Introduction to Corporate Finance
For this assignment (In short).. Use any of the suggestions in the Guidelines above that you find useful, or other sources if you prefer. Suggested length is 6 - 10 pages double-spaced (excluding tables, charts, and citations). Your written communications skills will be assessed according to the School of Business rubric attached. To get a better understanding of this assignment please Log on to my blackboard at: Seminar:Issues in Corp Finance Then, Click on "Live Case Lite" and everything stated on the page must be completed besides a video of an "elevator speech" That I must complete myself.
Part I: Introduction (Damodaran, Chapter 1, âThe Foundationsâ)
First, we review the basic principles of corporate finance: Â
- The Investment Principle: Â The firm should invest in assets and projects that yield a return greater the minimum acceptable hurdle rate, i.e. the cost of capital invested. Â The cost of capital should reflect the financing mix used â borrowed money (debt) or ownersâ capital (equity) and the riskiness of the project. The returns should be measured in terms of the cash flows generated and the timing of those cash flows.
- The Financing Principle: The firm should choose a financing mix that maximizes the value of the investments. Â The time horizon of the financing should be matched to the longevity of the assets being financed.
- The Dividend Principle: If the firm does not have enough investments that earn the hurdle rate, the firm should return cash to the owners of the business. Â Whether this is in the form of dividends or stock buybacks will depend upon the characteristics of the stockholders.
Every decision a firm makes will involve one or more of these principles, and every decision will have consequences. Â The unifying objective for corporate finance is the maximization of firm value or shareholder wealth, to the exclusion of the interests of other stakeholders (employees, customers, community). Â In other words, this objective assumes that shareholder interests are aligned with the best interests of the firm, markets are efficient, and social costs either do not exist or do not matter. So what can go wrong?
Part II: Corporate Governance (Damodaran, Chapter 2, âThe Objectiveâ and the corresponding webcast.
The main issue here is the extent to which shareholder interests are reflected in the management of the company. Â Who actually runs the company and who keeps an eye on them? Review the suggested framework for analysis of Corporate Governance: Voting structure, ownership structure, top shareholders, Â CEO and top management, Board of Directors, and Compensation Structure. Â Perhaps only a few of these issues will be relevant for your company, but be on the lookout for red flags!Â Your primary references could be the company website and annual report (10-K), as well as other filings to the SEC (www.sec.gov/Â -- click on âcompany filingsâ and search by company name or ticker symbol). Â Information about the companyâs corporate governance can be distilled from Statement 14-DEF, which is the âdefinitive proxy statementâ that must be filed whenever a shareholder vote is required (usually in connection with the annual meeting).
We do not have access to the S&P Capital IQ mentioned by Professor Damodaran, but we do have the Bloomberg Professional Service in the Trading Lab at Harborside. Â Here are the help sheets for using the ESG functionality map and corporate governance news monitor on the Bloomberg Terminals:
Donât overlook the myriad of free finance sites, either. Â For example:
http://www.reuters.comÂ use the search tool at the top of the webpage to pull up the financials for your company. Â Click on the âPeopleâ tab to get the biographies of all the executives and directors. Try to determine how many directors are independent.
http://finance.yahoo.comÂ check tabs on âProfileâ (compensation of key execs), âInsider Transactions,â and âInsider Roster.â
Also under Yahooâs âProfileâ tab is the Institutional Shareholder Services (ISS) corporate governance quotients (1 = low governance risk, 10 = high governance risk). Â There is an overall score as well as pillar scores for Audit, Board Structure, Shareholder Rights, and Compensation. Scores equal decile rank relative to index or region.
Yahooâs âSustainabilityâ tab provides ESG ratings including total and separate scores for Environmental, Social, and Governance performance and comparison to peer companies.
In addition to the Corporate Governance issues, consider any Â Bondholder Concerns. You can introduce the information you prepared on the companyâs debt for the discussion question. Finally, consider the issues related to the Financial MarketsÂ or Society and other Stakeholders.
Part III: Stockholder Analysis Damodaran, ACF4e Chapter 4, âThe Basics of Riskâ
The main issue here is that the make-up of the stockholder base â insiders, individuals, and institutions -- can give rise to potential problems. Who is the marginal investor in this stock?Â Â A marginal investor is one that holds a large amount of the stock AND trades in the stock. Â A small shareholder or one who never trades will not have much of an influence on share price. Â On the other hand, it is assumed that the actions of large institutions will impact the share price. Furthermore, their assessment of risk will define how the average shareholder should think about risk. Â If the marginal investors are well diversified, they will only care about the risk that they cannot diversify (the market risk); if they are not well diversified, they will care about all the risks in the company. Consider the questions in Part II.
In the webcast Professor Damodaran suggests eight potential scenarios that could arise from the distribution of shareholders:
- Institutional default. Â If institutional holders do not like what management is doing, they are more likely to sell the shares than they are to step in by voting against management.
- Self-holdings. Â Large holdings of Treasury stock or significant ownership by the company pension fund could be a control device.