How to build a corporate finance course: a complete guide for lecturers

Central question: What should a corporation optimise, and how do governance and incentives affect financial decisions?

Open the course by making the objective function explicit. Corporate finance is not a collection of formulas: it is a discipline for allocating capital, choosing financing and returning cash while recognising agency conflicts, stakeholder constraints and uncertainty. Lecturers can use this concept to establish the decision lens that will be reused throughout the course.

What this concept covers

• The financial manager as allocator of scarce capital rather than a spreadsheet technician.
• Value creation, opportunity cost and the distinction between accounting profit and economic value.
• Agency conflicts among managers, shareholders, creditors and other stakeholders.
• Governance, incentives, information asymmetry and financial decision rights.
• Why financing, investment and payout decisions must be judged together.

Learning outcomes

By the end of this concept, students should be able to:

• Explain the central investment, financing and payout decisions of corporate finance.
• Distinguish value creation from short-term earnings maximisation.
• Identify agency conflicts that can distort capital allocation.
• Evaluate how governance and incentives change a financial recommendation.

Supports the relevant course-level learning outcomes above.

How to teach it

• Start with a board decision rather than a definition: a profitable company has more projects than cash.
• Ask groups to define what success means for shareholders, lenders, employees and management.
• Use a short agency scenario to show why the same NPV can generate different behaviour.
• Return to the objective function whenever later topics create a trade-off between value, risk and flexibility.

Case-style example

HarbourTech plc has £120 million of surplus cash. Management proposes a £95 million headquarters that is expected to add only £55 million of present value, while a £70 million product expansion has an estimated NPV of £18 million. A shareholder group argues for a £60 million buyback instead. Students calculate the value impact of each choice, identify the agency issue, then write a two-sentence board recommendation. They discover that a financially feasible decision is not automatically a value-creating one.

Where students struggle

Students often say that the objective is simply to maximise profit or the share price today. Push them to separate accounting outcomes from cash-flow value and to recognise that good corporate finance also preserves the ability to fund future positive-NPV opportunities.

Reading and a quick check

Use the opening chapters of the core textbook on the corporation, financial manager and valuation principle. Quick check: ask students to classify five decisions as investment, financing, payout or governance, and explain the value consequence of each.

Teaching activity at this point

Use a short case, model build, board memo or seminar challenge here. The objective is to make students defend a decision before adding a simulation later in the lifecycle.

Where it leads

The next step is to turn strategic and accounting information into forecast cash flows that can support valuation and investment decisions.

Central question: How do accounting statements become decision-ready forecasts of cash flow?

Corporate finance depends on accounting information, but students must learn to translate reported earnings into cash flows that can be valued and financed. This concept gives lecturers the bridge from historical statements to forecast free cash flow, working capital needs and financing requirements.

What this concept covers

• Income statement, balance sheet and cash-flow statement linkages.
• Operating versus financing items and non-cash charges.
• Free cash flow to the firm and the logic of reinvestment.
• Revenue, margin, tax, capital expenditure and working-capital forecasting.
• Scenario design and the difference between a forecast and a target.

Learning outcomes

By the end of this concept, students should be able to:

• Reconcile earnings, operating cash flow and free cash flow.
• Build a driver-based forecast from a simplified historical dataset.
• Identify which assumptions create financing needs or cash surpluses.
• Challenge forecasts for internal consistency and economic plausibility.

Supports the relevant course-level learning outcomes above.

How to teach it

• Give students three years of simplified statements and ask them to trace one transaction through all three.
• Build a forecast from operational drivers rather than percentage growth alone.
• Require a base case and one coherent downside case, not ten unrelated sensitivities.
• Ask students which forecast item a lender, equity investor and CFO would each challenge first.

Case-style example

Redwood Components reports 2026 revenue of £80 million, EBITDA of £12 million, capex of £5 million and receivables equal to 50 days of sales. Management forecasts 20% revenue growth, a 17% EBITDA margin and receivable days falling to 42, while capex rises to £9 million. Students forecast EBITDA and the change in receivables, then estimate the cash-flow effect of the plan. They discover that growth can consume liquidity even when margins improve.

Where students struggle

Students often forecast every line independently and create statements that cannot coexist. Require them to explain the business driver behind each major assumption and to reconcile growth with working capital, capital expenditure and financing capacity.

Reading and a quick check

Use the core textbook sections on financial statements, cash flow and planning. Quick check: give students net income, depreciation, capex and a working-capital increase and ask them to derive a simplified free cash flow.

Where a simulation fits

This concept prepares students for the Investment Banking Simulation because later rounds require teams to interpret company information, forecast performance and use model outputs in transaction decisions.

Where it leads

Once students can produce cash flows, they need the time-value and no-arbitrage logic that turns future cash flows into present value.

Central question: How should cash flows at different dates be compared, and what makes a valuation internally consistent?

Time value of money is foundational, but in a Corporate Finance course it should be taught as the logic behind investment and financing decisions rather than as an isolated calculator exercise. The goal is to make present value, discounting, compounding and no-arbitrage reasoning automatic before students tackle cost of capital and enterprise valuation.

