MN10500: Corporate Finance For Managers (MN10500)

A very detailed summary on the full principle fiance (for managers) course. Formulas, methods, definitions, models, ratios, risks and returns.

Lecture Summary ● The trade-off between debt and equity. ○ Benefits ○ Costs ● Alternative capital structure theories and empirical evidence. ● The (simplified) cost of capital model to determine the optimal debt-equity combination that minimises WACC.

Corporate Financing Patterns ● Internally generated funds: ○ Retained earnings/plowback profit ● External sources of finance: ○ Debt ○ Equity ● Firms may raise funds from external sources or plow back profits (internal funds). External financing involves the choice between debt & equity. ● In practice, there are securities lying between the spectrum of 'pure' debt & equity and they are sometimes called 'mezzanine' or 'hybrid' securities.

Lecture Summary ● Characteristics of bonds ● Bond price as the present value of coupons and principal ● Characteristics of equity (stock) ● Dividend Discount Model: Calculations and critiques ● Constant Dividend Growth Model: Calculations and critiques

Lecture Summary ● Common measures of risk and return ○ Compare different asset classes ● Portfolio risk and return ○ Return as weighted-average return ○ Risk (in most cases) not weighted-average, but dependent on correlation. ● Diversification ○ Market (systematic) and unique (firm-specific) risks.

Lecture Summary ● Calculations: ○ Payback Period ○ NPV (not the 'normal' IRR) ○ Investment decisions under Capital Rationing ○ Modified IRR ● Advantages and disadvantages of alternative investment appraisal techniques: ○ NPV is the most accurate method in most cases.

Lecture Summary ● Market risk is the only relevant risk in a diversified portfolio. ● Capital Asset Pricing Model (CAPM) ○ Calculations ○ Critiques: Its assumptions & arguments/evidence against them. ● Cost of Capital (WACC) ○ Always after-tax, unless otherwise indicated.

Notes taken from the lecture on The Time Value of Money. A more detailed guide on the basics of present value and future value of money, and related concepts.