This course examines important issues in corporate finance from the perspective of financial managers who are responsible for making significant financing and investment decisions. You will learn how investment and financing decisions interact to affect the value of the firm and how management can evaluate operating decisions.

We build on topics covered in Course III (Corporate Finance) and cover selected chapters from the book “Corporate Finance” by Berk and DeMarzo (see below).

An important part of the course is to apply what you learned in Course III. You have to form teams in which you tackle topics that you encounter in practice.

We cover two key topics:

1. Principles of value creation through capital structure decisions.

2. Principles of valuing a firm or project in a capital market context.

Topics that you learn to apply include

• Fundamentals of Capital Budgeting (Chapter  8) and Valuing Stocks (Chapter  9)
• Cost of Capital (Chapter 12)
• Capital Structure in a Perfect Market (Modigliani-Miller) (Chapter 14)
• Debt and Taxes (Chapter 15)
• Financial Distress, Incentives, and Information Problems (Chapter 16)
• Capital Budgeting and Valuation with Leverage (Chapter 18)

All chapters refer to Berk/DeMarzo, Corporate Finance (3rd – 5th Global Edition, which you can all use).

1. Understand how financial decisions affect the value of a firm and identify key drivers of a firm’s financing decision.
   1. The choice between debt and equity (and how the Modigliani-Miller irrelevance theorem helps):
      1. Why can it be optimal to finance projects such as the Eurotunnel with high levels of debt?
      2. Why do pharmaceutical companies often have negative debt (i.e., more cash than debt)?
      3. Why do banks have an incentive to take on high levels of debt and high risk absent regulation?
   2. Structured financial instruments: When can it be optimal to use structured financing such as, for example, convertible debt?
      1. Mandatory convertible debt played an important role in the financing of the $63-billion takeover of Monsanto by Bayer in 2018.
      2. Contingent convertible debt CoCos is important in the regulation of banks.
2. Apply the discounted cash flow approach to value investment projects or firms.
   1. How can you use information from the income statement and balance sheet of a firm to calculate the expected cash flow underlying the discounted cash flow method?
   2. How can you use available market information to derive a firm’s cost of capital (i.e., cost of equity and weighted average cost of capital)?
3. Understand key drivers of a project's cost of capital.

Attendence is mandatory. If possible, the course will take place on campus, if this is not possible it will be online.

The course builds on material covered in Course III and selected chapters from Corporate Finance by Berk and DeMarzo. We will discuss the concepts in class and I guide you through the key points. You have to be prepared and read the relevant chapters before class.

We discuss exercises that help you to understand and deepen the key concepts in class. You have to be able to explain the solution to other students or explain what you did not understand. I will call not only voluntary participants, but I may ask you to come to the board, and I may do in class quizzes to test how well you prepared the exercises.

An important part of the course is to apply what you learned through a case study. You have to form teams in which you analyze a company (more in class). Each individual of the group has to be prepared to present the findings in class.

Class participation is mandatory and important. I may call on individuals to lead a discussion or otherwise participate in the discussion.

For specific information on the individual requirements see below.

In addition to having passed Courses I and II, you have to be familiar with the content of Course III.

You have to be familiar with the content of Course III.

E-mail: christian.laux@wu.ac.at

Case study: Group exercise on capital structure and valuation: I will give you specific questions throughout the course, which you have to address working together with your group. Requirement: short answers to the questions; you have to be prepared to present and explain your answers “in class.” You must not discuss the questions with other groups before we discuss them in class!

A note on group assignments: I will assign participants to groups. Each group consists of 3–5 members, depending on the number of people enrolled in class. (If you have group members that you would like to work with, you can send me an Email. However, there is no guarantee that I can accommodate the wishes.) When grading group exercises, I may take into account individual contributions, e.g., in the discussion of the group assignments in class. Thus, points can potentially differ for different group members.

Final: 60 - 90 minutes: individual exercise, closed book, you may only use a non-programmable calculator (no smartphone)! The exam will include problem-oriented quantitative questions, and theoretical questions to ensure understanding of the concepts discussed in class. The questions are conceptually similar to those we discuss in class.

Open questions: I will give you several open questions during class on the application of what you learned. Some of these questions are graded. (The open questions can be in the form of individual team exercises. In general, you have to submit written answers, but oral questions/answers are possible.)

Exercises: You receive exercises on the topics we cover and we discuss the solutions to the exercises in class. You have to be prepared to explain the solution to other students or explain what you did not understand. Short quizzes on the exercise questions are possible.

Participation has two dimensions, content and format/style. Each student is strongly encouraged to add to the content of the discussion, e.g., to present his or her alternative viewpoint, to apply concepts to the problem at hand, to find real-world examples that corroborate or refute what we discuss.

You can earn up to 5 bonus points for participation that contributes to the overall learning experience of all participants.