Rikkyo University

School of Business
Applied Corporate Finance
Raising Capital and Financing the Firm
Summer 2016
Professor James K. Seward
jkseward@syr.edu
Course Overview
Managers of firms have many responsibilities. A critical task is to ensure that the firm makes
appropriate financing decisions. In order to do so, managers must have a firm understanding of
the capital markets and the many financing instruments available to fund corporate investment.
This course focuses on how to establish a value-enhancing financial strategy and how to make
good financing decisions. In the modern financial era, the financing decision has become more
complicatedthere is a huge diversity of securities that can be issued. A second objective of the
course is to introduce some of these securities (debt, equity, preferred stock, convertible
securities, etc.). With the growth in derivatives in the past twenty years, firms no longer view
financing decisions as solely affecting their balance sheets. Many firms now use off-balance
sheet transactions to manage their exposure to risk. A third objective of the course is to examine
risk management strategies for the firm. In particular, the perspective taken is that of the chief
financial officer of a firm. Implicitly, the course assumes that the chief financial officer is the
customer to whom an investment banker pitches potential products, deals, or structures. Thus the
course should be taken by anyone interested in working in corporate finance at an investment
bank, as well as anyone interested in financial management in corporations or entrepreneurial
firms. In order to highlight the importance of the securities examined in this course, we will
make heavy use of case studies and prospectuses from actual transactions.
Course Materials
Case Packet
Harvard Business School Background Notes
In addition, there will be optional readings assigned that you can download from the internet.
These readings are referenced in each applicable session:
.

Evaluation
Class Participation
Written Assignments
Final Term Paper

30%
40%
30%

All students should attend every class and be prepared to discuss the cases and the readings. Any
student may be called on at any time during the course of the discussion. Group presentations, if
assigned, will count towards your class participation grade.
Each student will submit a two-page memorandum of analysis and recommendations at the
beginning of two case discussions. These assignments can be submitted individually or as a
group.
If you are working in a group, I will accept one memorandum from the group and count the grade
equally for all students in the group. No more than three students are permitted in a group.
Each memorandum should be typed and double-spaced. Write these as if you were writing a
recommendation to the major decision-maker in the case. The two-page limit is for text only.
You may attach as many numerical calculations as you wish. Memoranda will not be accepted
after the class has met. A memorandum will be given credit if it is handed in and no credit if it is
not. If you elect to hand in more than two assignments, I will count the highest two towards your
final class grade.
The final assignment for the term is a paper that will consist of an analysis of a type of financial
transaction. Choose any type of financing deal that interests you (e.g., convertible security,
equity offering, bonds, etc.). Use any source materials you can find (e.g. annual reports, 10-Ks,
prospectuses, newspaper articles, participants, etc.) to document the facts of the deals and then
prepare an analysis of the transaction. The point of the term paper is to enhance our
understanding of what constitutes a good and sound financing transaction. The term paper is due
three weeks after the final day of class. Term papers should be 7-10 pages in length, doublespaced.

Class Schedule

Session 1

Course Overview and Introduction to the Capital Markets

Read: Robert W. Baird, Global M&A Monthly

Session 2

Identifying Corporate Funding Needs

Read: HBS, Note on Bank Loans (9-291-026)
Case:

Clarkson Lumber (9-297-028)

Questions:
1. Why has Clarkson Lumber borrowed increasing amounts despite its
consistent profitability?
2. How has Mr. Clarkson met the financing needs of the company during the
period 1993 through 1995? Has the financial streng5th of Clarkson Lumber
improved or deteriorated?
3. How attractive is it to take the trade discount?
4. Do you agree with Mr. Clarksons estimate of the companys loan
requirements? How much will he need to finance the expected expansion in
sales to $5.5 million in 1996 and to take all trade discounts?
5. As Mr. Clarksons financial advisor, would you urge him to go ahead with, or
to reconsider, his anticipated expansion and his plans for additional debt
financing? As the banker, would you approve Mr. Clarksons loan request,
and, if so, what conditions would you put on the loan?

