WELCOME TO FIN303

FIN303 – Advanced Corporate Finance

Instructor: Do T. Thanh Huyen
Lecturer, Faculty of Business
FPT University
 The course provides
students with continuous
information and knowledge
about firm's financial
decision, how to manage its
TOPICS INCLUDE: financial performance more
* PART 1: COST OF CAPITAL AND FINANCING DECISIONS effectively in order to
(CHAP 13, 15, 16, 17) survive competition and
* PART 2: WORKING CAPITAL MANAGEMENT (CHAP 14) takeover in practical
* PART 3: FINANCIAL PLANNING AND FORECASTING environment.
(CHAP 19)
* PART 4: OPTIONS IN CORPORATE FINANCE (CHAP 20)

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FIN303 – ADVANCED CORPORATE FINANCE
ASSESSMENT
1) On-going assessment:
✓ 01 Group assignment : 15%
✓ 01 INDI. Assignment: 15%
✓ 02 quizzes (5% each): 10%
✓ 01 mid-term test (MT): 15%
✓ 01 Essay test: 15%
2) Final Exam (Multiple choice): 30%
3) Completion Criteria:
Every on-going assessment component > 0; Final Result >=5 &
Final Exam Score >=4
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FIN303 – LEARNING ROADMAP
Review FIN202 Quiz 1 Chap 16 + Midterm
Chap 13 + Chap 15 (5%) Chap 17 test (15%)

Chap 14 + Essay test

Quiz 2 (5%) Chap 20
Chap 19 (15%)

Individual Group
Final Exam
Assignment(*) Assignment(*)
(30%)
(15%) (15%)
CLASS RULES:

Be on time! Respect yourself, Do your homework!

your classmates,
your lecturers,
and your
classrooms

Stay on task Take turns

Follow directions Be respectful
Ask questions when others are
speaking
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WORKING IN GROUP

1. Build your group

2. Select the topic
3. Prepare and ask
if you need
4. Present your work

7
 REVIEW FIN202

FIN303 – Advanced Corporate Finance

Instructor: Do T. Thanh Huyen
Lecturer, Faculty of Business
FPT University
 CHAP 5
THE TIME VALUE OF FIN202

MONEY
PRESENT VALUE AND DISCOUNTING
PRESENT FUTURE

1. If the bank pays interest once per year:

𝑭𝑽
PV0 = (5.4) FVn = PV * (1+ r)n (5.1)
(1+ r)n

2. If the bank pays interest more than once per year:

𝑭𝑽 𝒓
PV0 = 𝒓 n∗m (5.5) FVn = PV * (1+ )n*m (5.2)
(1+ ) 𝒎
𝒎

3. If the bank pays continuous compounding interest rate:

𝑭𝑽
PV0 = (5.6) FVn = PV * er*n (5.3)
er∗n
Note: e = 2.71828, the base of the natural logarithm
 CHAP 6
DISCOUNTED CASH FIN202

FLOWS AND VALUATION

ANNUITIES AND PERPETUITIES

ANNUITIES: PERPETUITIES:
A series of equally-spaced and A series of equally-spaced and
level cash flows extending over a level cash flows that continue
FINITE number of periods FOREVER

Ordinary annuity:
an annuity in which payments are made
at the END of the periods

Annuity due:
an annuity in which payments are made
at the BEGINNING of the periods
ORDINARY ANNUITY – FORMULA
𝟏−𝐏𝐕𝐅𝐀
Ordinary annuity: A series of 𝐏𝐕𝐀𝟎 = 𝐂𝐅 × 𝐏𝐕𝐅𝐀 = 𝐂𝐅 ×
𝐢
i. equally-spaced cash flows 𝟏
𝟏−(𝟏+𝐢)𝐧
ii. equally-level cash flows = 𝐂𝐅 × (𝟔. 𝟏)
𝐢
iii. over a finite number of periods
iv. payments are made at the END of the
periods

