Corporate Finance

Philipp Krüger
Who I am
• Philipp Krüger
– Associate Professor of Finance

– Junior Chair at the Swiss Finance Institute

• Teaching:
– Corporate Finance

– Sustainable Finance

• Research:
– Corporate, Behavioral, and Sustainable Finance

• Email: philipp.krueger@unige.ch / Office 412 (Uni Pignon)

– Office hours by appointment only. 2
Objectives of the course
• Course: Corporate Finance (S201029)
• A big thanks to Professor Valta for the slides
• This course introduces students to the main concepts and
tools in corporate finance.
• The goal is to get a better understanding of how to make
corporate financial decisions.
• At the heart of the course is the principal of the absence of
arbitrage opportunities, or the Law of One Price – in life, you
don’t get something for nothing.
• This principle will form the backbone of the course.

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Organization of the course
• Lectures are held twice per week:
– Tuesdays, 8.15h – 10 h, room U 300

– Wednesdays, 10.15h – 12 h , room U 300

– The lecture on November, 13th will take place in Uni Bastions, room B101.

• On certain dates, there will be exercise sessions instead of lectures

(planned are 8, maybe more).
• Exercise sessions will be given by the assistant of the course:
Gabriela Hrasko (gabriela.znamenackova@unige.ch)
– Her office hours are by appointment (send an email).
– Office 309, Uni Pignon

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Organization of the course
• The required book for this course is:
Jonathan Berk and Peter DeMarzo, Corporate Finance,
Pearson, 3rd Ed., 2014
• The book also exists in French.
• There is a website for the course on moodle (not on Chamilo!)
where you can find the slides and exercises for the course:
– https://moodle.unige.ch

• While this course will be taught in English, an older version of the

slides and exercises (2014/2015) is also available in French.

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Evaluation of the course
• The grade for this course will be based on an individual final
written exam, consisting of multiple choice questions and
open questions).
• FINAL EXAM ONLY IN ENGLISH!
• PREPARATION BASED ON ENGLISH SLIDES RECOMMENDED!
• The exam will be two hours and closed book. You can use a
non-programmable calculator.
• The minimum grade to obtain the ECTS credits of the course is
4.00/6.00.
• The date of the final exam will be announced by the “bureau
des étudiants”.
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Overview of the course
• The course will cover the following topics:

– Investment decisions
– Capital budgeting
– Valuation of stocks
– Capital structure in perfect markets
– Capital structure and market imperfections
– Firm valuation
– Payout policy

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Corporate Finance

Introduction

Philip Krüger
Introduction
• Why should I care about this course?

• Why is it interesting? I have no intention to work in finance

after my graduation…

• What can I learn that is useful and that I do not know yet?

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Four types of firms

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Four types of firms
• Sole proprietorship
– Business is owned and run by one person

– Typically has few, if any, employees

– Advantages:
• Easy to create

– Disadvantages:
• Unlimited personal liability
• Limited life

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Four types of firms
• Partnership
– Similar to a sole proprietorship, but with more than one owner.

– All partners are personally liable for all the firm’s debt. A lender can
require any partner to repay all of the firm’s outstanding debts.

– The partnership ends with the death or withdrawal of any single

partner.

– A limited partnership has two types of owners.

• General partners: Have the same rights and liability as partners in a
“regular” partnership.
• Limited partners: Have limited liability and cannot lose more than their
initial investment.

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Four types of firms
• Limited Liability Company (LLC)
– All owners have limited liability but they can also run the business

– Relatively new business form

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Four types of firms
• Corporation
– A legal entity separate from its owners
• Has many of the legal powers individuals have such as the ability to enter
into contracts, own assets, and borrow money.
• The corporation is solely responsible for its own obligations. Its owners
are not liable for any obligation the corporation enters into.

– Formation
• Corporations must be legally formed.
• Corporations can chose where to incorporate.

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Four types of firms
• Corporation
– Ownership
• Represented by shares of stock
• Owner of stock is called “shareholder”, “stockholder”, or “equity holder”
• Sum of all ownership value is called equity
• There is no limit to the number of shareholders, and thus the amount of
funds a company can raise by selling stocks.
• Owner is entitled to dividend payments

– Tax implications
• Double taxation

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Example
• You are a shareholder in a corporation. The corporation earns
CHF 5 per share before taxes. After it has paid taxes, it will
distribute the rest of its earnings to you as a dividend. The
dividend is income to you, so you will then pay taxes on these
earnings. The corporate tax rate is 40% and your tax rate on
dividend income is 15%. How much of the earnings remains
after all taxes are paid?

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Example
• Solution: First, the corporation pays taxs; 0.4 × CHF 5 = CHF 2.
That leaves CHF 3 to distribute. However, you must pay 0.15 ×
CHF 3 = CHF 0.45 in income taxes on this amount, leaving CHF
2.55 per share after all taxes are paid. As a shareholder you
only end up with CHF 2.55 of the original CHF 5 in earnings.
Thus, your total effective tax rate is 2.45/5 = 49%.

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Ownership vs. control
• In a corporation, ownership and direct control are typically
separate.
• Board of directors
– Elected by shareholders
– Have ultimate decision-making authority

• Chief Executive Officer (CEO)

– Board typically delegates day-to-day decision making to the CEO.

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Ownership vs. control

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Ownership vs. control
• The financial manager is responsible for
– Investment decisions

– Financing decisions

– Cash management

• Goal of the firm

– Shareholders will agree that they are better off if management makes
decisions that maximize the value of their shares.

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Ownership vs. control
• The firm and society
– Often, a corporation’s decisions that increase the value of the firm’s
equity benefit society as a whole.

– As long as nobody else is worse off by a corporation’s decisions,

increasing the value of the firm’s equity is good for society.

– It becomes a problem when increasing the value of the firm’s equity

comes at the expense of others.

• Ethics and incentives within corporations

– Agency problems: managers may act in their own interest rather than
in the best interest of the shareholders.

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Ownership vs. control
• CEO performance
– If a CEO is performing poorly, shareholders can express their
dissatisfaction by selling their shares. This selling pressure will drive
the stock price down.

– Hostile takeover
• Low stock prices may entice a Corporate Raider to buy enough stock so
they have enough control to replace current management. The stock price
will rise after the new management team “fixes” the company.

• Corporate bankruptcy
– Reorganization and liquidation

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The stock market
• The stock market provides liquidity to shareholders
– Liquidity: the ability to easily sell an asset for close to the price you can
currently buy it for.

• Public company
– Stock is traded by the public on a stock exchange.

• Private company
– Stock may be traded privately.

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The stock market
• Primary markets
– When a corporation itself issues new shares of stock and sells them to
investors, they do so on the primary market.

• Secondary markets
– After the initial transaction in the primary market, the shares continue
to trade in a secondary market between investors.

• Largest stock markets

– New York Stock Exchange (NYSE) and NASDAQ

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The stock market

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