Finance for Executives



Finance for Executives 12 WeeksExecutive MBA programThis document outlines the 12-session EMBA Finance course.Goals of the programThe Finance core course, which is designed to provide a sound financial foundation for students, covers the concepts and methods in Corporate Finance and Capital Markets. The Corporate Finance theme focuses on the best strategies for firms to finance their current operations as well as their growth opportunities. The Capital Markets theme focuses on how capital markets work, the different instruments available and how firms can access them. We will analyze the principles behind debt securities, their risks and their valuation. We will also focus on project valuation, and examine strategies to finance operations and growth. We will devote special attention to the task of firm valuation, capital markets and mergers and acquisitions (M&As). Most firms use financial derivatives to manage and allocate risks in an efficient manner. Another objective of the course is to examine risk management strategies for the firm and derivatives usage.Program overviewIn order to make informed, intelligent decisions about their businesses, executives need to understand the information contained in a company’s financial statements. Therefore, the program starts with a review of the information contained in a company’s financial statements. It then moves on to how working capital requirements relate to the firm’s liquidity and sustainability in terms of growth and competitiveness. Capital markets, project valuation and financial policies are also covered in depth. Overall, the course aims to demonstrate how financial decisions can create value.The EMBA Finance course has been designed to cover the following sub-topics: SessionSession topicChapter1Time Value of Money and Interest Rates4, 62Bonds and Debt Issues63Project Valuation: Capital Budgeting Tools and Application44Investment Projects Valuation45Value Creation and Cost of Capital2, 36Capital Structure & Financing Decisions57Company Valuation98Raising Equity Capital: IPOs and SEOs79M&As1010M&As1011Derivatives: Futures, Forwards, Swaps11, 1212Derivatives: Options13A detailed outline of each session follows and includes readings, topics covered, key learning points, excel exercises, additional readings and recommended websites and other information. Finally, the outline of each session suggests real data to show in class (available from the updated PowerPoint slide deck with current data).Session 1 - Time Value of Money and Interest RatesTopics coveredIntroduction to time value of money.Principles of discounting applied to simple instruments, like bonds, loans.Case studyUK Gilts case study (IMD-7-1577) – includes Teaching note, and instructor’s excelReadingsFinance for Executives: A Practical Guide for Managers: Chapters 4 & 6 (6.1-6.3)Real data to show in class Interest rates in different countries – FT website Bond markets, interest rates, yield curve and CDS spreadsExcel in classBank loan, payment needed, amortization and interestYields on bonds - example in Chapter 6 (Finance for Executives)Leasing paymentsRoyalty interest - example in Chapter 4 (Finance for Executives)Key learning points from this sessionTime value of money: timing and discount ratesCommon uses of present value tools, for instance in bank loans, leasing, etc.WebsitesFinancial Times – Bonds & RatesBondsOnlineEuropean Central Bank – Long Term Interest Rate Statistic for EU Members StatesBoard of Governors of the Federal Reserve System – Federal Open Market CommitteePossible questions covered in the session: What is the value of cash flows received in different moments in time? I am considering a mortgage for a house. What is the monthly payment? What would the leasing payment be for a certain asset?Session 2 - Bonds and Debt IssuesTopics coveredLoans and bondsRatingsYield curveBond valuationRisks of investing in bondsMaturity structure of debtLiquidity and spreadsCDSCoCo's and other hybrid debt instrumentsCase study The October 2009 Petrobras Bond Issue (IMD-1-0285), includes Teaching note, powerpoint, and instructor’s excelReadingsFinance for Executives - Chapter 6Real data to show in class Interest rates in different countriesYield curveBond SpreadsCDS SpreadsExcel in classBond valuationChanges in prices as the yield changes, for bonds of different maturitiesComputing Yield-to-Maturity and Yield curvesKey learning points from this sessionBond prices are inversely related to the yield to maturityCorporate bonds risks, rating, pricingLiquidity