Corporate finance is the area of finance dealing with the financial decisions corporations make. These decisions often involve balancing risk and profitability, and aim to maximize shareholder value. Here’s a look at key chapters often covered in a corporate finance course:

Introduction to Corporate Finance

This section lays the groundwork. It defines the scope of corporate finance, outlining the roles and responsibilities of financial managers. It introduces the concept of the agency problem, where managers’ interests may not perfectly align with shareholders’, and discusses corporate governance mechanisms to mitigate this. Crucially, it emphasizes the primary goal of the corporation: maximizing shareholder wealth.

Time Value of Money

A fundamental concept. This chapter explains that money’s value changes over time due to earning potential and inflation. Students learn to calculate present and future values of single sums and annuities using different interest rates and compounding periods. The concept is crucial for evaluating investment opportunities.

Valuation of Stocks and Bonds

This section delves into how to determine the intrinsic value of financial assets. For bonds, it covers concepts like yield to maturity, coupon rates, and bond pricing theorems. For stocks, it explores dividend discount models (DDMs) and free cash flow to equity (FCFE) models. Understanding valuation techniques is vital for investment decisions.

Capital Budgeting

This crucial chapter focuses on how companies decide which projects to invest in. It introduces methods like Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index. NPV is generally considered the most reliable, but understanding the strengths and weaknesses of each method is vital. The chapter emphasizes identifying relevant cash flows and dealing with project risk.

Risk and Return

This section explores the relationship between risk and expected return. It introduces concepts like systematic (market) risk and unsystematic (firm-specific) risk. Students learn about the Capital Asset Pricing Model (CAPM) and its use in determining the required rate of return for an investment based on its beta (a measure of systematic risk).

Cost of Capital

This chapter explains how to calculate a company’s weighted average cost of capital (WACC). WACC represents the minimum return a company needs to earn on its investments to satisfy its investors (debt holders and equity holders). It’s a key input for capital budgeting decisions.

Capital Structure

This section examines how companies decide on the mix of debt and equity financing they use. It explores the Modigliani-Miller theorems (with and without taxes) and discusses the trade-off theory (balancing the tax benefits of debt with the costs of financial distress) and the pecking order theory (companies prefer internal financing, then debt, then equity). Choosing the optimal capital structure can significantly impact a company’s value.

Working Capital Management

This chapter focuses on the management of a company’s short-term assets and liabilities, including cash, accounts receivable, inventory, and accounts payable. Effective working capital management is crucial for maintaining liquidity and operational efficiency.

Dividend Policy

This section discusses how companies decide how much of their earnings to pay out to shareholders as dividends. It explores different dividend policies and the factors that influence these decisions, such as growth prospects, investor preferences, and legal constraints. Understanding dividend policy is important for investors evaluating a company’s financial health and future prospects.