Вы находитесь на странице: 1из 15

School of Accounting & Finance

Postgraduate Modular Finance Scheme

BAM021 Corporate Finance


Module Handbook 2011/12

Module Team Dr George Alexandrou Room 333 Tel: 65435 E-mail: G.Alexandrou@kingston.ac.uk Dr Natalia Isachenkova Room 307 Tel: 65206 E-mail: N.Isachenkova@kingston.ac.uk

BAM021 CORPORATE FINANCE Introduction


The knowledge of finance is equally important for companies, the society and those working in the corporate sector and the financial services industry. The areas of finance and investments are considered to be technical subjects, which is partly true, and for that, difficult for many people. However, finance is based on a set of simple and intuitive core ideas and principles and its knowledge is not only essential to the corporate survival and success but also offers a great career opportunity to qualified graduates. Furthermore, mastering the principles of corporate finance not only advances personal career prospects but offers an exciting intellectual challenge. This module is designed to offer a unique combination of major cotemporary theoretical and empirical developments in both areas. There is a substantial quantitative element in this module and students should be refreshing their maths and stats knowledge. The coursework requires students to explore a real-life case study by collecting relevant data from the Datastream and other sources. The module is delivered by three-hour weekly seminars, comprising lectures, demonstrations, tutorials, presentations and discussions on theory, applications and problem solving. AIMS To develop a critical knowledge and understanding of the core theories and concepts in the field of corporate finance To promote the critical understanding of the issues related to the corporate decision-making process and the application of corporate finance theories in real life. LEARNING OUTCOMES On successful completion of the module students will be able to: Demonstrate a critical understanding of modern corporate finance theories and their applications. Explain the decision making process of major corporate decisions and their implications for corporate stakeholders and investors. Demonstrate a working knowledge of methods to value securities. Explicate the major issues involved in investors decision-making and monitoring process. CURRICULUM CONTENT (INDICATIVE) The modern corporation, ownership, control and the role of markets Investment appraisal and capital budgeting Risk and return and portfolio theory Cost of capital and capital structure Dividend policy Equity and bond valuation Equity valuation Options Agency theory and corporate governance. TEACHING AND LEARNING STRATEGY (INDICATIVE) Various teaching strategies and approaches employed to facilitate student learning. These include formal lectures where theoretical material is presented and examined. Class discussions that require extensive 2

student presentation and input. Students will be engaged to work in groups on specific topics and prepare class presentations or discussions. Students are expected to read widely encouraged by references to the academic literature and the financial press. StudySpace is used to deliver materials, to present information on topical issues from the financial press and to invite student participation and active learning. Class time and directed learning: 33 hours Self-managed learning: 117 hours ASSESSMENT STRATEGY (INDICATIVE) The Assessment Strategy for this module is based on a time-constrained closed-books exam and a coursework assignment. The exam is structured in a way that allows students to demonstrate their knowledge, understanding and ability to apply techniques, theories and methods. The coursework assignment will be focused on specific questions requiring technical and analytical skills to demonstrate the ability to employ the acquired knowledge and understanding in problem solving. LEARNING OUTCOME On successful completion of the module, students will be able to: 1. Demonstrate a critical understanding of modern corporate finance theories and their applications. 2. Explain the decision making process of major corporate decisions and their implications for corporate stakeholders and investors. 3. ies. Demonstrate a working knowledge of methods to value securitASSESSMENT STRATEGY Summative Exam Coursework Summative Exam Coursework Summative Exam Coursework Summative Exam Coursework

by & by & by & by &

4. Explicate the major issues involved in investors decision-making and monitoring process. MAJOR CATEGORIES OF ASSESSMENT Exam 50% Coursework 50%.

