Law 325 Michael Bradley
James D. Cox
Principles of Corporate Finance Fall 2008
Course Description
This 3 credit course is designed to familiarize law students with the principles of corporate finance. In the world of corporate finance, the distinction between lawyers and investment bankers has become blurred. Whether negotiating a merger agreement, acquisition or divestiture, rendering a fairness opinion, preparing for an appraisal hearing, litigating securities class action or derivative suits, issuing new securities, taking a firm private via an LBO or public via an IPO, corporate lawyers and investment bankers work side-by-side, and lawyers without an appreciation of the basics of corporate finance are at a distinct disadvantage. Moreover, this course will provide important tools for litigators in identifying, preparing, and cross-examining financial expert witnesses. Even students who do not plan to venture into the corporate world will benefit from this course. The financial principles covered are essential for lawyers intending to do estate or tax planning, litigate divorces, or write the bylaws and compensation agreements for partnerships or closed corporations. Once the principles of finance are covered, attention is given to the legal norms and economic constraints that affect firm financial and capital structure, including contemporary approaches to interpreting the scope of provisions commonly found in debt and preferred stock instruments. This course will serve as a prerequisite for Corporate Restructuring and Venture Capital and Private Equity, two courses offered at the Fuqua School of Business and cross-listed in the Law School.
Topics include: the time value of money; the relation between risk and return; the workings and efficiency of capital markets; behavioral finance; valuing perpetuities and annuities; valuing corporate securities (stocks, bonds, and options); optimal capital structure and dividend policies; basic financial accounting; assessing the value of going concerns, forensic finance, how these principles are applied in the practical practice of law, and the judicial interpretation of bond covenants and preferred stock preferences.
Although the materials will stress the intuition of these principles, students will be expected to acquire a working knowledge of how to apply the analytical tools of finance to real-world problems.
Materials
The materials for the course are contained in a course packet that students should pick up prior to the first class meeting. The packet contains class notes that students should bring to class. These notes are not self-contained in that they are not complete without the accompanying lecture. Corporate Finance, Principles and Practice by William J. Carney,
Foundation Press, 2005 is also required for the course. Although the text does a nice job

integrating principles of corporate finance and the practice of corporate law, students who want a more in depth treatment of corporate finance from a financial economics perspective, I recommend Principles of Corporate Finance by Richard A. Brealy and
Stewart C. Myers, Irwin McGraw-Hill, editions 5 and later. Note that the latest edition, the 8 th
, includes a third author. The authors are Richard Brealy, Stewart Myers and
Franklin Allen. This is the most popular corporate finance textbook and is used in all the top business schools in the country. The class notes will make reference to the 6 th
and 8 th
Editions of this text.
Grading
Grading in the course will be based on the performance on 5 problem sets that will be done in groups of up to five students throughout the term and a final exam.
Contact Information
and Cox@law.duke.edu
Email:
Fuqua :
Academic Assistant: Shirley Edmond (660-8006)
660-8006 Phone Number
Law School :
Academic Assistant: Cary Edgar (613-7206)
Phone Number 613-8531
Office Hours

Law 325 Professor Michael Bradley
Principles of Corporate Finance Fall 2008
References:
(C) Carney, Corporate Finance, Principles and Practice.
(BM) Brealy and Myers, Principles of Corporate Finance, 6 th
Edition.
(BMA) Brealy, Myers and Allen, Principles of Corporate Finance, 8 th
Edition.
Syllabus
Page Number
1.
Pre-assignment
“After the Revolution in Corporate Finance,” Roberta Ramano 1
C – Preface and Chapter 1
2.
Time Value of Money 30
•
The definition of finance
•
Calculating expected rates of return
•
Future values and compounding
•
Present values and discounting
•
Net present values
•
Annuities
•
Perpetuities
•
Compound intervals
C – pp. 80-94
BM – Chapters 1-3
BMA – Chapters 1-3

3.
The Term Structure of Interest Rates and Bond Pricing 84
•
The term structure of interest rates
•
Pricing zero coupon bonds
•
Calculating the yield-to-maturity
•
Implicit forward rates
•
Pricing corporate bonds
BM – pp. 675-689
BMA – pp.629-640
4.
Risk, Return and the Capital Asset Pricing Model (CAPM) 103
•
The distinction between risk and uncertainty
•
Attitudes towards risk
•
The Capital Asset Pricing Model
•
The Securities Market Line
•
The Capital Market Line
•
Optimal portfolio choice
C – pp. 98-112
BM – pp. 187-203
BMA – pp. 147-197
5.
The Efficient Market Hypothesis (EMH) 123
•
The three degrees of market efficiency
•
Empirical evidence
•
Legal applications of the (EMH)
C – pp. 117-156
BM – Chapter 13
BMA – Chapter 13
6. Valuation and Accounting Numbers 131
•
The Balance Sheet
•
The Income Statement
•
Calculating Free Cash Flows
•
Valuation using comparables
•
Discounted Net Cash Flows – Net Present Values
C – Chapter 2
BM – Chapters 1-3, generally
BMA – Chapters 1-3, generally

7.
The Pricing of Common Stock 146
•
Dividend growth model
•
Valuing common stock using earnings
•
Price / earnings multiples
•
Valuing growth stocks
C – pp. 90-94
BM – Chapter 4
BMA – pp. 61-77
8.
Capital Structure 181
•
Capital structure in a perfect market setting
•
Modigliani-Miller Propositions
•
The components of equity risk
•
Capital structure with corporate taxes
C – pp. 195-228
BM – Chapter 17
BMA – Chapter 17
9.
Leverage-Related Costs 202
•
Bankruptcy costs
•
Agency costs of debt
•
The overinvestment problem
•
The underinvestment problem
•
Monitoring and bonding activities
•
Optimal capital structure
C – pp. 243-283
BM – Chapter 18
BMA – Chapter 18
10.
The CAPM and Capital Budgeting – Putting it All Together 233
•
Capital budgeting under uncertainty
•
Cost of capital and project discount rates
BM – Chapter 19
BMA – Chapter 19

11.
Options 257
•
The definition of puts and calls
•
The put-call parity relation
•
The boundaries of a call option
•
The option pricing model
•
Levered equity as a call option
•
Convertible debt
C – pp. 537-563
BM – Chapter 21
BMA – Chapters 21 and 22
12.
Share repurchases: An Alternative to Dividends (Time Permitting) 280
•
Open market share repurchases
•
Premium self tender offers
•
Dutch auction tender offers
•
Empirical evidence
C – pp. 742-750
BM – pp. 440-452
BMA – pp. 431-429