What is advanced corporate finance ivey business school

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  • What is Accounting?
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  • FUNDAMENTALS OF CORPORATE FINANCE - GBV

FUNDAMENTALS OF CORPORATE FINANCE - GBV

What is Advanced Corporate Finance?
Spring 2008
Stephen Sapp Note: Slides are on the web
Advanced Corporate Finance
Stephen Sapp h
What is finance?
? Deciding how to optimally manage a firm's assets
and liabilities.
? Managing the costs and benefits associated with the
timing of cash in- and outflows and how these can
be influenced by the different financial instruments
available to the firm (e.g., assets, liabilities and
derivatives).
Advanced Corporate Finance
Stephen Sapp h
What is Corporate Finance?
? Managing the funds (in and outflows) related to a
corporation's activities.
? It generally involves balancing firm profitability with the
risk of financial distress over the short- and long-term,
while attempting to maximize stakeholders' utility
(usually the value of its equity).
- It includes investing excess funds and raising funds (short-term
or long-term) for new or ongoing uses.
- It includes hedging financial risks.
? These decisions depend on the firm's objectives and
constraints such as institutional or individual goals, time
horizon, risk aversion and tax considerations.
Advanced Corporate Finance
Stephen Sapp h
What is Advanced Corporate Finance?
? Extension of previous courses to focus on the relationships
between financial factors and firm decisions from the
perspective of a financial manager.
? Financial factors / financial markets and instruments
- Stocks
- Bonds, Money market instruments
- Derivatives
? Value of financial decisions
- Determination of the fair value of corporate assets
? How risky is the asset? When is it risky?
? What cash flows will it produce? How valuable are they to me?
- How does the market price compare to similar assets? What is its
intrinsic value? Is it a worthwhile use of limited corporate funds?
Advanced Corporate Finance
Stephen Sapp h
Goal of the Course
Expand your financial "tool box"
? As global risks and opportunities have increased, financial
markets have developed tools to help manage this risk and
exploit these opportunities.
? This course focuses on identifying and evaluating the risks
relevant to managers operating in today's global environment.
? What types of risk do they face? Should these risks be managed? How can
the risks be managed?
? What types of opportunities? How can they be utilized?
? What value do these bring to the firm?
? Developing a logical framework linking firms and financial
markets to manage the risks and exploit the opportunities.
Advanced Corporate Finance
Stephen Sapp h
Course Overview
PART A ADVANCED CORP FIN
Introduction ? Introduction to financial markets
? Identifying business and financial risks
PART B RISK MANAGEMENT
Derivative Securities ? Designing hedging strategies
? Managing international assets
PART C GLOBAL CAPITAL RAISING
Financing Strategies ? Introduction to global financial markets
? Global equity and debt financing strategies
PART D GLOBAL INVESTING
Global Valuation and Investing ?Global capital budgeting
? International asset allocation
Advanced Corporate Finance
Stephen Sapp h
Administrative Issues
? Materials
- Assigned readings: the case packet, and the class web page.
- The materials are selected to complement the lectures, cases and
class discussions.
? Office hours
- "open door", but please email or call first
? Grades
- Based on case brief (due next Tuesday), final exam and class
contribution.
- Final exam (April 29th): 4 hour case with assigned questions
Advanced Corporate Finance
Stephen Sapp h
Class Contribution Grading
? Class-by-class record of contribution based on
- My evaluation of each student's class-by-class
contribution
- Input from peer evaluation of contribution
? Aggregation:
- At the end of the course, the quality and regularity of
contributions over the course will be used to arrive at the
final grade.
Advanced Corporate Finance
Stephen Sapp h
Case Analysis: Review
Steps to follow:
? Who is the decision maker?
? What is the decision?
? What are the criteria?
- Maximizing shareholders' wealth? Corporate wealth?
Management's wealth? NGO's?
- Limiting risk? What type of risk(s)? How significant are
each of these risks?
? Key alternatives to consider?
? Analysis and discussion of the alternatives.
? Decision and action plan.
Advanced Corporate Finance
Stephen Sapp h
What will we cover in this course?
? Identification and management of financial risk and
