Corporate Finance

Units

1. 1

   Foundations of corporate finance

   4 lessons

   1. The goal of the firm and agency problemsState the goal of financial management as maximizing the value of the owners' stake, name the three core decisions (investment, financing, working capital), and explain how agency costs arise when managers and shareholders want different things.
   2. Financial statements and cash flowCalculate cash flow from assets from financial-statement figures and reconcile it with cash flow to creditors and stockholders.
   3. Future value and compoundingCompute the future value FV = PV(1 + r)ᵗ of a single sum on a timeline, explain why compound interest outgrows simple interest, and use the Rule of 72 to estimate a doubling time.
   4. Present value and discountingValue dated cash flows today, recover an annual rate or number of years from a two-date cash flow, and value an uneven stream.
2. 2

   Annuities, perpetuities and interest rates

   4 lessons

   1. Annuities and annuities dueDerive and use the present value and future value of an ordinary annuity, PV = C × [1 − 1/(1 + r)ᵗ] / r and FV = C × [(1 + r)ᵗ − 1] / r, adjust them for an annuity due, and solve for the payment, the rate and the number of periods.
   2. Perpetuities and growing annuitiesValue a perpetuity PV = C / r, a growing perpetuity PV = C₁ / (r − g) and a growing annuity PV = C₁ × [1 − ((1 + g)/(1 + r))ᵗ] / (r − g), and use them on endowments, preferred stock and growing dividends.
   3. APR and effective annual rateConvert between a quoted APR and the effective annual rate, EAR = (1 + APR/m)ᵐ − 1, compare loans and accounts with different compounding, and handle continuous compounding EAR = e^APR − 1.
   4. Loan amortizationBuild an amortization schedule for a level-payment loan, splitting each payment into interest on the balance and principal reduction, and contrast it with a pure discount loan and an interest-only loan.
3. 3

   Capital budgeting

   4 lessons

   1. The net present value ruleCompute the net present value of a project, NPV = CF₀ + CF₁/(1 + r) + CF₂/(1 + r)² + ..., use the rule accept if NPV > 0, and read an NPV profile against the discount rate.
   2. IRR, payback and profitability indexCompute a project's IRR, payback, discounted payback and profitability index PI = PV of inflows / cost, and explain when IRR gives the wrong answer: nonconventional cash flows and mutually exclusive projects of different scale.
   3. Incremental project cash flowsBuild a project's cash flows from incremental sales and costs, MACRS depreciation, taxes, capital spending and net working capital, ignoring sunk costs and counting opportunity costs, using OCF = EBIT + depreciation − taxes.
   4. Scenario, sensitivity and break-even analysisTests a project's NPV under best and worst case scenarios and one variable sensitivity, and computes accounting, cash and financial break-even.
4. 4

   Interest rates and bond valuation

   4 lessons

   1. Bond features and bond pricesExplains coupon, face value, maturity and indenture, and prices a bond as the present value of its coupon annuity plus face value.
   2. Yield to maturity and current yieldSolves for yield to maturity, computes current yield, and explains premium, discount and par bonds through the price yield relationship.
   3. Interest rate riskShows that longer maturity and lower coupon bonds change more in price when rates move, using a price yield graph for two bonds.
   4. Bond ratings and the Fisher effectExplains bond ratings, investment grade versus junk, real versus nominal rates with the Fisher effect, and the components of the yield on a bond.
5. 5

   Stock valuation

   4 lessons

   1. The dividend discount modelValues stock as the present value of future dividends, applies the zero growth and Gordon constant growth model P0 = D1/(r - g), and splits return into dividend yield and capital gains yield.
   2. Nonconstant growthValues a stock with a period of supernormal growth followed by constant growth by discounting dividends and a terminal price, drawn on a timeline.
   3. Free cash flow valuationValues a firm by discounting free cash flows at the WACC with a terminal value, then subtracts debt to find equity value per share.
   4. Valuation using multiplesValues stock with price to earnings and enterprise value to EBITDA multiples from comparable firms, and links P/E to growth and the payout ratio.
6. 6

