Finance for Executives 12 Weeks

Executive MBA program

This document outlines the 12-session EMBA Finance course.

Goals of the program

The Finance core course, which is designed to provide a sound financial foundation for students, covers the concepts and methods in Corporate Finance and Capital Markets. The Corporate Finance theme focuses on the best strategies for firms to finance their current operations as well as their growth opportunities. The Capital Markets theme focuses on how capital markets work, the different instruments available and how firms can access them. We will analyze the principles behind debt securities, their risks and their valuation. We will also focus on project valuation, and examine strategies to finance operations and growth. We will devote special attention to the task of firm valuation, capital markets and mergers and acquisitions (M&As). Most firms use financial derivatives to manage and allocate risks in an efficient manner. Another objective of the course is to examine risk management strategies for the firm and derivatives usage.

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Program overview

In order to make informed, intelligent decisions about their businesses, executives need to understand the information contained in a company’s financial statements. Therefore, the program starts with a review of the information contained in a company’s financial statements. It then moves on to how working capital requirements relate to the firm’s liquidity and sustainability in terms of growth and competitiveness. Capital markets, project valuation and financial policies are also covered in depth. Overall, the course aims to demonstrate how financial decisions can create value.

The EMBA Finance course has been designed to cover the following sub-topics:

Session Session topic Chapter

1 Time Value of Money and Interest Rates 4, 6

2 Bonds and Debt Issues 6

3 Project Valuation: Capital Budgeting Tools and Application 4

4 Investment Projects Valuation 4

5 Value Creation and Cost of Capital 2, 3

6 Capital Structure & Financing Decisions 5

7 Company Valuation 9

8 Raising Equity Capital: IPOs and SEOs 7

9 M&As 10

10 M&As 10

11 Derivatives: Futures, Forwards, Swaps 11, 12

12 Derivatives: Options 13

A detailed outline of each session follows and includes readings, topics covered, key learning points, excel exercises, additional readings and recommended websites and other information. Finally, the outline of each session suggests real data to show in class (available from the updated PowerPoint slide deck with current data).

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Session 1 - Time Value of Money and Interest Rates

Topics covered Introduction to time value of money. Principles of discounting applied to simple instruments, like bonds, loans.

Case study UK Gilts case study (IMD-7-1577) – includes Teaching note, and instructor’s

excel

Readings Finance for Executives: A Practical Guide for Managers: Chapters 4 & 6 (6.1-

6.3)

Real data to show in class Interest rates in different countries – FT website Bond markets, interest rates, yield curve and CDS spreads

Excel in class Bank loan, payment needed, amortization and interest Yields on bonds - example in Chapter 6 (Finance for Executives) Leasing payments Royalty interest - example in Chapter 4 (Finance for Executives)

Key learning points from this session Time value of money: timing and discount rates

Common uses of present value tools, for instance in bank loans, leasing, etc.

Websites Financial Times – Bonds & Rates BondsOnline European Central Bank – Long Term Interest Rate Statistic for EU Members

States Board of Governors of the Federal Reserve System – Federal Open Market

Committee

Possible questions covered in the session: What is the value of cash flows received in different moments in time? I am considering a mortgage for a house. What is the monthly payment? What would the leasing payment be for a certain asset?

Session 2 - Bonds and Debt Issues

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Topics covered Loans and bonds Ratings Yield curve Bond valuation Risks of investing in bonds Maturity structure of debt Liquidity and spreads CDS CoCo's and other hybrid debt instruments

Case study The October 2009 Petrobras Bond Issue (IMD-1-0285), includes Teaching

note, powerpoint, and instructor’s excel

Readings Finance for Executives - Chapter 6

Real data to show in class Interest rates in different countries Yield curve Bond Spreads CDS Spreads

Excel in class Bond valuation Changes in prices as the yield changes, for bonds of different maturities Computing Yield-to-Maturity and Yield curves

Key learning points from this session Bond prices are inversely related to the yield to maturity Corporate bonds risks, rating, pricing Liquidity and its impact on bonds

Websites BondOnline European Central Bank – Long Term Interest Rate Satistic for EU Members

