V. CORPORATE FINANCE

A. Fundamental Issues

1. Forms of business organization

a. Sole proprietorship

b. Partnership

c. Corporation

2. Corporate governance issues

a. Agency relationships (i.e., stockholders, management, other stakeholders)

b. Managerial incentives to act in stockholders’ interests

B. Capital Investment Decisions

1. Investment decision criteria

a. Net present value (NPV) approach

b. Payback period rule

c. Discounted payback rule

d. Average accounting return

e. Internal rate of return (IRR) approach

f. Profitability index

2. Cash flow projections

a. Incremental

b. Common pitfalls (e.g., sunk costs, opportunity costs, side effects, net working

capital, financing costs)

c. Project cash flows and alternative definitions of operating cash flows

d. Uses of discounted cash flow analysis

3. Project analysis and evaluation

a. Scenario analysis

b. Sensitivity analysis

c. Simulation analysis

4. Capital rationing

C. Business and Financial Risk

1. Breakeven analysis

a. Fixed versus variable costs

b. Accounting break-even

2. Operating leverage

a. Implications (e.g., forecasting risk)

b. Measurement (i.e., degree of operating leverage)

3. Financial leverage

a. Implications (e.g., forecasting risk)

b. Measurement (e.g., degree of financial leverage)

4. Total combined leverage

D. Long Term Financial Policy

1. Cost of capital

a. Required return and cost of capital

b. Cost of equity (e.g., dividend growth model approach and security market line

approach)

c. Cost of debt and preferred stock

d. Weighted average cost of capital

e. Marginal cost of capital

f. Divisional and project costs of capital

g. Flotation costs and weighted average cost of capital

2. The effects of financial leverage

a. Capital structure and the cost of equity capital

b. Miller and Modigliani propositions

(1) Value of firm independent of capital structure (no taxes)

(2) Cost of equity is positive linear function of capital structure (differential

taxes)

c. Bankruptcy risk

d. Optimal capital structure

3. Dividends and dividend policy

a. Forms of dividends (e.g., regular, extra, special, liquidating)

b. Dividend payment chronology

c. Factors affecting dividend payout policy (e.g., taxes, flotation costs, dividend

restrictions, investor preference for current income, information content of

dividends, clientele effect)

d. Dividend policies (e.g., residual approach, stability, target payout, stock

repurchase, stock dividends, splits, reverse splits, forecasting dividends)

E. Mergers and Acquisitions

1. Legal forms of acquisition

a. Merger or consolidation

b. Acquisition of stock

c. Acquisition of assets

2. Classifications

a. Horizontal

b. Vertical

c. Conglomerate

3. Gains from acquisition

a. Perceived synergy

b. Brand building

c. Revenue enhancement

d. Cost reductions

e. Lower taxes

f. Capital requirements

4. Defensive tactics

a. Supermajority clause in corporate charter

b. Repurchase/standstill agreements (e.g., greenmail)

c. Exclusionary self-tenders

d. Poison pills and share rights plans

e. Going private and leveraged buyouts

F. Valuation Implications of Corporate Finance

1. Capital investment decisions

2. Long term financial policy

3. Mergers and acquisitions

A. Fundamental Issues

1. Forms of business organization

a. Sole proprietorship

b. Partnership

c. Corporation

2. Corporate governance issues

a. Agency relationships (i.e., stockholders, management, other stakeholders)

b. Managerial incentives to act in stockholders’ interests

B. Capital Investment Decisions

1. Investment decision criteria

a. Net present value (NPV) approach

b. Payback period rule

c. Discounted payback rule

d. Average accounting return

e. Internal rate of return (IRR) approach

f. Profitability index

2. Cash flow projections

a. Incremental

b. Common pitfalls (e.g., sunk costs, opportunity costs, side effects, net working

capital, financing costs)

c. Project cash flows and alternative definitions of operating cash flows

d. Uses of discounted cash flow analysis

3. Project analysis and evaluation

a. Scenario analysis

b. Sensitivity analysis

c. Simulation analysis

4. Capital rationing

C. Business and Financial Risk

1. Breakeven analysis

a. Fixed versus variable costs

b. Accounting break-even

2. Operating leverage

a. Implications (e.g., forecasting risk)

b. Measurement (i.e., degree of operating leverage)

3. Financial leverage

a. Implications (e.g., forecasting risk)

b. Measurement (e.g., degree of financial leverage)

4. Total combined leverage

D. Long Term Financial Policy

1. Cost of capital

a. Required return and cost of capital

b. Cost of equity (e.g., dividend growth model approach and security market line

approach)

c. Cost of debt and preferred stock

d. Weighted average cost of capital

e. Marginal cost of capital

f. Divisional and project costs of capital

g. Flotation costs and weighted average cost of capital

2. The effects of financial leverage

a. Capital structure and the cost of equity capital

b. Miller and Modigliani propositions

(1) Value of firm independent of capital structure (no taxes)

(2) Cost of equity is positive linear function of capital structure (differential

taxes)

c. Bankruptcy risk

d. Optimal capital structure

3. Dividends and dividend policy

a. Forms of dividends (e.g., regular, extra, special, liquidating)

b. Dividend payment chronology

c. Factors affecting dividend payout policy (e.g., taxes, flotation costs, dividend

restrictions, investor preference for current income, information content of

dividends, clientele effect)

d. Dividend policies (e.g., residual approach, stability, target payout, stock

repurchase, stock dividends, splits, reverse splits, forecasting dividends)

E. Mergers and Acquisitions

1. Legal forms of acquisition

a. Merger or consolidation

b. Acquisition of stock

c. Acquisition of assets

2. Classifications

a. Horizontal

b. Vertical

c. Conglomerate

3. Gains from acquisition

a. Perceived synergy

b. Brand building

c. Revenue enhancement

d. Cost reductions

e. Lower taxes

f. Capital requirements

4. Defensive tactics

a. Supermajority clause in corporate charter

b. Repurchase/standstill agreements (e.g., greenmail)

c. Exclusionary self-tenders

d. Poison pills and share rights plans

e. Going private and leveraged buyouts

F. Valuation Implications of Corporate Finance

1. Capital investment decisions

2. Long term financial policy

3. Mergers and acquisitions