In Module 2 we will dig deeper into the mechanics and the institutional details that are important to understand debt financing. We will learn models that allow us to link default probabilities to yields on a company’s debt. We will discuss the roles of credit ratings for debt markets and for companies. We will learn the importance of non-price contractual terms such as debt covenants, collateral, and seniority. We will use this knowledge to understand how companies choose between bank debt and bond financing. Finally, we will discuss how payout decisions (dividends and share repurchases) affect firm value and how companies choose their optimal payout policy.

In Module 3 we will identify good and bad reasons why companies engage in risk management, or hedging. We will learn the mechanics of how to use derivatives such as forwards and futures to eliminate specific risks. We will also discuss how to manage risks that cannot be hedged with derivatives. In particular, we will learn that appropriate liquidity management can work as a substitute for hedging strategies. We will also discuss how and why to hedge currency risk, and how to think about a company’s cost of capital when making cross-border investments.

In Module 4, we will apply our knowledge on how to discount future cash flows to challenging situations. First, we learn how the presence of debt can result in acceptance of negative NPV projects (overinvestment, excessive risk taking). Then, we learn how debt can result in the rejection of positive NPV projects (underinvestment). Next, we will learn that NPV of the firm can differ from NPV for society, and how this may explain firms’ decisions to make bribe payments even though corruption is detrimental to welfare. Last, we examine situations where the NPV equation does not hold and what this means for society.