Math Managerial Finance II—AFM372
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Transcript of Math Managerial Finance II—AFM372
Math Managerial Finance II—AFM372
• AKA: Corporate Finance
• Instructor: Alan Huang
• Office Hours: HH386E, TR 3:00-4:30 or by appointment
• Email: [email protected]– Normally emails are answered within 48 hours (72 hours if
received in weekends)– Emails received shortly before midterm and final will only be
answered in additional office hours– Use your TAs, course discussion forum, and office hours wisely.
Physical presence has priority over phone/emails/electronic posts.
• Required Text: – Corporate Finance (4th Canadian edition,
2008) by Ross, Westerfield, Jaffe and Roberts– Course Notes
• Problem Sets
Course Web pagehttp://www.arts.uwaterloo.ca/~aghuang/AFM372 (Also accessible through UWACE)
– Syllabus– Announcements– Lecture notes– Chapter solutions– Problem sets– Quizzes & Exams – Case
• Discussion Forum: UWACE, discussion forum tab
Course Evaluation
Weight
Integrative Case 10%
In-class exercisesQuizzes (2)
5%10%
Midterm exam (1) 30%
Final exam 45%
Important Dates
• September 30: Quiz 1
• October 24: Midterm Exam
• November 13: Quiz 2
• November 20: Case Due
STOCKHOLDERS
MANAGERS:
-Operation decisions
BONDHOLDERS SOCIETY
FINANCIAL MARKETS
Hire & fire managers
-Board
-Annual Meeting
Maximize stockholder wealth
Lend $
Protect bondholder interests
No social costs
Costs can be traced to firm
Reveal information honestly and on time
Markets are efficient & assess effect on value
What is Corporate Finance
The Classical Objective Function
STOCKHOLDERS
MANAGERS:
-Poor Operation decisions
BONDHOLDERS SOCIETY
FINANCIAL MARKETS
Have little control over managers
Managers put their interests above stockholders
Lend $
Bondholders can get ripped off
Significant social costs
Some costs can not be traced to firm
Delay bad news or provide misleading information
Markets make mistakes and can over- or under-react
What can go wrong?
STOCKHOLDERS
MANAGERS BONDHOLDERS SOCIETY
FINANCIAL MARKETS
1. More activist investors
2. Hostile takeovers
Managers of poorly run firms are put on notice
Protect themselves
1. Covenants
2. New type
Corporate good citizen constraints
1. More laws
2. Investor/Customer backlash
Firms are punished for misleading information
Investors and analysts become more skeptical
Advanced topics: Counter actions
Important concepts from AFM272
• Time value of money– Perpetuities, annuities
• Risk adjustments– CAPM:
E(Rj) = Rf + βj [E(Rm) – Rf]
• Capital budgeting– NPV rule
Basic PrinciplesObjective: Maximize the Value of the Firm
• Invest in projects that yield a return greater than the minimum acceptable hurdle rate (i.e. that have positive NPV)– The hurdle rate should reflect the (systematic) risk of the project
and the financing mix used
• Choose a financing mix that minimizes the hurdle rate
• If there are not enough investments that earn the hurdle rate, return the cash to the owners of the firm – The form of returns - dividends and stock buybacks - will depend
upon the stockholders’ characteristics
Another important principle: No-arbitrage
• a.k.a. the “law of one price”• arbitrage involves the simultaneous purchase and sale of
assets in such a way as to generate risk free profit at zero cost (a free lunch)
• in well-functioning capital markets, arbitrage opportunities will be extremely rare and will not last for long
• another way of thinking about this idea is that any two assets with identical future cash flows must sell for the same price today (or else there would be an arbitrage opportunity)
• though simple, this is a surprisingly powerful idea that is widely used in financial theory and practice
What will be covered in AFM372
• Interactions with stock and bond markets: How to raise money?– Chapters 14, 15, 20, 21
• Deciding the right financing mix– Chapters 16—18
• Dividend policy– Chapter 19
• Financial Derivatives & Risk management– Chapters 23—26
• Special topics – Leasing (ch. 20), M&A (ch. 31)