What this concept covers

• Present value, future value, annuities, perpetuities and growth.
• Nominal versus real cash flows and rates.
• Opportunity cost of capital and the law of one price.
• Valuing bonds and simple securities as discounted cash flows.
• Consistency of timing, risk, inflation and currency assumptions.

Learning outcomes

By the end of this concept, students should be able to:

• Calculate present and future values for uneven cash-flow streams.
• Choose a discount rate that is consistent with the cash flow being valued.
• Distinguish nominal and real valuation inputs.
• Diagnose common timing and discounting errors.

Supports the relevant course-level learning outcomes above.

How to teach it

• Use a capital-project cash-flow timeline before introducing formulas.
• Require students to solve one problem algebraically and one in a spreadsheet.
• Deliberately mix nominal and real inputs, then ask students to identify the inconsistency.
• Use a bond or lease example to connect time value to financing choices.

Case-style example

Moorland Energy can pay £18 million today for equipment that saves £4.9 million at each year-end for five years and has a £2 million resale value in year 5. Its nominal opportunity cost of capital is 8%. A supplier instead offers five beginning-of-year payments of £4.2 million. Students calculate both present values, compare timing and decide which contract is cheaper. They discover that payment timing can reverse a headline-price comparison.

Where students struggle

Students may know calculator functions without knowing what the rate or timing represents. Mark the setup as well as the arithmetic: a technically correct formula with inconsistent cash-flow timing is not a correct valuation.

Reading and a quick check

Use the core textbook chapters on time value, valuation and the law of one price. Quick check: ask students to explain why £1 next year is not directly comparable with £1 today before they calculate anything.

Teaching activity at this point

Use a short case, model build, board memo or seminar challenge here. The objective is to make students defend a decision before adding a simulation later in the lifecycle.

Where it leads

The valuation foundation allows the course to introduce risk and the cost of capital, which determine how uncertain cash flows should be discounted.

Central question: What return should investors require, and how should that required return enter corporate decisions?

Cost of capital is where asset pricing meets the corporation. Students need enough risk-return theory to choose and defend discount rates, but the teaching emphasis should remain on corporate decisions: project hurdle rates, WACC, debt costs, equity costs and the dangers of using one company-wide rate for every investment.

What this concept covers

• Diversification, systematic risk and beta.
• CAPM as a practical benchmark and its limitations.
• Cost of debt, cost of equity and weighted average cost of capital.
• Market-value weights, tax shields and target capital structure.
• Project-specific risk, divisional hurdle rates and sensitivity to discount-rate assumptions.

Learning outcomes

By the end of this concept, students should be able to:

• Estimate a cost of equity from market inputs.
• Calculate and interpret WACC using market-value weights.
• Evaluate whether a company-wide hurdle rate is appropriate for a project.
• Defend the assumptions used in a cost-of-capital estimate.

Supports the relevant course-level learning outcomes above.

How to teach it

• Build a WACC from a deliberately incomplete data pack and ask students what they still need.
• Compare a stable utility project with a volatile software venture inside the same group.
• Use a sensitivity table showing how valuation changes with WACC.
• Ask students to explain where CAPM is useful as a discipline and where it can mislead.

Case-style example

Aster Group has 60% equity and 40% debt by market value. Its equity beta is 1.25, the risk-free rate is 3.5%, the market risk premium is 5.5%, pre-tax debt costs 6.2% and tax is 25%. Students calculate WACC, then decide whether to use it for a new cybersecurity project whose comparable-company beta is 1.65. One group argues for group WACC; another for project risk. Students discover why one hurdle rate can distort capital allocation.

Where students struggle

Students often treat WACC as a fixed company fact. Make them explain its market inputs, target structure and project-risk assumptions, and require a range when the estimate is fragile.

Reading and a quick check

Assign a cost-of-capital chapter plus Gormsen and Huber on firms perceived cost of capital. Quick check: ask students what changes in WACC if the debt weight rises but the risk of both debt and equity also rises.

Teaching activity at this point

Use a short case, model build, board memo or seminar challenge here. The objective is to make students defend a decision before adding a simulation later in the lifecycle.

Where it leads

With cash flows and discount rates in place, students can now make the core investment decision: whether a project creates value.

Central question: Which investments should the firm accept when cash, information and managerial attention are limited?

Capital budgeting is the practical centre of Corporate Finance. Students should move beyond calculating NPV to deciding which cash flows are incremental, how to treat sunk costs and opportunity costs, how to incorporate working capital and tax effects, and how to make a decision when projects compete for scarce capital.

What this concept covers

• Incremental cash flows, sunk costs, opportunity costs and externalities.
• NPV, IRR, payback and profitability index.
• Mutually exclusive projects and capital rationing.
• Sensitivity, scenario and break-even analysis.
• Managerial flexibility and real-option intuition.

Learning outcomes

By the end of this concept, students should be able to:

• Construct incremental project cash flows.
• Calculate NPV and interpret IRR with appropriate caveats.
• Rank projects under capital constraints.
• Identify assumptions that can change an investment recommendation.

Supports the relevant course-level learning outcomes above.