   Risk and return

   4 lessons

   1. Lessons from capital market historyComputes dollar and percent returns, compares historical average returns and standard deviations of stocks, bonds and bills, and the equity risk premium.
   2. Expected return and varianceComputes expected return, variance and standard deviation for a stock from a probability table of economic states.
   3. Portfolios and diversificationComputes portfolio expected return and variance for two assets with correlation, and graphs how portfolio standard deviation falls as stocks are added.
   4. Systematic and unsystematic riskSeparates systematic (market) risk from unsystematic (firm-specific) risk, and explains why only systematic risk earns a risk premium.
7. 7

   Beta, CAPM and market efficiency

   4 lessons

   1. Measuring betaDefines beta as covariance with the market over market variance, estimates it as the slope of a regression of stock on market returns, and computes portfolio beta.
   2. CAPM and the security market lineDerives the security market line E(R) = Rf + beta(E(Rm) - Rf), draws it, and identifies underpriced and overpriced stocks.
   3. Efficient capital marketsExplains weak, semistrong and strong form efficiency, the random walk, and implications for managers' financing and timing decisions.
   4. Behavioral challenges to efficiencyCovers overreaction, momentum, limits to arbitrage and investor biases, and the evidence from anomalies such as the size and value effects.
8. 8

   Cost of capital

   4 lessons

   1. Cost of equityEstimates the cost of equity with the dividend growth model and with CAPM, and compares the strengths and weaknesses of each.
   2. Cost of debt and preferred stockEstimates the pre-tax cost of debt from yield to maturity, the after-tax cost RD(1 - T), and the cost of preferred stock D/P0.
   3. Weighted average cost of capitalComputes WACC = (E/V)RE + (D/V)RD(1 - T) using market value weights for a sample firm, and uses it to discount free cash flows.
   4. Divisional and project costs of capitalExplains why one WACC misprices projects of different risk, the pure play approach with unlevering beta, and the effect of flotation costs.
9. 9

   Capital structure

   4 lessons

   1. Financial leverage and EPSCompares EPS and ROE under all equity and levered structures across EBIT levels, finding the EBIT break-even point on an EPS EBIT graph.
   2. Modigliani-Miller without taxesExplains MM Proposition I (firm value independent of capital structure) via homemade leverage and Proposition II, RE = RA + (RA - RD)(D/E).
   3. Modigliani-Miller with taxesShows VL = VU + TC x D from the interest tax shield and the revised Proposition II, and why leverage raises firm value when taxes exist.
   4. Trade-off and pecking order theoriesAdds financial distress and bankruptcy costs to find the optimal capital structure in static trade-off theory, and contrasts the pecking order and signaling explanations.
10. 10

    Dividends and payout policy

    4 lessons

    1. Dividend types and payment mechanicsExplains regular and special dividends, the declaration, ex-dividend, record and payment dates, and the price drop on the ex-dividend date.
    2. Dividend irrelevanceShows MM dividend irrelevance with homemade dividends in a perfect market, and why stock repurchases and cash dividends are equivalent without taxes.
    3. Taxes, clientele and signalingExplains how taxes, flotation costs, clientele effects, information signaling and agency costs of free cash flow shape real payout policy.
    4. Stock repurchases, stock dividends and splitsCompares tender offers and open market repurchases with dividends, and explains stock dividends and splits and why their value effect is limited.
11. 11

    Short-term finance and working capital

    4 lessons

    1. Operating and cash cyclesComputes the operating cycle and cash cycle from inventory, receivables and payables periods, drawn on a timeline from purchase to collection.
    2. Cash budgeting and short-term financingPrepares a short-term cash budget and compares unsecured bank loans, lines of credit, compensating balances, commercial paper and trade credit.
    3. Credit and receivables managementEvaluates a change in credit policy with NPV, computes the cost of forgoing a trade discount such as 2/10 net 30, and explains the five Cs of credit.
    4. Inventory management and EOQDerives the economic order quantity EOQ = sqrt(2TF/CC) by balancing carrying and restocking costs, drawn on a cost curve, plus safety stock and reorder points.