Spring 2005

ECO 350K • Economics of Corporate Finance

Course Description

This course is about studying decision making within corporations. This has two main components: investment, or captial budgeting and financing, or capital structure. We start with capital budgeting and devote a fair amount of time to understanding the NPV criterion under various alternative scenarios. Then, we study capital structure where the focus is on topics like issuing of securities, debt and dividend policies, and of course, the celebrated Modigliani-Miller theorems. We also examine a few advanced topics like options, and mergers, and acquisitions. A considerable amount of time is also devoted to studying the issues of incentives and conflict-of-interest inside a corporation. This involves, for example, studying how the objectives of bondholders and stockholders differ and what effect that has on the efficient running of the firm. It also involves using the more recent developments in agency theory to study in depth the question of managerial compensation (for example the good and bad of paying CEO's with stock options).

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