Corporate Finance-II

Instructor:

Kashif Saleem, Ph.D.,

Associate Professor in Finance at LUT School of Business

Workload:

6,0 ECTS,

45 contact hours; 150 student work hours

 

Prerequisites:

Corporate Finance I

 

Course Description:

 

The course teaches students to use financial theory to solve practical problems by showing not just how, but why companies and management act as they do. It teaches general approaches to fundamental issues of corporate finance.  The course should help students to develop a conceptual and analytical framework for analyzing the decision making of corporate financial management.

This is a second part of the course. It particularly concentrates on decisions related to capital and debt structure of the company, information asymmetry and debt contracts

 

 

Course Content:

 

Topic 1: Choice of Capital Structure (12 hours)

1.1 Financial Leverage and Expected Return on Equity

1.2 Modigliani-Miller Theorem

1.3 A synthesis of the MM model and CAPM

1.4 Tax shield

1.5 Cost of capital with risky debt

 

Topic 2: Corporate Debt, Credit Risk and Debt Structure (8 hours)

2.1 Yields on Corporate Debt

2.2 Option to Default

2.3 Valuing debt using option technique

2.4 Credit default swap

2.5 Credit scoring models and probability of default

2.6 Value at Risk

 

Topic 3: Information Asymmetry and Agency Theory (12 hours)

3.0 Revision of Beliefs and Bayes Rule

3.1 Asymmetric Information and Signaling

3.2 Asymmetric Information in Financial Markets: Glosten-Milgrom Model

3.2 Agency and Moral Hazard

3.3 Agency Theory in Finance

 

Topic 4: The Design of Debt Contracts (10 hours)

4.1 Debt Contracts and Costly State Verification

4.2 Debt Contracts and the Allocation of Control Rights

4.3 Debt Contracts and the Provision of Incentives

4.4 Debt Contracts under Asymmetric Information

4.5 Maturity Structure of Debt Contracts

 

Teaching Methods:

Lectures and Seminars, Problem solving

 

Course Reading:

  

Books:

 

 [BMA6]  Brealey R.A., S.C. Myers, and F. Allen. Principles of Corporate Finance, 6th ed., McGraw-Hill, 2000

Solutions Manual for use with Brealey R.A., S.C. Myers, and F. Allen

[CFI] Greenbaum, Thakor, Contemporary Financial Intermediation, 2nd ed., 2007

 

Papers:

 

[1] Modigliani, Miller 1958, “The cost of capital, corporation finance and the theory of investment”, AER, Vol 48, No 3

[2] Hamada 1972, “The effect of the firm's capital Structure on the systematic risk of common stocks”, The Journal of Finance, Vol. 27, No. 2,

[3] Cohen 2007, “Incorporating default risk into Hamada's Equation for application to capital structure”

http://mpra.ub.uni-muenchen.de/3190/

[4] Leland 1994, “Corporate debt value, bond covenants and optimal capital structure”. Journal of Finance, XLIX, No 4

[5] Atkins, 1968, “Financial Ratios, Discriminant Analysis and the Prediction of Corporate

Bankruptcy”

[6] Glosten, Milgrom 1985, “Bid, ask and transaction prices in a specialist market with heterogeneously informed agents”, Journal of Financial Economics 14

[7] Jensen M. C. and W. H. Meckling, 1976, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”.  Journal of Financial Economics 3, 305-360

[8] Myers S. C., 1977, “Determinants of corporate borrowing”.  Journal of Financial Economics 5, 147-175

[9] Diamond D., 1991, “Debt Maturity Structure and Liquidity Risk

[10] Fulghieri P., Goldman E., 2008 Handbook of Intermediation and Banking, Chapter 1: The Design of Debt Contracts

 

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