ACHIEVING A PASS It is not a requirement that any major category of assessment must be passed separately in order to achieve an overall pass in the module. BIBLIOGRAPHY (INDICATIVE) Core Text(s) Berk J. and P. DeMarzo (2010) Corporate Finance, Global Edition 2ed, Pearson. Plus: MyFinanceLab for this textbook. Recommended Reading Elton M, M. Gruber, S. Brown, W. Goetzmann (2011) Modern Portfolio Theory and Investment Analysis, 8th Ed,Wiley. Arnold, G (2009) Corporate Financial Management, 4th Edition, FT-Prentice Hall 3

Bodie, Kane and Marcus (2005) Investments, 6th International Edition, McGraw-Hill. Brealey, R., Myers, S, and Allen, F. (2006) Corporate Finance, 8th ed., McGraw-Hill. Sharpe W, Alexander G, Bailey J (1999) Investments, 6th Edition, Prentice Hall Brealey, R. and Myers, S, (2002) Principles of Corporate Finance, 7th ed., McGraw-Hill. Bromwich M, (1976) The Economics of Capital Budgeting, Penguin. Copeland T, Koller T and Murrin J (2000) Valuation: Measuring and managing the Value of Companies, 3rd ed, McKinsey & Company: John Wiley & Sons. Lumby S. and Jones C. (2003) Corporate Finance:Theory and Practice, 7th ed. Thomson. McMenamin, J. (1999) Financial Management: an Introduction, Routledge Pike, R. and Neale B (2003) Corporate Finance and Investment: Decisions and Strategies, 4th ed., Prentice-Hall. Stern, J. and Chew, D. Jr. (1998) The Revolution in Corporate Finance 3rd ed., Blackwell Publishers. Watson, D. and Head, A. (2001) Corporate Finance: Principles and Practice, 3nd ed., Prentice Hall.

COURSE STRUCTURE (OVERVIEW)


WEEK 1 2 3 4 5 6 7 8 9 10 11 12 DATE 26/09/11 03/10/11 10/10/11 17/10/11 24/10/11 31/10/11 07/11/11 14/11/11 21/11/11 28/11/11 05/12/11 12/12/11 TOPIC COMPANIES, MARKETS, OWNERSHIP AND CONTROL CORPORATE REPORTING FIXED INCOME SECURITIES BOND VALUATION EQUITY VALUATION RISK AND RETURNS - PORTFOLIO THEORY - CAPM MERGERS AND ACQUISITIONS VALUE ADDED WEEK - GUIDED STUDY ASSIGNMENT INVESTMENT APPRAISAL INVESTMENT APPRAISAL & CAPITAL BUDGETING COST OF CAPITAL AND CAPITAL STRUCTURE OPTION PRICING & REAL OPTIONS AGENCY THEORY AND CORPORATE GOVERNANCE REVISION SESSION
GA GA

LECTURER
GA

GA GA GA GA

& NI
NI NI NI NI NI

& NI

COURSE STRUCTURE
WEEK 1. COMPANIES, OWNERSHIP AND CONTROL CORPORATE REPORTING

Topics Covered The nature and types of corporation Ownership and control The role of markets Corporate disclosure and reporting The financial statements Reading Berk and DeMarzo Chapters 1, 2. Further Reading Berle A. and Means G. (1932) The modern corporation and private property, Macmillan. LaPort R., F. Lopez-de-Silanes and A.Shleifer (1999) Corporate Ownership Around the World, Journal of Finance, v54, p471-517. Jensen M. and Meckling W. (1976) Theory of the Firm: Managerial Behaviour, Agency cost and Ownership Structure Journal of Financial Economics, v.3, p305-60. Williamson O. (1963) Managerial Discretion and business behavior, American Economic Review, v.53, p.1033-57. Palepu K., P. Healy and V. Bernard (2003) Business Analysis and Valuation: Using Financial Statements, South-Western College Pub. WEEK 2. FIXED INCOME SECURITIES BOND VALUATION

Topics Covered Savings deposits, money market instruments, government securities Corporate bonds, Eurobonds, preferred stock Clean and dirty bond prices Yield measures Bond analysis and valuation Bond portfolio management Convexity and duration Reading Berk and DeMarzo Chapter 8. Elton et al. Chapters 21, 22. Arnold - Chapter 11 Megginson and Smart Chapter4. Further Reading Sironi A. and Gabbi G. (2002) Which Factors Affect Corporate Bond Pricing? Evidence from Eurobonds Primary Market Spreads, working paper, Bocconi University and Universit degli Studi di

