University of Bath (UOB) • University of Bath

Excellent, very detailed notes on every lecture. Received the highest exam grade out of everyone taking the module.

Lecture Summary: Assessing Your Firm's Payout Policy ● Compare your firm’s dividends to its FCFE, looking at the last 5 years of information. ● Based upon your earlier analysis of your firm’s project choices, would you encourage the firm to return more cash or less cash to its owners? ● If you would encourage it to return more cash, what form should it take (dividends versus stock buybacks)? ● Customize a solution for your firm’s dividend policy, but think about your earlier...

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 ● 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.

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 ● 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

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.

Notes are taken from the lecture, on the topic Basics of Corporations.