stage problem where a company has both an option to explore and an option to develop oil reserves.

SUBJECT: Finance; Options; Petroleum industry; Real options; Risk; Uncertainty; Valuation

COPY YR.: 2001

Read: A Real-World Way to Manage Real Options

Each corporate growth project is an option in the sense that managers face choices--push ahead or pull back--along the way. Yet, many companies hesitate to apply options theory to initiatives such as R&D and geographic expansion, partly because these "real" options are highly complex. In this article, the authors make the case that the complexity of real options can be eased through the use of a binomial valuation model. Many of the problems with real-options analysis stem from the use of the Black-Scholes-Merton model, which isn't suited to real options. Binomial models, by contrast, are simpler mathematically, and you can tinker with a binomial model until it closely reflects the project you wish to value. Suppose your company is considering investing in a new plant. To use the binomial model, you must create an "event tree" to figure out the full range of possible values for the plant during the project's lifetime. Then you work backward from the value at completion, factoring in the various investments, to

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determine the value of the project today. These calculations provide you with numbers for all possible future values of the option at the various points where a decision needs to be made on whether to continue with the project. The authors also address another criticism of real options: that gaps often arise between theoretical and realized values of options of all types. Such gaps may be largely the result of managers exercising options at the wrong time. Looking for trigger points that correspond to the nodes on a binomial decision tree should not only tell managers when they need to decide on exercise, but also specify rules governing the exercise decisions.

SUBJECT: Finance, Accounting, Assets, Decision analysis, Decision making, Decision trees, Entrepreneurship, Finance, Financial analysis, Financial management, Growth management, Investments, Managerial skills, Options, Securities

COPY YR.: 2004

14 Topic: Applied real options analysis vs regular DCF-Capex methods

Case Study: DCF vs. Real Options: How Best to Value Online Financial Companies

This case is: (1) a comparison of discounted cash flows vs real options to value a company; and (2) an application to the British Internet bank Egg.

TEACHING PURPOSE: The teaching objectives are: (1) to facilitate a discussion of the comparison of DCF vs real options; and (2) to identify parameters necessary to apply real options to a bank.

SUBJECT: Finance; Electronic banking; Internet banking; Bank valuation; Real options

COPY YR.: 2001SETTING: United States / United Kingdom

A learning group will be asked to study and explain pp. 1-21 relative to the valuation of Amazon.com. For better understanding, the rest of the case study relative to Egg is advisable.

15 Topic: Financing

Case Study: Chase’s Strategy for Syndicating Hongkong Disneyland Loan (A)

In late 1999, the Walt Disney Co. and the Hong Kong government agreed to develop Hong Kong Disneyland, a HK$28 (U.S.$3.6) billion theme park and resort complex planned to open in late 2005. As part of the total financing package, the sponsors decided to raise HK$3.3 billion of non-recourse bank loans for construction and working capital, and selected Chase Manhattan Bank to underwrite and syndicate these facilities. This case concerns the process by which Chase successfully competed to lead this transaction. The key questions facing Chase were whether to bid at all, how to bid, and how to structure the syndication to meet the borrower's needs, its own profit objectives, and the market's expectation for an attractively priced credit. Includes a generic section about the process, participants, and economics of syndicated lending for students who are unfamiliar with syndicated lending. Teaching Purpose: Part of a module on Financing Projects in the Elective Curriculum (EC) course Large-Scale

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Investment (LSI). Illustrates: 1) the process, participants, and economics of syndicated lending (a market that now exceeds $2 trillion annually); 2) the key issues in designing a syndication strategy (e.g. how many banks to invite, which banks to invite, what fees to offer, and what share of the loan to hold in the end); and 3) the importance of relationships in syndicated lending. Although written for a course on project finance, it can easily be modified for courses on capital markets or financial institutions.

SUBJECT: Finance; Asia; Bank loans; Capital investments; Emerging markets; Entertainment industry; Financial strategy; Investment banking; Project finance

COPY YR.: 2001SETTING: Asia

Hand-out: Chase’s Strategy for Syndicating Hongkong Disneyland Loan (B)

Supplements the (A) case.

SUBJECT: Finance; Asia; Bank loans; Capital investments; Emerging markets; Entertainment industry; Financial strategy; Investment banking; Project finance

COPY YR.: 2001SETTING: Asia

16 Topic: Financing, Continued: A bond refunding in which equity rather than cash is used to extinguish debt

Case: Duke Power Company: Equity for Debt Swap (A), (B), and (C)

Two investment bankers at Salomon Brothers seek to determine the suitability of a debt-for-equity swap for this large public utility. The student must assess the valuation consequences of the swap (complete analysis is provided) and the means by which the swap would be executed. (The B case is F-0562, and the C case is F-0563)

SUBJECT: Finance; Liability Management; Financial Policy; Investment Banking; Debt/Equity swaps; Security Analysis; Valuation

