Session 1 Corporate Finance Introduction

Session 1: Introduction

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Topics

People Getting to know each other

Logistics Setting up the course

What is a firm and who owns it?

Expectations
This is an introductory session, it reviews some concepts you already know.

Reading
BMA 1

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Who am I?

• Mix of French/German/Bolivian origins

• MRes – Sciences Po
• Graduate Education
› European University Institute (Ph.D.)
› Oxford University (Post-Doc)Terms abroad
• Joined Bocconi in 2012
› Visited Harvard in 2016-17
› Associate Professor since 2018
• Miscellaneous:
› Personal background -> passionately European
› University as a period of intellectual curiosity!

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My research & class topics

• How bankruptcy law interacts with firm dynamics?
› Very similar to divorce!
› Very important because of allocative effects (survival of fittest or fattest)
• How conglomerates and business group allocate resources
› Favor or deter competition?
› How do they contribute to innovation?
• What is the role of financial contracts in shaping competition?
Terms abroad

› Trade credit as one of the most important sources of financing!

• Fintech! What is the future of the financial industry?
› Revolution that wipes away all the old institutions? (Marketplace lending)
› Business as usual?
› Something in between?

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Who are you?

• Where are you from?

› Continents
› Countries

• Where do you want to work?

› Industry: (Big) Corporation, Consulting
› Finance: Bank, Insurance, Asset management, PE, VC
› Government, International Organization, NGO
› Start-up, Own start-up
› Academia
› Other

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Who are you?

• In which field do you want to work?

› Finance
› Marketing
› Strategy
› HR
› Supply Chain
› Other

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Interactions!

• Online format makes interactions more challenging but not

impossible! We just need to be patient with each other!

• When you make a contribution to class discussions, please

mention your name to everyone

• This is a learning environment: research shows you learn a lot

from mistakes, so do not be shy! Mistakes are an essential part
of the learning process

• This is a learning environment: essential that discussions are

about the class and with the class – I’m very strict on this!
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What will we do in this class?

• Intro & understanding balance sheets

• NPV & investment decisions
• Valuing debt instruments
• Valuing equity instruments
• Risk & Return
• Market Efficiency
• Financing decisions & firm valuation
› Payout policy
› Leverage

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Setting expectations

• Fast-paced and quantitative course

• Builds extensively on existing knowledge of statistics, math,

and finance

• Check the slides on course pre-requisites

› You should be familiar with variance, covariance, stocks, bonds etc.

• Decide whether you want to drop/attend the course

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Logistics

• Course website: Blackboard

› Syllabus (and FAQ) contains all the information you need

• Textbook
› “Principles of Corporate Finance” - Brealey, Myers, and Allen (BMA)
12th edition

• My office hours:
› Office: Room 2-D2-07 (Roentgen)
› Tuesday 16.30-17.30

• Teaching assistant: Goonj Mohan

› Office hours: available on email request
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Logistics – Classroom (Physical and Virtual)

• Be here and on time: each class will start on time… and end on
time.

• Attendance is strongly encouraged: some topics are analyzed

more in-depth in class than in the book

• Aim: flip the classroom!

i. All slides are uploaded but not all are discussed in class.
ii. Class focuses on most difficult/interesting concepts and
exercices. Importance of interactions!
iii. All slides and classes follow the textbook – read it and check
your understanding of the material!
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Logistics – Course requirements

• Final exam: compulsory.
› Weight: 30% to 100% of final grade.
› Weight depends on other components (case studies/quizzes)
› Enrolment before deadlines set by the University

• Case studies
› Two graded cases (prepared before in groups 3-5)
› 20% (if better than exam)

• Quizzes on Blackboard
› At home
› 10 quizzes – grade is the average of the best 8 scores
› 50% (if better than exam)
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Take-homes
› Take-home zero to get familiar with the system
› round to the digit asked:
- For example you calculate 29.4769 and the question is asking you to
give the number up to the first digit
- The correct answer is then 29.5
› Assume 365 days in a year unless stated otherwise
› You need to submit before the deadline

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Merit and rigor in the assessment process

• One of Bocconi University’s most important values is merit.

• In particular, Bocconi places emphasis on the rigor of the student assessment

process. Fair assessment and appropriate grade distribution are crucial to
guaranteeing high quality education for students and defending the university’s
credibility.

• In addition, an appropriate grade distribution that is in line with international

standards facilitates an understanding and transfer of grades between institutions in
the Erasmus/ECTS system.

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The role of grade distribution

• An appropriate distribution among the various grade ranges is the result of
tests/exams designed to mirror the different levels of student preparation. Such
distribution is not applied mechanically, nor is it the result of forcing the way the
grades are assigned.

• Passing grades in courses with a high number of students should be distributed, on

the whole (out of all the exam sessions held each year), according to the benchmark
distribution below.

Grade range Marginal frequency Cumulative frequency

18-20 10% ≤ 20 At least 10%

21-23 25% ≤ 23 At least 35%

24-27 30% ≤ 27 At least 65%

28-29 25% ≤ 29 At least 90%

30-30L 10%

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Logistics – Some helpful suggestions

• Do readings ahead of time (skim textbook chapters in advance)

• Take notes during lectures

• Work on problem sets and quizzes

• Ask questions!

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Role of the financial manager

(2) (1)

Firm's Financial Financial

(4a)
operations manager markets

(3) (4b)

(1) Cash raised from investors

(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors

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Corporate Structure

Sole Proprietorships
Unlimited liability
Personal tax on profits
Partnerships

Limited liability
Corporations Corporate tax on profits +
Personal tax on dividends

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Our focus for this course: (Big) corporations

Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships

Limited Liability
Corporations Corporate tax on profits +
Personal tax on dividends

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Organizing a business
Sole Proprietorship Partnership Corporation

Who owns the The manager Partners Shareholders

business?

Are managers and No No Usually

owners separate?

What is the owner’s Unlimited Unlimited Limited

liability?

Are the owner & No No Yes

business taxed
separately?

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Corporate Governance –
Different views around the world

Whose Company Is It?

Dividends vs. Jobs?

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Corporate Governance –
Separation of ownership and control
Agency conflicts between managers and shareholders
lead to agency costs
› Shareholders want managers to maximize firm value.
› But difficult to monitor, especially when there are many shareholders.
› Not well monitored, managers might also follow their own interests, …
at the expense of shareholders.
› Agency costs take many forms: reduced effort, empire building,
“perks”…
- One example of “perks”: Corporate Jets. (Yermack, D. 2006 Flights
of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder
Returns)
https://www.sciencedirect.com/science/article/pii/S0304405X05001820

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Corporate Governance –
Separation of ownership and control
How can agency costs be mitigated?
1 - Compensation plans
2 - Board of directors
3 - Takeovers
4 – Auditors
…

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Corporate Governance –
Separation of ownership and control
How can agency costs be mitigated?
1 - Compensation plans
… if they are not manipulated (e.g. “options backdating”)
2 - Board of directors
… with independent board members (often executives, or
CEOs of other firms sit on the board)
3 – Takeovers
… if no anti-takeover provisions in the “articles of
incorporation” (e.g. “poison pills”)
4 - Auditors
… Arthur Andersen found guilty in the auditing of Enron

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Market Value vs. Book Value

Example

Book Value Balance Sheet

Assets = $10 bn Debt = $4 bn
Equity = $6 bn

Market Value Balance Sheet

Assets = $11.5 bn Debt = $4 bn
Equity = $7.5 bn
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