Investment opportunities of a corporation. Cash flows of an investment project. Project risk, cost of capital and discounted cash flows. Applying net present value (NPV) methodology in capital budgeting. Mutually exclusive projects. Profitability index (PI) as a relative measure of present value. Internal rate of return (IRR): methodology and limitations. Time constraints: discounted payback method. Value creation with efficient investment projects.

Modigliani and Miller theorem (MM) on capital structure, perfect capital market assumptions and basic MM irrelevance propositions. Weighted average cost of capital (WACC): a portfolio approach to determine the overall opportunity cost of capital. Competing definitions of WACC. Cost of debt, cost of equity and WACC under pure MM. Shareholder reaction to changes in capital structure. MM propositions with corporate income taxes. Income tax shield as motivation to take debt. Motivation of WACC behavior. The effect of personal taxes on capital structure. Miller equilibrium model. Tradeoff theory as a model of optimal capital structure: tax shield vs financial distress costs. Firm value vs WACC under tradeoff theory. The pecking order of financing theory. The information conveyed by capital structure decisions. A debtholder – equityholder conflict: debt overhang problem, asset substitution problem, debt covenants and monitoring opportunities as means to agency costs. An equityholder – manager conflict: overinvestment problem, deficient management efforts, aligning the conflicting interests with capital structure. Minimizing the total cost of two agency conflicts with capital structure choice.

Adjustments to capital budgeting techniques when evaluating a project under certain financing plan. Adjusted present value (APV), weighted average cost of capital (WACC) approach and free cash flow to equity (FCFE): three classical approaches to account for side effects.

Types of dividends: cash dividend, stock dividend, share repurchase. Payout policy as a financing problem. The Modigliani-Miller payout irrelevance theorem. Neither dividend size nor means of delivery matters under MM. The effect of investor taxes: a preference for capital gains compared to cash distributions. The dividend puzzle. Static clientele theory. Lintner’s stylized empirical facts. Signaling role of dividends. Payout decisions as means to align the interests of managers and shareholders.

Risk and the M&M theorem. The motivation to hedge: decrease tax payments, decrease costs of financial distress, improve planning for capital needs. The methods of interest rate risk management. Foreign exchange risk management. Application of risk management to industrial firms.

Types of M&A. Reasons to acquire: economies of scale, vertical integration, financing side motivation. Hubris hypothesis by Roll. Empirical evidence of inefficient M&As. Value creation via restructuring. Divestitures and bankruptcy as types of corporate restructuring. The sources for synergy in restructuring.

0.05 * Class participation + 0.5 * Final Exam + 0.15 * Group Project + 0.25 * Mid-Term Test + 0.05 * Quiz