This module focuses on two fundamental question of corporate finance: (1) What is the optimal capital structure of a firm? (2) What drives the value of a firm? The aim of the module is to introduce students to practical and theoretical factors driving capital structure decisions as well as firm values. Within advanced model frameworks students will be enabled to analyze the effects of corporate decisions on issued claims and develop solutions for classical incentive problems in corporate financing.

Content:

• Introduction to financing decisions
• A structural firm value model (Merton, 1974)
• Trade-off theory (Leland, 1994)
• Problems between claim holders
• Problems from asymmetric information
• Cost of Capital
• Discounted cash flow valuation
• WACC valuation for default risk
• Real options

Literature:

• Grinblatt, Mark and Titman, Sheridan (2002): Financial Markets and Corporate Strategy, 2nd ed., Boston, McGraw-Hill.
• Berk, Jonathan and DeMarzo, Peter (2017): Corporate Finance, 4th ed., Harlow, London, New York, Munich, Pearson.
• Kruschwitz, Lutz and Löffler, Andreas (2006): Discounted Cash Flow, Chichester, Weinheim, Wiley.
• Merton, Robert C. (1974): On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, Journal of Finance 29, p. 449-470.
• Leland, Hayne E. (1994): Corporate Debt Value, Bond Covenants, and Optimal Capital Structure, Journal of Finance 49, p. 1213-1252.