CORPORATE FINANCE Finance Theory II (15.402) – Spring 2003 – Dirk Jenter Finance Theory II (15.402) 2 i l 39% i 36% l 26% i l iCorporate Finance: Assets and Liabilities ab es liab. li l li ili liab. liab. liti Finance Theory II (15.402) – Spring 2003 – Dirk Jenter Assets Liabilities Current assets 11,358 35% Current 10,761 34% Net f xed aseets 12,626 39% Long-term ab. 9,294 29% Other long-term assets 8,129 25% Equity 12,058 38% Tota assets 32,113 Tota ties 32,113 Balance Sheet of P&G, as of 6/30/1999, in $Millions Balance Sheet of Manufacturing Sector as of 1998Q4, in $Billions Assets Liabilities Current assets 1,700 Current 1,246 28% Net f xed aseets 1,572 Long-term 1,515 34% Other ong-term assets 1,132 Equ ty 1,643 37% Tota assets 4,404 Total liab 4,404 13 • • • → Debt? → Equity? → • • Finance Theory II (15.402) – Spring 2003 – Dirk Jenter The Liability Side (RHS): Financing “Financing”: First, focus on liability side of Balance Sheet taking the firm’s assets as a given: How to finance the firm’s assets? Can we create value on the RHS? How can we forecast how much funding we need? Should we finance those funding needs with: Other sources? If we have enough internally generated funds, what do we do with the excess? When should we raise funds from the capital markets? 4 The Asset Side (LHS): Valuation • . the LHS. • → → • → → • → → “Valuation”: Finance Theory II (15.402) – Spring 2003 – Dirk Jenter Then focus on how to maximize the value of the assets, taking into account their financing How to create value on How do we evaluate a corporate investment project, e.g., new plant and equipment market entry How should we compare: payoffs today vs. down the road? projects with different risks? How do we value an established company? a start-up? a merger? 25 Our Approach • i → Fi → • number of real → → Limitations • • • Acquire a set of general tools General managers business cases. Usefulness aspects in detail. Finance Theory II (15.402) – Spring 2003 – Dirk Jenter What we will do that are crucial to sound business decis ons by: nancial managers Apply and confront them to a What we won’t do Pretend to be experts in any industry, financial or other. Discuss many institutional Discuss in detail stuff you could learn just as well reading a book or an article (see “readings”). 6 • • → , 7th → Higgins, th → • Lectures twice per week Principles of Corporate Finance Professor: Dirk Jenter Finance Theory II (15.402) – Spring 2003 – Dirk Jenter Corporate Finance – Section A Texts: Brealey & Myers, edition, Analysis for Financial Management, 7 edition, Case and Readings Packet 37 • • → , 7th → Higgins, th → • Lectures twice per week Principles of Corporate Finance Professor: Katharina Lewellen Finance Theory II (15.402) – Spring 2003 – Dirk Jenter Corporate Finance – Section B Texts: Brealey & Myers, edition, Analysis for Financial Management, 7 edition, Case and Readings Packet 8 • → Come prepared to discuss cases → ) → → • ) → → → → → l • • ) Midterm (30%) Final (30% its) Finance Theory II (15.402) – Spring 2003 – Dirk Jenter Course Requirements Class Participation (10%) Quality more important than quantity (! Willingness to participate as important as participation Introduce background readings into the discussion Case Memoranda (30% A professional memo to the decision maker Teams of three or four people Hand in all write-ups, except two of your choice Careful: Some cases are required! Two pages (p us exhib 49 Case Memoranda • → → → → → → → → ( → → Clearly written and professional Finance Theory II (15.402) – Spring 2003 – Dirk Jenter Memoranda should be Handed in for all of the cases except two of your choice Two pages (not counting charts and tables), Double spaced – Font of 11 or 12 Teams of three or four students Hand in one copy per team You may not work with students not on your team One & two person teams are discouraged Wilson I & II) count as one case Wilson, MCI, Dixon, and Ameritrade are required Make sure you turn in 10 memoranda! 10 The Big Picture: • • l • l • • • l • i • • • • i • • • i • • • • • Topics • i i • • • • ) • i i • • • 30% • 30% • 30% • i i 10% Feb 25 Financing Review Case: Intel Corp., 1992 Apr 1 Apr 8 Apr 10 12 il ls lui ies Cases ( Finance Theory II (15.402) – Spring 2003 – Dirk Jenter Part I: FINANCING Feb 6/11 Case: W son Lumber Feb 13 Lecture: Capita Structure 1 Feb 20 Lecture: Capita Structure 2 Case: UST Inc. Feb 27 Case: Massey Ferguson Mar 4 Lecture: Capita Structure 3 Mar 6 Case: MCI Commun cations Mar 11Mar 13Part II: VALUATION Lecture: Free Cash Flows Apr 3 Case: Amer trade Lecture: WACC and APV Case: Dixon Apr 15 Case: Diamond Chem ca Apr 17 Lecture: Real Options Apr 24 Case: MW Petroleum Apr 29 Lecture: Va ng a Company May 1 Case: Cooper Industr May 6 Case: Southland May 8 Hedg ng & R sk Management May 13 Corporate Governance May 15 Course Wrap-up Lectures (12) Text: Brealey and Myers + Higgins Notes on the web before class (+ in class) 10 Case wr te ups: 1-2 page wr te-ups Notes on the web after class (+ in class) Class participation is critical Grades, etc. Case write-ups Midterm (in class) Final (TBA) Class part cipat on 511 The Big Picture: Part I Financing • • • • • • • • • • Feb 6 Feb 11 Feb 13 Feb 20 Feb 25 Feb 27 Mar 4 Mar 6 Case: MCI Communications Mar 11 Financing Review Mar 13 Case: Intel Corporation Finance Theory II (15.402) – Spring 2003 – Dirk Jenter A. Identifying Funding Needs Case: Wilson Lumber 1 Case: Wilson Lumber 2 B. Optimal Capital Structure: The Basics Lecture: Capital Structure 1 Lecture: Capital Structure 2 Case: UST Inc. Case: Massey Ferguson C. Optimal Capital Structure: Information and Agency Lecture: Capital Structure 3 The Case of the Unidentified Industries Finance Theory II (15.402) – Spring 2003 – Dirk Jenter 6Advertising Agency Airline Commercial Bank Computer Software Developer Department Store Chain Electric & Gas Utility Health Maintenance Org. Meat Packer Pharmaceutical Manufacturer Retail Drug Chain Retail Grocery Chain A B C D E F G H I J K Line Balance Sheet Percentages #1 Cash and marketable securities 5 12 2 1