Lahore University of Management Sciences

FINN 400 Applied Corporate Finance

Spring 2013


Instructor Dr. Fazal J awad Seyyed, CFA
Room No. 208 SDSB
Office Hours TBA
Email fazal.jawad@lums.edu.pk
Telephone 042-3560-8030
Secretary/TA Saleem A. Khan
TA Office Hours TBA
Course URL (if any) LMS

Course Basics
Credit Hours 4
Lecture(s) Nbr of Lec(s) Per Week 2 Duration 1:50
Recitation/Lab (per week) Nbr of Lec(s) Per Week Duration
Tutorial (per week) Nbr of Lec(s) Per Week Duration

Course Distribution
Core ACF - Core
Elective
Open for Student Category
Close for Student Category

COURSE DESCRIPTION

Applied Corporate Finance is a case-based course in intermediate level finance. It provides insights into the
role of the financial manager, whose primary responsibility consists of acquiring funds needed by the firm and
directing these funds into projects that will maximize the value of the firm for its owners. In reaching this
objective, financial managers perform such varied roles/tasks as financial forecasting and analysis, raising
capital from most economical sources, channelizing firms resources to projects with best pay offs, dealing in
foreign currency and global financial markets to name a few.

As an applied course, the focus is on: (a) application of financial concepts, models, and tools to address typical
problems faced by financial managers, (b) examining financial theories and concepts in light of corporate
practices and empirical evidence for better understanding of the critical success factors and processes related to
financing, investment, and payout decisions of firms, and (c) interaction of financing and investment decisions
and how they interface with capital markets and impact firm value.

The course is divided into following six modules:

Module 1: Financial Analysis, Financial Modeling, and Working Capital Management Policies
Module 2: Risk-Return and Valuation of Financial Assets

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Module 3: Cost of Capital and Capital Budgeting: Processes and Practices
Module 4: Financing, Capital Structure, and Dividend Policy Decisions
Module 5: Firm Valuation and Evaluation of Mergers and Acquisitions
Module 6: International Finance and Special Topics


COURSE PREREQUISITE(S)
FINN 200 Intermediate Finance

COURSE LEARNING GOALS





The course attempts to:
Enhance students understanding of the theory and practice of corporate finance in making
financial decisions with the key objective of creating value for shareholders.
Reinforce students understanding of financing and investment choices faced by financial
managers through application of financial concepts and models in solving real life problems.
Enhance students understanding by examining empirical evidence and corporate finance
practices highlighting the processes and key considerations involved in making financial
decisions.
Expose students to a variety of perspectives and special topics in finance such as alternative
valuation methodologies, applications of real options, issues in international finance, ethics,
and behavioral finance providing fresh insights on some of the finance puzzles and
anomalies.
Develop student skills and competencies in using spreadsheets, financial models, and other
financial tools in addressing financial problems in a variety of settings based on case method
approach.
Motivate students to develop a keen interest in and knowledge of finance and to prepare them
for the pursuit of further education and careers in finance.


GRADING BREAKUP AND POLICY

The course grade is based on the following criteria:

Source % of Total
Class Participation and Attendance 20
Quizzes and Assignments 25
Mid-Term Exam 25
Final Examination (comprehensive) 30
Total 100



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Class Participation and Attendance: Students are expected to attend all classes. If you are not present at the
beginning of a class or leave class during the session without instructors prior permission, you will be
considered absent for the day. You must review the assigned materials in advance of the class in order to
contribute meaningfully to class discussions. You should plan to spend 5-7 hours for each class preparation.
Working in groups to prepare for class discussion cases is highly recommended. Groups comprising 4-5
persons will be formed by session 3. A significant portion of the course grade depends on the quality and level
of your involvement and input in class discussions. This is an excellent opportunity for you to enhance your
understanding of financial concepts and hone your application skills in corporate finance.

Quizzes: Several unannounced quizzes will be given on the assigned material (readings, cases, assignments,
etc) during the term. No make-up quizzes will be given. However, the lowest quiz grade including a zero for a
missed quiz will be disregarded.

Assignments: There will be several spreadsheet-based assignments during the term to sharpen your skills in
using spreadsheets to perform financial analysis and build financial models. The format and other requirements
will be specified by the instructor. All assignments must be submitted on the due date. Late submissions will
not be accepted.

Examinations: Both exams (mid-term and final) will comprise a blend of MCQs and open-ended
questions/problems or case-like situations.

