Objectives

This course examines the interaction between investment and financing decisions from the perspective of a corporate decision maker. The concept of net present value, suitably adapted to account for taxes and uncertainty, is used to determine how investment and financing decisions affect the value of the firm. This concept of value can be a basis for decisions in marketing, operations management and corporate strategy.

The course is primarily theoretical (as opposed to empirical), but applied (as opposed to purely methodological). The emphasis is on problem solving. Cases and problems emphasize decision-making in a business context. The purpose is to show how the mathematics of valuing cash flows, when combined with common sense and an understanding of incentives, can be used to value investment and financing decisions.

Selected Topics

-The goal of the firm
-Taxes and the cost of capital
-Valuation and the marginal investor
-Miller equilibrium and the marginal investor
-The tax advantage of debt
-The cost of capital
-Leasing
-Advanced topics in leasing
-Capital budgeting under uncertainty
-Valuation methods under uncertainty
-Product markets and capital budgeting
-Dividend policy
-Moral hazard and bond covenants

Richard Brealey and Stewart Myers, Principles of Corporate Finance\plain , (McGraw Hill, 1995) and lecture notes.

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