MGMT E-2700 Harvard University Extension School Corporate Finance Spring, 2016

Professor: Bruce Watson mgmte2700@dce.harvard.edu Lectures: Wednesdays 7:40 – 9:40 Science Center A Teaching Assistants: Chris Valois valois.mgmte2700@gmail.com Sections and Office Hours TBA

Rob Munger Sections and Office Hours TBA

SYLLABUS This course provides an overview of the field of corporate finance. It will be valuable for finance and non-finance professionals who work with a variety of different business organizations. One goal of the course is to foster the development of skills for making corporate investment and financing decisions. However, the course will also be useful for those engaged in the valuation of companies or their securities, as well as those who simply want a better understanding of how business works. Topics are organized around the standard corporate balance sheet. After a review of the requisite financial accounting and the time value of money, the course launches into a dissection of the left-hand, or “Assets,” side of the balance sheet. Capital budgeting and investment decisions are a critical part of any enterprise, and the relevant approaches and criteria will be explored in detail. Techniques such as sensitivity analysis, Monte Carlo simulation, and the “real options” approach will all be covered. The course then turns to the “right hand,” or financing, side of the balance sheet. Following an overview of the sources of corporate funding, the two main categories of financing—debt and equity—will be considered in turn. Striking the correct balance between these two is a critical issue for a company, and a major area of research in corporate finance. Some of the major concepts involved will be presented, starting with the measurement of the “weighted-average cost of capital.” There will also be a discussion of how this measure can be applied in practice, including some of the pitfalls involved. One of the major results in the field is embodied in the two propositions of the Modigliani-Miller Theorem, which will be covered in some depth. Corporate capital structure, and the advantages and disadvantages of leverage, provides a useful context for the Theorem, and will be discussed in the final lecture.

Course Requirements Exams There will be two exams for the course, a midterm and a final. Both will be taken on-line on the MyFinanceLab program. The midterm will be available on MyFinanceLab starting at 7:40 PM (US Eastern Time) on Wednesday, March 9. Students will have a 24-hour window, from 7:40 PM (US Eastern Time) on March 9 to 7:40 PM (US Eastern Time) on March 10, in which to complete the exam. The exam is one hour long, and, once begun, must be taken in one sitting. It cannot be partially finished, then saved, then completed later. The midterm will cover all the material presented in lecture, and in the corresponding chapters of the book, from the first lecture on January 27 to the lecture on March 2. The final will be available on MyFinanceLab starting at 7:40 PM (US Eastern Time) on Wednesday, May 11. Students will have a 24-hour window, from 7:40 PM (US Eastern Time) on May 11 to 7:40 PM (US Eastern Time) on May 12, in which to complete the exam. The exam is two hours long, and, once begun, must be taken in one sitting. It cannot be partially finished, then saved, then completed later. The final will be cumulative, and cover all the material presented in lecture, and in the corresponding chapters of the book, from the first lecture on January 27 to the last lecture on April 27. However, it will be weighted toward material presented since the midterm. Detailed instructions on both exams will be sent to students well in advance of the exam dates. Please Note:

• It is your responsibility to plan your travel ahead around exam dates. In particular, the date of the final exam is determined by the Registrar and cannot be changed for any reason. Requests to take the final on a different day, including requests for a make-up final, involve a formal appeal process through the Extension School Examination Committee.

• No makeup midterms will be given.

• Please see the section below on “Grading” to understand how your semester grade will be

determined if you must miss the midterm for any reason.