Future Value Factor −1

FVA𝐧 = 𝐂𝐅 ×
𝐢
𝐧
(𝟏 + 𝐢) − 𝟏
= CF × (6.2)
𝐢
ANNUITY DUE – PV AND FV
Ordinary annuity: A series of Annuity Due: A series of
i. equally-spaced cash flows i. equally-spaced cash flows
ii. equally-level cash flows ii. equally-level cash flows
iii. over a finite number of periods iii. over a finite number of periods
iv. payments are made at the END of the iv. payments are made at the BEGINNING of
periods the periods
Annuity due value = Ordinary annuity value × (1 + i)
𝟏
𝟏−
(𝟏+𝐢)𝐧
𝐏𝐕𝐀𝟎 = 𝐂𝐅 × (𝟔. 𝟏)
𝐢
𝐏𝐕𝐀𝐃𝐮𝐞 = 𝐏𝐕𝐀𝟎 × (𝟏 + 𝐢)𝐧
𝟏
Annuity transformation 𝟏−(𝟏+𝐢)𝐧
= 𝐂𝐅 × × (𝟏 + 𝐢) (𝟔. 𝟒)
𝐢

(𝟏 + 𝐢)𝐧 − 𝟏 FVA𝐃𝐮𝐞 = FVA𝐧 × (𝟏 + 𝐢)𝐧

FVA𝐧 = CF × (6.2)
𝐢
(𝟏+𝐢)𝐧 −𝟏
=CF × × (𝟏 + 𝐢)
𝐢
PERPETUITY – PV FORMULA
Perpetuity: A series of

i. equally-spaced cash flows

ii. equally-level cash flows
iii. continue FOREVER

n→∞
𝟏−(𝟏+𝐢)𝐧
𝟏
𝑪𝑭
𝐏𝐕𝐀𝟎 = 𝐂𝐅 × (𝟔. 𝟏) 𝐏𝐕𝐏𝟎 = (𝟔. 𝟑)
𝐢 𝒊
CFS THAT GROW AT A CONSTANT RATE
n
1+g
Growing ANNUITIES: 1− 1+i
A series of equally-spaced that PVA0 = CF1 ×
i−g
increase in size at a constant rate
for a finite number of periods (1+𝑖)𝑛 −(1+𝑔)𝑛
FVA = CF1 ∗ [ ]
𝑖 −𝑔

Condition to apply
• i > g;
Growing PERPETUITIES: • CF1= CF0×(1+g)
CF1
equally-spaced cash flows that PVP0 = (6.6)
i−g
increase in size at a constant rate
forever
 CHAP 7 FIN202

RISK AND RETURN

RETURN
Total holding period return consists of (1) capital appreciation (Rca) and (2)
income (Ri)
RT = Rca + Ri
𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑎𝑝𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑃1 − 𝑃0 Δ𝑃 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝐶𝐹1 𝐶𝐹1
𝑅𝑐𝑎 = = = 𝑅𝑖 = = =
𝑖𝑛𝑖𝑡𝑖𝑎𝑙𝑝𝑟𝑖𝑐𝑒 𝑃0 𝑃0 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑃0

an average of the possible returns from an investment,

E(RAsset) where each return is weighted by the probability that it will
occur
𝑛

𝐸(𝑅𝑎𝑠𝑠𝑒𝑡 ) = ෍(𝑝𝑖 × 𝑅𝑖 ) = (𝑝1 × 𝑅1 ) + (𝑝2 × 𝑅2 )+. . . +(𝑝𝑛 × 𝑅𝑛 ) (7.2)

23 𝑖=1
RISK – MEASURE OF VOLATILITY
VARIANCE:
measure of the uncertainty associated with an outcome

𝑉𝑎𝑟(𝑅𝑖 ) = 𝜎𝑅2 = ෍ 𝑝𝑖 × 𝑅𝑖 − 𝐸(𝑅) 2 (7.3)

𝑖=1

STANDARD DEVIATION:
the square root of the variance

𝜎= 𝜎𝑅2
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DIVERSIFYING RISK: NAMING
• Firm-specific risk is also called: risk that can be eliminated
✓ Unsystematic risk through diversification
✓ Asset-specific risk
✓ Diversifiable risk

• Market-level risk is also called: risk that cannot be eliminated

✓ Systematic Risk through diversification
✓ Market risk
✓ Non-diversifiable risk

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MEASURING RISK: PART II - BETA
•Coefficient of variation (CV)

a measure of the risk associated 𝜎𝑅𝑖

CV with an investment for each one 𝐶𝑉𝑖 = (7.4)
percent of expected return 𝐸(𝑅𝑖 )

Example:
Stock A has an expected return of 12 percent and a risk level of 0.12
𝐶𝑉𝐴 = = 1.00
12 percent, while Stock C has an expected return of 16 percent 0.12
and a risk level of 16 percent. If we assume that the risk level
given for each stock is equal to the standard deviation of its 0.16
𝐶𝑉𝐵 = = 1.00
return, we can find the coefficients of variation for the stocks as 0.16
follows:
MEASURING RISK: PART II - BETA
•Covariance of returns (Cov(R1,R2))