COPY YR.: 1983SETTING: Charlotte, North Carolina

17 Topic: Financing, Continued: Catbound

Case: Bank Leu's Prima Cat Bond Fund

In 2001, Bank Leu, a Swiss private bank, is considering creating the world's first public fund for catastrophe bonds. Cat bonds are securities whose payments depend on the probability of a catastrophe occurring, such as an earthquake or hurricane. Cat bonds are traditionally issued by large insurance or reinsurance companies. Outlines the traditional reinsurance market and securitization efforts that have taken place in the past and focuses on Bank Leu's decision as a buy-side participant in the cat bond market. Teaching Purpose: To explore how insurance risks can be transferred to the capital markets and how risks in general can be brokered, securitized, and traded.

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SUBJECT: Finance, Bonds, Capital markets, Europe, Financial instruments, Financing, Institutional investments, Risk management, Securities, Switzerland.

COPY YR.: 2004SETTING: Zurich, Switzerland


18 Topic: Credit Derivatives

Case: First American Bank: Credit Default Swaps

Discusses a bank's ability to manage its credit exposure to a particular client using credit default swaps. Teaching Purpose: To give students basic understanding of credit risk and credit derivative mechanics.

SUBJECT: Finance; Asset management, Banking industry, Banks, Credit, Derivatives, Economics, Financial institutions, Financial instruments, Financial management, Financial services, Financing, Portfolio management, Risk, Securities, Securities markets.

COPY YR.: 2002SETTING: New York; United States

19 Topic: Project finance

A learning group will be asked to do a presentation.

Case: Calpine Corporation: The Evolution from Project to Corporate Finance

In early 1999, Calpine Corp.'s CEO Pete Cartwright adopted an aggressive growth strategy with the goal of increasing the company's aggregate generating capacity from approximately 3,000 to 15,000 megawatts (MW) by 2004. He changed the strategy because he believed there was a fleeting opportunity to repower America given the inefficiency and age of current generating capacity as well as the recently granted ability to compete in wholesale power markets. To achieve the new goal, Calpine will have to build or acquire as many as 25 power plants at a total cost of $6 billion (approximately $500,000 per 1,000 MW). For a company with assets of $1.7 billion, a sub-investment grade debt rating, a debt-to-capitalization ratio of 79%, and an after-tax cash flow of $143 million in 1998, raising this much money was going to be a formidable challenge. The case opens with Calpine's finance team trying to decide how to finance four power plants currently under development. Should they use project finance, corporate finance, or a new hybrid structure with elements of both? Knowing the importance of speed, feasibility, and efficiency, SVP Bob Kelly and VP Rohn Crabtree must select a financial strategy that not only supports the company's high-growth competitive strategy, but also maximizes firm value. Teaching Purpose: Describes what project finance is, how it differs from corporate finance, and why firms use it to finance capital investments. Illustrates two benefits of using project finance--it encourages investment by solving the debt overhang problem and increases value from interest tax shields--as well as the disadvantages of using project finance: it is time consuming, costly to arrange, and very rigid once in place. Also illustrates the profit opportunities in

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the U.S. power industry created by changes in technology and regulation and the importance of adapting a company's financial strategy to support a new, high-growth competitive strategy designed to capture these fleeting profit opportunities.

SUBJECT: Finance; Capital expenditures; Corporate strategy; Deregulation; Electric power; Financial strategy; Organizational structure; Project finance; Valuation

COPY YR.: 2001SETTING: California

Read:

1) An Overview of the Project Finance Market

Provides an introduction to the field of project finance and a statistical overview of the project finance market as of the mid-to-late 1990s. Consists of four sections. The first section defines project finance and contrasts it with other well-known forms of financing. The second section describes the evolution of project finance from its origins in the 13th century in the mining industry, to the U.S. electric power industry in the 1970s and 1980s, and to a much wider range of applications and locations in the 1990s. The third section provides a statistical overview of the project finance market as it exists today in terms of industry, project, and participant data. The final section discusses current and likely future trends. There is also an appendix that describes sources of industry data and other project finance information.

TEACHING PURPOSE: Intended to familiarize readers with the concept of project finance. Provides descriptive statistics on the use of project finance (e.g., the size of the market, the types of projects, and the location of projects, etc.) as well as data on the major participants in the field.

SUBJECT: International Investment; Emerging Economies; Electric Power generation; Political Risk Analysis; Deal Structuring; Corporate Investment Analysis; Project Financing; Valuation; International; Alternative Business Issue or Setting; Cross-Cultural Issues; Diverse Protagonist; Gender (Female Protagonist); Diversity Issues

COPY YR.: 1996SETTING: Charlottesville, VA

1) Project Finance Glossary

Contains three parts. First, contains more than 300 definitions for terms commonly used in the field of project finance. Second, contains a list of more than 150 acronyms for official institutions and other project finance terms. Finally, contains a description of various coverage ratios used by project finance lenders.

