This course of lectures - developed and taught at the Yale School of Management and the California Institute of Technology - introduces students to elementary concepts of corporate finance using a more systematic approach than is generally found in other textbooks. Within a simple logical framework, axioms are first highlighted and the implications of these important concepts are studied. These implications are used to answer questions about corporate finance, including issues related to derivatives pricing, state price probabilities, dynamic hedging, dividends, capital structure decisions, and risk and incentive management. Numerical examples are provided, and the mathematics is kept simple throughout.
Part 1 Introducton to finance: finance; axioms of modern corporate finance; on value addivity; on the efficient markets hypothesis. Part 2 Basic finance: present value; capital budgeting; valuation under uncertainty - the CAPM. Part 3 Multiperiod pricing and derivatives: valuing risky cash flows; introduction to derivatives; pricing derivatives; pricing of multiperiod, risky investments; where to get state price probabilities?; warrants; the dynamic hedge argument; multiple periods in the binomial option pricing model; an application - pricing corporate bonds. Part 4 Corporate finance: are capital structure decisions relevant?; maybe capital structure affects firm value after all?; valuation of projects financed partly with debt; and what about dividends?. Part 5 Risk management: risk and incentive management. Part 6 Longer examples. Part 7 Appendix - notation and formulas.