1

What Corporate Finance is about…

• 3 Major Decisions of the Firm.

• -What Projects to Invest in (NPV Rule)

• How to Finance these Projects (Capital Structure Decision: Debt/equity).

• Payout Policy (Dividends/ Repurchasing Shares/ Re-investing).

2

Objective of Firm.

• Maximisation of Share-holder Wealth.

• => All Positive NPV projects/ or highest NPV project.

• => capital structure/payout policy that maximises share-holder wealth.

• But: managerial incentives/ market imperfections/ behavioural biases.

3

Academic Approach:

• Practical: Numerical “Cook Book” analysis: eg NPV Calculation.

• Deeper Conceptual: Essay style.• Exam: Combination of Numerical and

conceptual.• Numerical: From lecture slides AND from

Berk and DeMarzo book.• Conceptual: as above, plus reading list and

your own research.

4

Self-Assessment Exercises:

• Investment Appraisal: Know in detail: Chapter 6 and Chapter 7: Do end of chapter exercises.

• Capital Structure: Read well, and do some numerical exercises: Chapter 14, Chapter 15, Chapter 16.

• Payout Policy: Chapter 17:• Some overlap between numerical and

conceptual!!!

5

Some Conceptual Issues I:

• If NPV is best investment appraisal rule, why do managers sometimes use inferiro rules like payback, IRR (Managerial incentives, market imperfections, behavioral biases.

6

Some Conceptual Issues II

• Is Capital Structure really irrelevant? If not, what affects the optimum? Can we find an optimum?

• What methods do firms favour (trade-off, pecking order, life-cycle, benchmarking)? Why?

7

Some Conceptual Issues III

• Does Payout Policy Matter? What is the difference between returning cash to investors through dividends or share repurchases?

• When and why do firms raise finance through private equity (eg Venture Capitalists, rather than through public investors. What are the differences for incentives, firm value etc?