Siena - Department of Economics, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID308299_code020509670.pdf?abstractid=308299 Elton E., Gruber M., Agrawal D. and Mann C. (2002) Factors Affecting the Valuation of Corporate Bonds, working paper, New York University - Department of Finance , New York University Department of Finance , KMV Corporation and New York University - Department of Finance, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID307139_code020412670.pdf?abstractid=307139 Gilson S. and Warner J. (1998) Junk Bonds, Bank Debt and Financing Corporate Growth, working paper, Harvard University - Finance Unit and Simon School, University of Rochester, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/98021904.pdf?abstractid=47269 Brennan M. and E. Schwartz (1980), Conditional Predictions of Bond Prices and Returns, Journal of Finance, Vol. 35 (2), p.405-416. Chance D. (1990) Default Risk and the Duration of Zero Coupon Bonds, Journal of Finance, Vol. 45 (1), p.265-274. WEEK 3. Topics Covered Common stocks and Equity capital Issuing equity capital and primary equity market Equity valuation. Dividend and earnings based valuation models Earnings and dividends. The Lintner model The information content of dividends Reading Berk and DeMarzo Chapter 9. Elton et al. Chapters 18, 19. Arnold - Chapter 17 Megginson and Smart Chapter 5. Further Reading Lakonishok J. and Lev B. (1987) Stock Splits and Stock Dividends: Why, Who and When, Journal of Finance 42, n4 Sep, p.913-932. Jensen M. and Meckling W. (1976) Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure, Journal of Financial Economics 3, n4 Oct, p.305-360. Jensen M. (1986) Subramanyam K. and Venkatachalam M. (1998) The Role of Book Value in Equity Valuation: Does the Stock Variable Merely Proxy for relevant Past Flows?, Working paper, University of Southern California and Duke University Fuqua School of Business, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/98081304.pdf?abstractid=113388 Tham J. (2000) Practical Equity Valuation: A Simple Approach, working paper, Boston University Center for International Health and Development, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/000627354.pdf?abstractid=233825 Nissim D. and S. Penman (1999) Ratio Analysis and Equity Valuation, working paper, Columbia Business School - Department of Accounting, Business Law & Taxation and Columbia University Graduate School of Business - Department of Accounting, available on SSRN (http://ssrn.com), http://papers.ssrn.com/sol3/delivery.cfm/99041913.pdf?abstractid=161222 EQUITY VALUATION

Sougiannis T. and Penman S. (1997) A Comparison of Dividend, Cash Flow and earnings Approaches to Equity Valuation, working paper, University of Illinois at Urbana-Champaign - Department of Accountancy and Columbia University - Graduate School of Business - Department of Accounting, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/9703311.pdf? abstractid=15043 WEEK 4. RISK AND RETURNS PORTFOLIO THEORY - CAPM

Topics Covered Investment choice under uncertainty Utility theory risk aversion Portfolio risk and returns - portfolio selection under uncertainty Portfolio analysis Efficient set optimal portfolio Market model beta CAPM Reading Berk and DeMarzo Chapter 10, 11, 12, 13. Arnold - Chapter 7, 8, 14 Megginson and Smart Chapter 6 & 7. Bodie, Kane and Marcus Chapters 6, 7, 8, 9. Further Reading Schwert G. (2002) Anomalies and Market Efficiency, working paper, Simon School, University of Rochester, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID338080_code021022590.pdf?abstractid=338080 Black A., Buckland R. and Fraser P. (2001) Efficient Portfolio Diversification: Changing UK Stock Market Sector and Sub-Sector Volatilities, 1967-2000, working paper, University of Aberdeen , University of Aberdeen - Finance and Accounting Department and University of Aberdeen - Finance and Accounting Department, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID276048_code010728500.pdf?abstractid=276048 Bossaerts P., Kleiman D. and Plott C. (2000) Price Discovery in Financial Markets: The Case of the CAPM, working paper, California Institute of Technology , Lehman Brothers, New York and California Institute of Technology - Division of the Humanities and Social Sciences, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/000405404.pdf?abstractid=216820 Muradoglu G., Salih A. and Merchan M. (2002) A Behavioural Approach to Efficient Portfolio Formation, working paper, City University Business School , Bilkent University and Yapi Kredi Yatirim - Research Department, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID313982_code020607600.pdf?abstractid=313982 Keim D (1986) The CAPM and Equity Return Regularities, Financial Analysts Journal 42, n3 MayJun, p.19-34. Harris R., Marston F., Mishra D. and OBrian T. (2002) Ex Ante Cost of Equity Estimates of S&P 500 Firms: The Choice Between Global and Domestic CAPM, working paper, University of Virginia Darden Graduate School of Business Administration , University of Virginia - McIntire School of Commerce , Memorial University of Newfoundland - Faculty of Business Administration and University of Connecticut - Department of Finance, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID322680_code021004590.pdf?abstractid=322680 8

