Course ADVANCED CORPORATE FINANCE

SYLLABUS

I. An overview of Analysis of Financial Statements

II. - Financial Planning and Forecasting
III. - Time Value of Money
IV. - Evaluation of Cash flows
V. - Valuation of Equity
VI. - Capital Budgeting
VII. - Making Capital Investment Decisions
VIII. - Project Analysis and Evaluation
IX. - WACC
X. - Mergers and Acquisitions
XI. - Working Capital Management

Core Reading List:

 Corporate Finance (2014),) by Stephan A. Ross, Randolph W. Westfield, Jaffery Jaffe ,
and Ram Kumar Kakani. McGraw Hill Education (India) Private Limited. 10th edition,
Special Indian Edition. New Delhi, India
 Principles of Corporate Finance (2011). By Richard A. Brealey, Stewart C. Myers, and
Franklin Allen. McGraw - Hill Irwin. 10th edition, Global Edition. NY. USA
Reference Book
 Intermediate Financial Management (9th edition) by Eugene F. Brigham and Philip R.
Daves. Thompson/South-Western. Thompson Higher Education. Mason, OH. USA

Cuttings from daily Dawn and daily Business Recorder..

Lecture notes would be uploaded on the faculty portal based on text book material plus
additional material brought in by the instructor, including the derivations.
Course Objective:
This is compulsory course in business finance for EMBA second year students; pre-requisites are
either Corporate finance 1 o FM. It is expected that students must cover introductory levels of
such topics as: time value of money, valuation of securities, structure of financial markets,
capital investment decision making rules (NPV, IRR), component of weighted average cost of
capital (WACC), basics of capital structure theories, impact of capital structure on financial risk,
and basics of risk and returns with introductory knowledge of CAPM.
 Course ADVANCED CORPORATE FINANCE

This course is aimed at covering some of these topics in more detail with a focus on value
creation as a result of managerial decisions in the investing, financing and working capital areas.
Since value creation requires expected performance estimates therefore financial forecasting and
planning is taken up in the beginning of this course; and various methods of projecting financial
statements are discussed including the skills to prepare projected financial statements under
constant growth assumption and under sustainable growth assumptions. After preparing the
projected financial statements, students can extract free cash flows (FCF) and apply FCF model
of valuation with due consideration to the non operating assets and liabilities. Once valuation of
shares has been learnt, it is easy to value a potential target company in Merger and Acquisition
(M&A) situations; other issues related to M&A activities such as break-even exchange ratio in
an exchange of shares deal; maximum offer price; cash offer versus exchange of share offer; and
consolidated post merger balance sheet using purchase method and pooling of interest method,
and the creation of an intangible asset called goodwill are discussed. Short term financial
management including management of sources and uses of liquidity (management of working
capital) and the impact of conservative versus aggressive working capital policy on valuation are
taken up next. Some issues in financing decisions, specially the quantitative linkages between
the use of debt financing and its impact on valuation, some details of issues related to equity
financing decisions including, Rights Issue, Valuation of Rights, Bonus Shares (stock dividends),
stock splits and reverse splits and impact of these equity related decisions on valuation of shares
are also discussed. Dilemma of growth without value creation and its quantitative linkages with
attaining higher ROE through assuming higher financial leverage are discussed.

Each student will prepare a feasibility report of a proposed new business of large size (minimum
capital cost Rs 1,000 million) with focus on 5 years financial projections; and then a decision to
accept or reject the plan would be made based on projected financial ratio analysis, project
evaluation methods (NPV, IRR) , and corporate valuation techniques used to estimate value of
share at the end of year five. A written report and presentation will be done, it carries 25%
weight.

Student Learning Outcomes:

Students would:

 prepare next 5 year’s projected financial statements using realistic data along with some
assumptions where real life information is not available,
 do ratio analysis to evaluate expected performance in 6 areas of performance including
liquidity, solvency, asset management, profitability, return on capital, and market
measures of the proposed new venture using 5 years projected financial statements,
 apply project analysis methods (NPV, IRR, Payback Period) to decide acceptability of the
proposed new business venture,
 do valuation at the end of the 5th year by estimating P5 , expected share price at then of
year 5, to make a judgment that if sponsors of this project decide to go public and cash-
 Course ADVANCED CORPORATE FINANCE

in some of their investment in this project after managing it for 5 years then at what price
can they expect to sell some of their shareholding to the general public.

Teaching Strategy:
The teaching methodology will include classroom lectures, discussion sessions, numerical
questions and case studies, term project.

Final Assessment Criteria:

Mid Term 20%

Unannounced quizzes and 10%
class participation
Final test 50%
Term project 20%

Lahore School of Economics Plagiarism Policy

Lahore School adheres strictly to HEC plagiarism policies which are
available on the HEC website and Lahore School handbook on
plagiarism policy.

The policy can be found at

http://hec.gov.pk/english/services/faculty/Documents/Plagiarism/Plagiarism%20Policy.pdf
The Lahore School Regulations on Student Code of Behaviour specifies penalties for
plagiarism in reports, research papers and presentations in courses taken and in articles
published while studying at the Lahore School.