Calculator Requirement: You will need a financial calculator capable of performing present value/future
value functions. For example, Texas Instrument BA II meets these criteria. Many other brands are equally
suitable for this course.


Examination Detail
Midterm
Exam

Yes/No: Yes
Combine Separate: Combined
Duration: 2 Hours
POptionalerred Date: Week 8
Exam Specifications:

Final Exam

Yes/No: Yes
Combine Separate: Combined
Duration: 2 Hours
Exam Specifications:











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COURSE SCHEDULE
Module/
Session
Session Topic and Case Reading Material Learning Goals
Module 1: Financial Analysis, Financial Models, and Working Capital Management
Session 1

Topic: Overview of Corporate Finance
Theory and Practice

Z-Factor Rescue by the
Numbers
RWJ Ch 1: Introduction to
Corporate Finance (Optional)
1

Overview of corporate finance
and how finance can be a
source of creating competitive
advantage for the firm.
Session 2
Topic: Financial Analysis &
Forecasting

Case: *Clarkson Lumber Company
RWJ Ch 3: Financial
Statement Analysis and
Financial Models (Optional)


Examine linkages between
corporate strategy, growth,
profitability and financing
requirements of the firm.
Session 3
Topic: Free Cash Flows and Building
Financial Models

Case: Building a Financial Model: The
Case of PPG Corporation

Calculating Free Cash
Flows
SB Ch 7: Using Financial
Planning Models for
Valuation
Estimation and forecasting of
free cash flows and its
applications in building
financial models for valuation.
Session 4
Topic: Working Capital Management
Policies

Case: *Dells Working Capital
RWJ Ch 26-28: Short-Term
Financing, Cash,
Receivable and Inventory
Management (Optional)
Review working capital
policies including short-term
financing and its impact on
firm profitability.
Module 2: Risk-Return and Valuation of Financial Assets
Session 5
Topic: Portfolio Theory Risk and
Return

Case: *Beta Management Company
SB Ch 9: Statistics for
Portfolios
RWJ Ch 11: Return and
Risk: The Capital Asset
Pricing Model (Optional)
Review of portfolio theory,
diversification, CAPM, and
estimation of risk measures.


Session 6
Topic: Valuation of Bonds Duration
and Convexity
Case: Greydanus, Boechk &
Associates: The Yield Curve Kink
Decision
SB Ch 15: Bond Valuation
Note on Bond Valuation
and Returns

Overview of bond markets,
valuation, risk management,
and bond portfolio strategies.
Session 7
Topic: Stock Valuation

Case: Valuing Wal-Mart Stock
SB Ch 16: Valuing Stocks Examine alternative
approaches to value stocks.
Session 8
Topic: Equity Valuation Approaches

Case: *Warren Buffet, 1995
SB Ch 16: Valuing Stocks

Develop understanding of
fundamental valuation
approaches.
Module 3: Cost of Capital and Capital Budgeting: Processes and Practices
Session 9
Topic: Capital Budgeting and Cost of
Capital Evidence from the Field
Case/Survey: How Do CFOs Make
Capital Budgeting and Capital
Structure Decisions? Graham and
Harvey, Journal of Applied Corporate
Finance
SB Ch 4: Introduction to
Capital Budgeting
, Spring 2002.

RWJ Ch 6-7: Making
Capital Investment
Decisions and Risk in
Capital Budgeting (Optional)
Review survey findings on
capital budgeting and capital
structure processes and
practices of leading
corporations.


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Session 10
Topic: Estimating Firms Cost of
Capital

Case: *Marriot Corporation
RWJ Ch 13: Risk and Cost
of Capital (Optional)
Examine various approaches
and issues in estimating cost of
capital of a firm.
Session 11
Topic: Making Capital Investment
Decisions

Case: *Diamond Chemicals
SB Ch 5: Issues in Capital
Budgeting

Review issues in estimating
cash flows for evaluating
capital projects.
Session 12

Topic: Evaluating Capital Projects as
Real Options

Case: Real Options Exercises
RWJ Ch 22: Options and
Corporate Finance (Optional)
A Real-World Way to
Manage Real Options,
Copeland and Tufano,
HBR, 2004
Introduce real options,
valuation, and applications to
capital investment projects and
other corporate finance
decisions.