Agarwal N. (2003) Improving on The CAPM, Independent, available on SSRN (http://ssrn.com): http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID392222_code030422640.pdf?abstractid=392222 WEEK 5. Topics Covered The nature of mergers and acquisitions and merger waves Sources of value creation in mergers and acquisitions The effects of takeovers The takeover process Market reaction to merger announcements Takeover defenses Reading Berk and DeMarzo Chapter 22 Arnold - Chapter 23 Further Reading Powel R. and A. Stark (2005) Does operating performance increase post-takeover for UK takeovers? A comparison of performance measures and benchmarks Journal of Corporate Finance, v.11, p.293-317. Schleifer, A and R. Vishny (2003), Stock market driven acquisitions, Journal of Financial Economics, v.70, p.295-311. Moeller, S, F, Schlingemann and R, Stulz (2005), Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave, The Journal of Finance, v.60, p.757-782. Jensen, M.C. (1986), Agency costs of free cash flow, Corporate Finance and takeovers, The American Economic Review, v.76, p.323-329. Kothari, S.P. and J.B, Warner (2006), Econometrics of Event Studies [Online], Available at: http://mba.tuck.dartmouth.edu/pages/faculty/espen.eckbo/PDFs/Handbookpdf/CH1-EventStudies.pdf Fama, E. (1998), Market efficiency, long-term returns and behavioural finance, Journal of Financial Economics, Volume v.49, p.283-306. Draper, P, & Paudyal, K (1999) Corporate Takeovers: Mode of Payment, Returns and Trading Activity, Journal of Business Finance & Accounting, v.26, p.521-558. Eckbo, E.B, K.S, Thorburn (2000) Gains to bidder firms revisited: Domestic and foreign acquisitions in Canada, Journal of Financial and Quantitative analysis, v.35, p.1-25 Epstein, M.J (2005) The determinants and evaluation of merger success, Business Horizons, v.48, p.3746. Faccio M, J. McConnell and D. Stolin (2004) When do bidders gain? The difference in returns to acquirers of listed and unlisted targets, [Online], Available at: http://www2.owen.vanderbilt.edu/fmrc/pdf/wp2004-01.pdf 9 MERGERS AND ACQUISITIONS

Bargeron L, F. Schlingemann, R. Stulz and C. Zutter (1998), Why do private acquirers pay so little compared to public acquirers? Journal of Financial Economics, v.89, p.375-390. Berkovitch E, and M. Narayanan (1993), Motives for takeovers: An empirical investigation. Journal of Financial and Quantitative Analysis v.28, 3. Brown S and J Warner (1980), Measuring security price performance, Journal of Financial Economics, Volume 8, pp.205-258 [Online], Available at: http://student.bus.olemiss.edu/files/jeggington/OLE%20MISS%20PHD%20Program/FMA%20Paper/Fin %20635/5/Brown%20and%20Warner%201980.pdf Bugeja M, and T. Walter (1995) An empirical analysis of some determinants of the target shareholder premium in takeovers, Journal of Accounting and Finance, v.35, p.33-60. Chang S. (1998) Takeovers of privately held targets, methods of payment and bidder returns, Journal of Finance, v.53, p.773-784.

WEEK 6. WEEK 7.

