This course examines important issues in corporate finance from the perspective of financial managers.

To assure that we all have the same background, the first part of the course cover capital structure theory: Modigliani-Miller, taxes, cost of financial distress, risk-shifting, adverse selection, pecking order theory, free cash flow problem. In the midterm, on October 24, you can show that you master the material. To continue in the course, you have to get at least 50% of the points in the midterm.

After the midterm, the course continues with a mix of lectures, presentations by students, who have to cover and present specific topics as a group, and presentations by practitioners:

• Project finance (Confirmed speaker: Bernhard Haider, Country Manager Austria, ContourGlobal)
• Structured finance and securitization
• Convertible debt

Additional Topics (that we may cover, depending on students’ preferences)

• Venture capital financing
• Leveraged buyouts (LBOs) and private equity
• Initial public offerings (IPOs) and short-termism in capital markets
• Banks: Capital structure and regulation
• Payout polity: Dividends and repurchases
• New financing technologies: Crowdfunding and big tech financing
• Liquidity management: The role of cash and credit lines

We will decide on the specific topics we cover and allocate topics to groups during the first part of the course.

If you want to check whether you find the topic interesting and have not taken Course III yet, please have a look at the relevant chapters in Berk and DeMarzo. (See below.)

1. Understand how financial decisions affect the value of a firm and identify key drivers of a firm’s financing decision.
2. Understand key drivers of 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?
3. Understand benefits of 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.
4. Understand the role of cash-flow and control rights in financial arrangement.
5. Learn how to identify key aspects of financing decisions.

Attendence (at least 80%) is mandatory.

This is an applied course. Real word problems are complex and students have to be willing to actively participate in their groups, be interested in tackling challenging questions, and be comfortable with a learning approach that goes beyond “solving a set of exercises to prepare for an exam.”

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 prepare a presentation on a specific topic. Your group has to choose about the key issues that you want to present to other students based on the relevant theoretical and empirical literature.

Midterm: 35 Points

Topic presentation: 25 Points

Participation: 5 Points

Final: 35 Points

Note: A minimum of 18 points is required from the midterm to successfully pass the course.

The final grade is based on the number of total points and you need a total of at least 50 points (and at least 18 points in the midterm) to pass the course.

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You must have mastered the content of Courses I and II and ideally Course III.

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

Literature Part I:

Berk and DeMarzo: “Corporate Finance”:

• Capital Structure in a Perfect Market (Modigliani-Miller) (Chapter 14)
• Debt and Taxes (Chapter 15)
• Financial Distress, Incentives, and Information Problems (Chapter 16)

Jensen (1986): “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers”, American Economic Review, 323-329

Jensen and Meckling (1976): “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, Journal of Financial Economics, 305-360

Myers (1977): “Determinants of Corporate Borrowing“, Journal of Financial Economics, 147-175

Modigliani and Miller (1958): “The Cost of Capital, Corporation Finance and the Theory of Investment”, American Economic Review, 261-297

Myers and Majluf (1984): “Corporate Financing and Investment Decisions when Firms have Information that Investors do not have”, Journal of Financial Economics, 187-221

Midterm: Based on the content and exercises we cover in the first two lectures. It is a closed book exam, and you may only use a non-programmable calculator.

Topic presentation: Students are allocated a specific topic (based on preferences) and they have to prepare in a group of 3 to 5 students a presentation on the topic.

Final: Based on the topics we cover after the midterm. There will be a question on each groups' topics and students have to answer a subset of these questions (not including the topic they cover). It is a closed book exam.

Topic question: I will give you a specific topic/research paper during class, for example related to the Covid 19 pandemic crisis and corporate finance. Together with your group, you have to prepare a presentation on this topic/paper.

A note on group assignments: I will assign participants to topics based on preferences. 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 specific wishes on group members or topics.) When grading topic presentation, I may take into account individual contributions, e.g., in the discussion/presentation of the topic in class. Thus, points can potentially differ for different group members.