McGill University

Desautels Faculty of Management

Professor Jiro E. Kondo Applied Corporate Finance (FINE-443)

Syllabus

Course Description

This course is designed to supplement and enhance material covered in “Introductory Corporate Finance”
(FINE-342). The emphasis of the course is applied: whenever possible, I will implement and extend basic
tools from finance in “real-world” settings. As a result, I will target the following content mix: 2/3 traditional lecture
style, 1/6 applications via “mini case studies” (designed by me), and 1/6 applications via “traditional case studies”.
My applications will cover a selection of professional service functions including those of the CFO, the investment
banker, the venture capitalist, the consultant, and the policymaker.

An important deliverable for the course involves bridging the gap between theory and practice. Thus, much of the
classroom focus will be on implementation. In doing so, students will be encouraged to appreciate both the science
and art of corporate finance. No model is perfect, no implementation ideal, and often practitioners must deal with
this by balancing and choosing between numerous quantitative and qualitative forms of analysis. I hope this class will
help you both appreciate this difficulty and give you examples that shed light on tackling this challenge.

Through case studies, it will also emphasize the way that real-world problems will be delivered to you: frought with
ambiguity and vagueness. Your boss won’t state a problem to you by giving you all the data and telling you every
step (say, (a) to (g)) that you need to undertake. Instead, she’ll quickly summarize the problem and have you take the
lead. She’ll be willing to clarify a few points here and there but she’ll get annoyed if you ask for too much clarification.
As a result, you will have to learn to fill gaps on your own, use and have confidence in your judgement, and learn to
defend and market your interpretation and your solutions. In my opinion, these are the most important skills of the
world’s “true players”. Unfortunately, these skills aren’t tested or emphasized in McGill’s (or other school’s) other
finance classes. I hope to give you a reasonably safe and effective environment to start honing these skills and getting
comfortable with the realities of the real-world.

Prerequisites

The prerequisites for this course are a solid understanding of basic finance and probability/statistics.

The former requirement is met by successfully completing FINE-342. In particular, for the topic of valuation, I
expect students to be comfortable with core topics like: (i) calculating free cashflows, and (ii) using basic valuation
models like NPV with WACC for capital budgeting or the Gordon growth model for stocks. I also expect students to
be familiar with the key definitions and introductory techniques of options pricing. For the topic of capital structure,
I expect students to be familiar with the MM theorem and to have an understanding of how frictions like taxes,

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asymmetric information, and agency can lead to predictions on optimal capital structure.

The latter requirement may is met by successfully completing MGCR-271. In particular, I expect students to be
comfortable with basic regression analysis (e.g., estimation of OLS regressions and hypothesis testing).

Textbook

There is no required textbook for this class. Instead, I will hand out slides that cover the necessary content for
the course. However, the following textbooks contain some of the topics covered in the course:

1. Jonathan Berk and Peter DeMarzo, Corporate Finance, 2nd Edition, Prentice Hall.

2. Richard Brealey, Stewart Myers, and Franklin Allen, Principles of Corporate Finance, 10th Edition, McGraw-
Hill.

3. Sheridan Titman and John Martin, Valuation: The Art and Science of Corporate Investment Decisions, 2nd
Edition, Prentice Hall.

4. Ivo Welch, Corporate Finance, 2nd Edition, Self-Published. Freely available online at:

http://book.ivo-welch.info/home/.

5. Aswath Damodaran, Damodaran on Valuation, 2nd Edition, John Wiley & Sons.

6. Tim Keller, Marc Goedhart, and David Wessels, Valuation: Measuring and Managing the Value of Companies,
5th Edition, John Wiley & Sons.

The first four textbooks in this list focus on basic corporate finance theory while the latter two are more applied and
place an emphasis on implementation. I recommend that students own at least one book from each category as they
often serve as useful references for practitioners.

Course Requirements and Evaluation

The course grade will be determined as follows:

• Homeworks: 25%

• Cases: 20%

• Group Presentation: 5%

• Course Participation: 10%

• Final Exam: 40%

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There will be 2 homeworks and 2 cases. Each homework will consist of multi-part questions based on technical material
covered in class. Each case study will consist of three questions and will contain a mix of qualitative and quantitative
elements. Both sets of graded materials are to be completed by your work group and one submission per team is
sufficient. All graded materials are to be submitted by email to both the professor and the head TAs
email prior to the beginning of class and late submissions will not be accepted.

