Principles of corporate finance

This course is aimed at students who are interested in understanding the principles of corporate finance.

  • Project evaluation: the NPV rule and IRR rules of investment appraisal; ‘wrong’ investment appraisal rules: payback and accounting rate of return.
  • Real options: understand what real options are and why they are important in project valuation; understand and calculate the source of option value; three types of real options: options to abandon/expand/wait.
  • Dividend theory: the Modigliani–Miller and dividend irrelevancy; Lintner’s fact about dividend policy; dividends, taxes and clienteles; asymmetric information and signalling through dividend policy.
  • Capital structure: the Modigliani–Miller theorem: capital structure irrelevancy; taxation, bankruptcy costs and capital structure; weighted average cost of capital; Modigliani-Miller 2nd proposition; the Miller equilibrium; asymmetric information: 1) the under-investment problem, asymmetric information; 2) the risk-shifting problem, asymmetric information; 3) free cash-flow arguments; 4) the pecking order theory; 5) debt overhang.
  • Corporate governance: separation of ownership and control; management incentives; management shareholdings and firm value; corporate governance.
  • Mergers and acquisitions: motivations for merger activity; calculating the gains and losses from merger/takeover; the free-rider problem and takeover activity.
  • Equity offerings: understand venture capital and equity issuance in the public market; perform valuation with multiple financing rounds; initial public offerings and underpricing; winners’ curse problem.
  • Risk management: understand why and how companies manage risk; cost of hedging; covered and uncovered interest rate parity.

If you complete the course successfully, you should be able to:

  • explain how to value projects, and use key capital budgeting techniques (for example: NPV and IRR)
  • understand and apply real option theory as an advanced technique of capital budgeting
  • understand and explain the relevance, facts and role of the payout policy, and calculate how payouts affect the valuation of securities
  • understand the trade-off firms face between tax advantages of debt and various costs of debt
  • calculate and apply different costs of capital in valuation
  • understand and explain different capital structure theories, including information asymmetry and agency conflict
  • understand how companies issue new shares, and calculate related price impact in security offerings
  • discuss why merger and acquisition activities exist, and calculate the related gains and losses
  • understand risk, hedging, and numerous financial securities as tools to manage risk.


  • Brealey, Richard A., Stewart C. Myers, and Franklin Allen. Principles of Corporate Finance. (McGraw-Hill Education

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