Important Issues by chapter for Damodaran's Corporate Finance, 2nd ed.
Prof. P.V. Viswanath

Chapter Important Issues
Chapter 2: Firm Objectives
  1. What is the correct objective of the firm manager?  Ex-ante ?  Ex-post?
  2. In what way can managerial objectives differ from shareholder objectives?
  3. In what way can shareholder objectives differ from bondholder objectives?
  4. In what way can the firm's objectives differ from society's objectives?
  5. How can we try to align everybody's objectives so that the ex-ante goal of resource value maximization for all is achieved?
Chap. 4: Understanding Financial Statements
  1. Market Value is more important than book value for financial analysts
  2. Cash flow is more important than earnings
  3. A Balance-Sheet prepared according to GAAP principles does not always represent all the assets and liabilities of a firm; similarly, an Income Statement prepared according to GAAP does not always represent all operating expenses
    1. How to capitalize operating leases and include them in the balance sheet
    2. How to capitalize Research and Development expenses and include them in the balance sheet
Chapters 3 and 5: Value and Price: An Introduction
  1. Time-Value of money is crucial
  2. The discount rate for an asset is the opportunity cost of investing in that asset; i.e. what rate of return is demanded in the market to hold an asset that generates cashflows with risk similar to that asset?
  3. Valuing an asset with guaranteed cashflows
  4. Valuing an asset with promised cashflows and default risk
  5. Valuing an asset with equity risk
  6. Valuing an asset with equity risk -- a finitely lived asset
  7. Valuing an asset with equity risk -- the infinite life case; the Gordon Growth model
  8. Using FCFE to value stock
  9. Using FCFF to value the firm
Chapter 6: Equity Risk and Expected Return
  1. How to measure risk -- standard deviation
  2. Population characteristics and sample characteristics.  Estimating population characteristics with sample values
  3. Diversifiable and non-diversifiable risk
  4. A statistical analysis of how diversification reduces risk:
    1. A population example
    2. A sample example
    3. Variance of a portfolio with three assets; and more than three assets
    4. Demonstration of the mean-variance frontier
    5. Implications of everybody holding diversified portfolios
      1. Beta as a measure of risk of a single asset in a diversified portfolio
      2. The CAPM
Chapter 7: Estimating Hurdle Rates for Firms
  1. Estimating the cost of equity 
    1. Riskless rate (ignore --currency choices and real rates; --riskless rates when there is sovereign risk)
    2. Risk Premium (ignore references to foreign countries)
    3. Betas
      • Historical Market beta
      • Fundamental beta
      • Bottom-up beta
  1. Estimating the cost of debt
  2. Calculating the weights of debt and equity components
Chapter 16: An Overview of Financing Choices
  1. The distinction between debt and equity
  2. Equity choices for private firms:
    1. Owner's equity
    2. Venture Capital and Private Equity
  3. Equity choices for public firms
    1. Common stock
    2. Warrants
    3. Contingent Value Rights
  4. Debt Financing Options
    1. Bank Loans
    2. Bonds
    3. Leasing
  5. Hybrid Financing Options
    1. Convertible Debt
    2. Preferred Debt
    3. Option-linked bonds
Chapter 17: Financing Choices and a Firm's Life Cycle
  1. Internal Financing versus External Financing
    • Lifecycle pattern of financing
  2. Raising Equity
    • Venture Capital
    • IPOs (Going public: NASDAQ CD)
Chapter 18:  The Financing Mix: Tradeoffs and Theory
  1. Costs and benefits of debt (My webnotes)
    1. Benefits
      • Taxes
      • Discipline characteristics of debt
    2. Costs
19: The Optimal Financing Mix: The Cost of Capital Approach  (p. 574 - 592) 
  1. Webnotes

Chapter Summaries and short explanatory notes for Damodaran's Corporate Finance, 1st ed.

Chapter 1: Introduction to Corporate Finance

Corporate Finance is the study of decisions that affect the finances of the firm:

What is the objective of Corporate Finance?
To Maximize Firm Value: the larger the pie, the better off is everybody.