Homework 1 will count towards 15 points on your final score while homework 2 will count towards 10 points. Each
graded case will count towards 10 points. There will also be a group presentation for one of the case studies
(presented outside of class). This presentation will count towards 5 points on your final score. The grading will be
based on the strength of your group’s case analysis, responses to my questions about your case analysis, and the
professionalism of your presentation (quality of talk and materials used in the talk).

The final examination will be a timed take-home exam. The exam will be open book and you will need to use a
computer for the exams. This exam will count towards 40 points on your final score.

Throughout the course (and especially in the cases), I will make it a point to give ambiguous and open-ended ques-
tions. This likely differs from the style of questioning you’ve seen in other courses. This choice is intentional. In the
real world, you will seldom be provided with detailed descriptions of tasks. You must learn to fill in details using your
own judgement and determine the best ways to add useful analysis to help with decision making. An important goal
of this course is to give you some experience and confidence in doing this.

Office Hours and Review Sessions

My office hours will be held on TBD in room 504 in Bronfman. However, if you plan to attend my office hours, you
must email me at least a day in advance. Otherwise, I will allow myself to schedule other meetings during this time slot.

I will also hold additional review sessions prior to the final exam. The times and locations for these reviews will be
determined and announced later this semester.

Course Webpage

There is a course webpage on MyCourses and you should already have access to this page at the beginning of the
semester. If you do not or have difficulty accessing the material on this page, please email support.ist@mcgill.ca
for support. The following basic information will be available on this webpage: (i) lecture notes and spreadsheets
containing solutions to the lecture note problems, (ii) homeworks and case study questions, and (iii) spreadsheets con-
taining solutions to the homework problems. Case studies will be discussed in class but no solutions will be provided
online.

Furthermore, links to readings listed in the syllabus will be found on the course webpage as well. Some readings will
be suggested readings that complement the material and discussions from the classroom. However, there will be
one or two required readings for most topics. These required readings will be clearly marked in the

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syllabus and on MyCourses.

Do not email me questions through MyCourses or post discussion questions intended for me on a MyCourses discussion
forum. Instead, email me directly at jiro.kondo@mcgill.ca. I try to respond within a day or two but do not expect
quick responses to questions sent the evening before or the day a homework is due.

Honor Code

McGill University values academic integrity. Therefore, all students must understand the meaning and consequences
of cheating, plagiarism and other academic offences under the Code of Student Conduct and Disciplinary Procedures.
For reference to this code, please read over:

www.mcgill.ca/students/srr/honest.

When violating this code of conduct, you risk not only losing your academic credibility, but also the respect of your
peers and your teachers. I take this honor code extremely seriously.

Course Outline:

Below is an approximate schedule for the class. All lecture notes will be available on the class webpage. The required
readings below will be discussed in class or form the basis for classroom examples. The non-required readings are
meant for general interest and are related to some of the material or issues discussed in the course. I may briefly
discuss these in lectures (but only if time permits).

Topic 1: Implementing Basic Valuation

. Case Studies:
• “Fairness Opinions for M&A”.

• “The M&A Market: History and Current Trends”.

. Readings:
• Required Reading (Skim): Robert Novy-Marx and Joshua Rauh, “Public Pension Promises: How Big Are They and What
Are They Worth?”, Journal of Finance, 2011. Prior to “Forcasting Cashflows: Key Drivers” Class.

• Financial Industry Regulatory Authority (FINRA), “NASD Notice to Members 04-83”, FINRA Website, 2004:

http://www.finra.org/Industry/Regulation/Notices/2004/p012249

• Jeremy Stein, “A Comparables Approach to Measuring Cashflow-At-Risk For Non-Financial Firms”, Journal of Applied Corporate
Finance, 2001.

• Ivo Welch, “Corporate Finance”, Self-Published, Chapter 14.

• “All P/Es Are Not Created Equal”, McKinsey Quarterly, 2004.

• Emanuel Derman, “Beware of Economists Bearing Greek Symbols”, Harvard Business Review, 2005:

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 http://www.emanuelderman.com/writing/entry/beware-of-economists-bearing-greek-symbols-harvard-business-review

Topic 2: Extending Basic Valuation.