States Board of Governors of the Federal Reserve System – Federal Open Market

Committee

Additional readings / News Related to the Session AAA Rating Is a Rarity in Business - NYTimes Global Alcoholic Beverage Rating Methodology (Moody’s Global Corporate

Finance) Economics Focus – The Long and the Short of it (The Economist)

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Possible questions covered in the session: Should we issue fixed-rate debt or floating-rate debt? My company has

traditionally used only bank loans. Are corporate bonds an alternative? How do rating agencies look at different companies? What is the risk of investing in bonds? What are credit default swaps (CDS)? Should we have long-term or short-term debt?

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Session 3 - Project Valuation: Capital Budgeting Tools and Application

Topics covered Identify relevant cash flows NPV and its application Different project evaluation criteria: IRR, payback, return (profitability) index

Case study Atlantida (IMD-1-0289) – includes Teaching note, instructor’s excel and

powerpoint slides.

Readings Finance for Executives: A Practical Guide for Managers: Chapter 4

Excel in class LHI company - example from Chapter 4 (Finance for Executives)

Key learning points from this session Determine the relevant cash flows that result from a certain proposed

investment NPV as a measure of value creation The NPV analysis should always focus on differential cash flows Compute and interpret payback, IRR and profitability index for different

projects

Possible questions covered in the session:

Which of two apparently profitable investment projects should my company choose?

How can I ensure that my company allocates capital to projects that add value?

What criteria should we use to decide between different capital expenditures?

How do I decide between different cost reduction projects? How do I evaluate brands? What should we pay attention to when we evaluate projects outside the

company’s core business?

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Session 4 - Investment Projects Valuation

Topics covered Estimation of cash flows (working capital, operating cash flows, CAPEX, taxes) NPV and its application Sensitivity Analysis Commercial implications of NPV, and technological choices (350 vs 357 days

in Bacia de Campos case study)

Case study Bacia de Campos (IMD-1-0288) – includes Teaching note, instructor’s excel

and powerpoint slides.

Readings Finance for Executives: A Practical Guide for Managers: Chapter 4

Excel in class Rio Tinto sensitivity analysis - chapter 4 (Finance for Executives) Bacia de Campos excel model and sensitivity

Key learning points from this session Use the DCF/NPV tools to identify value creation opportunities Computation of project's cash flows based on business plan estimates Perform sensitivity analysis, and use it to identify the most sensitive areas of

a proposed investment project: then try to mitigate or manage those risks Use the NPV tools for day-to-day decisions (for instance, commercial

negotiations with suppliers and customers)

Websites Palisade – Monte Carlo Simulation

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Session 5 - Value Creation and Cost of Capital

Topics covered Return on Invested Capital, and its decomposition into key drivers:

profitability and efficiency. Cost of capital and its components; Economic Value Added; Working capital.

Case study Microsoft acquires Skype (IMD 1-0337) – includes Teaching note The Battle for Value: Federal Express Corporation vs. United Parcel Service of

America, inc. (abridged) (UV0004)

Readings Finance for Executives: A Practical Guide for Managers: Chapters 2 & 3

Real data to show in class WACC, ratings, betas, across different sectors and companies Market risk premium estimates – Chapter 2 (Finance for Executives)

Excel in class Use Chapter 3 Return on Invested Capital decomposition on a chosen

company. Simulate impact of different working capital policies.

Key learning points from this session The Value-Growth Matrix WACC and its components Risk and return as perceived by suppliers of capital Return on invested capital and its decomposition into managerial drivers Levers that affect the ROIC What value creation is and how it should link to the company strategy Value creation is about delivering returns above cost of capital. It requires an

optimal linkage of investment, financing and payout policies

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Websites finance.google.com , for betas of different companies Moodys.com , for ratings of different companies (needs registration) Nobelprize.org , about the CAPM and risk-return – Nobel prize of 1990

Additional readings / News Related to the Session Balancing ROIC and growth to build value (McKinsey on Finance, 2006, Bing

Cao, Bin Jiang and Timothy Koller) Global Stock Markets in the Twentieth Century (The Journal of Finance, June

1999, Philippe Jorion and William N. Goetzmann)

Possible questions covered in the session: What is the cost of capital, and how does it change over time? How does the cost of equity vary across different companies? How do I compute my company’s weighted average cost of capital? What is the relation between risk and cost of capital?