GUIDED STUDY ASSIGNMENT INVESTMENT APPRAISAL

Topics Covered Payback and Discounted Payback Accounting Rate of Return (ARR) Net Present Value (NPV) Internal Rate of Return (IRR) Modified Internal Rate of Return (MIRR) and the Reinvestment Assumption Desirable Properties of Investment Appraisal Techniques Differences between Economic and Accounting Definitions of Profit Relative Advantages and Disadvantages of Investment Appraisal Techniques Empirical Evidence on the Use of Investment Appraisal Techniques Reading Arnold - Chapters 2, 4 Megginson and Smart Chapters 8, 9 Further Reading Brealey , Myers, and Allen - Chapters 2, 3, 5 Lumby and Jones - Chapters 3, 4, 5, 6 McMenamin - Chapters 5, 10 Puxty and Dodds - Chapter 4 Pike and Neale - Chapters 5 Samuels, Wilkes and Brayshaw - Chapters 4, 7 10

Stern, J. and Chew - Chapter 5 Van Horne - Chapters 2, 6 Weston, Copeland, Shastri - Chapter 2 Bromwich,.M and Bhimani, A. (1991) Strategic Investment Appraisal, Management Accounting, March. Dugdale, D. and Addel-Kader, M. (1998) 'Investment in Advanced Manufacturing Technology: A Study of Practice in Large UK Companies', Management Accounting Research, 9, 261-84. Graham, J.R., Harvey, C.R. (2001) The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, 60, 187-243. Hirshleifer, J. (1958) On the Theory of Optimal Investment Decisions, Journal of Political Economy, 66, 329-52. Pike, R. (1983) A Review of Recent Trends in Formal Capital Budgeting Processes, Accounting and Business Research, Summer, 201-8. Pike, R. and Wolfe, M. (1998) Capital Budgeting in the 1990s, Chartered Institute of Management Accountants. Pike, R. (1996) 'A Longitudinal Survey on Capital Budgeting Practices', Journal of Business Finance & Accounting, 23, 1. Shao, L. and Shao, A. (1993) 'Capital Budgeting Practices of European Affiliates of US Transnational Companies', Journal of Multinational Financial Management, 3, 95-109. Wilkes, F.M. (1993) The interest in interest: interest rates and investment appraisal, Business Studies, 6(2), December. WEEK 8. INVESTMENT APPRAISAL & CAPITAL BUDGETING

Topics Covered Corporate Taxation and Investment Appraisal corporation tax - tax on corporate income capital allowances (annual writing down allowances) Replacement of Fixed Assets and Investment Appraisal least common multiple method annual equivalent method problems with both methods Investment Appraisal under Capital Rationing hard capital rationing soft capital rationing single-period capital rationing multi-period capital rationing sensitivity analysis Inflation and Investment Appraisal choosing between nominal & real cash flows and discount rates Investment Decisions and Uncertainty Definitions of risk and uncertainty Using statistical concepts to measure risk and uncertainty Decision frameworks Need for a systematic approach Sensitivity analysis 11

Reading Arnold - Chapters 3, 5, 6 Megginson and Smart Chapter 8, 9 Further Reading Brealey, Myers, and Allen - Chapters 5, 6, 9, 10 Lumby and Jones - Chapters 6, 7, 8, 9, 10 McMenamin - Chapters 10, 11 Pike and Neale - Chapters 5,6,9,10 Samuels, Wilkes and Brayshaw - Chapters 5, 6, 8 Van Horne - Chapters 6, 7 Watson, D. and Head Chapters 3,4 Weston, Copeland, Shastri - Chapter 2 Bhaskar, K.N. Linear Programming in Capital Budgeting: the Financing Problem, Journal of Business Finance & Accounting, Spring, 1983. Chan S.N. (1984) Capital Budgeting and Uncertain Inflation, Journal and Economics and Business, August. Grayson, G.J. (1967) The Use of Statistical Techniques in Capital Budgeting, In Financial Research and Management Decisions, A.A. Robincheck, (ed.) John Wiley. Kim, M.K. (1979) Inflationary Effects in the Capital Investment ', Journal of Finance, September 1979. Pike, R. (1988) 'An Empirical Study of the Adoption of Sophisticated Capital Budgeting Practices and Decision-making Effectiveness' Accounting and Business Research, Autumn Robincheck, A.A and Myers, S.C. (1966) Conceptual Problems with the Use of Risk-adjusted Discount Rates, Journal of Finance, December. Scarlett, R. (1995) Further Aspects of the Impact of Taxation on the Viability of Investment, Management Accounting, May. Weingartner, H.M. (1977) Capital Rationing: n Authors in Search of a Plot, Journal of Finance, December, 1977. WEEK 9. COST OF CAPITAL AND CAPITAL STRUCTURE