and its impact on bondsWebsitesBondOnlineEuropean Central Bank – Long Term Interest Rate Satistic for EU Members StatesBoard of Governors of the Federal Reserve System – Federal Open Market CommitteeAdditional readings / News Related to the SessionAAA Rating Is a Rarity in Business - NYTimesGlobal Alcoholic Beverage Rating Methodology (Moody’s Global Corporate Finance)Economics Focus – The Long and the Short of it (The Economist)Possible questions covered in the session: Should we issue fixed-rate debt or floating-rate debt? My company has traditionally used only bank loans. Are corporate bonds an alternative?How do rating agencies look at different companies? What is the risk of investing in bonds? What are credit default swaps (CDS)? Should we have long-term or short-term debt?Session 3 - Project Valuation: Capital Budgeting Tools and ApplicationTopics coveredIdentify relevant cash flowsNPV and its applicationDifferent project evaluation criteria: IRR, payback, return (profitability) indexCase studyAtlantida (IMD-1-0289) – includes Teaching note, instructor’s excel and powerpoint slides.ReadingsFinance for Executives: A Practical Guide for Managers: Chapter 4Excel in classLHI company - example from Chapter 4 (Finance for Executives)Key learning points from this sessionDetermine the relevant cash flows that result from a certain proposed investmentNPV as a measure of value creationThe NPV analysis should always focus on differential cash flowsCompute and interpret payback, IRR and profitability index for different projectsPossible questions covered in the session: Which of two apparently profitable investment projects should my company choose? How can I ensure that my company allocates capital to projects that add value? What criteria should we use to decide between different capital expenditures? How do I decide between different cost reduction projects? How do I evaluate brands? What should we pay attention to when we evaluate projects outside the company’s core business?Session 4 - Investment Projects ValuationTopics coveredEstimation of cash flows (working capital, operating cash flows, CAPEX, taxes)NPV and its applicationSensitivity AnalysisCommercial implications of NPV, and technological choices (350 vs 357 days in Bacia de Campos case study)Case study Bacia de Campos (IMD-1-0288) – includes Teaching note, instructor’s excel and powerpoint slides.ReadingsFinance for Executives: A Practical Guide for Managers: Chapter 4Excel in classRio Tinto sensitivity analysis - chapter 4 (Finance for Executives)Bacia de Campos excel model and sensitivityKey learning points from this sessionUse the DCF/NPV tools to identify value creation opportunitiesComputation of project's cash flows based on business plan estimatesPerform sensitivity analysis, and use it to identify the most sensitive areas of a proposed investment project: then try to mitigate or manage those risksUse the NPV tools for day-to-day decisions (for instance, commercial negotiations with suppliers and customers)WebsitesPalisade – Monte Carlo SimulationSession 5 - Value Creation and Cost of CapitalTopics coveredReturn on Invested Capital, and its decomposition into key drivers: profitability and efficiency.Cost of capital and its components; Economic Value Added; Working capital.Case studyMicrosoft acquires Skype (IMD 1-0337) – includes Teaching noteThe Battle for Value: Federal Express Corporation vs. United Parcel Service of America, inc. (abridged) (UV0004)ReadingsFinance for Executives: A Practical Guide for Managers: Chapters 2 & 3Real data to show in class WACC, ratings, betas, across different sectors and companiesMarket risk premium estimates – Chapter 2 (Finance for Executives)Excel in classUse Chapter 3 Return on Invested Capital decomposition on a chosen company. Simulate impact of different working capital policies.Key learning points from this sessionThe Value-Growth MatrixWACC and its componentsRisk and return as perceived by suppliers of capitalReturn on invested capital and its decomposition into managerial driversLevers that affect the ROICWhat value creation is and how it should link to the company strategyValue creation is about delivering returns above cost of capital. It requires an optimal linkage of investment, financing and payout policiesWebsitesfinance., for betas of different , for ratings of different companies (needs registration), about the CAPM and risk-return – Nobel prize of 1990Additional readings / News Related to the SessionBalancing ROIC and growth to build value (McKinsey