Corporate Finance
A Complete Course Handbook
Financial algebra · Bonds · Stocks · Investment decisions · Risk and return · CAPM · WACC
· Capita selecta
Rania El Ghalbzouri
MBA Bridging Programme — KU Leuven
Compiled from the complete lecture series, exercise sessions, model solutions, ACTUA readings and course
research papers. This handbook is self-contained: it replaces the original slides and documents in full.
Rania El Ghalbzouri
KU Leuven – MBA Bridging Programme Page 1
,Contents
Chapter 1 — Introduction to Corporate Finance .......................................................................... 3
Chapter 2 — Financial Algebra .................................................................................................... 12
Chapter 3 — Valuing Bonds ......................................................................................................... 24
Chapter 4 — Valuing Stocks......................................................................................................... 34
Chapters 5 & 6 — Corporate Investment Decisions: Tools and Practice ............................... 41
Chapters 7–9 — Measuring Risk and Return, CAPM and WACC ............................................. 52
Chapter 10 — Capita Selecta ........................................................................................................ 64
Rania El Ghalbzouri
KU Leuven – MBA Bridging Programme Page 2
,Chapter 1 — Introduction to
Corporate Finance
What corporate finance is, who makes financial decisions, why shareholder value is
the objective, and how agency conflicts complicate it
Open any financial newspaper and you will find companies making two kinds of decisions. Umicore
announces the sale of two business units and seeks partners for two others; Euronav launches an
initial public offering of its ordinary shares in the United States; Sarens announces a new senior
notes offering; Lumen Technologies declares a quarterly cash dividend; Avaio constructs a
desalination plant at the Port of Antwerp; and, in the background, the US Federal Reserve holds
interest rates steady despite political pressure while a pandemic weighs on financial markets and
the economy. Every one of these headlines is either a decision about what to invest in or a decision
about how to pay for it. Those two decisions are the entire subject of this course.
1.1 The two decisions of corporate finance
Corporate finance studies how companies create financial value. All corporate finance decisions
fall into two families, and every topic in this handbook develops the tools for one of them.
DEFINITION — Investment and financing decisions
Investment decisions (= capital budgeting decisions = capital expenditures) concern the purchase
or sale of real assets. A real asset is an asset used to produce goods and/or services. Real assets
can be tangible (plant, machinery) or intangible (brands, patents, R&D).
Financing decisions concern the sale or purchase of financial assets. A financial asset is a
financial claim to the income generated by the firm's real assets, formalized in a financial security.
Financing decisions change the firm's capital structure (the mix of debt versus equity) and include
the payout decision: paying dividends or repurchasing equity.
The distinction is easiest to see in practice. The table below reproduces the course's survey of
recent real-world decisions: the left column shows investment decisions (real assets), the right
column financing decisions (financial claims).
Company Recent investment decision Recent financing decision
Invests $7 billion in expanding Borrows $600 million from Chandler
Intel (US)
semiconductor plant in Chandler, Arizona Industrial Development Authority
Acquires self-driving start-up Zoox for Reinvests $33 billion that it generates
Amazon (US)
over $1.2 billion from operations
Announces construction of a new plant to Announces plans to sell $2 billion of
Tesla (US)
build the electric Cybertruck shares
Starts production at a deep-water
Shell (UK) Cuts dividend to preserve cash
development in the Gulf of Mexico
Increases production capacity for its fast- Reduces total debt from RMB 33.7 billion
BYD (China)
growing electric cars to RMB 18.5 billion
Completes a 230-MW wind farm in Arranges a borrowing facility with 14
Ørsted (Denmark)
Nebraska international banks
Spends $8 billion on advertising and Pays a dividend and completes a $200
Unilever (UK)
marketing million share buy-back programme
Rania El Ghalbzouri
KU Leuven – MBA Bridging Programme Page 3
, Company Recent investment decision Recent financing decision
Ambev SA (Brazil) Spends $268 million on R&D Reduces total debt by $8.9 billion
GlaxoSmithKline Acquires Canadian biopharma company Announces a share repurchase
(UK) Bellus Health for ≈ $2 billion programme worth up to £2 billion
Reliance Industries Plans a fully integrated solar photovoltaic Issues $1 billion of green bonds to fund
(India) gigafactory in India renewable energy projects
Table 1.1. Examples of recent corporate investment and financing decisions.
