FINANCE
Questions about the topics within the subject area of Finance should be directed to: Christian Riis Flor, Department of Business and Economics, e-mail: crf@sam.sdu.dk
Most topics are suitable for Business Econ., Math.Oecon., and Oecon students; the student’s quantitative level can be reflected in the used literature.
CAPM
The traditional CAPM yields the result that the expected (excess) return of a security is given by the security’s systematic risk due to correlation with the market portfolio. In this topic the student should carefully explain the CAPM. It is expected that the student considers the theoretical and empirical foundation for the model and by that performs a critical discussion of the limitations of the model and its applications. The simple static version of the CAPM can be used as a starting point and then followed by newer theoretical literature considering extensions. Alternatively, the seminar can consider an appropriate amount of the literature considering tests of CAPM and discuss the applicability of these tests. The seminar can also consider bring a perspective on other so-called asset pricing models.
Litteratur (forslag og inspiration):
M. Brennan, ”Capital market equilibrium with divergent borrowing and lending rates”, Journal of Financial and Quantitative Analysis 6, 1971.
W. Ferson and C. Harvey, “The variation of economic risk premiums”, Journal of Political Economy 99, 1991. Campbell, J. Y., Lo, A. W. and MacKinlay, A. C., 1997, The Econometrics of Financial Markets, Princeton University Press, Chapter 5.
Sharpe, W., 1964, Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance 19, 425-442.
Fama, E. and K. French (1996) “Multifactor Explanations of Asset Pricing Anomalies”, Journal of Finance, 51, 55-84.
Munk, C. (2005). Asset pricing modeller. Kapitel 2 i bogen Udviklingslinier i finansiering redigeret af M. Christensen, Jurist- og Økonomforbundets Forlag.
The binomial model and its applications
The binomial model is widely used to value derivatives and, in particular, options. The seminar could focus on a derivation of the binomial model and an elaborate discussion of its assumptions. One can also focus on the relation to the famous Black-Scholes model. The binomial model can be used to value European and American options, but also more exotic claims can be handled. The option pricing theory based on financial markets can also be used to analyze valuation of a firm’s real investment. This is called a real (or strategic) options analysis. A discussion and explanation of how and when the option pricing theory can be used to valuation is thus worthwhile. For example, one can address how production flexibility impacts a firm’s value. The seminar should either focus on financial options or real options.
Litteratur (forslag og inspiration):
Berk, J. og DeMarzo, P. (2014). Corporate Finance, Pearson. Kapitlerne 20-22.
Dixit, A.K. og R.S. Pindyck (1994). Investment under Uncertainty, Princeton University Press. Kapitel 1, 2. Hull, J.C. (2012). Options, Futures, and other Derivatives, Pearson kapitlerne 10-12.
Munk, C. (2000). Afledte aktiver. Undervisningsnote.
Markowitz’ portfolio choice model
A central financial decision undertaken by individuals is how to invest ones wealth. How should one save for one’s retirement? The mean-variance analysis by Markowitz is the foundation for the modern literature addressing a financial investor’s optimal asset allocation. In this seminar, the student should analyze the theoretical foundation for Markowitz’s portfolio choice model. More specifically, the efficient frontier should be derived and it should be discussed how investors with different utility function chose their optimal portfolio on the frontier. Furthermore, the underlying assumptions of the model should be thoroughly addressed.
Litteratur (forslag og inspiration):
Huang, C. og R.H. Litzenberger. (1988). Foundations for Financial Economics, North-Holland, kapitel 3.
Ingersoll, J.E. (1987). Theory of Financial Decision Making, Rowman & Littlefield. Kapitel 1-4.
Flor, C.R. og L.S. Larsen (2014). Indledende porteføljevalgsteori. Undervisningsnote til faget Finansiering, Investering og Virksomhedsstrategi.
Capital structure: Theory and practice
When a firm decides on the choice of the optimal capital structure, the firm must make a number of theoretical assessments and practical considerations. Three key considerations is the exploitation of the tax shield, assessment of bankruptcy costs and assessment of agency costs and revenues. The Trade-Off theory dictates that a firm when choosing capital structure need to balance the present value of the tax shield and the present value og the agency costs to the present value of the bankruptcy costs and the present value of the agency costs. The possibility of exploiting the tax shield by raising debt depends among other things on the size of the firm´s EBIT. When a firm needs to assess the present value of bankruptcy costs, the firm must assess 1) the probability of financial distress, 2) the magnitude of these costs if the firm is in financial distress and 3) the appropriate discount rate for the distress costs. Such an assessment is typically a complex task. In this topic it will be interesting to make theoretical considerations and empirical studies of companies' capital structure to analyze the extent to which the theory fits with practice.
