National Research University - Higher School of Economics ... · for Master’s Program 38.04.02 “Management” specialization “Global Business” 3 Stocks and Options 28 8 20

National Research University - Higher School of Economics

Course “Finance”

for Master’s Program 38.04.02 “Management” specialization “Global Business”

1 Course Summary

Level: Master, 1st year

Language of instruction: English

Period: Module 1

Workload: 32 hours

Course Teacher and Contact Details:

Anna E. Novak, [email protected]; [email protected]

“Finance” is a two-month intensive course in financial management. The course builds basic

conceptual and analytical framework focused on the financial analysis. It is specially designed for the

1st year Master Program “Management” students who need to study or to revise the basic concepts in

order to take advanced courses on Finance and Management.

The objective of this course is to introduce the students to the world of finance. This course

will introduce students to frameworks and tools to measure value; both for corporate and personal

assets. It will also help students in decision-making, again at both the corporate and personal levels.

This course is intended to provide a framework for analyzing the major types of financial

decisions made by economic agents. It is devoted to the fundamental principles of valuation and

financial management. Students will learn and apply the concepts of time value of money and risk to

understand the major determinants of value creation. This course consists of both theory and real world

examples to demonstrate how to value any asset.

2 Area of Application and Regulatory References

This Course Program establishes minimum requirements for skills and knowledge of the

student and determines the content and the forms of educational activities and reporting.

The Course Program is designed for lectures, teaching assistants and Master Program Students

[Master’s Program 38.04.02 “Management” specialization “Global Business” ] within the Course

[Finance]

The Course Program has been developed in accordance with:

NRU-HSE Curriculum [Nizhny Novgorod];

Education Program [Master’s Program 38.04.02 “Management” specialization “Global

Business”];

University Academic Plan of the Education Program (approved in year 2017)

3 Course Goals

Goals to achieve:

To teach and review the fundamental methods and skills of finance vital for understanding

valuation of any asset, personal or corporate

To prepare students to make sound personal and professional decisions

To provide students with a basic level of knowledge to enable them better understand the role

of finance in debates over corporate and public policy




To prepare students to take more advanced courses in finance

4 Students' Competencies to be Developed by the Course

On completing the course, students:

should demonstrate the knowledge of the basic theoretical concepts of financial management

and money management principles, the basics of asset management, as well as the composition and

structure of the sources of their funding, have knowledge of the company as a participant of the

financial market, have knowledge of the external financial environment of the company, the structure

of the financial market, the functions of financial institutions.

be able to search for the information needed to carry out specific economic analysis; to make

management decisions; be able to justify the choice and analyze the necessary economic and financial

information and data, able to evaluate the company policy in financial management.

have skills to analyze the main factors affecting the value of the company, the different

approaches to the justification of the strategic financial decisions; critical reflection on empirical

processes in the economy and the financial sector, theoretical and applied methods of analysis; have

the skills to analyze the effectiveness of investment projects studied methods (including applying the

theory of real options); participation in the development of design solutions in the field of professional

activities, preparation of proposals and measures for the implementation of the developed projects and

programs; analysis of the main factors of corporate value, different approaches to the justification of

the strategic and operational financial solutions and asset management.

5 How the Course Fits in with the Curriculum

[NRU-HSE Curriculum:]

The Course is an adaptation course for a Master Program “Global Business”.

There are no special prerequisites for this course because it starts with fundamentals and it will

be highlighted when there is a need for you to do some further work in specific subjects. Anyway,

basic understanding of economics, accounting, statistics and algebra acquired in the course of a

bachelor’s program will be an advantage and clearly help.

The main provisions of the Course should be used for further studies of the following Courses:

This course is required for studies of any finance and management course that follow. It

will enhance students’ understanding and ability to analyze company’s financial policy, and

could potentially become applicable in the course of writing a Master’s thesis.

6 Course Schedule

Detailed course schedule is provided in the table below.

# Topic Course

hours

Contact hours Self-study

Lectures Seminars Workshops

1 Fundamental concepts of

finance 14 4 10

2 Fixed Income Securities 14 4 10




3 Stocks and Options 28 8 20

4 Projects and Their Valuation 14 4 10

5 Capital Structure 14 4 10

6 Cash Distributions 12 4 8

7 Strategic and Financial

Restructuring

12 4 8

Total 114 32 82

7 Types of control and grading criteria

Type of

control

Form of

control

1year Notes

1 2 3 4

Current

(week)

Home

assignment

2,4,6,7,8 Problem sets are assigned for

every major topic, and consist of

take-home exercises involving

working with real financial data,

solving problems, or other

assignments corresponding to

topics covered. Problem sets will

be due every two weeks. The

case will be due at the end of the

7th week, and the final problem

set will be at the end of the

course. The case will require you

to apply the techniques learned in

the course to value an investment

project.

