📊 Corporate Finance

What you’ll learn

1. The Firm Is A Cash MachineFrame every corporate finance question as one trade: cash now for cash later.A firm is a machine that turns cash today into cash tomorrow. Two decisions govern it: which assets to buy (investment — where value is created) and whose money to use (financing — which mostly divides the value up). Comparing cash now to cash later requires a discount rate, which is where risk enters and where every serious argument in finance happens.
2. A Dollar TodayMove cash through time in both directions and read a discount factor.Later money is worth less because money compounds, not because it decays — the logic survives at zero inflation. FV = PV × (1+r)ⁿ running forward; PV = FV ÷ (1+r)ⁿ running back. At 10%, $1,000 in five years is worth $620.92 today. Streams are just sums of discounted payments, with the annuity and perpetuity (C ÷ r) as the useful shortcuts.
3. NPV: The Only Rule That Is Actually RightCompute an NPV and understand precisely what the resulting number measures.NPV = Σ CFₜ ÷ (1+r)ᵗ − investment. A $10m machine paying $3m for five years discounted at 10% has PV $11.372m and NPV +$1.372m. That surplus is value created above what the money would have earned elsewhere at the same risk — which is why zero NPV means exactly matching the alternative, not failing. NPV uses all cash flows, respects timing, is stated in today's dollars, and measures against the right benchmark.
4. The Rules That Feel Better Than They AreSee exactly where IRR, payback and accounting returns break — and why people use them anyway.Our machine's IRR is 15.24%, and in vanilla cases IRR agrees with NPV. But sign changes give multiple roots (−$1,000/+$6,000/−$6,000 has IRRs of 26.79% AND 373.21%), IRR ignores scale (50% on $1 loses to 40% on $100), it assumes reinvestment at itself, and it can't cope with changing rates. Payback ignores everything past the cutoff and, in its usual form, time value entirely — a crude proxy for exposure that discards data to express it.
5. Which Cash Flows Even CountApply the incremental test — and catch sunk costs, opportunity costs, working capital, depreciation and interest.Count only what changes because you said yes. Sunk costs are visible things that must not count; opportunity costs (the land you already own) are invisible things that must. Working capital is real cash out now and back at the end. Depreciation isn't cash, but the tax it saves is. And interest is excluded, because the cost of financing already lives in the discount rate — subtracting it too charges for financing twice.
6. Risk Is Not A FeelingSplit risk into diversifiable and systematic, and see why only one of them is paid for.The discount rate is the return on an alternative of equivalent risk, so risk is a quantity that prices every future dollar. Idiosyncratic risk cancels in a diversified portfolio; systematic risk hits everything at once and cannot be diversified away. Because the first could be shed for free, only the second is compensated — so 'risky' in finance means 'bumpy when everything else is bumpy,' not merely volatile.
7. CAPM: A Model, With Its Critics In The RoomUse CAPM to estimate a cost of equity, and name the three serious objections to it.Beta measures exposure to market movement — not volatility. CAPM prices it: expected return = risk-free rate + β × market risk premium; with 4%, β = 1.2 and a 5% premium, that's 10%. The critiques are mainstream, not fringe: the inputs are estimated and slippery; Fama and French (1992) showed size and book-to-market explain returns beta misses; and Roll (1977) argued the true market portfolio is unobservable, so every test is a test of a proxy.
8. WACC: Blending The Cost Of MoneyCompute a WACC, locate the tax shield inside it, and avoid the discount-rate mistake it invites.WACC = (E/V)Rₑ + (D/V)R_d(1 − Tc). With E = $600m, D = $400m, Rₑ = 12%, R_d = 6% and Tc = 21%: 7.2% + 1.896% = 9.096%. The (1 − Tc) is the tax shield — $24m of interest saves $5.04m of tax, so debt costs 4.74% after tax. Crucially, WACC is the right rate only for projects of the firm's own average risk; using it on anything else systematically corrupts decisions in both directions.
9. Capital Structure: The Argument Modigliani And Miller StartedUnderstand MM as a diagnostic — then use it to derive trade-off and pecking-order theory.Modigliani and Miller (1958) proved capital structure is irrelevant under no taxes, no distress costs, no transaction costs and symmetric information: cheaper debt is exactly offset by riskier, dearer equity (MM II). Since all those conditions fail, the theorem's real use is to force anyone to name which friction they mean. Taxes give the shield (MM 1963); distress costs push back, yielding the trade-off theory; asymmetric information gives Myers and Majluf's pecking order (1984).
10. Paying It Back OutCompare dividends and buybacks mechanically, and see why the EPS effect isn't value.Both move cash from the firm to owners and reduce firm value by the amount paid; neither creates value by itself. They differ in choice (a buyback lets holders opt in), in tax treatment across jurisdictions, and in signalling — dividends are sticky, so starting one signals durable cash flows. A buyback raises EPS purely by shrinking the denominator, which creates nothing; the genuinely good decision is returning cash you can't deploy above your cost of capital.
11. What Actually Creates ValueCollapse the whole course into one inequality — and see why growth is a multiplier, not a strategy.Value is created when return on invested capital exceeds the cost of that capital, and destroyed when it doesn't — regardless of size, growth or narrative. Growth multiplies whatever sign you already had: doubling a business earning 6% on 9% capital doubles the rate of destruction while the headlines say 'expansion.' NPV is this comparison applied to one project, which is why it's the rule and revenue, EPS and market share are not.

Questions this course answers

Grounded in trusted sources

• Richard A. Brealey, Stewart C. Myers and Franklin Allen, Principles of Corporate Finance (McGraw-Hill)
• Franco Modigliani and Merton H. Miller, "The Cost of Capital, Corporation Finance and the Theory of Investment," American Economic Review 48(3), 1958
• Modigliani and Miller, "Corporate Income Taxes and the Cost of Capital: A Correction," American Economic Review 53(3), 1963
• William F. Sharpe, "Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk," Journal of Finance 19(3), 1964
• Eugene F. Fama and Kenneth R. French, "The Cross-Section of Expected Stock Returns," Journal of Finance 47(2), 1992
• Richard Roll, "A Critique of the Asset Pricing Theory's Tests," Journal of Financial Economics 4(2), 1977
• Stewart C. Myers and Nicholas S. Majluf, "Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have," Journal of Financial Economics 13(2), 1984
• All monetary and percentage examples in this course are computed in-session from stated hypothetical assumptions; none are market data, forecasts, or recommendations.

Every Wunder lesson is built from real, reputable sources — never invented.

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