Covariance of a measure of how the returns on two assets covary, or move

returns together
𝑛

𝐶𝑜𝑣(𝑅1 , 𝑅2 ) = 𝜎𝑅1 2 = ෍ 𝑝𝑖 × 𝑅1,𝑖 − 𝐸(𝑅1) × 𝑅2,𝑖 − 𝐸(𝑅2) (7.8)

,
𝑖=1

Correlation between the returns

The correlation between the returns on two assets will always
Correlation have a value between -1 and +1.

𝜎𝑅1 2
ρ𝑅1 2 = , (7.9)
, 𝜎𝑅 × 𝜎𝑅
1 2
MEASURING RISK: PART II - BETA
• Beta: a measure of non-diversifiable, systematic, or market, risk
• For stock i, its beta is:

𝜎𝑖
𝛽𝑖 = ∗ 𝜌𝑖,𝑚
𝜎𝑚

• Conceptually, beta measures:

• a stock’s volatility relative to the portfolio as a whole
• a stock’s contribution of risk to the portfolio
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COMPENSATION FOR BEARING SYSTEMATIC RISK
• Capital Asset Pricing Model
• The Capital Asset Pricing Model (CAPM) describes the relationship between risk and required
expected return for an asset

Required
(Market Risk (Stock i’s Beta
Return on = Risk-Free rate + *
Premium) Coefficient)
Stock i

E(R ) = R +  E(R ) – R
i rf i m rf

COMPENSATION FOR BEARING SYSTEMATIC RISK
• The CAPM and Portfolio Returns
➢ The expected return for a portfolio is the weighted
average of the expected returns of the assets in the
portfolio
➢ The beta of a portfolio is the weighted average of the
betas of the assets in the portfolio

n
 n asset portfolio =  ( xi  i ) = ( x 11 ) + ( x 2  2 ) + ... + ( x n  n ) (7.10)
i =1
 CHAP 8
BOND VALUATION AND FIN202

THE STRUCTURE OF
INTEREST RATES
CORPORATE BONDS – TYPES
Vanilla bond
• coupon payments fixed for the
life of the bond
• repay principal and retire the
bonds at maturity
• contracts have the features
and provisions found in most
bond covenants.
• annual or semiannual coupon
payments
Zero-coupon bond
• no coupon payments
• pays face value at maturity.
• sell at deep discount
Convertible bonds
• may be exchanged for shares
of the firm’s stock
• sells for a higher price than a
comparable non-convertible
bond
• bondholders benefit if the
market value of the company’s
stock gets high enough
 BOND VALUATION – STEPS
STEP 2:
Determine expected future cash flows
– the coupon payments and
principal (par value)
STEP 3:
Compute the current market value, or
price (PB) by calculating the present
value of the expected cash flows
PB = PVCoupon Payments+ PVPar Value

STEP 1:
Determine the required
rate-of-return
BOND VALUATION – SEMIANNUAL COMPOUNDING
• Most bonds issued in Europe pay annual coupons, most issued in the U.S. pay semiannual coupons
• Eq. 8.2 shows how to value bonds that pay semi-annual coupons
PB = PVCoupon Payments+ PVPar Value

𝐶 Τ𝑚 𝐶 Τ𝑚 𝐶 Τ𝑚 𝐶 Τ𝑚 𝐹𝑛𝑚
𝑃𝐵 = + + +. . . + + (8.2)
(1 + 𝑖 Τ𝑚)1 (1 + 𝑖 Τ𝑚)2 (1 + 𝑖 Τ𝑚)3 (1 + 𝑖 Τ𝑚)𝑛 (1 + 𝑖/𝑚)𝑛𝑚

Applying annuity equation (equation 6.1), we can calculate price of bond as follow
1
1− 𝑖
𝐶 (1 + )𝑚𝑛 𝐹𝑚𝑛
𝑃𝐵 = × 𝑚 +
𝑚 𝑖 𝑖 𝑚𝑛
(1 + )
𝑚 𝑚
BOND YIELD
• YTM is the discount rate that 1
1− 𝑌𝑇𝑀
makes the present value of the 𝐶 (1 + 𝑚 )𝑚𝑛 1,000
Yield to coupon and principal payments 𝑃𝐵 = ×
𝑚 𝑌𝑇𝑀
+
𝑌𝑇𝑀 𝑚∗𝑛
Maturity equal the price of bond 𝑚 1 + 𝑚
(YTM)