. Case Studies:
• “Arundel Partners”, HBS Case Study.

• “Department of the Interior”.

. Readings:
• Required Pre-Study: Review the following topics: (i) Payoff Diagrams and the Put-Call Parity, and (ii) The Binomial Model of
Option Pricing (1-Period Model).

• Sheridan Titman and John Martin, Valuation: The Art and Science of Corporate Investment Decisions, Chapters 11-13.

• Robert McDonald, “The Role of Real Options in Capital Budgeting: Theory and Practice”, Journal of Applied Corporate
Finance, 2006.

Topic 3: Capital Structure.

. Case Studies:
• “Evaluating Capital Structure”.

• “Capital Structure and Valuation”.

. Readings:
• Required Reading (Skim): Michael Barclay and Clifford Smith, “The Capital Structure Puzzle: Another Look at the
Evidence”, Journal of Applied Corporate Finance, 1995. Prior to “Review of Tax and Agency Considerations” Class.

• John Graham, Jules van Binsbergen, and Jie Yang, “Optimal Capital Structure”, Journal of Applied Corporate Finance, 2011.

• Michael Barclay and Clifford Smith, “On Financial Architecture: Leverage, Maturity, and Priority”, Journal of Applied
Corporate Finance, 1996.

• Steven Kaplan and Richard Ruback, “The Market Pricing of Cash Flow Forecasts: Discounted Cash Flow vs. The
Method of Comparables”, Journal of Applied Corporate Finance, 1996.

• Ivo Welch, “Corporate Finance”, Self-Published, Chapters 17-18.

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 Table 1: Tentative Course Schedule

Date Topic Lecture Readings (Optional)

Tue, Sep 3 Course Introduction Course Objectives and Topics -
Thu, Sep 5 Implementing Basic Valuation: DCF Review of NPV w/ WACC: Examples -
Tue, Sep 10 Implementing Basic Valuation: DCF Estimating the Cost of Capital in Practice Welch, Ch.9-10
Thu, Sep 12 Implementing Basic Valuation: DCF Cont’d -
Tue, Sep 17 Implementing Basic Valuation: DCF Forecasting Cashflows: Key Drivers Welch, Ch.21
Thu, Sep 19 Implementing Basic Valuation: DCF Cont’d -
Tue, Sep 24 Implementing Basic Valuation: DCF Cont’d -
Thu, Sep 26 Implementing Basic Valuation: Multiples Theory and Practice Welch, Ch.15
Tue, Oct 1 Implementing Basic Valuation: Multiples Cont’d -
Thu, Oct 3 Implementing Basic Valuation: Additional DCF is Not A Number: Sensitivity Analysis -
Tue, Oct 8 Extending Basic Valuation: Flexibility Review of Option Valuation -
Thu, Oct 10 Extending Basic Valuation: Flexibility Cont’d -
Tue, Oct 15 Extending Basic Valuation: Flexibility Options in Corporate Finance Titman-Martin, Ch.12-13
Thu, Oct 17 Extending Basic Valuation: Flexibility Cont’d -
Tue, Oct 22 Capital Structure: Leverage Review of Tax and Agency Considerations Welch, Ch.17-19
Thu, Oct 24 Capital Structure: Leverage Cost of Capital Minimization -
Tue, Oct 29 Capital Structure: Leverage Cont’d -
Thu, Oct 31 In China TA Review Session (Optional) ;-) -
Tue, Nov 5 Cont’d TA Review Session (Optional) ;-) -
Thu, Nov 7 Cont’d TA Review Session (Optional) ;-) -
Tue, Nov 12 Cont’d TA Review Session (Optional) ;-) -
Thu, Nov 14 Capital Structure: Leverage Graham Approach -
Tue, Nov 19 Capital Structure: Leverage Cont’d -
Thu, Nov 21 Capital Structure: Leverage Cont’d -
Tue, Nov 26 Capital Structure: Valuation APV w/ Graham Approach -
Thu, Nov 28 Buffer
Tue, Dec 3 Cont’d
TBD ≈4 Hour Final Review Session
Remark: Slides (and accompanying Excel Spreadsheets) are the main readings throughout the course.