Final Exam * The final exam will be

cumulative and cover all topics

discussed in the course

Grading Criteria

Grade

points

In Words

10

Excellent 9

8

7 Good

6

5 Satisfactory

4

3

Failed/Not passed 2

1

0 Failed/Unfair Behavior (cheating)

Cumulative grade (Gcumulative) is calculated as the weighted average with the following weights:

Gcumulative= 0.5 * Gh/w + 0.3 * Gcase + 0.2 * Gclass ,




where

Gh/w – weighted average grade for 4 home assignments,

Gcase – grade for 1 take-home group case,

Gclass – grade for class participation (includes class activity and in-class quizzes results)

The final grade (Gfinal) is calculated as the weighted average with the following weights:

Gfinal = 0.5 * Gcumulative + 0.5* Gexam

8 The Course Outline

PART 1. FUNDAMENTAL CONCEPTS OF FINANCE.

Financial system: concept, functions, elements. Financial instruments, markets and

institutions: concept, types and role in the functioning of the financial system. The efficiency of the

financial system and economic growth. Current trends in the financial system: globalization,

securitization and financial engineering.

An Overview of Financial Management: concept features. Goals, objectives and objects of

financial management. Investment and financial decisions of the company. The separation of

ownership and management functions. Theory of shareholder value and stakeholder influence.

Financial and real assets. The financial model of the firm. Profit and cash flow. Free cash

flow and shareholder value.

The reading list

Required:

Brigham, Eugene F. and Michael C. Ehrhardt. Financial Management: Theory and Practice. Cengage

Learning, 2011, Ch. 1-3

Recommended:

Tirole, J. The Theory of Corporate Finance. Princeton University Press, 2006, Ch. 1, 2.

Bailey, R. E. The Economics of Financial Markets. Cambridge University Press, 2005, Ch. 1.

Levine, R. Financial Development and Economic Growth: Views and Agenda, Journal of Economic

Literature, Vol. XXXV, 1997, 688-726.

Merton, R. C. A Functional Perspective of Financial Intermediation, Financial Management, 1995, 23-41.

PART 2. FIXED INCOME SECURITIES.

The time value of money. The perfect capital market assumption, the absence of arbitrage and

the capital market equilibrium. Factors that determine the level of interest rates. Spot and forward

interest rates. Term structure of interest rates. Shape of the curve of interest rates, the main empirical

facts. Fundamentals of the theory of interest rates: the expectations hypothesis, market segmentation

hypothesis, the hypothesis of liquidity preference.

Risk-free asset pricing. Discounted cash flows and the present value of assets. Special cases

of determining the present value of cash flows: annuity, perpetuity, increasing rents and a growing

annuity. Using the concept of time value of money in the valuation of debt capital instruments. Pricing

coupon and zero-coupon bonds in the absence of risk. Current yield and yield to maturity. Bonds

traded with a premium and a discount. Value of the bond over time.

http://www.google.ru/search?hl=ru&tbo=p&tbm=bks&q=inauthor:%22Eugene+F.+Brigham%22

http://www.google.ru/search?hl=ru&tbo=p&tbm=bks&q=inauthor:%22Michael+C.+Ehrhardt%22




The reading list

Required:



Recommended: Bailey, R. E. The Economics of Financial Markets. Cambridge University Press, 2005, Ch. 3, 12-13.

PART 3. STOCKS AND OPTIONS.

The concept of uncertainty and risk in the modern theory of finance. Return on investment in

assets. Uncertainty and the arbitrage pricing theory. The measurement of risk. Foundations of modern

portfolio theory. Diversification. Systematic and non-systematic risks.

Uncertainty and capital market equilibrium. Capital asset pricing model. Assumptions of the

model and the equilibrium condition. Beta as a measure of systematic risk of the asset. Line market

securities. Portfolio beta. Empirical studies of CAPM consistency and its criticism. Multifactor asset

pricing models as a generalization of equilibrium analysis.

Arbitrage theory of asset pricing. Fama and French three-factor model FF3F: a review and

empirical study.

Information efficiency of capital markets: the concept, empirical studies and criticism.

Using the concept of risk and return trade-off in the evaluation of the fundamental value of

equity instruments. Gordon model. Features estimate the expected growth rate of dividends. Two-stage

model estimates of the fundamental value of the shares. Price-to-earnings ratio (P/E) in the assessment

of the fundamental value of the shares.