Two observations follow from the table. First, investment and financing decisions are made together
and continuously — a firm that builds a gigafactory must simultaneously decide whether green
bonds, shares or retained cash will pay for it. Second, payout decisions (Unilever's buy-back, Shell's
dividend cut) are financing decisions: they determine how much cash is returned to investors rather
than reinvested.
EXAM TIP — Terminology to recognise instantly
• Investment decision = capital budgeting decision = capital expenditure (CAPEX) — three
names for the same thing; the exam uses them interchangeably.
• A real asset produces goods/services; a financial asset is a claim on the income those real
assets generate.
• The payout decision (dividends / repurchases) belongs to the financing decision, not the
investment decision.
1.2 The role of the financial manager
The financial manager stands between the firm's operations and the financial markets, and
manages the flow of cash between them. Figure 1.1 traces the cycle.
Figure 1.1. The role of the financial manager: cash flows between investors and the firm's operations.
The figure shows five flows. (1) Cash is raised from investors on the financial markets — by issuing
shares or debt. (2) That cash is invested in the firm's operations, i.e. in real assets. (3) The
operations generate cash. That cash then follows one of two routes: (4a) it is reinvested in the firm,
or (4b) it is returned to the investors as dividends, share repurchases or debt service. Every arrow
corresponds to a decision studied in this course: arrow (1) is the financing decision, arrow (2) the
investment decision, and the split between (4a) and (4b) is the payout decision. The financial
manager's task is to run this cycle so that the value flowing back to investors exceeds what they
put in, given the risk they bear.
Rania El Ghalbzouri
KU Leuven – MBA Bridging Programme Page 4
A Complete Course Handbook
Financial algebra · Bonds · Stocks · Investment decisions · Risk and return · CAPM · WACC
· Capita selecta
Rania El Ghalbzouri
MBA Bridging Programme — KU Leuven
Compiled from the complete lecture series, exercise sessions, model solutions, ACTUA readings and course
research papers. This handbook is self-contained: it replaces the original slides and documents in full.
Rania El Ghalbzouri
KU Leuven – MBA Bridging Programme Page 1
,Contents
Chapter 1 — Introduction to Corporate Finance .......................................................................... 3
Chapter 2 — Financial Algebra .................................................................................................... 12
Chapter 3 — Valuing Bonds ......................................................................................................... 24
Chapter 4 — Valuing Stocks......................................................................................................... 34
Chapters 5 & 6 — Corporate Investment Decisions: Tools and Practice ............................... 41
Chapters 7–9 — Measuring Risk and Return, CAPM and WACC ............................................. 52
Chapter 10 — Capita Selecta ........................................................................................................ 64
Rania El Ghalbzouri
KU Leuven – MBA Bridging Programme Page 2
,Chapter 1 — Introduction to
Corporate Finance
What corporate finance is, who makes financial decisions, why shareholder value is
the objective, and how agency conflicts complicate it
Open any financial newspaper and you will find companies making two kinds of decisions. Umicore
announces the sale of two business units and seeks partners for two others; Euronav launches an
initial public offering of its ordinary shares in the United States; Sarens announces a new senior
notes offering; Lumen Technologies declares a quarterly cash dividend; Avaio constructs a
desalination plant at the Port of Antwerp; and, in the background, the US Federal Reserve holds
interest rates steady despite political pressure while a pandemic weighs on financial markets and
the economy. Every one of these headlines is either a decision about what to invest in or a decision
about how to pay for it. Those two decisions are the entire subject of this course.
1.1 The two decisions of corporate finance
Corporate finance studies how companies create financial value. All corporate finance decisions
fall into two families, and every topic in this handbook develops the tools for one of them.