1
1−
• The return earned on a bond 𝐶
𝑖
(1 + 𝑚)𝑚∗𝑡 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
given the cash flows actually 𝑃𝐵 = × +
Realized received by investor 𝑚 𝑖 𝑖 𝑚∗𝑡
𝑚 1+𝑚
Yield
BOND YIELDS
Effective Annual Yield

Effective annual yield (EAY) is the annual yield that takes compounding into account;
another name for the effective annual interest rate (EAR)

Quoted rate 𝒎
EAY = (1 + ) −1
m
 CHAP 9 FIN202

STOCK VALUATION
EQUITY SECURITIES – TYPES
COMMON STOCK
• Is the basic ownership claim in a corporation
• Has the right to vote on matters such as
electing a board of directors, setting a capital
budget, and proposed mergers or acquisitions
• Has the right to a firm’s residual assets after
creditors, preferred stockholders, and others
with higher priority claims have been satisfied
PREFERRED STOCK
• Represents ownership in corporation
• Does not have the right to vote
• Has priority over common stock with respect to
dividends and liquidation of assets
• Must be paid a fixed dividend before funds
are distributed to common stockholders

Price of Stock = PV of expected future benefits , (in this case, it is dividend)

𝐷1 𝐷2 𝐷3 𝐷𝑡 𝐷𝑡
𝑃0 = + + +. . . + = σ∞
𝑡=1 (9.1)
(1+𝑖)1 (1+𝑖)2 (1+𝑖)3 (1+𝑖)𝑡 (1+𝑖)𝑡
COMMON STOCK VALUATION – SUMMARY
Assumption 1: Zero-growth
𝐃
• The dividend has a zero growth rate and is 𝐏𝟎 = (𝟗. 𝟐)
always the same 𝐑

Assumption 2: Constant growth

𝐃𝐭+𝟏
• The dividend has a constant growth rate.
𝐏𝐭 = (𝟗. 𝟓)
𝐑−𝐠

Assumption 3: Multi-stage growth

𝐃𝟏 𝐃𝟐 𝐃𝐭 𝐏𝐭
• The dividend has a mixed growth rate; i.e., the 𝐏𝟎 = + +. . . + +
rate is higher in some periods and lower in others. (𝟏 + 𝐫)𝟏 (𝟏 + 𝐫)𝟐 (𝟏 + 𝐫)𝐭 (𝟏 + 𝐫)𝐭
EQUITY VALUATION – PREFERRED STOCK
• CASE 1: Preferred stock with a fixed maturity is PS0 = PV (Dividend payments) + PV (Par value)
priced using the bond valuation model
developed in Chapter 8 1
• Equation 8.2 can be restated as the price of 1−
𝑖 𝑛∗𝑚
1+𝑚
a share of preferred stock (PS0) 𝐷 100
𝑃𝑝𝑠 = ∗ 𝑖 + 𝑖 𝑛∗𝑚
𝑚 1+
𝑚 𝑚

• CASE 2: Perpetual preferred stock has no

maturity date
• Dividends are fixed (g = 0)
𝐷
• Dividend payments go on forever 𝑃𝑝𝑠 =
• Use Equation 9.2 to value perpetual 𝑖
preferred stock
 CHAP 10
THE FUNDAMENTALS OF FIN202

CAPITAL BUDGETING
INVESTMENT APPRAISAL METHODS
1) Net Present Value:
n
NCF1 NCF2 NCFn NCFt
NPV = NCF0 + + + ... + =෍ 10.1
1 + k (1 + k)2 (1 + k)n (1 + k)t
t=0

2) Internal Rate of Return: 3) Modified Internal Rate of Return:

n
NCFt 𝑛 𝑇𝑉𝑛
NCF0 + ෍ =0 𝑀𝐼𝑅𝑅 = −1
(1 + IRR)t 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐶𝑜𝑠𝑡
t=1

4) Payback period and Discounted PB:

Remaining cost to recover

PB = 𝑌ears before cost recovery +
Cash flow during the year
PRACTICE
THANK YOU FOR YOUR
ATTENTION
Instructor: Do T. Thanh Huyen
Lecturer, Faculty of Business
FPT University
Email: HuyenDTT24@fe.edu.vn