Topic 1: Corporate Financing and Real Asset Valuation
o Leverage (mix of debt and equity)
o Debt tax shields
o Cost of capital
o Valuation of real assets:
o Weighted average cost of capital (WACC) method
o Adjusted present value (APV) method
Topic 2: Corporate Financing Policy
o Irrelevance of Capital Structure (Modigliani-Miller-Theorem)
o Observed patterns in corporate financing policies and the assumptions of MM
Topic 3: Capital Structure: Trade-off between Tax Shields and Financial Distress Costs
o Corporate and personal taxes
o Direct and indirect bankruptcy costs
Topic 4: Debt Holder – Equity Holder Conflicts
o Debt overhang / underinvestment
o Asset substitution / risk-shifting
o Short-sighted investments
o Reluctance to liquidate
Topic 5: Management Incentives, Information, and Corporate Control
o Free cash flow problem / overinvestment
o Pecking order theory
After completing the course, students will understand
· how real assets are valued, taking into consideration the appropriate cost of capital
· the effect of leverage and debt tax shields on a firm’s cost of capital
· the irrelevance of capital structure and payout policy under the assumptions proposed by Modigliani and Miller (MM) and how relaxing the assumptions of MM can help explain observed patterns of optimal corporate financing policies
· the trade-off between debt tax-shields and financial distress costs, such as direct and indirect bankruptcy costs
· conflicting interests of debt holders and equity holders and how they may affect corporate financing and investment decisions (underinvestment, asset substitution, short-sighted investments, reluctance to liquidate)
· the separation of ownership and control and the misalignment of incentives of management and shareholders
· that information asymmetries may cause underpricing of newly issued securities due to adverse selection (pecking order).
Participation is compulsory in the interactive part. There are grade related performance assessments in each interactive unit. There is absolutely no way to get these points if you are not present for the entire unit.
Students need to be admitted to the specialization Finance: Markets, Institutions & Instruments and need to have completed Course I and Course II successfully to register for the course.
basic knowledge of Excel or R, basics in Statistics
alexander.muermann@wu.ac.at