Business 35200 “Corporation Finance” Professor Theo Vermaelen Phone : to be announced E-mail : theo.vermaelen@gsb.uchicago.edu Office hours : to be announced Review sessions : Mondays 5-6pm, Saturdays 12-1pm Course prerequisites Business 30000, 33001, 35000 and 41000 are required Required reading The textbook for the course is Brealey, Myers and Allen, Principles of Corporate Finance, 8th edition. There is also a course packet that includes extra readings and cases for the class. Lecture notes will be handed out during the class. Course description and requirements The purpose of this course is to teach you the basics of corporate finance. Corporate finance is about making the right investment, financing and restructuring decisions to create shareholder value. This requires learning valuation methods: valuation of projects, valuation of companies and valuation of strategic options. Second, to illustrate how value can be created by (1) capital budgeting decisions (2) capital structure policy (3) raising funds (4) returning funds to shareholders through dividend payments and share repurchase and (5) corporate restructuring such as mergers and acquisitions, and leveraged buyouts. Weekly homework assignments will be distributed. This homework will count for 10% of the grade. Homework can be group work as long as the number of group members does not exceed 5. Although the homework only counts for a small percentage of your grade, it will be a good preparation for the midterm and final exam. Class participation will also count for 10% of the grade. To cover the material, I will mostly use lectures. However, in order to convince students that what we learn can be applied in practice, we also cover three case studies. Grading Midterm : 40% Final : 40% Homework : 10% Class participation : 10% The midterm will cover all the material during the first 4 weeks. The final will cover all material covered during the last 4 weeks.

OUTLINE: CORPORATE FINANCE

Business 35200-81/85

Professor Theo Vermaelen

Summer 2005 Week 1 Session 1 Introduction to Corporate Finance Capital Budgeting and Alternative Investment Criteria Read : BMA 5.1-5.4 Session 2 Identifying Relevant Cash Flows Read : BMA 6.1 Week 2 Session 3 Capital Budgeting : Applications Prepare : Assignment 1 : Investment Analysis and Lockheed Tri Star case,

from Kester, Fruhan, Pier and Ruback, Case Problems in Finance, pp 431-438 (1)

Session 4 Company Valuation Read : BMA 19.2 Week 3 Session 5 Company Valuation Prepare : Assignment 2 : MRC case (2) Session 6 Optimal Capital Structure : the M&M principles Read : BMA 17.1-17.2; 18.1 Prepare : Assignment 3 : Exercises

Week 4 Session 7 The Weighted Average Cost of Capital (WACC) Read : BMA 19.1 Prepare : Assignment 4 : Marriott Corporation case (3) Session 8 WACC vs APV Read : BMA 19.4

T Luehrman: “Using APV : A better tool for valuing operations”, HBR, May-June 1997 pp145-154 (4)

Week 5 Midterm Exam Week 6 Session 9 Optimal Capital Structure : Agency costs of debt Read : BMA 18.3 Miller “Leverage” (5) Miller “The M&M propositions after 30 years” (6) Session 10 Optimal Capital Structure : Agency costs of

equity/asymmetric information Read : BMA 12 Jensen “Agency costs of free cash flow, corporate finance and

takeovers” (7) Prepare : Assignment 5 : Exercises Week 7 Session 11 Going Private and Leveraged Buyouts Read : BMA 33.1 Going private and leveraged buyouts (8)

Session 12 Going Public and Equity Issues Read : BMA 15 C W Smith “Raising capital : theory and evidence” (9) P Asquith & D Mullins “Signalling with dividends, stock

repurchases and equity issues” (10) Prepare : Assignment 6 : Exercises Week 8 Session 13 Share Repurchase and Dividend Policy Read : BMA 16 Ikenberry & Vermaelen “Market under-reaction to open market

share repurchases” (11) Grullon & Ikenberry “What do we know about share

repurchases?” (12) Session 14 Mergers and Acquisitions : motivations and consequences Read : BMA 32 Prepare : Assignment 7 : Exercises Week 9 Session 15 Mergers and Acquisitions : tactical issues Read : “Takeover defenses” (13) Session 16 Review Prepare : Assignment 8 : Cooper Industries case (14) Week 10 Final Exam