Corporate Finance Course Lecture 1

University of St. Gallen (HSG)

• Corporate Finance course, lecture 1: Introduction
• Lecturer: Marc Arnold

Lecturer Information

• Marc Arnold is a full professor at the School of Finance
• Director of ACA
• Research interests include Corporate Finance, Financial Intermediation, Theoretical Corporate Finance, Debt Structure, Debt Governance, and Household Investment
• Has a visiting professorship at Stern School of Business, NYU
• Also works as a Product Structurer in Derivatives Trading at Credit Suisse

General Course Information

• Resources for topics include lecture slides & research articles available on the learning platform (Canvas)
• Group assignments are available
• Current info and announcements are often provided regularly

Syllabus

• The syllabus details the dates, topics, and related literature for each class session
• Topics include Administrative Notes and Introduction, Latest Developments, Efficient Markets, Options, Capital Structure, Agency Conflicts, Corporate Governance, Trading Room Sessions, Presentations

Post-Lecture Program

• 90-minute program
• Includes lectures, trading room sessions, and presentations
• Slides/chapters in the textbook will be part of the covered material

Assessment Criteria for Group Work

• The presentation and its content are graded
• Must adhere to guidelines and have proper organization
• Quality of the learning experience is important

Important Information for Exchange Students

• Exchange students must register for the exam by November 1, 2024.
• Exchange students will follow the same exam format as regular students (90 minutes)

Objectives

• Financial Market Fundamentals
• Market Participants and Types
• Short Selling and Leverage Risks
• Corporate Finance Principles

Real Assets vs. Financial Assets

• Real assets are essential for production and services
• Real asset prosperity depends on productivity
• Examples include real estate, machinery, and knowledge
• Financial assets are utilized by companies to fund real assets
• Types include stocks, bonds, and derivatives

Financial Assets of Households

• Data displayed in graphs show the financial assets (including currency, deposits, debt securities, shares, and assets in collective investment schemes) over several years, alongside liabilities and net worth figures.

Assets and Market Participation in the USA

• Data on asset holdings and values, including percentages and conditional median/mean values, for different asset types categorized for 2016 and 2019 surveys.

What Drives Real Estate Prices?

• Factors impacting real estate prices include inflation, stock market performance, interest rate changes, land supply dynamics, demographic trends, and general economic conditions including policies, and gross domestic product

Discussion: Cracking the Real Estate Code (Levitt, 2005)

• The discussion involves analysing the correlation between real estate ad marketing phrases and sales price.
• Adjectives such as "granite," "maple," "fantastic," "attractive," "state-of-the-art," and "great neighborhood" are discussed, and students are encouraged to deduce how different word choices correlate with higher or lower sales prices.

China's Real Estate Problem

• China's housing market has been declining for several years
• New sales and construction have significantly declined
• Price drops have impacted different areas of the nation, with some reaching 75%
• Factors behind the decline include reduced living space growth, along with slowing urbanization.

Long-Term Returns (Historical Performance Switzerland)

• Data is presented in graphs showing nominal and real values of shares and bonds against the consumer price index from 1926 to 2023.

Players in the Financial Markets

• Key players in financial markets include Households, Corporations, States, Financial Intermediaries, and National Banks with their respective roles and activities

Inflation

• A graph displays historical inflation rates in various countries (e.g. UK, Euro Area, Germany, US, Japan, Switzerland, and Worldwide) from 1960 to 2022.

Asset-Backed Securities (ABS)

• Shows cash flows for a mortgage pass-through security
• Diagrams illustrating the transmission of cash flows across different entities in an ABS transaction including home owners, originators, and investors across differing assets such as equipment, credit cards, auto loans and more

Discussion on Asset-Backed Securities

• Students should discuss the pros and cons of Asset-Backed Securities using a peer-to-peer discussion format

Market Types

• Types of market types are analyzed including direct search, brokered market, dealer market, and auction market

Example: Novartis

• Data on order books/shares for Novartis
• Data presented in graphs, tables and figures

Order Types

• Market orders, limit orders, and stop-loss orders

Purchase of Shares with Debt Financing

• The exercise demonstrates purchasing shares with debt financing/margin trading, including scenarios for price increases and decreases

Shorting

• The exercise demonstrates the process of short-selling

Discussion on Short Selling

• Students should discuss the potential benefits/harm of short selling on the financial system

What Is Corporate Finance All About?

• Corporate finance encompasses decisions related to spending and collecting money for investments and their financing needs

Investment and Financing Decisions are Often Interconnected

• Data showcases examples of companies making investment and financing decisions that interconnect with each other

Reliable Planning Horizon and Project Life

• Charts illustrate the capabilities for planning and predictive lifespans of projects in industries such as retail, finance, services, technology, and manufacturing

Key Corporate Finance Principles

• Focuses on risk, investments, value, value creation, and governance.

Key Takeaways

• Financial markets involve various participants with distinct roles and objectives
• Leverage purchases impact both risk and profit potential
• Corporate finance decisions prioritize company financial well-being
• Investment and financing decisions frequently interact