Corporate Finance

The module covers fundamental concepts in corporate finance. This knowledge is important as a fundament for advanced courses in corporate finance as well as a career in the investment banking or in a corporate treasury department.

• Options: Basic understanding, put call parity, binomial and Black-Scholes option pricing, equity as call option
• Real options: Identification and binomial pricing
• Valuation: Introduction to DCF methods, multiples methods and applications
• IPO: Empirical studies of IPO costs, IPO process
• Capital structure: WACC under OPM, CAPM and MM, trade off theory of debt, agency theory of debt, pecking order theory of debt
• Efficient markets: Definitions, modeling, empirical approaches and results
• M&A: Explanations of wealth effects of M&A, explanations for conglomerates, Empirical results on
other forms of ownership decreases and change (divestitures, carve outs, spin offs, tracking stock,
split ups, LBOs)
• Dividend policy: Theories of optimal dividend policy, Empirical evidence

After successful completion of the module, students will be able to explain the most common concepts in corporate finance such as real and financial options, company valuation, market efficiency and dividend and leverage policies. Furthermore, they are able to discuss critically these topics. Finally, they will be able to apply the above concepts and decide on corporate financial policies as well as evaluate financial and real options and companies (e.g., by using option theory or DCF methods).

The student should have a solid understanding of finance fundamentals (discounting cash flows, risk, CAPM). These topics are covered in the course “Investitions- und Finanzmanagement” or in other introductory finance classes.

There is a weekly lecture and tutorial. During the lecture, the content is presented with the help of slides and computations on a tablet computer. Students can gain a deeper understanding by solving the weekly problem sets. The solution to these problem sets is presented each week during the tutorial.

Presentation slides and white board.

Required:
• Berk, DeMarzo (2014, 3/E): Corporate Finance
• Copeland, T. E./ Weston, J. F./ Shastri, K. (2005): Financial Theory and Corporate Policy, USA, Addison Wesley, 4th International Edition.

Further recommended readings will be given in the lecture.

The grading is based on an open-book e-test with a duration of 90 minutes. This exam consists of theoretical questions regarding corporate finance (e.g. characteristics of real options, when to apply which company valuation method, theoretical considerations on the optimal capital structure) as well as performing applied computations (e.g. valuing real options, computing equity values by discounting cash flows, adjusting firm risk measures for leverage) . The theoretical questions are mainly based on the lecture whereas the calculations are mainly based on the tutorial.