Postgraduate Course: Corporate Finance (ECNM11032)
Course Outline
| School | School of Economics |
College | College of Arts, Humanities and Social Sciences |
| Credit level (Normal year taken) | SCQF Level 11 (Postgraduate) |
Availability | Available to all students |
| SCQF Credits | 10 |
ECTS Credits | 5 |
| Summary | In this course we will investigate theories of how the value of a collection of corporate liabilities (such as shares and bonds) are affected by corporate actions. The type of corporate actions we are concerned with includes: (a) corporate "financing" decisions (i.e. where companies choose capital structure); (b) decisions about dividend payouts and debt policy; (c) the value of the option to default; (c) the impact of mergers and takeovers on the value of the relevant corporations; and (d) corporate "real" investment decisions (i.e. where the company invests in a new plant or machinery or designs a new product). The course is wholly theoretical in nature.
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| Course description |
The financial state of the firm
The content in this class introduces you to various ways of understanding in broad terms the financial state of the firm, including assets and liabilities, balance sheets, income statements and cash flows. We consider the differences between investment decisions and financing decisions and discuss maximisation of shareholder value.
Capital structure I
This class considers the capital structure of the corporation focusing on payout policy. We consider dividends and repurchases of stock. We focus on the controversy surrounding payout policy and the argument that dividend policy is irrelevant. We will discover that the theoretical view of dividend irrelevancy is dependent on the functioning of capital markets.
Capital structure II
This class considers debt policy with and without taxes and the costs of financial distress and agency problems. Modigliani and Miller propositions one and two are illustrated. We discover that in perfectly, competitive and informationally efficient markets, without corporate taxes, there is no impact on the value of the company when it has leverage. However, the introduction of corporate taxes where the interest payments on debt are tax deductible, illustrates a situation where the value of the company does increase. Theories of capital structure, including trade-off theory and the pecking order are discussed, as well as asymmetric information.
Agency, mergers, corporate control and governance
This class considers agency issues between owners and shareholders, applications such as bank funding and capital controls are considered; we also look at motives for mergers and the market for corporation control. The topic of corporate governance is also briefly covered in this class.
Valuation and real options 1
This class develops the concepts of net present value (NPV) and the internal rate of return (IRR) from a capital budgeting perspective. The limitations of net present value are discussed; for example, NPV analysis ignores the possible adjustments and choices that a firm can make before or after an investment project is undertaken. This is particularly important when considering the value of real options which happens when a firm faces a partially irreversible investment decision in an uncertain environment.
Valuation and real options 2
This class builds on the material presented in valuation and real options 1 and gives further analysis of real options including investment options, abandon (disinvestment) options, expansion options, timing options, and more. We use the conceptually useful decision tree methodology to understand the applications of real options and consider the more advanced techniques that are frequently applied to this area.
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Entry Requirements (not applicable to Visiting Students)
| Pre-requisites |
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Co-requisites | |
| Prohibited Combinations | |
Other requirements | Students should be enrolled on MSc Economics, MSc Economics (Econometrics), MSc Economics (Finance) or MSc Mathematical Economics and Econometrics.
Any other students must email sgpe@ed.ac.uk in advance to request permission.
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Information for Visiting Students
| Pre-requisites | Students should be enrolled on MSc Economics, MSc Economics (Econometrics), MSc Economics (Finance) or MSc Mathematical Economics and Econometrics.
Any other students must email sgpe@ed.ac.uk in advance to request permission.
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| High Demand Course? |
Yes |
Course Delivery Information
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| Academic year 2024/25, Available to all students (SV1)
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Quota: None |
| Course Start |
Block 4 (Sem 2) |
Timetable |
Timetable |
| Learning and Teaching activities (Further Info) |
Total Hours:
100
(
Lecture Hours 18,
Summative Assessment Hours 2,
Programme Level Learning and Teaching Hours 2,
Directed Learning and Independent Learning Hours
78 )
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| Assessment (Further Info) |
Written Exam
100 %,
Coursework
0 %,
Practical Exam
0 %
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| Additional Information (Assessment) |
By a two-hour degree exam (100%).
The exam will be in-person, closed-book, and held in the May exam diet. |
| Feedback |
You will be provided with a series of questions (some multiple choice) that will enable you to evaluate your progress against the learning outcomes for the course. The teaching team will provide the preferred answers and guidance for self-assessment. |
| Exam Information |
| Exam Diet |
Paper Name |
Hours & Minutes |
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| Main Exam Diet S2 (April/May) | | 2:00 | |
Learning Outcomes
On completion of this course, the student will be able to:
- To review the main theoretical developments in explaining firm investment and financing decisions.
- Have understanding of the main theories to explain a company's gearing, capital structure, and dividend policies.
- Have understanding of valuations of real options.
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Reading List
You will be provided with additional readings as the course progresses.
Lectures 1-4 We will frequently refer to some chapters in the following text as background and which provides a solid background to these lectures: R.A Brealey, S. C. Myers & F. Allen 14th edition, Principles of Corporate Finance, McGraw Hill. Earlier editions will also serve you equally well. Purchase is not necessary as we will only refer to a fraction of the book.
Lectures 5-6 You will find the following texts useful for consultation for the two sessions called "Valuation and Options":
T. Copeland and V. Antikarov (1994), Real Options: A Practitioner s Guide (New York: Texere, 2001).
A. Dixit A. and Pindyck, R. (1994), Investment under Uncertainty, Princeton University Press.
H. Smit and L. Trigeorgis (2004), Strategic Investment, Real Options and Games, Princeton University Press.
Other reading for lectures 1-4: Other textbooks at this level cover similar ground, such as Berk, J. and DeMarzo, P. (2019, or earlier editions), Corporate Finance. Pearson.
A more advanced text is Tirole, J., (2006), The Theory of Corporate Finance, Princeton
Useful surveys:
Murray Z. Frank, Vidhan K. Goyal (2008), ¿Trade-Off and Pecking Order Theories of Debt¿, in Ch.12 in B. Espen Eckbo, (ed.) Handbook of Empirical Corporate Finance, Elsevier, 2008, Pages 135-202.
Marco Becht, Patrick Bolton and Ailsa Roell (2003), ¿Corporate Governance and Control,¿ Ch. 1 in Handbook of the Economics of Finance, Edited by G.M. Constantinides, M. Harris and R. Stulz, Elsevier.
Journal Articles:
Myers, Stewart C. (2001), ¿Capital Structure¿, The Journal of economic perspectives 15(2), 181 ¿ 102.
Myers, S. C. and N. S. Majluf (1984), ¿Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have,¿ Journal of Financial Economics, 13, 187¿221.
Jensen, M. C. and W. H. Meckling (1976), ¿Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,¿ Journal of Financial Economics, 3, 305¿360.
Sanford J. Grossman and Oliver D. Hart (1980), ¿Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation¿, The Bell Journal of Economics, Vol. 11, No. 1 (Spring, 1980), pp. 42-64.
Shleifer, Andrei and Vishny, Robert W. (1997), ¿A Survey of Corporate Governance,¿ The Journal of Finance, 52(2), 737 ¿ 783. |
Additional Information
| Course URL |
http://www.sgpe.ac.uk/ |
| Graduate Attributes and Skills |
Not entered |
| Keywords | Not entered |
Contacts
| Course organiser | Prof Jonathan Thomas
Tel: (0131 6)50 4515
Email: Jonathan.Thomas@ed.ac.uk |
Course secretary | |
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