Corporate Finance

This book provides a comprehensive overview of the most important topics covered in a corporate finance course.

Subjects as Value and Opportunity Cost of Capital, Budgeting, Market efficiency and Options are explained.

The compendium is designed such that it mimics the structure of a typical corporate finance course. Throughout the compendium theory is supplemented with examples and illustrations.

This compendium provides a comprehensive overview of the most important topics covered in a corporate finance course at the Bachelor, Master or MBA level. The intension is to supplement renowned corporate finance textbooks such as Brealey, Myers and Allen's "Corporate Finance", Damodaran's "Corporate Finance - Theory and Practice", and Ross, Westerfield and Jordan's "Corporate Finance Fundamentals".

The compendium is designed such that it follows the structure of a typical corporate finance course. Throughout the compendium theory is supplemented with examples and illustrations.

1. Introduction

2. The objective of the firm

3. Present value and opportunity cost of capital
3.1 Compounded versus simple interest
3.2 Present value
3.3 Future value
3.4 Principle of value additivity
3.5 Net present value
3.6 Perpetuities and annuities
3.7 Nominal and real rates of interest
3.8 Valuing bonds using present value formulas
3.9 Valuing stocks using present value formulas

4. The net present value investment rule

5. Risk, return and opportunity cost of capital
5.1 Risk and risk premia
5.2 The effect of diversification on risk
5.3 Measuring market risk
5.4 Portfolio risk and return
5.4.1 Portfolio variance
5.4.2 Portfolio’s market risk
5.5 Portfolio theory
5.6 Capital assets pricing model (CAPM)
5.7 Alternative asset pricing models
5.7.1 Arbitrage pricing theory
5.7.2 Consumption beta
5.7.3 Three-Factor Model

6. Capital budgeting
6.1 Cost of capital with preferred stocks
6.2 Cost of capital for new projects
6.3 Alternative methods to adjust for risk
6.4 Capital budgeting in practise
6.4.1 What to discount?
6.4.2 Calculating free cash flows
6.4.3 Valuing businesses
6.5 Why projects have positive NPV

7. Market efficiency
7.1 Tests of the efficient market hypothesis
7.1.1 Weak form
7.1.2 Semi-strong form
7.1.3 Strong form
7.1.4 Classical stock market anomalies
7.2 Behavioural finance

8. Corporate financing and valuation
8.1 Debt characteristics
8.2 Equity characteristics
8.3 Debt policy
8.3.1 Does the firm’s debt policy affect firm value?
8.3.2 Debt policy in a perfect capital market
8.4 How capital structure affects the beta measure of risk
8.5 How capital structure affects company cost of capital
8.6 Capital structure theory when markets are imperfect
8.7 Introducing corporate taxes and cost of financial distress
8.8 The Trade-off theory of capital structure
8.9 The pecking order theory of capital structure
8.10 A final word on Weighted Average Cost of Capital
8.11 Dividend policy
8.11.1 Dividend payments in practise
8.11.2 Stock repurchases in practise
8.11.3 How companies decide on the dividend policy
8.11.4 Do the firm’s dividend policy affect firm value?
8.11.5 Why dividend policy may increase firm value
8.11.6 Why dividend policy may decrease firm value

9. Options
9.1 Option value
9.2 What determines option value?
9.3 Option pricing
9.3.1 Binominal method of option pricing
9.3.2 Black-Scholes’ Model of option pricing

10. Real options
10.1 Expansion option
10.2 Timing option
10.3 Abandonment option
10.4 Flexible production option
10.5 Practical problems in valuing real options

11. Appendix: Overview of formulas

Index