1. Corporate Finance in Lilliputian Style Alexander Bukhvalov MCF 2010

2. XYZ company: Creation Actors: Engineer X (innovative project, $200K life savings) Mrs Y (doing nothing, wealthy, has fortunate inheritance $730K) Mr Z (a legal company partner, has bonus of $250K)

3. XYZ company: Creation Project needs $1M for implementation. Actors behavior: Engineer X does not wish to spend any penny from his life savings Mrs Y is light-minded about her unexpected inheritance Mr Z as a professional thinks about investment thoroughly

4. XYZ company: Creation Solution: Engineer X: CEO, $100K investment in equity, 50% ownership Mrs Y: $700K investment in equity, 50% ownership Mr Z: $200K investment as a credit.

5. XYZ company: Creation An option for opportunistic behavior: Assume that Mr X (but not Mrs Y and Mr Z) knows that with probability 0.5 the value of the company in year will be either $100M (success) or $100K (failure and liquidation). This is asymmetry of information, which is typical for agency problem. Without opportunistic behavior of Mr X we have the following outcomes in the case of liquidation: Mr X and Mrs Y get nothing, Mr Z gets $100K since debt claims have higher subordination in the case of liquidation. Assuming opportunistic behavior Mr X sets his annual salary as an employee at $100K. Now he gets $100K what is perfect offset of his investment (employees salary have the highest subordination) whereas Mr Z unexpectedly gets nothing. He had no voice to confirm CEO’s salary. Mrs Y had her voting rights to approve or disapprove CEO’s salary but she were too much believing in success.

6. The Role of Financial Assets (1)Transfer of capital (2)Allocation of risks Notice that in transfer of capital Mr X was forced to make binding investment as an attempt to cure potential agency problem. Notice individual risk preferences, which depend not only on behavioral patterns but on current circumstances as well.

7. Policy vs Strategy Policy is about general rules applied in specific type of decisions Strategy is about competitive advantages in the product’s market Real Options Analysis concept links finance and strategy.

8. XYZ company: IPO IPO = Initial Public Offering Legally: Private company becomes public Value: Company “without value” becomes company with market value (capitalization) Investments: Equity financing

9. XYZ company: Debt Investments: Debt financing (leverage) V = E + D Debt policy Irrelevance theorems: MM-theorem (leverage, dividends, risk), separation of investment and financing decisions…

10. XYZ company: Valuation DCF model (future profits from production) Multiples model (comparables) Tobin’s Q (Q=Cap/BV) Market model: capitalization Fundamental valuation: accounting