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"The sooner you start saving, the more time your money has to grow."
This popular wisdom is the basis of one of the key pillars of finance: Having a dollar today is more valuable than having a dollar in one year, simply because I can invest the dollar today and earn interest on it. The purpose of this module is to understand the key issues surrounding this "Time Value of Money." We learn how to compute the future value of investments that we make today, and we see how to determine the present value of payments that we expect to receive in the future. Moreover, we look at important shortcuts in the valuation of simple investment projects such as perpetuities and annuities. While the module is rather technical, it provides indispensable skills that are relevant for virtually anything we do in finance.
How to determine whether an investment makes financial sense or not? This module introduces the most important investment decision criteria that try to answer this question. The basic idea is very simple: Investors like projects that make more money than they cost!
We start with the Net Present Value (NPV) rule, wich measures the difference between the present value of all cash inflows and the present value of all cash outflows that are associated with an investment decision. We show that managers who follow the NPV rule and accept only projects with positive NPV generally increase the financial value of the firm.
We also discuss other approaches to measure the difference between the costs and benefits of a project, in particular the Internal Rate of Return (IRR), which indicates which return an investor can expect by investing in a project, and Payback rule, which shows how long it takes for a project to return the invested capital. While both metrics have their justifications, NPV generally does a better job.
In this module, we learn how to estimate project cash flows. The relevant cash flow is the so-called net cash flow (NCF), which indicates how much money a project is expected to generate for the providers of capital. The estimation of the relevant cash flows is arguably the most important step in any capital budgeting exercise.
The module first explains in detail what NCFs are and what basic rules we have to remember when estimating the NCFs of projects. In the process, we learn how to compute Incremental Net Cash Flows and we practice this knowledge with a number of examples and case studies. The module then shows how to make sure that we treat inflation in a consistent way. Finally, we discuss how to include important non-financial goals, such as environmental, social, and governance (ESG) factors into our considerations, using a so-called Adjusted Present Value (APV) approach.
The purpose of this module is to learn how to estimate risk-adjusted discount rates to value projects (or firms). It takes us on a journey with many important steps. First, we have to understand what "risk" actually means and how the relation between risk and return can be formulated. To find the necessary answers, the first major block of this module introduces the basic principles of portfolio theory. The second part of the module then shows how to use the insights from portfolio theory to derive discount rates. To this end, we present the Capital Asset Pricing Model (CAPM), which formalizes the relation between return and risk, and we show what practical steps are relevant to get to what we ultimately want: A discount rate to estimate project or firm value, the so called Weighted Average Cost of Capital (WACC).
This course gives a comprehensive overview of the basic concepts of corporate finance and firm valuation. After completing the course, you will be able to assess the fair market value of any firm using state-of-the-art valuation methods.
In this module, we learn how to read and analyze financial statements. Most importantly, we learn how to quickly assess the financial health and performance of a company and how to interpret the most important financial ratios. Very often, a detailed financial analysis is the starting point for important corporate decisions. Financial analysis also provides very useful information for Financial Planning and Valuation.
Financial planning is one of the key tools of financial management. In this course, we first discuss in detail how to derive cash flows from the firm's balance sheets and income statements. Then we take a closer look at the critical issue of how to project cash flows. The result of these projections will be the firm's financial plan. We look at a comprehensive financial planning case and learn how to use Monte Carlo Simulation to transform financial plans into powerful management tools.
This module introduces you to the most popular valuation approach among practitioners: Relative valuation. Its popularity is based on the fact that relative valuation is fairly simple to conduct and very easy to communicate. However, in order to properly apply this method, we need to take a careful look at what valuation multiples actually are and how we can use them to value firms or their equity. We also take a careful look at the most popular multiple among financial analysts: The P/E ratio.
In this course, we learn how financial leverage affect a firm's cost of capital and how we can actually capitalize firm cash flows. After we have discussed in detail the issues of financial planning and cash flow estimation in the course Financial Planning for Managers, this course takes the logical next step towards the estimation of firm value.