its role in managing business or enterprise risk.
? Understanding the costs and benefits to raising
funds for operations in foreign versus domestic
markets.
? Evaluating the costs and benefits to purchasing and
operating financial and non-financial assets in
emerging and developed markets (i.e., M&As, JVs
or greenfield).
Advanced Corporate Finance
Stephen Sapp h
Risk Management
Firms must manage two types of risk:
1. Business Risk
? The risk associated with manufacturing and marketing the firm's
products
2. Financial Risk
? The risk associated with ensuring the firm has adequate cashflows
to meet its commitments.
? How do these risks depend on our actions? Others' actions?
Financial markets?
? Are they something we should try to hedge?
? What tools exist to perform the desired function?
Advanced Corporate Finance
Stephen Sapp h
Source of Financial Risks?
? Producing goods and services requires one to purchase inputs
whose prices are influenced by global market conditions.
- Commodity prices depend on global supply and demand (i.e., the
price of oil)
? Financing your operations requires one to borrow or lend and
these interest rates are influenced by global market conditions.
- Interest rates depend on global demand for financial assets (i.e.,
the current US interest rates?)
? Selling your goods depends on market conditions in both your
domestic market and international markets.
? Can we / should we do anything about these risks?
Advanced Corporate Finance
Stephen Sapp h
Where Do These Risks Originate?
? Global trade in goods, services and financial assets has
resulted in increased risks and opportunities for firms.
There are now greater sources of supply and demand.
- Global trade has increased dramatically over the past 30 years.
- Some reasons for this: technology, economic growth, decreasing
trade barriers, improved transportation ...
? The most obvious sources of risk:
- Importing requires buying Euros, or Yen with Canadian dollars.
- Exporting our goods and services requires that people buy
Canadian dollars and our prices remain competitive when
converted to the other currency.
- What about borrowing/lending?
Advanced Corporate Finance
Stephen Sapp h
Examples of Risks and Opportunities
? Financial Risk
- Capital risk - debt or equity values
- Currency risk - value of C$ for inputs and outputs
- Liquidity risk - the ability to buy or sell financial securities
? Political Risks
- Difficulty enforcing contracts or "rule of law".
- Changes in regulation or differences in regulation, expropriation.
? Market Imperfections
- Legal restrictions on market access.
- Market segmentation.
? Expanded Opportunity Set
- Move production overseas. Economies of scale
- Diversification of market risk.
- Global investment opportunities and financing alternatives.
Advanced Corporate Finance
Stephen Sapp h
Why Face These Risks?
? Comparative advantage. Countries have different strengths
and weaknesses.
? As barriers to trade have fallen, firms have started to take
advantage of these differences to maximize their performance.
Revealed Comparative Advantages
US Canada Germany Italy Japan
Food, drink & tobacco 0.31 0.28 -0.36 -0.29 -0.85
Raw materials 0.43 0.51 -0.55 -0.30 -0.88
Oil products -0.64 0.34 -0.72 -0.74 -0.99
Chemicals 0.42 -0.16 0.20 -0.06 -0.58
Machinery 0.12 -0.19 0.34 0.22 0.80
Other manufacturing -0.68 -0.07 0.01 0.01 0.40
Source: OECD
Advanced Corporate Finance
Stephen Sapp h
Identifying the Risks Faced by Firms?
? Key questions we will examine:
- What are the risks? How serious are the risks?
- How do these risks impact management, shareholders, and
debt holders?
- What should we (as managers) do about them?
? Some examples to consider:
- Canadian Banks
- Auto manufacturing in MI versus ON versus China
- Canadian Tech Companies
Advanced Corporate Finance
Stephen Sapp h
Identifying the Risks Faced by Firms?
? Look at the Management Discussion and Analysis
(MD&A) section for McDonalds Corporation (MCD -
NYSE)
Advanced Corporate Finance
Stephen Sapp h
Managing Foreign Exchange Risk
To decide about hedging:
? What exactly is the risk?
? Is it a financial or business risk? Is it a cash risk or an
accounting risk?
? Are the risks significant? Are the opportunities large
enough to offset these risks?
? When are these risks largest?
? What happens in a "worst case" scenario? "best case"?
? What are the indirect costs and benefits?
? Are these risks we should be bearing? How effectively
can we manage them?
Advanced Corporate Finance
Stephen Sapp h

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