CORPORATE FINANCE

Course Contents

1. The Financial Environment

   1.1. The Flow of Savings to Corporations

       1.1.1. The Stock Market

       1.1.2. Other Financial Markets

       1.1.3. Financial Intermediaries

       1.1.4. Financial Institutions

       1.1.5. Total Financing of U. S. Corporations

   1.2. Functions of Financial Markets and Intermediaries

       1.2.1. Transporting Cash Across Time

       1.2.2. Liquidity

       1.2.3. The Payment Mechanism

       1.2.4. Reducing Risk

       1.2.5. Information Provided to Financial Markets

       1.2.6. The Opportunity Cost of Capital
2. Valuing Bonds

   2.1. Bond Characteristics

       2.1.1. Reading the Financial Pages

   2.2. Bond Prices and Yields

       2.2.1. How Bond Prices Vary with Interest Rates

       2.2.2. Yield to Maturity versus Current Yield

       2.2.3. Rate of Return

       2.2.4. Interest Rate Risk

       2.2.5. The Yield Curve

       2.2.6. Normal and Real Rate of Interest

       2.2.7. Default Risk

       2.2.8. Variation in Corporate Bonds
3. Valuing Stocks

   3.1. Stocks and Stock Market

       3.1.1. Reading the Stock Market Listings

   3.2. Book Values, Liquidation Values, and Market Values

   3.3. Valuing Common Stocks

       3.3.1. Today’s Price and Tomorrow’s Price

       3.3.2. The Dividend Discount Model

   3.4. Simplifying the Dividend Discount Model

       3.4.1. The Dividend Discount Model with no Growth

       3.4.2. The Constant – Growth Dividend Discount Model

       3.4.3. Estimating Expected Rates of Returns

       3.4.4. Non–Constant Growth

   3.5. Growth Stocks and Income Stocks

       3.5.1. The Price Earning Ratio

       3.5.2. Valuing Entire Businesses

   3.6. There are No Free Lunches on Wall Street

       3.6.1. Method 1: Technical Analysis

       3.6.2. Method 2: Fundamental Analysis

       3.6.3. A Theory to Fit The Facts

   3.7. Behavioral Finance and the Rise and Fall of the Dot.Coms
4. Using Discounted Cash Flow Analysis to Make Investment Decisions

   4.1. Discount Cash Flows, Not Profits

   4.2. Discount Incremental Cash Flows

       4.2.1. Include all Indirect Effect

       4.2.2. Forget Sunk Costs

       4.2.3. Include Opportunity Cost

       4.2.4. Recognize the Investment in Working Capital

       4.2.5. Beware of Allocated Overhead Costs

   4.3. Discount Nominal Cash Flows by the Nominal Cost of Capital

   4.4. Separate Investment and Financing Decisions

   4.5. Calculating Cash Flow

       4.5.1. Capital Investment

       4.5.2. Investment in Working Capital

       4.5.3. Cash Flow from Operations
5. Project Analysis

   5.1. How Firms Organize the Investment Process

       5.1.1. Stage One: The Capital Budget

       5.1.2. Stage Two: Project Authorizations

       5.1.3. Problems and Some Solutions

   5.2. Some “What – If” Questions

       5.2.1. Sensitivity Analysis

       5.2.2. Scenario Analysis

   5.3. Break Even Analysis

       5.3.1. Accounting Break Even Analysis

       5.3.2. Economic Value Added and Break Even Analysis

       5.3.3. Operating Leverage

   5.4. Real Options and the Value of Flexibility

       5.4.1. The Option to Expand

       5.4.2. A Second Real Option: The Option to Abounded

       5.4.3. A Third Real Option: The Timing Option

       5.4.4. A Fourth Real Option: Flexible Production Facilities
6. Introduction to Risk, Return, and the Opportunity Cost of Capital

