Transcript Slides - Harvard Business School

FIN2 Overview—Module 1
Feb 1
Debt & Value: debt issuance, bond valuation,
perfect capital markets, taxes, debt and firm value,
interest tax shields, APV
Financial Policy: cost of financial distress, agency
problems, information asymmetry, optimal capital
structure, weighted average cost of capital
Risk, Options & Hedging: option valuation, risk
management
Mergers & Acquisitions: value of synergies,
forms of consideration, friendly and hostile
transactions
Review
May 10
FIN2 Policies
Participation (50%)
• Be prepared, be on time.
• Be relevant, be constructive,
be thoughtful.
• Your ideas matter. True for
everyone.
• Use absence notification tool.
• Cold calls are always benign.
Exercises
• Not graded. But count for
participation.
Participation feedback
• Week after Spring Break.
Final exam (50%)
• In class, May 18.
Tutorials
• Thursday afternoons
• Rimma Yusim, ryusim@hbs.
Office hours
• Weekly, almost always
Tuesdays, 12:30 – 2:30 pm
• Drop in, no appointment
necessary
• Other times by appointment
Anything else
• David Frieze, [email protected]
• Adam Scarano,
ascarano@hbs.
Pooling and Tranching
Fixed
Income
investors:
Tranche A
Home
buyer/
owner
$
Mortgage
broker
$
Mortgage
lender,
e.g. a
bank
$
Synthesiz
er of
MBOs,
e.g.
Morgan
Stanley
$
Pension
Funds
Tranche B
Sovereign
Wealth
Tranche C Funds
“toxic”
Mutual
Funds
Hedge
funds
Clarence Nathan
Mike Garner
Mike Francis
Glenn Pizzaluso
(Rosetree
Capital Management)
Tranche A
Home
buyer/
owner
$
Mortga
ge
broker
$
Mortga
ge
lender,
e.g. a
bank
$
Synthes
izer of
MBOs,
e.g.
Morgan
Stanley
$
Tranche B
Tranche C
“toxic”
Asset Pool
Tranche A
Home
buyer/
owner
$
Mortga
ge
broker
$
Mortga
ge
lender,
e.g. a
bank
$
Synthes
izer of
MBOs,
e.g.
Morgan
Stanley
$
Tranche B
$
Tranche C
“toxic”
Tranche A
Home
buyer/
owner
$
Mortga
ge
broker
$
Mortga
ge
lender,
e.g. a
bank
$
Synthes
izer of
MBOs,
e.g.
Morgan
Stanley
$
Tranche B
Tranche C
“toxic”
Tension between “perfect” and
“imperfect” worlds


Finance theory assumes perfect markets with perfect human
beings
Human imperfections:
– Bounded knowledge (don’t know everything)
– Capacity for deceit (can’t trust everyone)


When perfect theory meets imperfect reality, the result can be
profit or disaster
Apply your theory first, then ask,
– “What imperfections are allowing me to make a profit?”
– “How big is the gap?”

Best profits are in world that is a little imperfect, but not
spinning out of control
– It’s called “civilization”
Capital Structure Fallacies

Debt is a “cheaper” source of finance, so debt is
better
– Must look at “all-in” cost, i.e. weighted average

Debt increases eps, thus firms should borrow
– Debt also increases volatility of eps, i.e. “quality of
earnings” goes down
The Real World of Capital Structure