Introduction to financial options and their application in finance. Call and put options. Hedge

portfolio. One- and multi-period binomial option pricing model. The Black-Scholes option pricing

model.

The reading list

Required:


Learning, 2011, Ch. 6-8,24

Recommended:

Bailey, R. E. The Economics of Financial Markets. Cambridge University Press, 2005, Ch. 3, 5-10.

Campbell, John Y., 2000, Asset Pricing at the Millennium, Journal of Finance, 55 (4), 1515-1567.

Cochrane, J. H. New Facts in Finance, Economic Perspectives, 23 (3) 1999, 59-78.

Fama E. F., French K. R. Multifactor Explanations of Asset Pricing Anomalies, The Journal of Finance,

1996, 55-84.

Fama, E. F. Market Efficiency, Long-Term Returns, and Behavioral Finance, Journal of Financial

Economics, 1998, 293-306.

Fama, E. F., French, K. R. ‘CAPM is Wanted Dead or Alive’. Journal of Finance, Vol. 51, Issue 5, 1996,

pp. 1947-1958.

Lo, A. W. Finance: A Selective Survey, Journal of the American Statistical Association, Vol. 95, 2000,

629-635.

Rubinstein, M. Markowitz’s Portfolio Selection: a Fifty Year Retrospective, The Journal of Finance.

Vol.LVII, 3, 2002, pp. 1041-1045.








PART 4. PROJECTS AND THEIR VALUATION.

Investment policy. Applying the basic financial concepts to investment choice. The

assumption of the independence of financial and investment decisions in the investment analysis. Free

cash flow, the company's value and investment decisions of the firm.

Evaluating the effectiveness of investment projects. Accounting and economic indicators in

the evaluation of investment decisions: main concepts, advantages, disadvantages. The net present

value of the investment: NPV. Methods of project analysis: internal rate of return (IRR), profitability

index (PI), payback period (PBP) and the discounted payback period of the project (DPBP).

Disadvantages and limitations of the listed above methods.

Elements of real options theory. Types of real options. An option to increase or decrease in

the project, the option to eliminate the project, the option to delay the project. Simulation of real

options using a decision tree.

The reading list

Required:


Learning, 2011, Ch. 9-11,25

Recommended:

Damodaran, A. Applied Corporate Finance. Wiley. 2000, Ch. 4-6.

Myers S.C., Fisher Black’s contribution to corporate finance, Financial Management, Vol. 25, №4, 1996,

p. 95-103.

PART 5. CAPITAL STRUCTURE.

Business risks of the corporation. Operational and financial risk. Financial and operational

leverage. Review of the company financing sources. Equity, debt and hybrid financing instruments:

concept, types, features of attraction and use. Overview of empirical observations and facts corporate

finance.

Company's capital structure and the characteristics of financial claims. Modigliani-Miller

theorem in the absence of taxes in the economy: the maintenance and proof. Theorem role in the

modern theory of corporate finance. Introduction of imperfections in financial markets: the role of

corporate taxes in the management of its capital structure.

The correlation between financial and investment decisions of the firm. Analysis of the

company’s cost of capital. Methods for valuation the cost of its own and borrowed capital. Cost of

capital and financial leverage. Correction of the company beta, using financial leverage and the

Hamada equation: assumptions and limitations of the analysis.

The method of weighted average cost of capital WACC. Modigliani-Miller theorem in the

form of weighted average cost of capital of the company. Capital structure optimization: WACC

minimizing and maximizing the company’s value.

The reading list

Required:







Learning, 2011, Ch. 15,19,26

Recommended:

Damodaran, A. Applied Corporate Finance – 3rd ed. Wiley. 2000, Ch. 7-9.

Bailey, R. E. The Economics of Financial Markets. Cambridge University Press, 2005, Ch. 12-13.

Tirole, J. The Theory of Corporate Finance. Princeton University Press, 2006, Ch. 2.

Damodaran A. (1999), Financing Innovation and Capital Structure Choices, Journal of Applied Corporate

Finance, Vol.12 (Spring), №1.

Harris, M., and Raviv, A. The Theory of Capital Structure. Journal of Finance, Vol. 46, Issue 1, 1991, pp.

297-355.

PART 6. CASH DISTRIBUTIONS.

Distributions to shareholders: dividends and repurchases. The Modigliani-Miller dividend

irrelevance theorem. The effect of market imperfections (taxes and transaction costs) on dividend

policy. The effect of market frictions on distribution policy. Dividend irrelevance theory. Dividend

preference theory. Empirical evidence on distribution policies.

The reading list

Required:


Learning, 2011, Ch. 14

Recommended:

Damodaran, A. Applied Corporate Finance. Wiley. 2000, Ch. 10-11.

