London School of Economics and Political Science (LSE)

Modules

92
Corporate Finance

Prerequisites - 02 Introduction to economics and 05a Mathematics 1.

Project evaluation: Hirschleifer analysis and Fisher separation; the NPV rule and IRR rules of investment appraisal; comparison of NPV and IRR; 'wrong' investment appraisal rules: payback and accounting rate of return.

Risk and return - the CAPM and APT: the mathematics of portfolios; mean-variance analysis; two-fund separation and the CAPM; Roll's critique of the CAPM; factor models; the arbitrage pricing theory.

Derivative assets - characteristics and pricing: definitions: forwards and futures; replication, arbitrage and pricing; a general approach to derivative pricing using binomial methods; options: characteristics and types; bounding and linking option prices; the Black-Scholes analysis.

Efficient markets - theory and empirical evidence: underpinning and definitions of market efficiency; weak-form tests: return predictability; the joint hypothesis problem; semi-strong form tests: the event study methodology and examples; strong form tests: tests for private information.

Capital structure: the Modigliani-Miller theorem: capital structure irrelevancy; taxation, bankruptcy costs and capital structure; the Miller equilibrium; asymmetric information - 1) the under-investment problem, asymmetric information; 2) the risk-shifting problem, asymmetric information; 3) the pecking order theory.

Dividend theory: the Modigliani-Miller and dividend irrelevancy; Lintner's fact about dividend policy; dividends, taxes and clienteles; asymmetric information and signalling through dividend policy.

Mergers and acquisitions: motivations for merger activity; calculating the gains and losses from merger/takeover; the free-rider problem and takeover activity.