on Finance, 2006, Bing Cao, Bin Jiang and Timothy Koller)Global Stock Markets in the Twentieth Century (The Journal of Finance, June 1999, Philippe Jorion and William N. Goetzmann)Possible questions covered in the session: What is the cost of capital, and how does it change over time? How does the cost of equity vary across different companies? How do I compute my company’s weighted average cost of capital?What is the relation between risk and cost of capital?Session 6 - Capital Structure & Financing StrategiesTopics coveredLeverage and its implications.Leverage and RiskRisk, WACC and capital structure choices.Case studyFinancial Strategy at BAA (IMD-1-0293) – includes Teaching noteDiageo plc (HBS 9-201-033)ReadingsFinance for Executives: A Practical Guide for Managers: Chapter 5Real data to show in class Debt ratios for companies in different continents (Eurostoxx 50, Dow Jones, Rest of the World). Financial distress costs across sectors – Fig. 5.4 (Finance for Executives)Rating matrix used by Moody’s for a certain industry (for instance Global Alcohol)Excel in classDebt increases Risk: Example Ch 5 - Debt and risk page 88Ch 5 - Tax savings from debtImpact of leverage on WACC of different companies. How to estimate levered/unlevered betas –customizable excel spreadsheet from Chapter 9 (Finance for Executives)Key learning points from this sessionCompanies differ in their optimal capital structure, and an understanding of the key drivers behind financing decisionsStatic trade-off (taxes and distress) theory is not enoughIncluding financial flexibility is key to understand capital structure decisionsWebsitesAdditional readings / News Related to the SessionAAA Rating Is a Rarity in Business (The New York Times, 2 August 2011, Eric Dash)Global Alcoholic Beverage Rating Methodology (Moody’s Global Corporate Finance, Sept. 2009) How Much Cash Does your Company Need (HBR, 2003, Richard Passov)The Theory and Practice of Corporate Finance: Evidence from the Field (Journal of Financial Economics, 2001, John R. Graham, Campbell R. Harvey)Possible questions covered in the session: Why do some companies have sustainably very high amounts of debt?How much debt should we have in our company?How does the optimal financing mix vary across industries? What is the impact of debt on operations (customers, suppliers, employees, etc.)?Session 7 - Company ValuationTopics coveredMultiples and DCF valuationsSensitivity analysisForecasting cash flowsTerminal value: long term growth and WACCCase studyTelefónica’s Bid for the Mobile Market in Brazil (IMD-1-0359) – includes Teaching note, instructor’s excel and powerpoint slides.ReadingsFinance for Executives: A Practical Guide for Managers: Chapter 9Real data to show in class PER ratios for countries and industriesExcel in classChapter 9 template and example of valuation by DCF (Finance for Executives)Key learning points from this sessionCompany valuation techniques and value creationRole of terminal value and growth in perpetuityMultiples and relation with fundamentals (risk, growth, return)Triangulation between multiples and terminal growth ratePossible questions covered in the session: Our company is considering spinning off a division that is no longer core to our business. What is its fair value? How many years should we use when valuing companies? What are the different methods used to value companies? How do different multiples work?Session 8 - Raising Equity Capital: IPOs and SEOsTopics coveredWhy go public? The initial public offering (IPO) processFollow on offers - SEOsRights and their pricingVoting and non-voting sharesCross-listingsCase studyEquity Capital Raising: The SEO of Petrobras 2010 (IMD-7-1581) – includes Teaching note, instructor’s excel and powerpoint slides.Preparing for the Google IPO: A revolution in the making (IME-1-0216) – includes Teaching notes. ReadingsFinance for Executives: A Practical Guide for Managers: Chapter 7Real data to show in class UnderpricingFees paid to investment banksVolume of equity raising activitiesTop IPOs/SEOs of last yearExcel in classRights Issue example from Ch 7 - TER UniCredit RightsKey learning points from this sessionIPO and SEO processUnderwriting fees, greenshoe, commitments by the investment bankerControl and ownership dilutionDifference between primary and secondary issuesPricing principles behind IPOs and SEOs (including rights issues)WebsitesPetrobras investor relation’s pageThe Wall Street Journal – Investment Banking ScorecardAdditional readings / News Related to the SessionPetrobras - Two