This class exists in these courses :
• IÉSEG > IESEG Degree - Programme Grande École > Semester 1 > 2,00 ECTS

Prerequisites

Students are definitely expected to have background in Finance

Introduction to Financial Markets
Corporate Finance Fundamentals (basics of corporate capial budgeting and capital structure)
Portfolio Management and Analysis
Statistics and Probability in Finance.

Learning outcomes

1. Identify the steps involved in estimating the cash flows from investment projects,
2. Estimate the required rates of return from a project,
3. Understand the interactions between investment and financing decisions,
4. Analyze a project's risks and opportunities
5. Assess the various managerial flexibilities involved in the project.
6. Able to value the dynamics of the projects using lattice-based models (binomial trees)

Course description

This course is an in-depth exploration of methods used in corporate investment appraisal, with a focus on practical applications of managerial flexibility.

Course outline:
Part I: Estimating Incremental cash flows

1. Stand-alone principle
2. Operating cash flows, capital spending and changes in net working capital
3. Pitfalls: Sunk costs, opportunity costs, interest expenses and other financing costs
4. Sensitivity and scenario analysis
5. Company strategy, Supply Chain strategy and financial impacts

Part II: Estimating a project's cost of capital

1. Unlevered vs. levered cost of equity
2. Risk-free vs. risky debt
3. The weighted average cost of capital (WACC)
4. Financing side effects
5. The pecking-order theory

Part III: Managerial Flexibility and Project Appraisal

1. The use of (real) options to refine the valuation of investment projects
2. European-style real options: R&D
3. European-style real options: Growth
4. American-style real options: Wait
5. American-style real options: Abandonment

Class type

Class structure

Teaching methods

• Case study
• Coaching
• Interactive class
• Project work

Assessment

Students will prepare and discuss 3 case studies, related to one of the three parts of the course

Recommended reading

• Berk, J., and DeMarzo, P., 2011. Corporate Finance, 2nd Edition, Pearson. -

• Seitz, N., and Ellison, M., 2005. Capital Budgeting and Long-Term Financing Decisions. South-Western 4th edition. -

• Shockley, R., 2007. An Applied Course in Real Options Valuation, Thomson, South Western. -

• Titman, S., and Martin, J., 2008. Valuation. The Art and Science of Corporate Investment Decisions, Pearson Education. -