WEMBA Summer 2002 Finance Elective

1
WEMBA Summer 2002 Finance Elective

• Chris Lamoureux
• UofA

2
Value Management

• Finance is Everything
• Process
• Assets
• Liabilities

3
Process

• Incentives
• Information
• Evaluation (ex. EVA)

4
Assets

• Capital Budgeting vs Strategic Planning
• Expected Future Cash Flows
• Economic Implications
• Pro-Forma Financials
• Key Value Drivers
• Real Options
• Develop Intuition
• Develop Analytic Framework

5
Liabilities

• Issues
• Internal vs. External Capital
• Debt vs. Equity
• Bank Debt vs. Public Debt

6
Style

• Readings
• McKenzie Quarterly
• Light Academic Articles
• Copeland Book (Cookbook)
• Long-Term Group Projects
• Strategic Valuation
• Build Spreadsheet Models
• ALCAR-style

7
Style (Contd.)

• Each Class - Increasingly Complex Real Option
  Spreadsheets
• Each Class - Demonstrate Mastery of Economic
  Concepts
• Exam -- Final Only
• All Else -- Group Work

8
Skills / Tools

• Process
• Underpinnings of Corporate Form
• Information Economics (Contract Theory)
• Managerial Accounting

9
Skills / Tools (contd.)

• Assets - Std. Cap Budgtg
• Identifying Future Cash Flows
• Tax Laws
• Engineering / Marketing
• Risk-Adjusted Discount Rate (Key assumption of
  Market Efficiency)

10
Skills / Tools (contd.)

• Assets - Real Options
• Identify the Implicit Options (Every Investment
  creates some options and destroys others)
• Option Pricing (Key assumption of Market
  Efficiency)
• Binomial Trees
• Hysteresis

11
Skills / Tools (contd.)

• Assets - Strategic Planning
• Financial Statements (FASB) ? ?
  Economic Picture
• Valuation Model (ex ALCAR)
• Sensitivity Analysis (Value Drivers)
• Key assumption of Market Efficiency
• Economic Picture ?
  ? Financial Statements (FASB)

12
Skills / Tools (contd.)

• Liabilities (Financing)
• M M Irrelevance / Taxes ?
• Key assumption of Market Efficiency - how risk is
  priced in market
• Information Economics -- Contract Theory (Agency
  Costs)

13
Separability / Hierarchy

• Absent Options perspective
• Find Optimal Capital Structure
• Use WACC from that cap struct to discount
  expected future cash flows. (May be different for
  different divisions /projects.)
• Optimal Process (strategic architecture) also
  solved in isolation.

14
Separability / Hierarchy (contd.)

• Option perspective
• Capital Structure creates / destroys options that
  complement technological options (not additive).
• Strategic Architecture creates / destroys options
  in its own right / and is costly.