Week 1 - Lecture 1 - Value creation, financial statements, and from FS to CFs 3
Part 1 - Value creation 3
Part 2 - Investment in Growth (MVA and EVA) 4
Part 3 - Financial Statements 8
Part 4 - From Financial Statements to CFs 16
Part 5 - Special topic: provisions or contingencies 17
Part 6 - Projections A 20
Week 1 - Lecture 2 22
Part 2.1 - Capital Budgeting 22
Part 2.2 - Alternative investment decision methods 29
Part 2.3 - Capital Asset Pricing Model (CAPM) 34
Part 2.4 - Real Options 36
Part 2.5 - Corporate Governance 36
Part 2.6 - Executive Compensation 38
Part 2.7 - Shareholder Voting 40
Part 2.8 - Shareholder vs Stakeholder view 44
Week 2 - Lecture 3 - Capital Structure and Valuation 46
Part 1 - Basics and MM1958 46
Part 2 - MM1963 48
Part 3 - WACC after and before tax; levered and unlevered betas 53
Part 4 - Costs of financial distress and Miller 1977 56
Week 2 - Lecture 4 - Capital Structure and Valuation 60
Part 1 - Agency theory, Jensen and Meckling 1976 60
Part 2 - Free Cash Flow theory, Jensen 1986 64
Part 3 - Pecking Order Theory, Myers 1984 and Myers and Majluf 1984 65
Part 4 - Shyam-Sunder and Myers 1999 66
Part 5 - Summary and Tips 66
Part 4.6 - Risky Debt 69
Part 4.7 - Risky Debt Problem solved 70
Week 3 - Lecture 5 - CAPM, build up method, APT and factor models 72
Part 5.1 - Capital Asset Pricing Model (CAPM) 72
Part 5.2 - CAPM and Build Up model 75
Part 5.3 - Arbitrage Pricing Theory [part 1] 79
Part 5.4 - Arbitrage Pricing Theory [part 2] 81
Part 5.5 - Arbitrage Pricing Theory [part 3] 85
Part 5.6 - ‘Best Practices’ in Estimating the Cost of Capital: an update 88
Week 3 - Lecture 6 - Payout Policy 90
Part 6.1 - Payout Policy and Dividend Irrelevance 90
Part 6.2 - Payout Policy and Taxation 93
1
, Part 6.3 - Payout vs Retention of Cash 96
Part 6.4 - Signalling with Payout Policy 98
Week 4 - Lecture 7 - Risk Management 101
Part 7.1 - Risk Management 101
Part 7.2 - Insurance 103
Part 7.3 - Hedging input price risk 105
Part 7.4 - Interest rate risk 106
Week 4 - Lecture 8 - Short-term Financial Planning 111
Part 8.1 - Working Capital Management 111
Part 8.2 - NWC component management 112
Part 8.3 - Cash and credit constraints 115
Part 8.4 - The Matching Principle 116
Week 5 - Lecture 9 & 10 - Issuance 118
Lecture 9/10.1 - Equity Issuance 118
Lecture 9/10.2 - IPO 123
Lecture 9/10.3 - IPO Puzzles 126
Lecture 9/10.4 - Venture capital 131
Lecture 9/10.5 - Debt issuance 134
Week 6 - Guest Lectures 138
Part 1 - Tuesday - Securitization 138
Part 2 146
2
,Week 1 - Lecture 1 - Value creation, financial statements, and from FS to CFs
Part 1 - Value creation
When does a project create value?
NPV > 0 → project creates value
NPV < 0 → project destroys
NPV = 0 → neither creation nor destruction of value
Economic Value Added (EVA) = that attempts to measure the true economic profit
produced by a company.
Market Value Added (MVA) = is simply the difference between the current total market
value of a company and the capital contributed by investors (including both shareholders
and bondholders). It is typically used for companies that are larger and publicly-traded.
In this example:
Project A:
MVA (Market Value Added) = 10 (value you get on the market with r)
EVA (Economic Value Added)= 11/1+r (value you get when investing)
NPV = -100 + 121/1.1 = +10
Market Value balance sheet: 110 = market value of assets
Book Value balance sheet: 100 = book value of assets
3
, Investors often look at the market-to-book value.
Project B: the share price will go down
You can have profitable projects but you still should not invest in it.
Only invest in projects which have a positive NPV.
Part 2 - Investment in Growth (MVA and EVA)
Market Value Added (MVA) and Economic Value Added (EVA)
Some other numerical examples (ignore taxes)
Value = Present value of the expected Free Cash Flows
Value = PV E(FCF)
The FCF is the CF that you can pay out each year to the providers of capital.
Special case: Value0 = FCF1 / (WACC – g)
The CF will never end so it is a perpetual.
Because of a ROI of 20%, the EBIT in year 1 is 100 (500 x 20%).
EVA year 1 = 100 - 0.12 + 500
MVA 0 = EVA1 / (WACC - g) = 40 / (0.12-0.05) = 571,43
ROIC = EBIT / Invested Capital = = 20%
Growth = ROIC x (Net investment / EBIT) = 20% x 25% = 5%
EBIT = Earnings before interest and taxes
Invested capital = Operating working capital + Net property, plant, and equipment + Other
assets
Question: What if the investment rate* is 40% instead of 25%?
What happens with the growth rate? → increases
What happens with the FCF in year 1? → decreases
What happens with the value of the firm?
