Investment Management

Blok 8: Corporate Finance and Valuation

Coördinator: Prof. dr. R.W.Mills 
Dit blok bestaat uit 9 hoorcolleges (Engels)

Inhoud
Corporate Finance can be thought of as the area of finance dealing with the financial decisions made within corporations and focuses specifically upon the tools and analysis used to make these decisions. The focus in module 8 is Corporate Finance specifically in relation to Valuation and in this regard firm value is considered to be enhanced when the return on capital exceeds the cost of capital.
 
In module 7 some of the tools of Corporate Finance were covered within the context of trying to take a forward looking view of a business from a fundamental perspective in terms of its share price in relation to its strategy. In that module we saw that since the 1980s, the objective of creating ‘shareholder value’ by earning an economic return on capital invested in excess of the cost of that capital has spread from the US and has been adopted increasingly by companies. A number of shareholder value approaches have emerged, which draw upon the financial theory of value, which is that value in economic terms is considered as being the present value of the firm’s expected future net cash flows.

The acceptance of cash flow approaches to valuation has been accompanied by a trend to place relatively less importance on traditional accounting measures such as earnings per share and has seen the evolution and development of a number of new methods, or metrics, for measuring company performance. These new metrics all share the same basic premise that a company only creates value if the economic return on its capital is greater than the cost of that capital. 

This module builds upon module 7 and is very practically oriented. It commences with a review of the toolkit for company valuation and the issues associated with it in terms of valuation challenges, like the selection of the planning period and terminal value estimation. These issues are reviewed initially with reference to an Initial Public Offering (IPO) valuation. Thereafter, major Corporate Finance issues, like the Cost of Capital, Mergers and Acquisitions, Divestments, Leveraging, and Buy-Outs are considered.

Reading

• Financial Statement Analysis, Corporate Finance and Valuation – Principles and Applications Book 2, Mills, R. W., First Edition, Value Focus, 2007. ISBN 978-1-906156-03-9.
• Harry Deangelo, Linda Deangelo and René M. Stulz, Fundamentals, Market Timing, and Seasoned Equity Offerings, Working Paper 13285, http://www.nber.org/papers/w13285, National Bureau Of Economic Research, 1050 Massachusetts Avenue, Cambridge, Ma 02138, July 2007.
• An Introduction to Mezzanine Finance and Private Equity, Journal of Applied Corporate Finance, J R Willis and D A Clark.
• Conor Kehoe and Robert N. Palter, The future of private equity, McKinsey Quarterly, April 2009.

Further reading:

• Business Analysis and Valuation – IFRS Edition, K. G. Palepu, P. M. Healy, V. L. Bernard and E. Peek, Thomson, 2007. ISBN–13:978-1-84480-492-4/ISBN-10:1-84480-492-5.
• Antonio Capaldo, David Cogman, and Hannu Suonio, What’s different about M&A in this Downturn, McKinsey Quarterly, January 2009.
• Richard Dobbs, Bin Jiang, and Timothy M. Koller, Why the crisis hasn’t shaken the cost of capital, McKinsey Quarterly, December 2008.