Fama, E. F., and French, K. R. ‘Disappearing Dividends: Changing Firm Characteristics or Lower

Propensity to Pay?’. Journal of Financial Economics, No. 60, 2001, pp. 3-43.

DeAngelo H., DeAngelo L., Shinner D., Corporate Payout Policy, Foundations and Trends in Finance,

Vol. 3, 2008, pp. 95-287.

Frankfurter, G.M., Wood Jr., B.G. Dividend policy theories and their empirical tests, International Review

of Financial Analysis, 11 (2), 2002, pp. 111-138

La Porta R., Lopez-De-Silanes F., Schleifer A., Vishny R., Agency Problem and Dividend Poli-cies

around the World, The Journal of Finance, 2000,Vol. 55, p.1-33.

PART 7. STRATEGIC AND FINANCIAL RESTRUCTURING.

The methods of corporate restructuring: mergers and acquisitions (M&A), leveraged buyouts

(LBOs), divestitures. Incentives: synergy, tax optimization, diversification. Types of mergers;

government control and regulation of M&A. The adjusted present value method (APV) in the

investment analysis. LBOs: the effect on stock prices. Corporate divestitures and the problem of

control. Bankruptcy, reorganization, liquidation and corporate control. Financial analysis of efficiency

in case of restructuring.

The reading list

Required:












Recommended:

Higgins Robert C., Schall Lawrence D. (1975). Corporate Bankruptcy and Conglomerate Merger.

The Journal of Finance, Vol. 30, No. 1 (Mar., 1975), pp. 93-113

Jensen Michael C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.

The American Economic Review, Vol. 76, No. 2,

Rossi, Stefano and Paolo Volpin (2003), Cross-Country Determinants of Mergers and Acquisitions,

LBS Working Paper, Vol. 25.

Dittmar, A., Shivdasani, А. (2003) Divestitures and Divisional Investment Policies. Journal of

Finance, Vol. 58, pp. 2711-2743

9 Educational Technologies

The following methods and forms of study are used in the course:

Seminars (4 hours a week on average) are held in the form of cases and discussion of

theoretical and practical articles, individual assignments and problem sets.

Self-study (Home quizzes, problem sets, reading)

Group case study

Students are expected to use MS Excel or any other software to analyze data, because

homework assignments and partially in-class work will include tasks where this software is needed.

10 Methods and Materials for Current Testing and Attestation

10.1 Current Testing Assignments

Problem set examples [exam-type questions]:

1. [week 1] You are interested in a new vehicle. The price of the car is $20000. After visiting your

manager, doing your research on the best leases available, you have three options.

a) Purchase the car for cash and receive a $1000 cash rebate from Dealer 1.

b) Lease the car from Dealer 2. You should pay the dealer $2000 now and $500 a month for each

of the next 24months. After 24 months you may buy the car for $5,000.

Supposing the market interest rate is 8% choose the best option.

. You have been asked to calculate the debt ratio for a firm that has the following

components to its financing mix –

• The firm has 1 million shares outstanding, trading at $ 50 per share.

• The firm has $ 25 million in straight debt, carrying a market interest rate of 8%.

• The firm has 20,000 10-year convertible bonds outstanding, with a face value of

$1000, a market value of $1100, and a coupon rate of 5% paid twice a year.

Estimate the debt ratio for this firm.

2. [week 4] The company is considering a 2-year investment project, which is currently required

investment of $ 5 million. In each future year can equally face one of two events: the demand for the

company's products can be high, or - otherwise - low. In the first year, the company expects $ 2.3

million return on investment if the demand would be low, and $ 3 million -otherwise. The cost of

capital of the company is estimated at 10%.

Evaluate the project using the NPV criterion and the method of decision tree.




What if the company would have the right to refuse to implement the project (option to liquidation) at

the end of the first year? Assume equipment in this moment could be sold for $ 2.4 million. Construct

a decision tree taking into account this possibility. What is the value of the option to eliminate the

project?

3. [week 5] XYZ Corporation, a textile manufacturer, is evaluating its capital structure. The balance

sheet of the company is as follows (in billions):

Assets Liabilities

Fixed Assets 2000 Debt 1250

Current Assets 500 Equity 1250

In addition, you are provided the following information:

(a) The debt is in the form of long term bonds, with a coupon rate of 7%. The bonds are

currently rated A and are selling at a yield of 10% (the market value of the bonds

is 80% of the face value).

(b) The firm currently has 20 million shares outstanding, and the current market price is

$200 per share. The firm pays a dividend of $10 per share and has a price/earnings

ratio of 10.