* Investment rate = Net investment / EBIT
4
Part 1 - Value creation 3
Part 2 - Investment in Growth (MVA and EVA) 4
Part 3 - Financial Statements 8
Part 4 - From Financial Statements to CFs 16
Part 5 - Special topic: provisions or contingencies 17
Part 6 - Projections A 20
Week 1 - Lecture 2 22
Part 2.1 - Capital Budgeting 22
Part 2.2 - Alternative investment decision methods 29
Part 2.3 - Capital Asset Pricing Model (CAPM) 34
Part 2.4 - Real Options 36
Part 2.5 - Corporate Governance 36
Part 2.6 - Executive Compensation 38
Part 2.7 - Shareholder Voting 40
Part 2.8 - Shareholder vs Stakeholder view 44
Week 2 - Lecture 3 - Capital Structure and Valuation 46
Part 1 - Basics and MM1958 46
Part 2 - MM1963 48
Part 3 - WACC after and before tax; levered and unlevered betas 53
Part 4 - Costs of financial distress and Miller 1977 56
Week 2 - Lecture 4 - Capital Structure and Valuation 60
Part 1 - Agency theory, Jensen and Meckling 1976 60
Part 2 - Free Cash Flow theory, Jensen 1986 64
Part 3 - Pecking Order Theory, Myers 1984 and Myers and Majluf 1984 65
Part 4 - Shyam-Sunder and Myers 1999 66
Part 5 - Summary and Tips 66
Part 4.6 - Risky Debt 69
Part 4.7 - Risky Debt Problem solved 70
Week 3 - Lecture 5 - CAPM, build up method, APT and factor models 72
Part 5.1 - Capital Asset Pricing Model (CAPM) 72
Part 5.2 - CAPM and Build Up model 75
Part 5.3 - Arbitrage Pricing Theory [part 1] 79
Part 5.4 - Arbitrage Pricing Theory [part 2] 81
Part 5.5 - Arbitrage Pricing Theory [part 3] 85
Part 5.6 - ‘Best Practices’ in Estimating the Cost of Capital: an update 88
Week 3 - Lecture 6 - Payout Policy 90
Part 6.1 - Payout Policy and Dividend Irrelevance 90
Part 6.2 - Payout Policy and Taxation 93
1
, Part 6.3 - Payout vs Retention of Cash 96
Part 6.4 - Signalling with Payout Policy 98
Week 4 - Lecture 7 - Risk Management 101
Part 7.1 - Risk Management 101
Part 7.2 - Insurance 103
Part 7.3 - Hedging input price risk 105
Part 7.4 - Interest rate risk 106
Week 4 - Lecture 8 - Short-term Financial Planning 111
Part 8.1 - Working Capital Management 111
Part 8.2 - NWC component management 112
Part 8.3 - Cash and credit constraints 115
Part 8.4 - The Matching Principle 116
Week 5 - Lecture 9 & 10 - Issuance 118
Lecture 9/10.1 - Equity Issuance 118
Lecture 9/10.2 - IPO 123
Lecture 9/10.3 - IPO Puzzles 126
Lecture 9/10.4 - Venture capital 131
Lecture 9/10.5 - Debt issuance 134
Week 6 - Guest Lectures 138
Part 1 - Tuesday - Securitization 138
Part 2 146
2
,Week 1 - Lecture 1 - Value creation, financial statements, and from FS to CFs
Part 1 - Value creation
When does a project create value?
NPV > 0 → project creates value
NPV < 0 → project destroys
NPV = 0 → neither creation nor destruction of value
Economic Value Added (EVA) = that attempts to measure the true economic profit
produced by a company.
Market Value Added (MVA) = is simply the difference between the current total market
value of a company and the capital contributed by investors (including both shareholders
and bondholders). It is typically used for companies that are larger and publicly-traded.
In this example:
Project A:
MVA (Market Value Added) = 10 (value you get on the market with r)
EVA (Economic Value Added)= 11/1+r (value you get when investing)
NPV = -100 + 121/1.1 = +10
Market Value balance sheet: 110 = market value of assets
Book Value balance sheet: 100 = book value of assets
3
, Investors often look at the market-to-book value.
Project B: the share price will go down
You can have profitable projects but you still should not invest in it.
Only invest in projects which have a positive NPV.
Part 2 - Investment in Growth (MVA and EVA)
Market Value Added (MVA) and Economic Value Added (EVA)
Some other numerical examples (ignore taxes)
Value = Present value of the expected Free Cash Flows
Value = PV E(FCF)
The FCF is the CF that you can pay out each year to the providers of capital.
Special case: Value0 = FCF1 / (WACC – g)
The CF will never end so it is a perpetual.
Because of a ROI of 20%, the EBIT in year 1 is 100 (500 x 20%).
EVA year 1 = 100 - 0.12 + 500
MVA 0 = EVA1 / (WACC - g) = 40 / (0.12-0.05) = 571,43
ROIC = EBIT / Invested Capital = = 20%
Growth = ROIC x (Net investment / EBIT) = 20% x 25% = 5%
EBIT = Earnings before interest and taxes
Invested capital = Operating working capital + Net property, plant, and equipment + Other
assets
Question: What if the investment rate* is 40% instead of 25%?
What happens with the growth rate? → increases
What happens with the FCF in year 1? → decreases
What happens with the value of the firm?
* Investment rate = Net investment / EBIT
4