We present two conceptual approaches towards the estimation of firm value: the so-called DCF-WACC approach and the DCF-APV approach. We also learn how to estimate the WACC (Weighted Average Cost of Capital) in practice.
When valuing firms, the market generally assumes a very long-term perspective. This module shows how to incorporate such a long-term perspective in our firm valuation framework. It also discusses key relations between growth, investment policy, and value creation in the long run. Finally, it presents a simplified model that allows us to assess the value of mature companies with only 5 assumptions.
It turns out that the expected cash flows that arise after the years that are typically covered by the financial plan financial plan often account for 50% or more of firm value. It is therefore crucial to understand and assess this so-called continuing value.
How to value startup companies? The valuation of startups is arguably the most fascinating but also the most daunting valuation challenge. Many investors such as business angels, startup funds, and venture capitalists face this challenge when trying to determine whether a new venture promises to be an attractive investment opportunity.
Firm Valuation has covered in many details the standard techniques to value relatively mature companies. The purpose of this section is to understand the specific challenges we face when valuing startup firms and to see how we can adjust the standard valuation techniques to at least roughly assess the potential financial value of a new venture.
This modules inquires into the relevance of financing decisions in the real world. In particular, it takes a close look at the various costs and benefits of debt financing, including tax effects, distress costs, and potential "agency" problems. We also present a simple yet powerful model to better understand the incentive implications of debt financing as well as the valuation of debt and equity. Finally, the module presents the major capital structure theories and illustrates how firms can solve the various trade-off to find an optimal leverage range.
This module takes a closer look at one of the core elements of the firm's financial policy: the Payout Policy. The main purpose of the module is to present a systematic approach for managers to navigate the two key questions surrounding the payout policy: How much money should the firm return to its shareholders? And how should cash be returned? In the process, we discuss the key advantages and disadvantages of dividends and share buybacks and show how the firm's payout policy should be linked to its investment policy and financing policy.
This module focuses on the fascinating process that converts privately held firms into public corporations. The module starts with a discussion of the main advantages and disadvantages of going and being public. Then it discusses in detail the various ways of tapping into public equity markets. In particular, it takes a close look at Initial Public Offerings (IPOs), in which firms hire an underwriting syndicate of investment banks to help with the marketing, pricing, and allocation of the shares. We present a simple model to understand the total costs of an IPO as well as its implications for the value and ownership allocation of the firm. Next, we study alternative ways of going public, including Direct Listings and Direct Public Offerings. We conclude the module with an overview of recent trends in the context of "digitalization," where new platforms emerge to cut out the underwriters and open public equity to a much broader base of firms and investors (e.g., Crowd Financing). In this context, we also discuss the potential risks and benefits that the emerging blockchain technology poses when firms engage in crowd financing via Initial Coin Offerings (ICOs).
The purpose of this module is to learn how to get from the valuation of a company to the actual deal (e.g., acquisition, financing round). This is the topic of financial deal making. The module shows how to use relatively simple finance tools to bridge valuation gaps and bring buyers and sellers together. It discusses the basic principles of financial deal making and shows the main elements of a typical deal structure. The terms of financial deals are usually summarized in the term sheet. We learn how to read or draft such term sheets, what the individual clauses actually mean, and how these clauses determine the allocation of returns, control, and liquidity among the parties of the deal.
Mergers and Acquisitions (M&A) have tremendous economic relevance and constitute a crucial mechanism in an economy's reallocation of resources. This course focuses on important financial aspects of M&A transactions. After discussing the various forms of takeover, we present the standard M&A process and the valuation challenges that are associated with that process, in particular with respect to the anticipated net synergies of the deal. Then we study the key considerations of how to set the offer price and its composition (e.g., cash vs. stock deals). We look at how the deal structure affects the risk- and value allocation among the parties, and we close with a discussion of why creating value with M&A is easier said than done.