Corporate Financial Analysis

FINA 365 develops students’ understanding of corporate finance and the financial decisions made to maximize firm value. The course introduces tools that help students to evaluate which investments are worthwhile, how they can be improved, and how they should be financed.

The course begins with an overview of corporate finance and financial statement analysis. Students examine how firms create value, the conflicts that can arise between managers and shareholders, and how financial decisions affect a firm’s statements. Key skills include interpreting financial reports, analyzing performance with ratios, valuing cash flows, and understanding bond pricing and credit risk.

The second section focuses on capital budgeting and firm valuation. Students learn to identify relevant cash flows, evaluate projects using multiple investment decision rules, and conduct scenario and break-even analyses. They also gain experience with multiple stock valuation models such as the Dividend Discount Model, Free Cash Flow Model, and the Method of Comparables.

The final section addresses risk, cost of capital, and capital structure. Topics include systematic versus firm-specific risk, diversification, and the risk-return tradeoff. Students learn how to estimate the cost of equity and debt, as well as calculate the weighted average cost of capital (WACC). They also learn the Modigliani-Miller Propositions, the costs and benefits of debt financing, and the tradeoff theory that explains a firm’s financing choices and optimal capital structure.

By the end of the course, students will have learned to utilize corporate finance tools to make value-enhancing decisions.

Learning Objectives

Overview of Corporate Finance, Financial Statement Analysis, Valuing Cash Flows:

• Understand value maximization as a goal for corporate decisions
• Identify conflicts of interest between managers and owners and explain how they are mitigated
• Explain how managerial decisions impact the Balance Sheet and Income Statements
• Infer the transactions that the firm undertook during the year when given two consecutive years of balance sheets and income statements
• Measure firm performance using financial ratios
• Calculate the present and future values of single sums, mixed cash flows, annuities, perpetuities, and growing cash flows
• Explain various types of bonds and compute the price and yield to maturity of a bond
• Understand bond ratings and identify the credit risk as an essential determinant of the price and yield to maturity of corporate bonds

Capital Budgeting and Firm Valuation:

• Identify all relevant (incremental) cash flows for a capital budgeting project
• Calculate expected cash flows given information about sales, production costs, taxes, depreciation, etc.
• Evaluate alternative projects using investment decision rules (the Net Present Value, Payback Rule, Profitability Index, and Internal Rate of Return)
• Conduct scenario analysis of future cash flows and break-even analysis
• Conduct cost analysis of a project by differentiating between fixed and variable costs
• Estimate the intrinsic value of a stock using the Dividend-Discount model, the Discounted Free Cash Flow Model, and the Comparable Valuation method

Risk, Cost of Capital, Capital Structure:

• Describe the difference between firm-specific and systematic risk
• Understand the concept of diversification
• Explain the relation between required (expected) return and systematic risk
• Use the Capital Asset Pricing Model (CAPM) to estimate the cost of equity capital
• Demonstrate the impact of financial leverage on risk for the shareholders
• Estimate the Cost of Debt
• Calculate the weighted average cost of capital (WACC)
• Understand the concept of MM Propositions I and II
• Explain why taxes change the conclusion of the M&M Propositions
• Identify the costs and benefits of using debt