Problem Sets There will be nine problem sets assigned during the term. These will be multiple choice assignments completed on MyFinanceLab. Problem set availability and due dates are given in the calendar below. Further instructions about MyFinanceLab will be given before the first problem set is assigned. The due date on problem sets cannot be extended for any reason. However, the lowest two of the problem set scores for the semester will be dropped from the calculation of each student’s semester grade. So, if you cannot do one of the problem sets some week, that will just be one of the scores that gets dropped. Grading Your semester grade will be the higher of: 30% problem set scores 30% problem sets 30% midterm exam or 70% final exam 40% final exam So, if you do poorly on the midterm, or are unable to take it for any reason, your final exam will automatically be reweighted to be 70% of your semester grade, with the problem sets constituting the remaining 30%. We will make these calculations automatically for each student—you don’t have to “opt in” or “opt out” of one or the other weighting. We will make certain you receive the highest grade to which you are entitled. Grading Mechanics: Assigning Letter Grades Based on a Curve Semester grades are determined by a curve. The nature of a curve is that your grade is based on your performance relative to all other students in the class. It does not involve an “absolute standard,” e.g., 90 – 100 = A, 80 – 90 = B, etc., which you may be used to from some other courses. I believe that a curve is ultimately the fairest way to determine grades, since it does not set some arbitrary absolute standard, but judges students on their performance relative to their peers. With a curve, your grade is based on your percentile rank in the class, i.e., the percentage of students in the class who scored below you. If you are in the 60th percentile, for example, that means that 60% of students had scores equal to or below yours, while 40% of students had scores above yours.

How We Calculate Total Semester Points To determine your letter grade for the semester the curve is applied to your total semester points. Your total semester points will be the higher of: 30% problem set scores 30% problem sets 30% midterm exam or 70% final exam 40% final exam So, if you do poorly on the midterm, or are unable to take it for any reason, your final exam will automatically be reweighted to be 70% of your semester grade, with the problem sets constituting the remaining 30%. We will make these calculations automatically for each student—you don’t have to “opt into” or “opt out of” one or the other weighting. We will make certain you receive the highest grade to which you are entitled. Your problem set average (dropping the two lowest) will be out of 100 pts. possible; your midterm will be out of 100 pts. possible; and your final will be out of 133.33 points possible. Alternatively, we will calculate your total semester points based on 100 pts. possible on the problem set average, and 233.33 pts. possible on the final. These two methods yield the two alternative weightings mentioned in the first paragraph of this section. For each student, we will use whichever weighting results in a higher semester point total for that student. For example, suppose you average 83/100 on your highest problem sets (dropping your lowest two) and 93/100 on your midterm. Now, let’s say there are 240 pts. possible on the final, and your score is 200/240 pts. Note that 200/240 = .833 (Meaning, you got 83.3% of the possible points on the exam). We would then multiply .833 by 133.33, and by 233.33, to calculate your total points using the two possible weightings on the final. This would give you .833 × 133.33 = 111.11 pts. weighting the final at 30%, and .833 × 233.33 = 194.44 pts weighting the final at 70%. So, for the semester, your total points would be 83 + 93 + 111.11 = 287.11 pts using the 30/30/40 weighting. Using the 30/70 weighting, your total points would be 83 + 194.44 = 277.44. So, we would use the 30/30/40 method, since it gives you higher total points.

The Curve Used in Assigning Your Letter Grade for the Semester To determine your semester grade, we will employ the (very generous) curve given below: Letter Grade Percentile Rank Range of Letter Grade A 83rd Percentile – 100th Percentile A- 63rd Percentile – 83rd Percentile B+ 44th Percentile – 63rd Percentile B 34th Percentile – 44th Percentile B- 24th Percentile – 34th Percentile C+ 19th Percentile – 24th Percentile C 14th Percentile – 19th Percentile C- 9th Percentile – 14th Percentile D 5th Percentile – 9th Percentile E/F 0th Percentile – 5th Percentile To return to our example above: Recall that your hypothetical semester point total is 287.11/333.33, and suppose that 43% of students had semester point totals higher than yours (i.e. above 287.11), and therefore 57% had semester point totals less than or equal to yours (i.e. at or below 287.11). This means that you are in the 57th percentile overall. Your semester grade, then, would be a B+. Readings Most of the reading assignments are drawn from the the textbook: Fundamentals of Corporate Finance, 3rd edition, by Jonathan Berk, Peter DeMarzo and Jarrad Harford. The majority of the assigned reading in the text reinforces material you'll learn in class If you have purchased a used copy of an earlier edition of Berk, DeMarzo and Harford, you should still find it useful. However, the page numbers given below refer to the latest, 3rd edition. If possible, I urge you to obtain the 3rd edition. Other relevant reading will also be placed on the “Readings” page of the course web site when relevant.