Instructor:
Syed Sadir Zaidi
e-mail : sadirzaidi@gcu.edu.pk

Class Rules:
• Students must have their own books and scientific calculators at all times.
• Mobile phones should be switched off before entering class and kept in pockets or bags.
• Students who are late by more than 10 minutes will not be marked present.
• Any student missing class will not be allowed to submit assignments later.
• Quizzes will be announced 5-7 days in advance. There will be no retakes nor will leave be
 Course ADVANCED CORPORATE FINANCE
granted.
 You are required to bring FC-100 or 200 financial calculator in the class
LECTURE SESSIONS
1 Overview of the course, some
guidelines for the term project,
refreshing the basics of valuation and
risk & return , such as business risk,
financial risk, total risk, diversifiable
risk, non diversifiable risk, relevant
risk.
2 How three major areas of decision
making in corporate finance have
impact on valuation of share?
3 Total Capital Invested in a
corporation is measured from both
sides of balance sheet as NWC + FA
= LTL + OE.
4 Analysis of historical data by
common size, trend and ratios. Case
study of liquidity measures and cost
of financing.
5 Financial Planning: How does
growth in OE translates into growth
in share price if 5 corporate policies
are kept unchanged
6 Gordon’s Model is useful under the NUMERICALS
assumptions of constant growth, but
it has limitation that kc must be
greater than g.
7 Equation method of estimating
external funds needed (EFN),
Statement method of estimating EFN
8 the concept of plug, using cash as
DISCUSSION
SESSIONS
Project details and the
revision of the financial
statement
project details and the
revision of the financial
statement
analysis of liquidity and
other ratios and their
impact
refreshing the basics of
valuation and risk & return
, such as business risk,
financial risk, and total
risk, diversifiable.
Numerical
case study to better
understand financial
statement analysis and
cash flow analysis, with a
particular
NUMERICALS
case study numerical and
 Course ADVANCED CORPORATE FINANCE

plug if projected financial statements examples solved by

were made without making a cash students
budget.
9 Case Study about Financial Planning, case study on time value of
highlighting linkages of cash budget, money
balance sheet, income statement
statement of changes in RE using a 3
10 detailed discussion on
monthly period framework for a sales growth and its impact
start-up trading business on projected income
Please also read chapter 10 &11 statement and balance
sheet

11 5-year financial plan and Excel-based Numerical examples

model of what- if game showing
12 how different input assumptions have Case Study about Financial
effect on the projected financial Planning
statements.
13 Valuation of equity: Six valuation numerical
models: 1) Gordon’s Model , also
called DDM with constant growth
assumption; 24) accounting valuation
model
14 3) PE valuation model and its Case study and numerical
bifurcation into tangible PE and
Franchise PE; 4) PB valuation
model.

Midterm test
15

16 Valuation models continue: 5) free Numerical questions

cash flows model; 6) equity cash
flows model. EVA (economics value
added) vs. MVA (market value
added), relationship of MVA with
equity valuation. Understanding from
these valuation models that ROE
must be greater than cost of equity
(Kc) for the value creation
17 ROIC must be greater than after tax Numerical
 Course ADVANCED CORPORATE FINANCE

cost of debt (Ki) for value creation;

ROIC must be greater than WACC
for value creation. Clear analytical
understanding about linkages
between PE ratio, MV to BV ratio
(PB ratio), EPS and ROE. Please
read chapter 10 and 11

18 Mergers and Acquisition: valuation Discussion on different

of target co real life examples
19 cash offer vs. exchange of shares Numerical
offer, exchange ratio
20 breakeven exchange ratio, post Case study
merger consolidated balance sheet
& Income statements,. Please read
chapter 26

21 Financing Decisions: some issues in Case study

equity financing : stock dividends ,
stock splits, reverse split, their effect
on valuation of shares. Rights issue
of shares, valuations of rights, effect
of right issue on stock valuation.
22 Par value, Book value, Market Numerical
value, Organizational value, Break-
up value or liquidation value, and
Fair value (going concern value) of
a share; and the difference between
these values and their use in
managerial decisions.

23 Financing Decisions: How presence Numerical and case study

of financial leverage (use f debt
capital) impacts valuation of
corporations. Derivation of
relationship between ROE , ROIC
and Financial leverage. How Beta,
Kc, Kd, and WACC are influenced
by financial leverage. Financing
decisions effect as captured by
WACC and operating/investing
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decisions’ impact as captured by

ROIC jointly impact EVA, that is
value creation .
24 Two paths to attain higher ROE: 1) Numerical
employing higher Financial
leverage, 2) earning higher ROIC,
and impacts of these 2 paths on
growth planning and on value
creation / value destruction for
shareholders. Which path leads to
the paradox of growth without
value creation: the dilemma of
value destroying growth.
Please read chapters 15 to 17.

25 Management of Liquidity (working Numerical

capital management). Differences
between aggressive versus
conservative WC investment policy;
and aggressive vs. conservative WC
financing policy
26 How WC policy has influence on Numerical
valuation of shares. Effective
interest rate on short term running
finances, and acceptable collateral.
Cash budget: a better tool for doing
liquidity planning. Please read
chapters 21 to 23

27 Project Presentations
28 Project Presentations
29 Project Presentations
30 Final term exam
Course ADVANCED CORPORATE FINANCE