At the end of the course the student is able to:
- analyse capital budgeting decisions for expansion and replacement projects;
- gain insight into the calculation of the cost of capital;
- handle complex interactions between investment and financing decisions;
- reason in real option terms and recognise real options in investment projects;
- handle options to delay, growth options, options to abandon and other option types;
- use option models to value real option problems;
- understand capital structure decisions;
- solve financing problems by means of near-equity;
- understand dividend policy decisions.
The course analyses how financial managers (Chief Financial Officers – CFOs) deal with uncertainty in a dynamic business environment. We focus on two areas in which a CFO can add value to a company in handling uncertainty: investment and financial decisions. We analyse how CFOs take investment decisions under uncertainty. In the first part, we analyse how investment projects can be evaluated and selected. We analyse capital budgeting techniques for expansion versus replacement projects. We also analyse how to select investment projects in an inflationary environment. In part two, we zoom in on determining the cost of capital. We analyse differences between cost of capital at the company level, divisional level and project level. We discuss how we can determine the cost of capital of unlisted firms. Part three examines the interaction between investment and financing decisions and added value of the APV-model compared to the standard NPV model. Part four focuses on the new and important concept of real options with respect to capital budgeting decisions. We discuss how to recognise real option characteristics in projects. We analyse options to delay, options to abandon, growth options, sequential options, and switch options. We discuss differences between different sources of risk and how to incorporate them in the analysis. We use different option valuation models to support complex decision-making. Part five onwards zooms in on financing decisions under uncertainty. We first explore how companies decide on their mix of debt and equity. Next, we analyse the use of financial option characteristics in near-equity instruments to match the real option characteristics of projects. Finally, we discuss dividend policy decisions. The course makes intensive use of Harvard Business School case studies.|
A combination of lectures and seminars.
- Final exam (100% of the final grade)
In case online access is required for this course and you are not in the position to buy the access code, you are advised to contact the course coordinator for an alternative solution. Please note that access codes are not re-usable meaning that codes from second hand books do not work, as well as access codes from books with a different ISBN number. Separate or spare codes are usually not available.