How do we do this? By ensuring that each decision serves to maximize firm value. If markets operate efficiently, this is done by maximizing the net present value associated with each decision. To do this, we use the tools of Corporate Finance

Chapter 2: The Objective Function in Corporate Finance

Concept checks: p. 12, p. 13

Real World Problems:

Inadequacy of Institutions designed to provide power to stockholders

Solutions to these conflicts


6, 7


Find examples from the pages of business journals, newspapers etc. that illustrate the conflict between different classes of security holders

Webnotes on The Objective Function in Corporate Finance

Chapter 3: Present Value


2, 3, 8, 20, 21

Webnotes on Present Value

Chapter 4: Understanding Financial Statements

Principal Financial Statements

Webnotes on Understanding Financial Statements

Chapter 5: Risk and Return

Asset Pricing Models


2, 3, 6, 8, 9, 11, 14, 15.

Computer Exercises

Webnotes on Risk and Return

Chapter 6: Estimation of Discount Rates


Problem 4, 8, 14, 20, 21, Concept Check p. 141

Computer Exercises

Webnotes on Estimation of Discount Rates

Chapter 7: Capital Budgeting Decision Rules

Capital Budgeting Decision Rules or Investment Decision Rules are attempts to allocate the firm's resources in the most efficient way possible.

A project is any decision that results in using the scarce resources of a firm.

Types of Investment Decisions

Approaches to Investment Decision Making

Categories of Decision Rules


1, 3, 4, 7, 13, 14, 15

Webnotes on Capital Budgeting Decision Rules

Chapter 8: Problems in Estimating Cash Flows

Cash-Flow Ingredients for a Project

First Principles of Cash-Flow Estimation

Cash Flows should be after taxes

Cash Flows should be incremental

Cash Flows should be estimated consistently


4, 6, 9, 15.

Chap. 9: Issues in Capital Budgeting

Capital Rationing

Mutually Exclusive Projects


1, 2, 4, 5, 9

Chapter 15: Capital Structure - An Overview of Financing Choices

The Choices: Types of Financing



Hybrid Securities

The Historical Experience: How Firms have actually raised funds

Ways of Raising Funds

The Choices for a Seasoned Firm


1, 2, 5, 8

Chapter 17: Capital Structure - Tradeoffs and Theory

The Benefits of Debt

The Costs of Debt

The Modigliani-Miller Theorem

There is an Optimal Capital Structure

How Firms Choose Their Capital Structure


2, 4, 6, 8, 10, 11, 14, 16.

Webnotes on Capital Structure: Tradeoffs and Theory

Webnotes on Perspectives on Diversification

Chapter 18: Capital Structure: Models and Applications

The Cost of Capital Approach

A Practical Framework for Analyzing Capital Structure


1, 2, 4, 10, 13, 19, 22

Webnotes on Capital Structure: Models and Applications

Webnotes on Equity Valuation

Chapter 20: The Determinants of Dividend Policy

Empirical Characteristics of Dividends:

Measures of dividend payment:

Sufficient Assumptions for Dividend Irrelevance

  1. The issue of new stock (to replace excess dividends) is costless and can, therefore, cover the shortfall caused by paying excess dividends.
  2. Firms that face a cash shortfall do not respond by cutting back on projects and thereby affect future operating cash flows.
  3. Stockholders are indifferent between receiving dividends and price appreciation.
  4. Any cash remaining in the firm is invested in projects that have zero net present value (such as financial investments) rather than used to take on poor projects.

Implications of Dividend Irrelevance:

A firm cannot resurrect its image with stockholders by offering higher dividends when its true prospects are bad.

Taxation of Dividends:

Reasons for paying dividends:


2, 4, 10, 13, 19, 22.

Webnotes on The Determinants of Dividend Policy

Chapter 21: A Framework for Analyzing Dividend Policy

Determinants of Dividend Policy:

A Framework for Analyzing Dividend Policy

Poor Projects and Low Payout

Good Projects and Low Payout

Poor Projects and High Payout

Good Projects and High Payout


2, 4, 6, 8, 13.

Webnotes on A Framework for Analyzing Dividend Policy

Chapter 27: Option Pricing Theory

What is an Option?

Determinants of Option Value

American versus European Options

Option Pricing Models


1, 2, 6, 9.

Webnotes on Option Pricing

Chapter 28: Applications of Option Pricing Theory in Corporate Finance

Caveats on Applying Option Pricing Models in Corporate Finance

Options in Capital Budgeting

Valuing Equity as an Option

Options Applications in Capital Structure and Dividend Policy


4, 8, 9, 14.

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