Litteratur (forslag og inspiration):
J. Berens and C. Cuny: The Capital Structure Puzzle Revisited, Review of Financial Studies 8 (1995): 1185-1208.
M. King: Taxation and the Cost of Capital, Review of Economic Studies 41 (1974): 21-35.
J. Stiglitz: Taxation, Corporate Financial Policy, and the Cost of Capital, Journal of Public Economics 2 (1973):
1-34.
J. Mackie-Mason: Do Taxes Affect Corporate Financing Decisions, Journal of Finance 45 (1990): 1471 – 1493.
M. Bradley, G. Jarrel and E. Kim: On the Existence of an Optimal Capital Structure: Theory, and Evidence, The Journal of Finance 39 (1984): 857 – 878.
S. Titman and R. Wessels: The Determinants of Capital Structure Choice, Journal of Finance 43 (1988): 1- 19.
J. Graham and C. Harvey: How Do CFOs Make Capital Budgeting and Capital Structure Decisions, Journal of Applied Corporate Finance 15 (2002): 8 – 23.
E. Norton: Factors Affecting Capital Structure Decisions, Financial Review 26 (1991): 431 – 446.
F. Bancel and U. Mittoo: Cross-Country Determinants of Capital Structure Choice: A Survey of European Firms, Financial Management 33 (2004): 103 – 132.
Tim C. Opler and S. Titman: Financial Distress and Corporate Performance, Journal of Finance 49 (1994): 1015 – 1040.
I. Strebulaev: Do Tests of Capital Structure Theory Mean What They Say?, Journal of Finance 62 (2007):1747 – 1787.
M. Lemmon, M. Roberts and J. Zender: Back to the beginning: Persistence and cross-section of Corporate Capital Structure, Journal of Finance 63 (2008): 1575 – 1608.
A. Korteweg: The Net Benefits to Leverage, Journal of Finance, 65 (2010): 2137 – 2170.
L. Shyam-Sunder and S. Myers: Testing Static Tradeoff Against Pecking Order Models of Capital Structure, Journal of Financial Economics 51(2): 219-244.
Valuation of listed firms and valuation of shares in listed firms
Today the function of the stock market is not only to be the source for raising outside equity capital. Stock markets are also a place where information is exchanged between investors, other stakeholders and businesses. On the stock markets information about businesses and decisions taken by businesses are analyzed and assessed. Part of the information exchanged between companies and professional investors, is the estimation of share values. These estimates, made by many professional investors and financial institutions, thus form part of the information base, which will influence and determine the supply and demand for the company's shares and thus price. Valuation of listed companies and shares is one of many key issues within corporate finance. The analysis part of a valuation will typically consist of the following four elements which, depending on the scope and focus of the analysis will imply different weights:
a) Strategic Analysis
b) Analysis of historical performance (Financial Statement analysis)
c) Setup and reasons for choosing scenarios on the basis of paragraph a) and b)
d) Choice of valuation model, estimating key model parameters and the specific value calculations.
When discipline in the seminary is financing a substantial part of the analysis will include paragraph d).
Litteratur (forslag og inspiration):
R. Harris and J. Pringle: Risk-Adjusted Discount Rates – Extensions from the Average-Risk Case, Journal of Financial Research 8 (1985): 237- 244.
I. Inselbag and H. Kaufold: Two DCF Approaches on Valuing Companies Under Alternative Financing Strategies (and How to Choose Between Them), Journal of Applied Corporate Finance 10 (1997): 114 – 122.
T. Luehrman: Using APV: A better Tool for valuing Operations, Harvard Business Review 75 (1997): 145 – 154.
J. Miles and J. Ezzell: The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification, Journal of Financial and Quantitative Analysis 15 (1980): 719 – 730.
R. Ruback: Capital Cash Flows: A simple Approach to Valuing Risky Cash Flows, Financial Management 31 (2002): 85 – 104.
Øvrig supplerende litteratur, hvoraf noget er mere værktøjsorienteret (forslag):
Richard Barker: Determining Value – Valuation Models and Financial Statements, Pearson (2001).
T. Copeland, T. Koller and J. Murrin: Valuation: Measuring and Managing the Value of Companies, 5.ed, Wiley (McKinsey & Company), (2010).
Stephen Penman: Financial Statement Analysis and Security Valuation, 5.ed. McGraw-Hill (2013)
Aswath Damodaran: Investment Valuation: Tools and Techniques for Determining the Value of Any Assets, 3.ed, Wiley (2012).
Leonard C. Soffer and Robin J. Soffer: Financial Statement Analysis: A Valuation Approach, Pearson (2003).
George Chacko and Carolyn L. Evans: Valuation: Methods and Models in Applied Corporate Finance, Pearson (2014).
Sheridan Titman and John D. Martin: Valuation: The Art and Science of Corporate Investment Decisions, 3.ed. (2016).
Ole Sørensen: Regnskabsanalyse og værdiansættelse – En praktisk tilgang, 4. udgave, Gads Forlag (2012).