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Session 6 - Capital Structure & Financing Strategies

Topics covered Leverage and its implications. Leverage and Risk Risk, WACC and capital structure choices.

Case study Financial Strategy at BAA (IMD-1-0293) – includes Teaching note Diageo plc (HBS 9-201-033)

Readings Finance for Executives: A Practical Guide for Managers: Chapter 5

Real data to show in class Debt ratios for companies in different continents (Eurostoxx 50, Dow Jones,

Rest of the World). Financial distress costs across sectors – Fig. 5.4 (Finance for Executives) Rating matrix used by Moody’s for a certain industry (for instance Global

Alcohol)

Excel in class Debt increases Risk: Example Ch 5 - Debt and risk page 88 Ch 5 - Tax savings from debt Impact of leverage on WACC of different companies. How to estimate

levered/unlevered betas –customizable excel spreadsheet from Chapter 9 (Finance for Executives)

Key learning points from this session Companies differ in their optimal capital structure, and an understanding of

the key drivers behind financing decisions Static trade-off (taxes and distress) theory is not enough Including financial flexibility is key to understand capital structure decisions

Websites www.moodys.com

Additional readings / News Related to the Session AAA Rating Is a Rarity in Business (The New York Times, 2 August 2011, Eric

Dash) Global Alcoholic Beverage Rating Methodology (Moody’s Global Corporate

Finance, Sept. 2009)

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How Much Cash Does your Company Need (HBR, 2003, Richard Passov) The Theory and Practice of Corporate Finance: Evidence from the Field

(Journal of Financial Economics, 2001, John R. Graham, Campbell R. Harvey)

Possible questions covered in the session: Why do some companies have sustainably very high amounts of debt? How much debt should we have in our company? How does the optimal financing mix vary across industries? What is the impact of debt on operations (customers, suppliers, employees,

etc.)?

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Session 7 - Company Valuation

Topics covered Multiples and DCF valuations Sensitivity analysis Forecasting cash flows Terminal value: long term growth and WACC

Case study Telefónica’s Bid for the Mobile Market in Brazil (IMD-1-0359) – includes

Teaching note, instructor’s excel and powerpoint slides.

Readings Finance for Executives: A Practical Guide for Managers: Chapter 9

Real data to show in class PER ratios for countries and industries

Excel in class Chapter 9 template and example of valuation by DCF (Finance for Executives)

Key learning points from this session Company valuation techniques and value creation Role of terminal value and growth in perpetuity Multiples and relation with fundamentals (risk, growth, return) Triangulation between multiples and terminal growth rate

Possible questions covered in the session: Our company is considering spinning off a division that is no longer core to

our business. What is its fair value? How many years should we use when valuing companies? What are the different methods used to value companies? How do different multiples work?

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Session 8 - Raising Equity Capital: IPOs and SEOs

Topics covered Why go public? The initial public offering (IPO) process Follow on offers - SEOs Rights and their pricing Voting and non-voting shares Cross-listings

Case study Equity Capital Raising: The SEO of Petrobras 2010 (IMD-7-1581) – includes

Teaching note, instructor’s excel and powerpoint slides. Preparing for the Google IPO: A revolution in the making (IME-1-0216) –

includes Teaching notes.

Readings Finance for Executives: A Practical Guide for Managers: Chapter 7

Real data to show in class Underpricing Fees paid to investment banks Volume of equity raising activities Top IPOs/SEOs of last year

Excel in class Rights Issue example from Ch 7 - TER UniCredit Rights

Key learning points from this session IPO and SEO process Underwriting fees, greenshoe, commitments by the investment banker Control and ownership dilution Difference between primary and secondary issues Pricing principles behind IPOs and SEOs (including rights issues)

Websites Petrobras investor relation’s page The Wall Street Journal – Investment Banking Scorecard

Additional readings / News Related to the Session Petrobras - Two heads are worse than one (The Economist, 5 April 2014)

Possible questions covered in the session:

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Should my company go public? How do equity-raising processes work? What are the stages in an initial public offering? What are the costs and fees of public equity issues? What happens when a company issues rights? Why do companies have stock splits? Is there value in being listed in different exchanges around the world?