Fundamental Valuation Model Paradigm cost of equity cost of preference shares cost of debt Weighted Average Cost of Capital the basic model the rationale for WACC; the assumptions and constraints on the use of WACC Financial Gearing impact on shareholders' earnings and financial risk measurement of financial gearing - income gearing and capital gearing determinants of debt capacity Models of Capital Structure Choice Reading Arnold - Chapters 19, 21 Megginson and Smart Chapter 10 Further Reading 12

Brealey, Myers, and Allen Chapters 9, 17, 18, 19 Lumby and Jones Chapters 16, 17, 18, 19 McMenamin - Chapters 12, 13 Puxty and Dodds - Chapters 5, 11 Pike and Neale - Chapters 4, 20, 21, Samuels, Wilkes and Brayshaw Chapters 15, 17 Stern, J. and Chew - Chapter 11 Van Horne - Chapters 8,9,10 Watson, D. and Head - Chapter 8 Weston, Copeland, Shastri - Chapter 15 Arditti, F.D. (1973) The Weighted Average Cost of Capital: Some Questions on its Definition, Interpretation and Use, Journal of Finance, September Barnea, A., Haugen, R.A. and Senbet, L.W. (1981) Market Imperfections, Agency Problems and Capital Broyles, J. (1999) 'The Cost of Capital', Management Quarterly, ICEAW 23-29 Davidson, I. and Freeman, M. (1999) 'Estimating the equity risk premium' European Journal of Finance, 52, 1-11. Damodaran, A. (2010) Equity Risk Premiums (ERP): Determinants, Estimation and Implications - The 2010 Edition (February 14, 2010), mimeo; available at SSRN: http://ssrn.com/abstract=1556382. Dimson, E.,, Marsh, P. and Staunton, M. (2003). Global Evidence on the Equity Risk Premium, Journal of Applied Corporate Finance, 15 (4), Summer. Gordon, M.J. (1959) Dividends, Earnings and Stock Prices, Review of Economics and Statistics, May. Graham, J.R., Harvey, C.R. (2001) The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, 60, 187-243. Jensen, M.C. (1989) Eclipse of the Public Corporation, Harvard Business Review, 5, 61-74. Keane, S.M. (1978) The Cost of Capital as a Financial Decision Tool, Journal of Business Finance & Accouniting. Miller, M.H. (1977) Debt and Taxes, Journal of Finance, 32, 261-76. Miller, M. and Modigliani, F. (1958) 'The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review, 48, 261-96. Myers, S. (1984) The Capital Structure Puzzle, Journal of Finance, 39, 575-92. Scott, D.F and Petty, J.W. (1980) Determining the Cost of Common Equity Capital: The Direct Method, Journal of Business Research, March. Wippern, R.F. (1966) Financial Structure and the Value of the Firm, Journal of Finance, December. WEEK 10. OPTION PRICING & REAL OPTIONS