heads are worse than one (The Economist, 5 April 2014)Possible questions covered in the session: Should my company go public? How do equity-raising processes work? What are the stages in an initial public offering? What are the costs and fees of public equity issues? What happens when a company issues rights? Why do companies have stock splits? Is there value in being listed in different exchanges around the world?Session 9-10 - M&AsTopics coveredThe market for M&AsProcess of M&A dealsValue creation and synergiesValuation: stand alone, and with synergiesTerminal value, growth rate, WACCMultiples and premiumsCase studyBig Beer: InBev vs. Anheuser-Busch (IMD-1-0291) – includes Teaching note and excelTelefónica’s Bid for the Mobile Market in Brazil (IMD-1-0359) – includes Teaching note, instructor’s excel and powerpoint slidesReadingsFinance for Executives: A Practical Guide for Managers: Chapter 10Real data to show in class Merger waves – Figure 10.1 (Finance for Executives)Investment banks league tables and fees Volume of deals by regionTop deals of last year Excel in classChapter 10 template and example – with and without synergiesKey learning points from this sessionMergers and acquisitions (M&As), their objectives, and the techniques used in the valuation of a target companyThe market for M&AsGood and bad reasons for M&AsValuation in M&As (DCF, WACC, multiples, premiums, comparable deals, etc.)Synergies and their role in successful M&AsWebsitesFinancial Times – League TablesWSJ Investment banking scorecardAdditional readings / News Related to the SessionInBev Completes Acquisition of Anheuser-Busch (Press Release ABInBev)Mergermarket H1 2013 M&A Report: July 2013Possible questions covered in the session: When do mergers create value?What are the appropriate methodologies to value potential acquisition candidates? How can we ensure that our acquisitions create value? How do I choose between different payment methods? What happens after the M&A deal is concluded?Session 11 - Derivatives: Futures, Forwards, SwapsTopics coveredWhy to hedge?Futures and forward principlesDifferences between futures and forwardsSwaps and their usePricing of futures and forwardsCase studyThe Volkswagen Short Squeeze (IMD-1-0318) - with teaching note, slides, and excel modelThe Walt Disney Company’s Yen Financing (HBS 9-287-058)ReadingsFinance for Executives: A Practical Guide for Managers: Chapters 11 & 12Real data to show in class BIS data on different derivative marketsOrange juice futures trading dataExcel in classPricing of derivatives - chapter 12Market-to-market and liquidity needs (margin calls) - chapter 12Key learning points from this sessionThe main type of derivatives available to companiesEffective usage of derivatives can create significant value and allows for effective risk management strategiesFutures and marking-to-marketPricing of Futures and ForwardsSwaps and their useWebsitesBank for International SettlementsAdditional readings / News Related to the SessionCurrency “Carry Trade” Becomes Harder Play Amid Version to Risk (The Wall Street Journal Online August 2007, Craig Karmin & Yukari Iwatani Kane) Yuan for the Money – The Rise of China’s Currency Will Change the Way World Does Business (The Economist Feb 2013)Possible questions covered in the session: Why and when should we use derivatives for risk management? What are the differences between futures and forwards? How do derivatives markets work, and how can companies use them effectively?How does marking-to-market work? How are futures, swaps, and options priced in the market?Session 12 - Derivatives: OptionsTopics coveredPayoffs of different optionsValuation of optionsDrivers of valueIn-the-money and out-of-the-money optionsStrategies using optionsCase studyChina Aviation Oil (IMD-3-1888) - includes teaching note, and excel modelCephalon, Inc. (HBS 9-298-116)ReadingsFinance for Executives - Chapter 13Real data to show in class CBOE data.Options on Apple - Bloomberg screenshot - ITM, OTM, ATMImplied volatility - VIX indexExcel in classProtective put, straddle, collar, and their useOption calculator - chapter 13Key learning points from this sessionOption terminologyValuation of options: optionality has valueStrategies can be used to minimize the cost of hedging strategiesWebsitesCBOEGlobal DerivativesCME GroupPossible questions covered in the session: How are stock options valued?Why does volatility make options more valuable?What influences the value of an option? ................
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