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Session 9-10 - M&As

Topics covered The market for M&As Process of M&A deals Value creation and synergies Valuation: stand alone, and with synergies Terminal value, growth rate, WACC Multiples and premiums

Case study Big Beer: InBev vs. Anheuser-Busch (IMD-1-0291) – includes Teaching note

and excel Telefónica’s Bid for the Mobile Market in Brazil (IMD-1-0359) – includes

Teaching note, instructor’s excel and powerpoint slides

Readings Finance for Executives: A Practical Guide for Managers: Chapter 10

Real data to show in class Merger waves – Figure 10.1 (Finance for Executives) Investment banks league tables and fees Volume of deals by region Top deals of last year

Excel in class

Chapter 10 template and example – with and without synergies

Key learning points from this session Mergers and acquisitions (M&As), their objectives, and the techniques used

in the valuation of a target company The market for M&As Good and bad reasons for M&As Valuation in M&As (DCF, WACC, multiples, premiums, comparable deals, etc.) Synergies and their role in successful M&As

Websites Financial Times – League Tables WSJ Investment banking scorecard

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Additional readings / News Related to the Session InBev Completes Acquisition of Anheuser-Busch (Press Release ABInBev) Mergermarket H1 2013 M&A Report: July 2013

Possible questions covered in the session: When do mergers create value? What are the appropriate methodologies to value potential acquisition

candidates? How can we ensure that our acquisitions create value? How do I choose between different payment methods? What happens after the M&A deal is concluded?

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Session 11 - Derivatives: Futures, Forwards, Swaps

Topics covered Why to hedge? Futures and forward principles Differences between futures and forwards Swaps and their use Pricing of futures and forwards

Case study The Volkswagen Short Squeeze (IMD-1-0318) - with teaching note, slides, and

excel model The Walt Disney Company’s Yen Financing (HBS 9-287-058)

Readings Finance for Executives: A Practical Guide for Managers: Chapters 11 & 12

Real data to show in class

BIS data on different derivative markets Orange juice futures trading data

Excel in class

Pricing of derivatives - chapter 12 Market-to-market and liquidity needs (margin calls) - chapter 12

Key learning points from this session The main type of derivatives available to companies Effective usage of derivatives can create significant value and allows for

effective risk management strategies Futures and marking-to-market Pricing of Futures and Forwards Swaps and their use

Websites www.theice.com Bank for International Settlements

Additional readings / News Related to the Session

Currency “Carry Trade” Becomes Harder Play Amid Version to Risk (The Wall Street Journal Online August 2007, Craig Karmin & Yukari Iwatani Kane)

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Yuan for the Money – The Rise of China’s Currency Will Change the Way World Does Business (The Economist Feb 2013)

Possible questions covered in the session: Why and when should we use derivatives for risk management? What are the differences between futures and forwards? How do derivatives markets work, and how can companies use them

effectively? How does marking-to-market work? How are futures, swaps, and options priced in the market?

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Session 12 - Derivatives: Options

Topics covered Payoffs of different options Valuation of options Drivers of value In-the-money and out-of-the-money options Strategies using options

Case study China Aviation Oil (IMD-3-1888) - includes teaching note, and excel model Cephalon, Inc. (HBS 9-298-116)

Readings Finance for Executives - Chapter 13

Real data to show in class CBOE data. Options on Apple - Bloomberg screenshot - ITM, OTM, ATM Implied volatility - VIX index

Excel in class Protective put, straddle, collar, and their use Option calculator - chapter 13

Key learning points from this session Option terminology Valuation of options: optionality has value Strategies can be used to minimize the cost of hedging strategies

Websites CBOE Global Derivatives CME Group

Possible questions covered in the session: How are stock options valued? Why does volatility make options more valuable? What influences the value of an option?

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