Topics Covered How Options Work option terminology and position diagrams put-call parity intrinsic value the gearing effect limiting exposure to downside risk writing options determinants of option values An Overview of Option Pricing a simple option-valuation model and the binomial pricing model the Black-Scholes closed-form solution for option pricing 13

the hedge ratio (Delta) use of the Black-Scholes model and extensions to the Black-Scholes model Option Theory Applications to Corporate Finance Applications in Investment Analysis: option to delay; option to expand; option to abandon Applications in Valuation Reading Arnold - Chapter 24. Sharpe, Alexander, Bailey Chapter 19 Megginson and Smart Chapter 15 Further Reading Brealey , Myers, and Allen - Chapters 20, 21, 22 Lumby and Jones - Chapter 13 Pike and Neale - Chapter 13 Samuels, Wilkes and Brayshaw - Chapter 11 Van Horne - Chapter 5 Weston, Copeland, and Shastri - Chapter 7 Amram, M and Kulatilaka, N (1999) Real Options: Managing Strategic Investment in an Uncertain World, Harvard Business School Press. Dixit and Pindyck (1995) The Options Approach to Capital Investment, Harvard Business Review, May-June. Kesner, W.C., 1984. Todays Options for Tomorrows Growth, Harvard Business Review, MarchApril. Redhead, K., 1990. Introduction to Financial Futures and Options (Woodhead-Faulkner). Some useful websites: www.liffe.com; www.numa.com/index.htm WEEK 11. AGENCY THEORY AND CORPORATE GOVERNANCE

Topics Covered Ownership and Control, Managerial Incentives Agency Problem and the Value of the Firm Market for Corporate Control Corporate Governance Reading Arnold - Chapters 2, 21, 22 Megginson and Smart Chapter 1 Sharpe, Alexander, Bailey Chapters 1, 2 Weston, Copeland, and Shastri Chapters 13, 14 Further Reading: Brealey, Myers and Allen Chapters 12, 34 Lumby and Jones - Chapter 19 Pike and Neale - Chapter 1, 20 Van Horne - Chapter 9, 23. Bebchuk, L., Cohen, A.( 2005), The Cost of Entrenched Boards, Journal of Financial Economics 78, 409-433.

14

Chung, K.H., Elder, J. And Kim, J. (2010) Corporate Governance and Liquidity, Journal of Financial & Quantitative Analysis, 45(2), 265-291. Chhaochharia,V. and Laeven, L. (2009)Corporate Governance Norms and Practices, Journal of Financial Intermediation, 18(3), 405-431. Dahya J, McConnell J. and Travlos, N, (2002) The Cadbury Committee, Corporate Performance and Top Management Turnover. Journal of Finance, 2003. Fiordelisi, F., Molyneux, P. (2010) The Determinants of Shareholder Value in European Banking, Journal of Banking and Finance, 34, 1189-1200. Gillan, S.L. (2006) Recent Developments in Corporate Governance: An Overview, Journal of Corporate Finance, 12, 381-402. Jensen M. and Meckling W. (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, 3(4), 305-360. Jensen M. (2001), Value Maximization, Stakeholder Theory, and the Corporate Objective Function, Journal of Applied Corporate Finance, 14(3), 8-21. Jiraporn, P., Singh, M., and Lee, C. I. (2009)Ineffective Corporate Governance: Director Busyness and Board Committee Memberships, Journal of Banking & Finance, 33(5), 819-828. Kirchmaier, T., Grant, J. (2005) Corporate Ownership Structure and Performance in Europe, European Management Review, 2, 231-45. LaPorta R, Lopez-de-Silanes F. and Shleifer A. (1999), Corporate Ownership Around the World, Journal of Finance, Vol. 54, pp. 471-517. Martijn Cremers, K.J. and Nair, V.B. (2005), Governance Mechanisms and Equity Prices, Journal of Finance, 60, 2859-94. McKnight, P.J. and Weir, C. (2009)Agency Costs, Corporate Governance Mechanisms and Ownership Structure in Large UK Publicly Quoted Companies: A Panel Data Analysis, The Quarterly Review of Economics and Finance, 49(2), 139-158. "Corporate Governance In Japan And The Uk: Codes, Theory And Practice," Pacific Economic Review, 14(5), 622-638. Monks, R. (2002), Creating Value Through Corporate Governance Corporate Governance, 10, 116 123. Tirole, J (2001), Corporate Governance, Econometrica, 69, 1-35. Yermack D. (1996), Higher Market Valuation Companies with a Small Board of Directors, Journal of Financial Economics, Vol. 40, pp. 185-211. Week 12. REVISION SESSION

15