Investing in a very large project: Airbus A3XX. Textbook. As was the case for
Advanced Corporate Finance I, there is no specific textbook for the present
course.
Advanced Corporate Finance II Lecturer:
Michel Habib, Institut für schweizerisches Bankwesen, Universität Zürich
Description This second course continues in the same line as the first course. It is intended to explore further issues in corporate finance, such as the role of information and incentives in determining the forms of financing a firm chooses, hedging, venture capital, initial public offerings, and investment in very large projects. The course further applies the concepts learnt in the first course to a variety of problems in financial intermediation, such as the securitisation of commercial and industrial loans, the transfer of catastrophe risk to financial markets, agency in insurance, dealing with a run on an insurance company and the setting up of a ‘bad’ bank. These are studied in the context of real cases. Topics covered • • • • • • • • • • •
Information and incentives in financing: Readings from the Financial Times Zero sum games in financial distress: Marvel Entertainment Group Securitising commercial and industrial loans: Fremont Financial Corporation Transferring catastrophe risk to the financial markets: Mid Ocean Limited Hedging foreign exchange risk: Aspen Technology Inc. Contracting for venture capital: Hotmail Corporation Going public: Morgan Stanley Initial Public Offering Agency in insurance: Lloyd’s of London A run on an insurance company: First Executive Corporation The invention of the ‘bad’ bank: Restructuring the Mellon Bank Investing in a very large project: Airbus A3XX
Textbook As was the case for Advanced Corporate Finance I, there is no specific textbook for the present course. Besides the books mentioned for Corporate Finance I, books that may prove useful are Financial Theory and Corporate Policy, by T. Copeland, J.F. Weston and K. Shastri, Financial Markets and Corporate Strategy, by M. Grinblatt and S. Titman, Contemporary Financial Intermediation, by S. Greenbaum and A. Thakor, and International Financial Markets and the Firm, by P. Sercu and R. Uppal. Assessment Assessment is based on six cases. The write-up of five cases amongst those listed above, and an in-class presentation of a case not listed above that has been chosen in agreement with me. The write-up of each of the first five cases is to be handed in on the day the case is discussed. The slides or transparencies for the sixth case are to be handed to me on the day the case is presented to the class. The work is to be done by groups of four to five persons. Each of the first five case accounts for 12% of the course grade. The sixth case accounts for the remaining 40%. The write-up of each of the first five cases need be no longer than 3-4 pages.
If you wish to contact me I encourage you to contact my assistant or me if you are having any problem understanding the material. Preparation for the first lecture There is no preparation for the first lecture, besides reviewing the material learnt in Advanced Corporate Finance I.
Schedule 29 March: A Questionnaire in Finance (Continued) 5 April: Financing 12 April: Marvel Entertainment Group P 19 April: Securitisation and Loan Sales 26 April: Fremont Financial Corporation P 3 May: Mid Ocean Limited, Aspen Technology Inc. P 10 May: Hotmail Corporation 17 May: Morgan Stanley Initial Public Offering P 24 May: Lloyd’s of London 31 May: Financial Intermediaries, First Executive Corporation 7 June: Restructuring the Mellon Bank 14 June: Airbus A3XX P 21 June: Class Presentation 28 June: Class Presentation
Questions for cases Marvel Entertainment Group What does the decline in MEG’s share price from $4.625 to $2.75 and then to $2 reflect? What must Mr. Perelman believe is the minimum value of the restructured MEG? What do you think of Bear Stearns’s estimate of the going-concern value of MEG without the Toy Biz acquisition? What should the debtholders of MEG do? What about the holders of the bonds issued by the holding companies? Fremont Financial Corporation Evaluate the three forms of financing considered. Which form of financing should Fremont choose? Why? Mid Ocean Limited Discuss the advantages and disadvantages of catastrophe options and catastrophe bonds. Discuss the specific structure of the BCOE and the GCCI. What opportunities and threats do catastrophe options present for Mid Ocean? Aspen Technology Inc. What are the implications of Aspen’s hedging programme for Aspen’s cash flows? Should Aspen hedge? If it should hedge, what should it hedge and why? Hotmail Corporation Provide an economic rationale for the various clauses in the first financing contract and the third. What should the founders do? Morgan Stanley Initial Public Offering Why should Morgan go public? What should the offer price per share be? What are the consequences of the proposed changes for the parties involved?
Lloyd’s of London Why did Lloyd’s admit limited liability corporate investors and limit the liability of existing names? What do you think was the primary cause of the huge losses borne by Lloyd’s? What does the experience of Lloyd’s suggest regarding the relation between external financing and internal organisation? First Executive Corporation Is First Executive insolvent, on a balance sheet basis and on a cash flow basis? Discuss the pros and cons of marking to market. Do you think seizure was justified? Mellon Bank Why should Mellon set up a ‘bad’ bank? Discuss the financing of Grant Street. Discuss the raising of new equity by Mellon. Airbus A3XX Why should Airbus consider developing the A3XX? How many A3XXs must Airbus sell? How will Boeing respond? Should Airbus proceed?
