Corporate Finance Fundamentals (CFI) Course Notes


Primary market

  • Buy side: institutions/investments
  • Sell side: investment banks
  • Corporations: exchange bonds/shares for capital

Secondary market

  • Fund managers buy/sell at stock exchange through investment banks

Creates economic benefit greater than one year

Increase assets

NPV = FV/(1+r)^n

Note: Excel =NPV is different from manual calculation → “Excel NPV formula assumes that the first time period is 1 and not 0. So, if your first cash flow occurs at the beginning of the first period (i.e. 0 period), the first value must be added to the NPV result, not included in the values arguments (or use XNPV).”

Terminal Value (growing perpetuity formula) = FCF*(1+g)/CoC-g → CoC = discount rate = risk-free rate → risk go up, value down

Terminal Value (using metrics) = Metric (Earnings, EBITDA, Revenue) * Multiple

Enterprise value = Equity value (= share price * shares) + debt - cash = NPV of business

IRR: equivalent to compound annual growth rate, can be used to set NPV of CFs to equal 0

M&A process:

  1. Strategy
  2. Criteria
  3. Search
  4. Approach
  5. Evaluation and valuation
  6. Negotiation
  7. Due diligence
  8. Contracts
  9. Financing
  10. Integration

Strategic buyers (expansion or operational synergies) or financial buyers (private equity, professional investor, high leverage)

Standalone value + [hard synergies (cost savings) + soft synergies (revenue enhancements) - transation costs] = standalone value + net synergies = price paid (consideration) + value created

Capital structure = debt vs equity (high leverage = high debt:equity)(equity + debt = assets)


WACC (%) = cost of equity * % equity + cost of debt * % net debt

Risk and returns, high → low: Equity (common shares > preferred shares > shareholder loans) > subordinated debt > senior debt

Sources: private (founders, PE, VC, LBO) vs public (institutional, retail)

Shareholder loans pay interest but no dividend; preferred and common shares pay dividends, preferred has priority

Benefits: for corporation: can lower CoC, avoid equity dilution; for investor: can increase return

Assessing debt capacity: EBITDA, volatility, ratios (debt:X, X:EBITDA), …

Senior debt: revolver, term loans → usually 2-3x EBITDA, required 2x interest coverage

Subordinated debt: bonds, mezz, notes → some dilute equity


Credit ratings: investment grade: Baa3/BBB-/BBB (low) and above; high yield/junk bonds: Ba1, BB+, BB (high) and below

Equity Debt
Interest / mandatory fixed payments No Yes (typically)
Repayments / maturity No Yes
Ownership Yes No dilution
Control Degree of control, voting rights (typically) Requires covenants and financial performance metrics that must be met
CoC Higher Lower
RoR Higher (dividends + capital appreciation) Lower
Claim on firm’s assets if liquidation Last First
Operational flexibility Maximum Restrictions
Can push a firm into bankruptcy

Bank raises capital for corporation as debt/equity securities

Firm commitment (underwriter buys and sells) vs best efforts (underwriter sells on behalf of corporation)

IPO: usually with some discount to ensure after-IPO trading and reduce the risk of equity overhang

Earnings: distribute vs retain → e.g. if CoC > IRR, repurchase shares or pay dividend, else retain and reinvest

Share buyback increasees EPS; paying dividend (if regular) increases yield