Student Profiles Every term, the course enrolls people from an amazing variety of backgrounds and walks of life. And, the reasons for taking the class are almost as diverse as students’ backgrounds. In order to share a little of their life stories with their classmates, students are encouraged to submit a few lines about themselves to the course email address: mgmte2700@dce.harvard.edu. These will be formatted and posted on a “Student Profiles” page on the course web site. Please note that this is completely voluntary, and also that the only people who will be able to view what you submit will be your classmates and the teaching staff—nobody else. You do not have to identify yourself with anything besides your first name if you don’t want to. Just submit a few lines about your job, background, interests, and/or why you have decided to study corporate finance. Even if you decide not to submit a profile, you will enjoy reading about some of your fellow students.

COURSE CALENDAR Wed., Jan. 27 Introduction and Overview Registering for MyFinanceLab Forms of Business Organization Introduction to Financial Accounting Berk, DeMarzo and Harford Chap. 1 Wed., Feb. 3 Financial Accounting (cont.) Financial Statements Key Financial Metrics and Ratios Berk, DeMarzo and Harford Chap. 2 Problem Set 1 Available on MyFinanceLab Wed., Feb. 10 The Left-Hand Side of the Balance Sheet Review of Present Discounted Value (PDV) and Net Present Value (NPV) The Capital Budgeting Process and Decision Criteria Using NPV to Make Investment Decisions Berk, DeMarzo and Harford Chaps. 3, 4 and 8 Problem Set 1 Due Problem Set 2 Available on MyFinanceLab Wed., Feb. 17 Project Analysis Techniques Sensitivity Analysis Monte Carlo Simulation Real Option Analysis Berk, DeMarzo and Harford Chap. 9 Problem Set 2 Due Problem Set 3 Available on MyFinanceLab

Wed., Feb. 24 The Right-Hand Side of the Balance Sheet Overview of Corporate Financing

The Cost of Capital Introduction to the Weighted-Average Cost of Capital (WACC)

Berk, DeMarzo and Harford Chap. 13 Problem Set 4 Available on MyFinanceLab Wed., March 2 The Issuance of Corporate Securities Venture Capital Issuance of Corporate Securities Berk, DeMarzo and Harford Chap. 14 Mon., March 7 Problem Set 4 Due

Wed., March 9 Midterm Exam Available on MyFinanceLab to (covering material from Jan. 27 to March 4, inclusive)

Thurs., March 10

Wed., March 23 Debt Financing Bank Loans Types of Debt Securities

Berk, DeMarzo and Harford Chap. 15 Problem Set 5 Available on MyFinanceLab

Wed., March 30 Capital Structure Perfect Capital Markets The Modigliani-Miller Propositions The Effect of Debt and Taxes

Berk, DeMarzo and Harford Sections 16.1 – 16.3 Problem Set 5 Due Problem Set 6 Available on MyFinanceLab

Wed., April 6 Capital Structure (cont.) Financial Distress Optimal Capital Structure Berk, DeMarzo and Harford Sections 16.5 – 16.7 Wed., April 13 Financial Modeling and Pro Forma Analysis Growth and Firm Value Valuing an Expansion Berk, DeMarzo and Harford Chap. 19 Problem Set 6 Due Problem Set 7 Available on MyFinanceLab Wed., April 20 Short-Term Financial Planning The Matching Principle Short-Term Planning with Bank Loans Commercial Paper Berk, DeMarzo and Harford Chap. 20 Problem Set 7 Due Problem Set 8 Available on MyFinanceLab Wed., April 27 International Corporate Finance The Role of Exchange Rates Internationally Integrated Capital Markets Internationally Segmented Capital Markets Berk, DeMarzo and Harford Chap. 34 Problem Set 8 Due Problem Set 9 Available on MyFinanceLab Wed., May 4 Review Session for the Final Exam Problem Set 9 Due Wed., May 11 Final Exam Available on MyFinanceLab to (cumulative—including all topics covered in the course; but weighted toward Thurs., May 12 material covered since the midterm)