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, 21st 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 Znamenackova (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 1) - Investment decision: how to decide to choose different project

– Valuation of stocks
– Capital structure in perfect markets
Debt VS Equity 2) Financing decision: How to value
– Capital structure and market imperfections project, how to finance the project

– Firm valuation 1) + 2)

– Payout policy Whether compay invest or distribute the investment for the shareholders

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Corporate Finance

Introduction

Philip Krüger
 Seperation between owners (shareholders) and control
(managers): people who own banks are very different from people
who work for the bank (private banks)

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?
know why managers decide to invest or not

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 Four types of firms In the US

SARL

Société en noms collectifs

Société anonyme

Entreprises individuels

total revenu

Importance of firm: number of firm or the aggregate sales

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Four types of firms
• Sole proprietorship Most common organizational firm

– Business is owned and run by one person

– Typically has few, if any, employees no separation of ownership and

control

– Advantages:
• Easy to create

– Disadvantages:
• Unlimited personal liability
• Limited life Bank can take the money from the personal owner even if it is for
company to repay the loan

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Four types of firms
• Partnership when reputation plays a big role, important to have a partnership: doctors, lawers
– 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.Unlimited liabilities

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

partner. If a partner dies then partnership is over except if there is an agreement

– A limited partnership has two types of owners.

• General partners: Have the same rights and liability as partners in a
“regular” partnership. liable with their personal funds
• Limited partners: Have limited liability and cannot lose more than their
initial investment.
only loose what they invested. Provide capital: assurance company

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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

invest an initial capital: choose to run the company they can only loose what they initially invested.
EX: restaurant: initial capital, go out of business: only loose what we initially put at the beginning to lunch the company

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Four types of firms
• Corporation Generate the highest revenu in the US

– 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 THEY CAN CHOOSE WAY to corporate

legal document created: charter which define the purpose of the company

• Corporations must be legally formed.

• Corporations can chose where to incorporate.
headquarter and incorporate
Delaware: stable to corporate

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 Four types of firms
• Corporation
– Ownership how financial decision are made in corporations

• Represented by shares of stock

No restriction on who can become the owners, dont need specific qualification
• Owner of stock is called “shareholder”, “stockholder”, or “equity holder”
• Sum of all ownership value is called equity
no limited on restriction of shareholders
• There is no limit to the number of shareholders, and thus the amount of
funds a company can raise by selling stocks.
dividend: share of the owning of the company which can be distribute to the shareholders: BUT THEY DONT HAVE TO: ex:
• Owner is entitled to dividendAmazone
payments

– Tax implications
• Double taxation
because the corporation pay taxe once, if there is dividend which is distribute, there is going to be another taxe on it as well

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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?

5(1-0.4) * (1-0.15) = 2.55 —> go to the shareholders

2.45/5 : 49% (because it is tax twice)

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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 represent the interest of the shareholders/owners
To run the company in the best interest of the owners
– Elected by shareholders set the rules of the company
will set the strategy of the company, hire the managers of the company, compensation of the managers
– Have ultimate decision-making authority
the board hires a PDG

• Chief Executive Officer (CEO)

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

Managers: hire by the owners through the board

of directors

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Ownership vs. control

Shareholders hire the

Appoints

PDG Decide on the team

Chef technology Officer

Control 2 main areas:

will focus on it

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 Ownership vs. control
• The financial manager is responsible for
way cost and benefit to all investiment, which investment to carry out or not: decide to invest to one product over another
– Investment decisions

– Financing decisions How to finance this project: debt or equity

investment

– Cash management
You need initial investment to develop a project: invest initially right before a product is sold: insure that the funds are available

• Goal of the firm

not always clear especially if you have different owners

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

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 Ownership vs. control
• The firm and society
ment or pollution: maximize the value of the shareholders and pollute: problem if that happen at the expense of the society or
other shareholders
– Often, a corporation’s decisions that increase the value of the firm’s
equity benefit society as a whole.
the executive are the agends of the shareholders: hired by the board on the behalf of the shareholders

– 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.
Agency problem: managers take the corporate jet for private life: happen of the expense of the shareholders: you have to pay
for this private trips

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Ownership vs. control
• CEO performance
managers’s salary is based on 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.
Alies the personal wants of the managers with the shareholders

– 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
managers wants to avoid

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 The stock market
• The stock market provides liquidity to shareholders
Shareholders meet to buy and sell stocks
– Liquidity: the ability to easily sell an asset for close to the price you can
currently buy it for. easy to buy and sell your shares

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

• Private company
– Stock may be traded privately.
facebook: before stock exchange, before it became public, already had a lot shareholders. Also can have stock but it is privately
traded
Liquidity is lower is private company than public ones

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The stock market
• Primary markets Initial Public Offering

– 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

Value of the buy and sell transaction: if you add all of them the total value of the equity securities of these companies
during the year it will give you the volume the owners change a lot : la valeur des capitaux propres de l’entrepris

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