Session 3

Establishing and Managing Capital Structure Decisions

Read: HBS, Note on Theory of Optimal Capital Structure (9-279-069)
Case:

Diageo plc

Questions:
1.

How has Diageo historically managed its capital structure?

2. What is the static trade-off theory (textbook version)? How would you apply
it to Diageos business prior to the sale of Pillsbury and spinoff of Burger King?
3. Why is Diageo selling Pillsbury and spinning off Burger King? How might
value be created through these transactions?
4. Based on the results of the model, what recommendation would you make
for Diageos future capital structure? Does the model capture all of the important
risk factors faced by Diageo? How might you adjust the recommendation from
the model to adjust for any missing factors?

Session 4

High Yield Debt

Altman, The Anatomy of the High Yield Bond Market

(http://pages.stern.nyu.edu/~ealtman/anatomy.pdf)
Understanding the High-Yield Bond Market
(http://www.financiallearn.com/investing/bonds/understanding-the-high-yieldbond-market/)
Case:

Metromedia Broadcasting Corporation (HBS 9-286-044)

Questions:
1. How and why did the market for high-yield securities develop?
2. Do they represent a good investment for Anchor?
3. Why is Metromedia issuing high-yield debt? What types of investors are
likely to buy the various slices of this deal?
4. Do the Metromedia securities represent a good opportunity for Anchor?

Session 5

Initial Public Offerings (IPOs)

Read: http://bear.cba.ufl.edu/ritter/ipodata.htm
http://bear.cba.ufl.edu/ritter/ipolink.htm
Case:

Amazon.comGoing Public (HBS 9-899-003)

Questions:
1. Why did Jeff Bezos choose books as the initial category for launching his
new company?
2. What is the business model for Amazon.com? How does their business
model differ from that of Barnes & Noble or Borders? How would you value
Amazon?
3. Should Amazon.com go public? Why or why not?
4. What are plausible scenarios for the period leading up to a final pricing
meeting, which typically takes place the night before an IPO? How should
management respond to these scenarios (e.g., is there a price below which
Amazon.com should not go public?
5. What should Joy Covey, the CFO, do?
Session 6

Convertible Securities and Preferred Stock

Read: Chemmanur et al Why Issue Mandatory Convertibles?
(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=417601)
Convertible Securities (9-202-129)

Corning Convertible Preferred Stock Prospectus

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=1942984-853305606&type=sect&TabIndex=2&companyid=4903&ppu=%252fdefault.aspx%253fcik
%253d24741
Case: Corning: Convertible Preferred Stock (HBS 9-206-018)
Questions:
1. Describe Cornings business. How has the firm performed? What accounts
for the changes in Cornings stock in Exhibit 2?
2. Evaluate Cornings financing strategy. How has the firm raised capital in the
past?
3. Why is JP Morgan proposing this particular security? Who are the likely
buyers?
4. Draw a payoff diagram for the convertible security in Exhibit 10. Value the
security as the sum of its parts. Would you purchase the Corning convertible
preferred shares at par?
5. What should Flaws do?

Session 7

Global Financing
Read: HBS, The Finance Function in a Global Corporation (R0807K)
HBS, Note on Foreign Currency Swaps (9-292-043)
Case:

The Walt Disney Companys Yen Financing (HBS 9-287-058)

Questions:
1. Should Disney hedge its yen royalty cash flow? Why or why not? If so, how
much should be hedged and over what time frame?
2. Assuming a hedge is desirable, what hedging techniques are available to the
treasurer and what are the advantages and disadvantages of each?
3. In light of the various other techniques for hedging currency exposures, why
does a market for currency swaps exist? Who benefits and who loses in such
an arrangement? Can a swap really create value for a corporation, and if so,
where does the value come from? What risks does a swap carry for the
various parties involved?
4. Evaluate Goldmans proposal for an ECU bond issue accompanied by an
ECU/yen swap. How does its all-in yen cost compare to that of the
proposed yen term loan?