Math Managerial Finance II—AFM372

• AKA: Corporate Finance

• Instructor: Alan Huang

• Office Hours: HH386E, TR 3:00-4:30 or by appointment

• Email: aghuang@uwaterloo.ca– Normally emails are answered within 48 hours (72 hours if

received in weekends)– Emails received shortly before midterm and final will only be

answered in additional office hours– Use your TAs, course discussion forum, and office hours wisely.

Physical presence has priority over phone/emails/electronic posts.

• Required Text: – Corporate Finance (4th Canadian edition,

2008) by Ross, Westerfield, Jaffe and Roberts– Course Notes

• Problem Sets

Course Web pagehttp://www.arts.uwaterloo.ca/~aghuang/AFM372 (Also accessible through UWACE)

– Syllabus– Announcements– Lecture notes– Chapter solutions– Problem sets– Quizzes & Exams – Case

• Discussion Forum: UWACE, discussion forum tab

Course Evaluation

Weight

Integrative Case 10%

In-class exercisesQuizzes (2)

5%10%

Midterm exam (1) 30%

Final exam 45%

Important Dates

• September 30: Quiz 1

• October 24: Midterm Exam

• November 13: Quiz 2

• November 20: Case Due

STOCKHOLDERS

MANAGERS:

-Operation decisions

BONDHOLDERS SOCIETY

FINANCIAL MARKETS

Hire & fire managers

-Board

-Annual Meeting

Maximize stockholder wealth

Lend $

Protect bondholder interests

No social costs

Costs can be traced to firm

Reveal information honestly and on time

Markets are efficient & assess effect on value

What is Corporate Finance

The Classical Objective Function

STOCKHOLDERS

MANAGERS:

-Poor Operation decisions

BONDHOLDERS SOCIETY

FINANCIAL MARKETS

Have little control over managers

Managers put their interests above stockholders

Lend $

Bondholders can get ripped off

Significant social costs

Some costs can not be traced to firm

Delay bad news or provide misleading information

Markets make mistakes and can over- or under-react

What can go wrong?

STOCKHOLDERS

MANAGERS BONDHOLDERS SOCIETY

FINANCIAL MARKETS

1. More activist investors

2. Hostile takeovers

Managers of poorly run firms are put on notice

Protect themselves

1. Covenants

2. New type

Corporate good citizen constraints

1. More laws

2. Investor/Customer backlash

Firms are punished for misleading information

Investors and analysts become more skeptical

Advanced topics: Counter actions

Important concepts from AFM272

• Time value of money– Perpetuities, annuities

• Risk adjustments– CAPM:

E(Rj) = Rf + βj [E(Rm) – Rf]

• Capital budgeting– NPV rule

Basic PrinciplesObjective: Maximize the Value of the Firm

• Invest in projects that yield a return greater than the minimum acceptable hurdle rate (i.e. that have positive NPV)– The hurdle rate should reflect the (systematic) risk of the project

and the financing mix used

• Choose a financing mix that minimizes the hurdle rate

• If there are not enough investments that earn the hurdle rate, return the cash to the owners of the firm – The form of returns - dividends and stock buybacks - will depend

upon the stockholders’ characteristics

Another important principle: No-arbitrage

• a.k.a. the “law of one price”• arbitrage involves the simultaneous purchase and sale of

assets in such a way as to generate risk free profit at zero cost (a free lunch)

• in well-functioning capital markets, arbitrage opportunities will be extremely rare and will not last for long

• another way of thinking about this idea is that any two assets with identical future cash flows must sell for the same price today (or else there would be an arbitrage opportunity)

• though simple, this is a surprisingly powerful idea that is widely used in financial theory and practice

What will be covered in AFM372

• Interactions with stock and bond markets: How to raise money?– Chapters 14, 15, 20, 21

• Deciding the right financing mix– Chapters 16—18

• Dividend policy– Chapter 19

• Financial Derivatives & Risk management– Chapters 23—26

• Special topics – Leasing (ch. 20), M&A (ch. 31)