Corporate finance deals primarily with the monetary decisions made by corporations and the methods and analytic tools which are utilized in a firm’s decision making process. In the Corporate Finance Part II textbook, students familiar with the fundamentals of corporate finance are introduced to more advanced approaches to budgeting, financing, and valuation. It is available as a free e-book and can be downloaded here.
The text begins with a discussion of capital budgeting, the cost of capital for preferred stocks and new projects, certainty equivalents, estimated cash flows, business value based on the Weighted Average Cost of Capital (WACC), and determining positive Net Present Value (NPV) using sensitivity analysis, scenario analysis, and the Monte Carlo method. Additional topics include market efficiency, stock market anomalies, behavioral finance, debt and equity characteristics, capital structure, trade-off theory, pecking order theory, option value, the Black-Scholes’ Model of option pricing, expansion options, abandonment options, and more. All formulas and equations throughout Corporate Finance Part II are accompanied by detailed explanations and graphs. A formula appendix and index follows the text.
Students interested in learning fundamental concepts in corporate finance should download the first e-book in this series, Corporate Finance, which is also available as a free e-book on bookboon.com.
1. Capital budgeting
1.1 Cost of capital with preferred stocks
1.2 Cost of capital for new projects
1.3 Alternative methods to adjust for risk
1.4 Capital budgeting in practise
1.4.1 What to discount?
1.4.2 Calculating free cash flows
1.4.3 Valuing businesses
1.5 Why projects have positive NPV
2. Market efficiency
2.1 Tests of the efficient market hypothesis
2.1.1 Weak form
2.1.2 Semi-strong form
2.1.3 Strong form
2.1.4 Classical stock market anomalies
2.2 Behavioural finance
3. Corporate financing and valuation
3.1 Debt characteristics
3.2 Equity characteristics
3.3 Debt policy
3.3.1 Does the firm’s debt policy affect firm value?
3.3.2 Debt policy in a perfect capital market
3.4 How capital structure affects the beta measure of risk
3.5 How capital structure affects company cost of capital
3.6 Capital structure theory when markets are imperfect
3.7 Introducing corporate taxes and cost of financial distress
3.8 The Trade-off theory of capital structure
3.9 The pecking order theory of capital structure
3.10 A final word on Weighted Average Cost of Capital
3.11 Dividend policy
3.11.1 Dividend payments in practise
3.11.2 Stock repurchases in practise
3.11.3 How companies decide on the dividend policy
3.11.4 Does the firm’s dividend policy affect firm value?
3.11.5 Why dividend policy may increase firm value
3.11.6 Why dividend policy may decrease firm value
4.1 Option value
4.2 What determines option value?
4.3 Option pricing
4.3.1 Binominal method of option pricing
4.3.2 Black-Scholes’ Model of option pricing
5. Real options
5.1 Expansion option
5.2 Timing option
5.3 Abandonment option
5.4 Flexible production option
5.5 Practical problems in valuing real options
6. Appendix: Overview of formulas