Module 4: Financing, Capital Structure, and Dividend Policy Decisions
Session 13
Topic: Corporate Financing and
Capital Structure

Case: *Debt Policy at UST, Inc., 2001
RWJ Ch 17: Capital
Structure (Optional)
Examine and evaluate various
financing choices available to
modern corporations.
Session 14
Topic: Lease Financing

Case: AMG Lease Versus Buy
Decision
RWJ Ch 21: Leasing
(Optional)
Evaluate pros and cons of
leasing as an alternative to
corporate borrowing.
Session 15
Topic: Dividends and Alternative
Payouts

Case: *Dividend Policy at FPL
RWJ Ch 19: Dividend and
other Payouts (Optional)
Review and evaluate corporate
dividend polices in light of
finance theory and business
practices.
Session 16
Topic: Raising Capital Through Public
Offerings

Case: *Netscape IPO
RWJ Ch 20: Issuing
Securities to the Public
(Optional)
Provide overview of the
processes, procedures, and
requirements of going public.
Module 5: Firm Valuation and Evaluation of Mergers and Acquisitions
Session 17
Topic: Valuation of the Firm

Case: Mercury Athletic: Valuing the
Opportunity
Whats it worth? A General
Managers Guide to Valuation
SB Ch 7: Using Financial
Planning Models for
Valuation
Using free cash flows to value
a firm.
Session 18
Topic: Adjusted Present Value (APV)
Approach to Valuation

Case: Using APV: A Better Tool for
Valuing Operations.
Note on Adjusted Present
Value
Introduce adjusted present
value (APV) and its
applications as an alternative
to WACC based valuation.
Session 19
Topic: Merger and Acquisition
Evaluation

Case: *Radio One, Inc.
RWJ Ch 29: Mergers,
Acquisitions, and
Divestitures (Optional)
Discuss issues in valuation of
merger and acquisition
candidates.
Module 6: International Finance and Special Topics
Session 20
Topic: International Corporate
Finance
RWJ Ch 31: International
Corporate Finance (Optional)
Examine various issues and
complexities in evaluating

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Case: Innocents Abroad: Currencies
and International Stock Returns
cross border investing and
financing alternatives.
Session 21
Topic: : International Corporate
Finance

Case/Field Survey: Emerging
Markets Finance, Bekaert and
Harvey, Journal of Empirical Finance
RWJ Ch 31: International
Corporate Finance (Optional)
,
2003
Focus on special issues and
problems relating to financial
decisions in emerging markets.
Session 22
Topic: Behavioral Finance Insights for
Corporate Finance Decisions

Case/Field Survey: Behavioral
Corporate Finance: A Current
Survey, 2012
RWJ Ch 14: Efficient
Capital Markets and
Behavioral Challenges
(Optional)
Review findings of a recent
comprehensive survey of
behavioral finance and its
insights in understanding some
of finance puzzles and
anomalies.
Session 23
Topic: Value Creation and Ethical
Behavior

Case: Ethics in Finance
Financial Measures of
Value Creation
Discuss various measures of
value creation and review the
implications of ethical
behavior on financial
decisions.
Session 24 Final Exam Review
Final Examination (Comprehensive)
1
Note: Reading material designated as Optional is not part of the study pack. You may use any standard Corporate
Finance textbook of your choice to review the session topic.

Textbook(s)/Supplementary Readings
Textbook:

No specific textbook is required for this course. You may use any standard corporate finance textbook to
review the assigned topic. A number of corporate finance textbooks are listed below. The course schedule
refers to relevant chapters from Corporate Finance by Ross, Westerfield, and J affe (RWJ ) for your reference
(indicated as Optional). Material indicated as Optional is not mandatory reading. You can substitute this
material with any textbook of your choice. The study pack does not contain readings designated as Optional.

Ross, Westerfield and J affe, Corporate Finance, 9
th
Edition, McGraw Hill, 2010. (RWJ)
Reference Books:
Benninga, Simon, Principles of Finance with Excel, 2
nd
Edition, Oxford University Press, 2011. (SB)
Brigham, Eugene and Daves, P., Intermediate Financial Management, 8
th
(or a later edition), Thomson,
South Western.
Brealey, Myers, and Allen, Principles of Corporate Finance, 8
th
Edition, McGraw-Hill/Irwin, 2006.

Additional Recommended Readings:
Students are encouraged to read financial publications such as The Wall Street J ournal, Financial Times;
Business Recorder to stay abreast of developments related to this course.