Corporate Finance

Introduction

Prof. Dr. Karl Ludwig Keiber, Dipl.-Wi.-Ing.

Lehrstuhl für Betriebswirtschaftslehre, insb. Finance
Europa-Universität Viadrina, Frankfurt (Oder)

Corporate Finance
Introduction 1. The instructor
2. Administrative details
3. Preliminaries
4. Why corporate finance?
5. Aims of the course
6. This course and corporate finance
7. Course contents

http://www.wiwi.euv-frankfurt-o.de/keiber
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 Corporate Finance
Introduction

Administrative details

• Contact
– keiber@euv-frankfurt-o.de
– HG 227 office hours, Wednesdays 11:00am-12:00pm
• register by sending an e-mail to keiber@euv-frankfurt-o.de
• Target group
– Students with strong interest in
• derivative securities
• the application of option pricing theory to corporate financial decision making
• understanding credit risk
• further specializing in finance

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 Corporate Finance
Introduction

Administrative details

• Registration
– Teaching notes (Moodle)
– Evaluation (Moodle)
– Exam (HIS)
• Teaching notes
– Password protection
– Some (experience: speed, attention)
• Readings
– See the module catalogue but …
• Grading
– Written exam
• July dd, 2018, hh:mmxm – hh:mmxm
• Resit, mmm dd, 2018, hh:mmxm – hh:mmxm

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Introduction

Administrative details

• Schedule
– Lectures (June 4, 2018 – July 6, 2018)
• Tuesdays, 04:00pm – 08:00pm c.t.
• Wednesdays, 09:00am – 11:00am c.t.
• Wednesday, July 4, 2018, no class
– Tutorials (June 4, 2018 – July 6, 2018)
• Wednesdays, 12:00pm – 02:00pm c.t. AND 02:00pm – 04:00pm c.t.
• Thursday, July 5, 2018, 11:00am – 01:00pm c.t. AND 02:00pm – 04:00pm c.t.

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Introduction

Preliminaries

• Mathematics, microeconomics, and statistics

– Utility functions of rational individuals
– Constrained optimization
– Total derivative
– Linear algebra (vector and matrix operations)
– Binomial distribution and normal distribution
– Basic statistics

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Introduction

Why corporate finance?

• Brealey and Myers (2003, p. ix)

– “... we should spell out why down-to-earth, red-blooded managers need to bother with
theory.”
– “Managers learn from experience ... But [the best managers] need more than time-
honored rules of thumb. [They] must understand why companies and financial
markets behave the way they do. In other words, [they] need a theory of finance.”

• Ross, Westerfield and Jaffe (2002, p. vi)

– “... emphasize the modern fundamentals of the theory of finance and make the theory
come to life ...”
– “... beginning student views corporate finance as a collection of unrelated topics ...”

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Introduction

Aims of the course

• Revisiting essential tools of modern financial theory

– Pricing of state-contingent claims
– Option pricing
• Demonstrating the application of those tools to corporate finance
– Pricing of credit risky debt
• Underpinning theory with examples
– Tutorials
• Aim of utmost importance
– Enhancing your understanding of corporate finance

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Introduction

This course and corporate finance

• Introduction of risky debt financing i.e. credit risk.
Cash flows and returns
Certainty Uncertainty

Value and
Unspecified Risk
Capital Budgeting

Capital Structure
and Cost of Capital
Capital structure

Valuation
Mixed
debt-equity
Dividend Policy

Options

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Introduction

Course contents

• State preference theory

– Optimal mix of pure securities
– Risk neutral valuation
• Financial options (BM, Chap. 20; RWJ, Chap. 22)
• Corporate securities as options (BM, Chap. 20; CW, Chap. 8; CWS, Chap. 7;
RWJ, Chap. 22)
– Equity as call option
– Debt and covered call writing
– Equity, debt, and put-call parity
– Agency problems revisited: asset substitution and underinvestment

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Introduction

Course contents

• Option pricing approaches (BM, Chap. 21; CW, Chaps. 8, 13; CWS, Chap. 15;
RWJ, Chap. 22)
– Binomial option pricing
– Black and Scholes option pricing model
• Real options (BM, Chap. 22; CW, Chaps. 12; CWS, Chap. 9; RWJ, Chap. 23)
– Basic idea of real options and analogy to financial options
– Types of real options and valuation in discrete time
– Option to defer: valuation in continuous time
– Caveats and pitfalls in the application of option pricing models

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