Objectives

The aim of this course is to provide students with a thorough understanding of how corporate financial decisions are made in the presence of economic uncertainty.

In this course we will study the sources of corporate financing and the evaluation of alternative investment projects. This process will involve understanding principles of capital budgeting, measuring and projecting cash flows and computing the firm’s cost of capital. We will examine how taxation and bankruptcy costs affect corporate financing, and how ultimately those decisions shape the cost of firm financing. We will go through a variety of methods for valuing projects, equities or firms.

We will study how investment and financing decisions are distorted when conflicts of interest emerge between creditors and shareholders, or management and shareholders. We will see why valuable projects may not be undertaken, how debt financing may give rise to value destroying investments and excessive risk taking. Furthermore, we will see why firms may be cut off from financing (credit rationing), and how firms can navigate corporate bankruptcy. Finally, we will examine the challenges firms are facing in the contemporary world, as they are planning ahead to face the dangers and opportunities of climate change.

Contents

1. Introduction to Finance

2. Financial Statement Analysis

3. Time value of money

4. Capital Budgeting I

5. Student Presentations

6. Capital Budgeting II

7. Capital Budgeting III

8. Risk in investment projects

9. Valuation I

10. Valuation II

11. Bankruptcy and the Trade-off Theory of Capital Structure

12. The Green transition

13. Agency costs

14. Asymmetric Information

References

No single textbook covers the entirety of the topics that we will consider. It is not mandatory for students to buy any textbook, but below I am providing some useful references:

The main textbook for the course is:

• Berk, Jonathan and Peter DeMarzo (2019), Corporate Finance, Global Edition, 5th Edition, Pearson International, ISBN-13: 978-1292304151.

Additional readings will be provided in class or electronically.

The following textbooks may also be helpful on some of the topics covered:

• Tirole, Jean (2005): The Theory of Corporate Finance, Princeton University Press, ISBN-10: 0691125562.

• Damodaran, Aswath (2008): Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, Second Edition, Wiley & Sons, ISBN-10: 0471751219.
• Brealy, Richard, Myers, Stewart and Franklin Allen (2019): Principles of Corporate Finance, 13th Edition, McGraw-Hill Irwin, ISBN-13: ‎ 978-1260565553

Despite the extensive use of data, there will not be an emphasis on the theory of econometrics. Rather, the course will use the “toolkit” of econometrics to understand how firms make corporate finance decisions. Nevertheless, if students feel that they need a textbook on econometrics, here is a modern treatment:

• Cameron, Trivedi (2005): Microeconometrics: Methods and Applications, Cambridge University Press, ISBN-13: 978-0521848053.

A companion of this book covers Stata:

• Cameron, Trivedi (2020): Microeconometrics using Stata: Stata Press, 2nd Edition, ISBN-13 : 978-1597180733

Evaluation

First attempt

Exam:

Written 3h00 hours

Documentation:

Allowed

Calculator:

Allowed with restrictions

Evaluation:

• Final exam format: written, 3 hours.
• The final grade for the course is:

Grade=0.2*Project Grade Average +0.8*Final Exam Grade.

The Project and the Final Exam are each graded on a 1-6 scale. A grade 0 will be assigned for late submissions/omissions/copying or any other breach of academic integrity.

Retake exam: Same as first attempt.

Retake

Exam:

Written 3h00 hours

Documentation:

Allowed

Calculator:

Allowed with restrictions

Evaluation:

Retake exam: Same as first attempt.