DEFINITION — Investment and financing decisions
Investment decisions (= capital budgeting decisions = capital expenditures) concern the purchase
or sale of real assets. A real asset is an asset used to produce goods and/or services. Real assets
can be tangible (plant, machinery) or intangible (brands, patents, R&D).
Financing decisions concern the sale or purchase of financial assets. A financial asset is a
financial claim to the income generated by the firm's real assets, formalized in a financial security.
Financing decisions change the firm's capital structure (the mix of debt versus equity) and include
the payout decision: paying dividends or repurchasing equity.
The distinction is easiest to see in practice. The table below reproduces the course's survey of
recent real-world decisions: the left column shows investment decisions (real assets), the right
column financing decisions (financial claims).
Company Recent investment decision Recent financing decision
Invests $7 billion in expanding Borrows $600 million from Chandler
Intel (US)
semiconductor plant in Chandler, Arizona Industrial Development Authority
Acquires self-driving start-up Zoox for Reinvests $33 billion that it generates
Amazon (US)
over $1.2 billion from operations
Announces construction of a new plant to Announces plans to sell $2 billion of
Tesla (US)
build the electric Cybertruck shares
Starts production at a deep-water
Shell (UK) Cuts dividend to preserve cash
development in the Gulf of Mexico
Increases production capacity for its fast- Reduces total debt from RMB 33.7 billion
BYD (China)
growing electric cars to RMB 18.5 billion
Completes a 230-MW wind farm in Arranges a borrowing facility with 14
Ørsted (Denmark)
Nebraska international banks
Spends $8 billion on advertising and Pays a dividend and completes a $200
Unilever (UK)
marketing million share buy-back programme
Rania El Ghalbzouri
KU Leuven – MBA Bridging Programme Page 3
, Company Recent investment decision Recent financing decision
Ambev SA (Brazil) Spends $268 million on R&D Reduces total debt by $8.9 billion
GlaxoSmithKline Acquires Canadian biopharma company Announces a share repurchase
(UK) Bellus Health for ≈ $2 billion programme worth up to £2 billion
Reliance Industries Plans a fully integrated solar photovoltaic Issues $1 billion of green bonds to fund
(India) gigafactory in India renewable energy projects
Table 1.1. Examples of recent corporate investment and financing decisions.
Two observations follow from the table. First, investment and financing decisions are made together
and continuously — a firm that builds a gigafactory must simultaneously decide whether green
bonds, shares or retained cash will pay for it. Second, payout decisions (Unilever's buy-back, Shell's
dividend cut) are financing decisions: they determine how much cash is returned to investors rather
than reinvested.
EXAM TIP — Terminology to recognise instantly
• Investment decision = capital budgeting decision = capital expenditure (CAPEX) — three
names for the same thing; the exam uses them interchangeably.
• A real asset produces goods/services; a financial asset is a claim on the income those real
assets generate.
• The payout decision (dividends / repurchases) belongs to the financing decision, not the
investment decision.
1.2 The role of the financial manager
The financial manager stands between the firm's operations and the financial markets, and
manages the flow of cash between them. Figure 1.1 traces the cycle.
Figure 1.1. The role of the financial manager: cash flows between investors and the firm's operations.
The figure shows five flows. (1) Cash is raised from investors on the financial markets — by issuing
shares or debt. (2) That cash is invested in the firm's operations, i.e. in real assets. (3) The
operations generate cash. That cash then follows one of two routes: (4a) it is reinvested in the firm,
or (4b) it is returned to the investors as dividends, share repurchases or debt service. Every arrow
corresponds to a decision studied in this course: arrow (1) is the financing decision, arrow (2) the
investment decision, and the split between (4a) and (4b) is the payout decision. The financial
manager's task is to run this cycle so that the value flowing back to investors exceeds what they
put in, given the risk they bear.
Rania El Ghalbzouri
KU Leuven – MBA Bridging Programme Page 4