TEACHING PURPOSE: A reference document for people interested in project finance.

SUBJECT: Finance; Capital investments, Developing countries, Emerging markets, Financing, International business, International finance, Project finance, Project management.

COPY YR.: 200213


3) Project Finance Research, Data, and Information Sources

Documents the major sources of project finance research and data. It is to be a reference guide for MBA students writing for the elective curriculum course, Large-scale Investment, and for others interested in the field of project finance.

SUBJECT: Finance; Data bases; Economic analysis; Online information services; Project finance; Research methodology; World Wide Web

COPY YR.: 2000

20 Topic: Financing Markets


Case: The International Securities Exchange: New Ground in Options Markets

Covers the equity options market and studies the major parties involved and the options trading process. Takes an in-depth look at the path taken by the International Securities Exchange as it entered a mature exchange industry and transformed itself into a major competitor. Teaching Purpose: Provides an introduction to securities markets. Students are exposed to concepts of liquidity and transaction costs and asked to question the function and design of securities exchanges. Sufficient data is provided for students to analyze a substantial pilot study to advise the exchange on its strategy going forward.

SUBJECT: Finance, Assets, Capital markets, Cash management, Derivatives, Financial instruments, Financial services, Investments, Liquidity, Market analysis, Market structure, Options, Securities, Securities markets, Securities trading.

COPY YR.: 2003SETTING: New York, USA


Submission of Papers

Knowledge, Competencies, Skills, Values and Attitudes

Session

Knowledge Skills/Competencies Values & Attitudes

1 The major corporate finance decisions

How to integrate these major decisions

Developing the big picture of corporate finance

2 Understanding the relationship between financing and capital structure

How to analyze the capital structure of a company

Understanding capital structure, debt financing, bond ratings and offshore offerings

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3 Understanding a business segment WACC

Analytical methods in estimating business segment WACCs

Introduction of the use of the replicating portfolio approach

4 Does an increase in leverage increase value?

How to do a debt issue and a repurchase

Appreciating the welfare of shareholders in capital structure changes

5 Undertaking a major change in capital structure

How to analyze a major change in capital structure via a debt financed stock report program

Calculation of tax shields of debt financing

Appreciating business and financial risks in a recap

6 Deciding whether to pay out dividends or do a report

Evaluation of a company's asset needs

Analyzing the financial effect of payout alternatives

Risk assessment

Introduction of signaling effects, clientele effects, and practical considerations in setting dividend policy

7 Integrating capital structure theory and distribution policies

Analyzing a large share repurchase

Understanding the various theories of capital structure and dividends

8 Understanding the theoretical and practical implications of dividend policy

Analyzing the effect of a dividend cut

Appreciating a relevant dividend policy

9 FCFF/FCFE, effects on stock market price and corporate value

Identifying value creation and it's source in a leveraged recap; risks of high leverage

Understanding agency costs and firm value, and the disciplinary effect of high leverage

10 The concept of capital rationing

The analytical methods in CAPEX under soft and hard capital rationing

The real complexity of CAPEX analysis

11 Understand the transfer of value when a parent firm issues a guarantee

The valuation of a guarantee

Defining the proper set of comparables in valuation

12 The value of managerial flexibility

Real options analysis The expansion of CAPEX methods where there are real options

13 Real option valuation Valuing a mine Bidding within a context of a real option definition and bid rules

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plus negotiations

14 Fending off a hostile takeover attempt via a voluntary restructuring

Estimating the trade-off between corporate flexibility and the discipline of debt

Seeing the problem or benefit of entrenched management

15 Applied real options analysis vs regular DCF-Capex methods

Looking at the valuation of Amazon.com

Explaining the discrepancy between the DCF value and the real options method value

16 A bond refunding in which equity rather than cash is used to extinguish debt

Analyzing a right hand side balance sheet swap:

Shareholders" perspective; investment banker's perspective; (A)

The management perspective and the company's financial strategy (B)

The regulatory and public perspective (C)

The creation and distribution of value (if any) in a balance sheet swap

17 The value of a company under restructuring

Evaluation of a complex capital structure and how to estimate a possible WACC

Evaluation of a voluntary recap proposal from various perspectives

Integration of the bankruptcy process, restructuring valuation, and agency problems

18 Convertible Securities

How to value a convertible The use of converts in financial strategy

19 Project finance in general; in an emerging market

The valuation of a project finance deal

The structuring of financial transactions

20 Evaluating a financial strategy and its execution

Estimating the value of large greenfield projects

Lessons learned from failure

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advanced corp. finance.doc

Documents

sealed air embarked

disrupted astatus quo

employee stock ownership

collateralized mortgage obligation

free cash flow

changing compensation systems

promoted internal change

advance corporate finance