Corporate Finance: How Investment and Financing Decisions Create value

Level 1

Level 2

What is Value: How Do we measure it?

Level 3.1

Identifying Value Creation from Investment Decisions

Identifying Value Creation from Financing Decisions

Level 3.2

Begin Level 2 What is Value: How Do we measure it?

Level 2

Assets Generate Cash Flows (Inflows and Outflows)

Time value of Money: Return on Financial Asset of Comparable Risk

Risk-Free and Risky Cash Flows: Risk Premium

PV Formulae

NPV: Did an Investment Make Money?

Financial Assets: (a) Price, (b) NPV of investing in financial assets, (c) Return

PV Formulae

NPV: Did an Investment Make Money?

Financial Assets: (a) Price, (b) NPV of investing in financial assets, (c) Return

Valuation of Bonds

Valuation of Stocks

Bond Features

Finding the discount rate from the price, YTM

YTM, Coupon Rate, Current Yield and Cost of Capital

Discounte d Dividend Model

Gordon Model and Applications

First Look at P/E Ratios

End Level 2 Begin Level 3.1

Identifying Value Creation from Investment Decisions

Capital Budgeting: which projects to Invest In?

NPV and IRR, Other Criteria

NPV and Stock Price

Project Cash flows; Non-standard cash flows and projects

Estimating Discount rates

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NPV and IRR, Other Criteria

NPV and Stock Price

Project Cash flows; Non-standard cash flows and projects

Estimating Discount rates

Real and Nominal Returns, IRR and NPV in Real and Nominal Terms

Conventional Cash Flows, Link between IRR and NPV

Advantages of IRR over NPV

Problems with IRR: Multiple IRRs, Mutually Exclusive Projects and Multiple Crossover Rates

Payback Rule and the Profitability Index

NPV and IRR, Other Criteria

NPV and Stock Price

Project Cash flows; Non-standard cash flows and projects

Estimating Discount rates

Measuring Historical Average Return and Return Variability; the Risk-Return Tradeoff; RiskPremium

Portfolio Return and Risk

Principle of Diversification, Systematic and Unsystematic Risk

Systematic Risk and Beta

The Systematic Risk Principle; Risk-Premium and the CAPM

End Level 3.1 Begin Level 3.2

Identifying Value Creation from Financing Decisions

Financing in the absence of Taxes and Bankruptcy Costs (and other market imperfections) and Value Creation

Financing in an imperfect environment and Value Creation

Valuation Impacts of Security Issuance

Financing in the absence of Taxes and Bankruptcy Costs (and other market imperfections) and Value Creation

Financing in an imperfect environment and Value Creation

Valuation Impacts of Security Issuance

The ModiglianiMiller (M&M) Theorem

Leverage, Risk and return in the M&M world

Leverage, Equity Beta and Asset Beta in the M&M world

The WACC; M&M Theorem and the WACC

Why the M&M Result is important

Financing in an imperfect environment and Value Creation

Financing in the absence of Taxes and Bankruptcy Costs (and other market imperfections) and Value Creation

Valuation Impacts of Security Issuance

The notion of an optimal capital structure

The WACC with taxes

The WACC method of Valuation

Bankruptcy and Other Costs of Debt

The APV Method of Valuation

Comparison of the WACC and APV Method; Merger Valuation (RJR Nabisco Case)

Steps in estimating the WACC, M&M Proposition II

Asset and equity Beta Revisited

Financing in the absence of Taxes and Bankruptcy Costs (and other market imperfections) and Value Creation

Financing in an imperfect environment and Value Creation

Valuation Impacts of Security

Issuance

Equity Issuance Under Asymmetric Information

Rights Issues

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