   6.1. Rate of Return: A Review

   6.2. A Century of Capital Market History

       6.2.1. Market Indexes

       6.2.2. The Historical Record

       6.2.3. Using Historical Evidence to Estimate Today’s Cost of Capital

   6.3. Measuring Risk

       6.3.1. Variance and Standard Deviation

       6.3.2. A Note on Calculating Variance

       6.3.3. Measuring the variance in Stock Return

   6.4. Risk and Diversification

       6.4.1. Diversification

       6.4.2. Asset versus Portfolio Risk

       6.4.3. Market Risk versus Unique Risk

   6.5. Thinking about Risk

       6.5.1. Message 1: Some Risk Look Big and Dangerous but Really are Diversifiable

       6.5.2. Message 2: Market Risk are Macro Risks

       6.5.3. Message 3: Risk can be Measured
7. Risk, Return and Capital Budgeting
   7.1. Measuring Market Risk
       7.1.1. Measuring Beta
       7.1.2. Betas for Amazon.com and Exxon Mobile
       7.1.3. Portfolio Betas
   7.2. Risk and Return
       7.2.1. Why the CAPM Works
       7.2.2. The Security Market Line
       7.2.3. How well does the CAPM Work?
       7.2.4. Using the CAPM to Estimated Expected Return
   7.3. Capital Budgeting and Project Risk
       7.3.1. Company versus Project Risk
       7.3.2. Determinant of Project Risk
       7.3.3. Don’t add Fudge Factors to Discount Rates
8. The Cost of Capital
   8.1. Geothermal Cost of Capital
   8.2. The Weighted–Average Cost of Capital
       8.2.1. Calculating Company Cost of Capital as a Weighted Average
       8.2.2. Market versus Book Weights
       8.2.3. Taxes and the Weighted–Average Costs of Capital
       8.2.4. What If There Are Three (or More) Sources of Financing?
       8.2.5. Wrapping up Geothermal
       8.2.6. Checking our Logic
   8.3. Measuring Capital Structure
   8.4. Calculating the Required Rate of Returns
       8.4.1. The Expected Return on Bonds
       8.4.2. The Expected Return on Common Stock
       8.4.3. The Expected Return on Preferred Stock
   8.5. Calculating the Weighted Average Cost of Capital
       8.5.1. Real Company WACCs
   8.6. Interpreting the Weighted Average Cost of Capital
       8.6.1. When You Can and Can’t Use WACC
       8.6.2. Some Common Mistakes
       8.6.3. How Changing Capital Structure Affects Expected Returns
       8.6.4. What Happens when the Corporate Tax Rate is not Zero
9. An Overview of Corporate Financing
   9.1. Creating Value with Financing Decisions
   9.2. Common Stock
       9.2.1. Ownership of the Corporation
       9.2.2. Voting Procedures
       9.2.3. Classes of Stock
   9.3. Preferred Stocks
   9.4. Corporate Debt
       9.4.1. Debt Comes in Many Forms
       9.4.2. Innovation in the Debt Market
10. Debt Policy
    10.1. How Borrowing Affects Values in a Tax Free Economy
        10.1.1. MM’s Argument
        10.1.2. How Borrowing Affects Earnings per Share
        10.1.3. How Borrowing Affects Risk and Return
        10.1.4. Debt and the Cost of Equity
    10.2. Capital Structure and Corporate Taxes
        10.2.1. Debt and Taxes of River Cruises
        10.2.2. How Interest Tax Shields Contribute to the Value of Stockholders’ Equity
        10.2.3. Corporate Taxes and the Weighted Average Cost of Capital
        10.2.4. The Implications of Corporate Taxes for Capital Structure
    10.3. Costs of Financial Distress
        10.3.1. Bankruptcy Costs
        10.3.2. Financial Distress without Bankruptcy
        10.3.3. Cost of Distress Vary with Type of Asset
    10.4. Explaining Financing Choices
        10.4.1. The Trade–Off Theory
        10.4.2. A Pecking Order Theory
        10.4.3. The Two Forces of Financial Stock
11. Dividend Policy

    11.1. How Dividends are Paid

        11.1.1. Cash Dividends

        11.1.2. Some Legal Limitations on Dividends

        11.1.3. Stock Dividends and Stock Splits

    11.2. Share Repurchase
        11.2.1. The Role of Share Repurchases

        11.2.2. Repurchases and Share Valuation

    11.3. How Do Companies Decide on Dividend Payments?

    11.4. Why Dividend Policy should not Matter?

        11.4.1. Dividends Policy is Irrelevant in Competitive Markets

        11.4.2. The Assumptions behind Dividend Irrelevance

    11.5. Why Dividends may Increase Firm Value?

        11.5.1. Market Imperfections

        11.5.2. Dividends as Signals

    11.6. Why Dividends may Reduce Firm Value?

        11.6.1. Why Pay any Dividends at All?

        11.6.2. Taxation of Dividends and Capital Gains under Current Tax Law
12. Financial Planning
    12.1. What is Financial Planning
        12.1.1. Financial Planning Focuses on the Big Picture
        12.1.2. Why Build Financial Plans?
    12.2. Financial Planning Models
        12.2.1. Components of a Financial Planning Model
        12.2.2. An Example of a Planning Model
        12.2.3. An Improved Model
    12.3. Planners Beware
        12.3.1. Pitfalls in Model Design
        12.3.2. The Assumption in Percentage of Sales Models
        12.3.3. The Role of Financial Planning Models
13. Credit Management and Bankruptcy

Recommended Books

1. Marcus, B. M. (2006). Fundamentals of Corporate Finance. New Jersey: Irwin / McGraw–Hill.
2. Ross, S. (2007). Corporate Finance. New York: Irwin / McGraw–Hill.
3. Ross, Westerfield, & Jordan, (2009). Corporate Finance. New York: McGraw–Hill.
4. Gupta, N. & Sharma, C. (2008). Corporate Accounting. New Delhi: Ane Books.