(c) The stock currently has a beta of 1,25. The six-month Treasury bill rate is 6%.

(d) The tax rate for this firm is 30%.

Calculate the debt/equity ratio for this firm in book value terms, in market value terms.

Find the firm's after-tax cost of debt and the firm's current cost of capital.

10.2 Questions for Assessment of Quality of the Course Acquisition

1. Financial management: goals, objects and main concepts.

2. Theories of shareholder value and stakeholder influence.

3. Corporate governance and agency costs.

4. The financial model of the firm.

5. The financial environment of the company. Financial instruments, markets and institutions.

6. Current trends in the financial system.

7. The concept of the time value of cash flows.

8. The term structure of interest rates.

9. Investment Analysis of fixed income.

10. The concept of risk and return. No-arbitrage and capital market equilibrium under uncertainty.

11. The foundations of modern portfolio theory. Diversification.

12. Capital asset pricing model and the Sharpe Lintner CAPM.

13. Empirical studies of CAPM consistency and their criticism.

14. Multifactor asset pricing models.

15. Arbitration theory of asset pricing APT. Three-factor model Fama and French FF3F.

16. Informational efficiency of capital markets EMH.

17. Methods for evaluating the effectiveness of real investment.

18. Net present value NPV.

19. Internal rate of return IRR.

20. Fundamentals of the theory of real options.

21. Sources of financing investment activity.

22. Financial and operational leverage.

23. The capital structure of the company and the Modigliani-Miller theorem.

24. The compromise model of the capital structure of the corporation.




25. The cost of capital of the corporation. The weighted average cost of capital WACC.

26. Accounting for financial risk and the Hamada equation.

27. The relationship of financial and investment decisions of the company: the use of WACC.

28. The relationship of financial and investment decisions of the company: the use of APV.

29. Theories of dividend policy.

30. M&A definition, types and motives.

31. Reasons for divestitures.

32. LBOs definition and the possible effect on the stock price.

11 Teaching Methods and Information Provision

11.1 Students' Guidelines

Lectures and seminars. The course is very intensive so you are expected to follow the course

syllabus and read the Required Reading Chapters before the class to be prepared for discussion and

questions.

Home assignment. Every week you’ll get the home assignment with readings, textbook

questions, problem sets, and/or mini-cases assigned. Detailed solutions to some of the assigned

homework will be posted on the class website/send to the group e-mail or discussed in class if needed.

Students are required to complete at least a partial solution to every assigned homework problem

during the week in which the homework is due, and have the homework fully completed no later than

the following week.

Group case. Students will be randomly assigned to a three- or four-member group. Each group

will be required to research a problem of concern for a particular company, and present that problem as

a case study suitable for group discussion. The case study should provide a written summary of the

problem with sufficient detail and all the calculations (10 pages, 12ppt max) to enable another group in

class to properly discuss the problem and decide on an appropriate solution to it.

Final exam. Most of the exam questions will be modeled after problems assigned for

homework or demonstrated during lecture

Communication Channels. E-mail is the best way to contact me. If you have questions or face

difficulties concerning the course, you can attend teachers’ consultations (time and dates can be found

on my personal web-page).

11.2 Main reading


Learning, 2011

11.3 Supplementary Reading

Bailey, R. E. The Economics of Financial Markets. Cambridge University Press, 2005.

Damodaran A. Applied Corporate Finance. Wiley, 2010

Damodaran, A. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset.

Wiley, 2012.

Tirole, J. The Theory of Corporate Finance. Princeton University Press, 2006.






Journals

1. American Economic Review

2. Emerging Markets Review

3. Journal of Applied Corporate Finance

4. Journal of Corporate Finance

5. Journal of Economic Literature

6. Journal of Finance

7. Journal of Financial Economics

8. Electronic Journal of Corporate Finance (in Russian)

11.4 Directories, dictionaries, encyclopedias

http://www.securities.com – Emerging markets information service

http://www.yahoo.finance.com – financial data online

http://people.stern.nyu.edu/adamodar/ - A. Damodaran official web-site

http://www.bloomberg.com – Bloomberg up-to-date market information

http://www.sec.gov/ - US Securities and exchange commission web-site

http://www.investor.reuters.com/ - Analysts’ recearch reports

12 Technical Provision

All technology required for the course, including projectors, will be provided in class.

http://www.securities.com/

http://www.yahoo.finance.com/

http://people.stern.nyu.edu/adamodar/

http://www.bloomberg.com/

http://www.sec.gov/

http://www.investor.reuters.com/

Documents

National Research University - Higher School of Economics ... · for Master’s Program 38.04.02 “Management” specialization “Global Business” 3 Stocks and Options 28 8 20