Advanced Corporate Finance / Advanced Corporate Finance

The Academic Study Board of Economics, Odense
Teaching activity id: 9345301.
Teaching language: English.ECTS / weighting: 10 ECTS / 0.167 full-time equivalent.
Examination language: English.
Exam activity id: 9345312, 9345302.Approved: 24-02-15.
Period: Autumn 2015.
Grading: External examiner.
Assessment: 7-point scale.
Offered in: Odense.

Subject director:
Alexander Schandlbauer, Department of Business and Economics.

Prerequisites:
Bachelor of Science in Economics, Mathematics and Economics or Business Administration (with finance courses corresponding to a BSc in Economics).

This course requires that the student has prior knowledge of financial markets, financial instruments (e.g., options, futures, forwards) and, in particular, basic corporate finance. The latter includes knowledge about, e.g., the valuation of real assets and capital structure issues - e.g., for uncertain cash flow streams the student must be able to use risk neutral valuation to compute their values in a binomial model and apply this to address debt and equity holder conflicts. Standard concepts from finance such as e.g. the principle of no arbitrage, pay-off diagrams, and discounting must also be mastered. All these competences are acquired in the course "Finansiering, investering og virksomhedsstrategi" (course no. 9161001) based on the textbook:

* David Hillier, Mark Grinblatt and Sheridan Titman: Financial Markets and Corporate Strategy, European Edition, Irwin/McGraw-Hill, latest edition.

The student must have an elementary background in mathematics and probability theory. In particular one should be able to compute expectations, conditional probabilities, variances, and covariances of random variables whether their distribution is discrete (e.g., binomial) or continuous (e.g., normal). Finally, it is highly recommended that the student is familiar with simple optimization methods (e.g., first-order conditions and Lagrange optimization). These are all competences acquired in the courses "Matematik" (course no. 9105701) and "Statistik" (course no. 9116001) which are based on the textbooks:

* Knut Sydsaeter and Peter Hammond, Essential Mathematics for Economic Analysis, Pearson Education, latest edition.
* Malcow-Møller, N. og Allan Würtz "Indblik i Statistik", latest edition.

Purpose:
Advanced Corporate Finance deals on a graduate level with financial issues regarding the various decisions taken in relation to the corporation, e.g. capital bugeting, credit rationing, corporate risk management, agency costs,  and corporate control. Importantly, Advanced Corporate Finance also analyzes incentive and information problems induced by decision making. The main focus of this
course is the theoretical analysis of these issues.

The course aims to give students a thorough understanding of central issues in corporate finance and to see how the problems can be analyzed theoretically. For example,. the analysis of incentive and information problems builds on principal-agent and signaling models and central models for agency conflicts are presented. Examples could be over- and underinvestment problems, IPOs (initial public offerings), and takeovers.

In order to focus on the central insights, the primary part of the course uses a discrete-time framework, but for some issues continuous-time models may be considered as well. In order to study the problems, elements from game theory and contract theory can be introduced.

The graduate course Advanced Corporate Finance also serves as background for other elective graduate courses in Finance where e.g. investment as well as capital structure problems are considered or where empirical questions are discussed in more detail.

To summarize, the course provides the students with knowledge of many core corporate finance topics at a graduate level. Using this knowledge, the students obtain skills to theoretically assess problems in corporate finance which in turn equips the students with competences to analyze and reflects upon complex problems.

Due to assignments and group work, the student also obtains competences in collabaration and communication.

Content - Key areas:
  • Capital structure, for example with a view on
  1. agency problems, e.g. related to investments with option features (strategic and real options)
  2. tax rules and bankruptcy costs
  3. bankruptcy law, seniority and maturity
  • Asymmetric information problems (moral hazard and adverse selection) with applications in corporate finance. Applications could, for example, be IPOs or takeovers (corporate control).  
  • Corporate strategy, liquidity, and risk management

Goals description (SOLO taxonomy):
To fulfill the purposes of the course the student must be able to:

Demonstrate knowledge about the course’s focus areas enabling the student to:
  • Explain and reflect upon capital structure models in discrete-time
  • Describe, identify, and elaborate on principal-agent type models in a corporate finance context
  • Describe and identify theories and models on moral hazard problems or adverse selection problems
  • Identify agency problems regarding the capital structure including problems of over- and underinvestment
  • Explain corporate risk management theories and models
  • Can reflect upon underlying assumptions regarding all topics
  • Describe continuous-time models (when applicable for the main topics)

Demonstrate skills, such that the student is able to:
  • Analyze and discuss capital structure models in discrete-time
  • Discuss and analyze principal-agent type models
  • Analyze and relate theories and models on moral hazard problems or adverse selection problems, and apply such models to, e.g., IPOs and corporate control (takeovers)
  • Analyze and discuss agency problems regarding the capital structure including problems of over- and underinvestment
  • Compare and relate corporate risk management theories and models
  • Criticize and compare underlying assumptions regarding all topics
  • Perform simple analyses with continuous-time models (when applicable for the main topics)

Demonstrate competences, such that the student is able to:
  • Independently apply models and theories related to capital structure issues with a focus on agency problems
  • Identify a need for further development of the models and theories related to capital structure issues with a focus on agency problems
  • Apply principal-agent type models in new, but related, topics
  • Independently apply theories and models on moral hazard problems or adverse selection problems, e.g., IPOs and corporate control (takeovers) and use this to develop models in new, but related, topics
  • Independently apply corporate risk management theories and models and use this to develop models in new, but related, topics
  • Use the above knowledge and skills to participate in team work so that the student obtains competences in collaboration and communication.

Literature:
Examples
  • Selected chapters from Hillier, D., Grinblatt, M., and S. Titman:"Financial Markets and Corporate Strategy", McGraw-Hill, newest edition, or similar material.
  • Selected chapters from J. Tirole:"The Theory of Corporate Finance", Princeton University Press (newest edition).
  • Articles and lecture notes. An example could be: Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5, 147-175.

Time of classes:
Autumn.
Scheduled classes:
4 hours of lectures (2x2) weekly for 11.5 non-consecutive weeks.
The lecturing period can be extended due to intervening project or assignment work.

Form of instruction:
In addition, there is project work in intervening periods of the semester.

The students' workload is expected to be distributed as follows:
Lectures - 46 hours
Preparation, lectures - 143 hours
Compulsory assignment - 80 hours
Oral examination - 1 hour
Total 270 hours.

Time of examination:
Ordinary examination in December and re-exam in February.

Registration for the course is automatically a registration for the examination in the course. Cancellation is not possible. If the student does not participate in the examination, the student will use an examination attempt. If the student does not pass the ordinary examination, the student will automatically be registered for the re-exam in the same examination period. Cancellation of registration for the re-exam is not possible.
The university may grant an exemption from the rules in case of exceptional circumstances.

Evaluation at the re-exam can be changed.

Examination conditions:
Compulsory assignment (9345312) solved in groups of ca. 3-4 students. The instructor can in rare cases grant an exemption and allow single/double person groups.

Assessment: Internal, passed/not passed.

The compulsory assignment consists of ten sub-assignments. At least eight sub-assignments must be answered satisfactorily in order to qualify for the ordinary exam.
A sub-assignment has been answered satisfactorily when at least 60% of its questions have been answered correctly.  

Duration: Approximately weekly (date for submissions will appear on the examination plan).
Location: Home assignment.
Internet Access: Necessary.
Hand Out: Course page in Blackboard.
Hand In: Via SDUassignment in the course page in Blackboard.
Extent: No limitations.
Exam Aids: All exam aids allowed.


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Examination in this course is not allowed if the student has passed Advanced Corporate Finance (9320812/9320822).

Form of examination for the certificate:
Oral examination.

Supplemental information for the form of examination:
Individual oral examination.
20 minutes with 20 minutes preparation.
The examination is based on a randomly drawn topic, but it can also include questions in other topics.
All exam aids are allowed at the preparation.

Comments:
Examination for external guest students: Internal grading with co-examiner.

Programmes:
cand.oecon. Finance and Economics
Autumn Semester, mandatory. Offered in: Odense
cand.merc. Accounting and Finance
Autumn Semester, mandatory. Offered in: Odense