How to teach it

• Start with a messy project brief containing sunk costs and shared overheads.
• Require a cash-flow bridge showing exactly what was included and excluded.
• Use one mutually exclusive project pair where IRR and NPV rank differently.
• Finish with a capital-allocation committee where teams defend one project and reject another.

Case-style example

Keystone Foods has £30 million available. Project North costs £18 million and has an NPV of £6.2 million; Project South costs £14 million and has an NPV of £5.5 million; Project East costs £11 million and has an NPV of £3.8 million. North and South are mutually exclusive. Students choose a portfolio under the cash limit, calculate value created, then explain what extra evidence could change the ranking. They discover that project selection is a constrained portfolio decision, not an IRR contest.

Where students struggle

Students frequently include allocated overheads, exclude opportunity costs or use IRR as the decision rule without asking whether cash-flow scale and timing differ. Require a written explanation of the cash-flow logic alongside the model.

Reading and a quick check

Use the core textbook capital-budgeting chapters. Quick check: give five project costs and ask students to label each as incremental, sunk, opportunity cost or irrelevant before calculating NPV.

Teaching activity at this point

Use a short case, model build, board memo or seminar challenge here. The objective is to make students defend a decision before adding a simulation later in the lifecycle.

Where it leads

Project valuation scales naturally into enterprise valuation, where students value an entire operating business and connect the result to transaction decisions.

Where a simulation fits

The Capital Budgeting Simulation fits directly after this concept. Each student acts as CFO, evaluates competing projects using NPV, IRR, profitability index and payback, then allocates a fixed $10 million budget across eight projects. It turns project appraisal and capital rationing into an attributable investment decision rather than a formula check.

Central question: How should a company be valued when the answer depends on forecasts, terminal value and market evidence?

A Corporate Finance course should teach valuation as an argument supported by a model, not a single correct number. This concept brings together forecasting, free cash flow, WACC, terminal value, trading comparables and transaction evidence so students can produce a valuation range and defend the assumptions that drive it.

What this concept covers

• Enterprise value versus equity value and the bridge between them.
• FCFF-based DCF valuation and terminal value methods.
• Comparable companies and transaction multiples.
• Sensitivity tables, scenario ranges and model checks.
• Turning valuation output into a transaction or strategic recommendation.

Learning outcomes

By the end of this concept, students should be able to:

• Build or audit a simplified enterprise DCF.
• Bridge enterprise value to equity value.
• Triangulate DCF and market-multiple evidence.
• Defend a valuation range and identify its most fragile assumptions.

Supports the relevant course-level learning outcomes above.

How to teach it

• Give all teams the same company but allow different defensible forecasts.
• Require a valuation football field rather than one point estimate.
• Ask students to defend terminal growth and exit-multiple assumptions aloud.
• Use the model as a decision input for a later acquisition or financing exercise.

Case-style example

Lumen Data Services has forecast FCFF of £8m, £10m, £12m, £14m and £16m over five years. Teams may use WACC between 8.5% and 10.5% and terminal growth between 2% and 3.5%. Net debt is £42m. Students calculate a valuation range, bridge to equity value and compare it with an 11.0x EBITDA precedent transaction. They discover that a polished DCF can still support materially different but defensible conclusions.

Where students struggle

Students often hide the decision inside a spreadsheet. Ask them to identify the two assumptions that drive most of the range and to state what evidence would justify moving from the low case to the high case.

Reading and a quick check

Use the valuation chapters of the core textbook and Dessaint et al. on CAPM-based company valuations. Quick check: ask students to explain why a lower WACC raises enterprise value and why that does not automatically mean the company became less risky.

Where a simulation fits

The Investment Banking Simulation fits strongly after this concept. Students use financial models and DCF valuation as inputs to financing, advisory and enterprise-value decisions across a four-round transaction process.

Where it leads

Valuation establishes what the operating assets may be worth. The next concepts ask how those assets should be financed and how much financial flexibility the company should preserve.

Central question: How should a firm balance debt, equity, cash retention and distributions when there is no single optimal leverage ratio?

Capital structure should be taught as a policy choice under uncertainty. Students need the tax-shield and distress logic, but they also need to see financial flexibility, agency effects, market conditions and payout policy. The teaching objective is not to calculate an exact optimal ratio, but to defend a financing range that supports the firms strategy and risk profile.

What this concept covers

• Modigliani-Miller logic as a benchmark rather than a description of reality.
• Tax shields, distress costs, agency costs and information effects.
• Debt capacity, interest coverage, cash-flow resilience and ratings considerations.
• Dividends, repurchases and retained cash as competing uses of financial capacity.
• Target leverage ranges and financial flexibility.

Learning outcomes

By the end of this concept, students should be able to:

• Evaluate the benefits and costs of additional leverage.
• Estimate a defensible debt-capacity range from operating data.
• Connect payout policy to investment opportunities and financing needs.
• Recommend a capital-structure policy under base and downside scenarios.

Supports the relevant course-level learning outcomes above.

How to teach it

• Give groups the same company and assign CFO, shareholder and lender perspectives.
• Ask students to test leverage under a recession case before discussing tax benefits.
• Compare a mature cash-generative company with a high-growth firm needing repeated investment.
• Require a financing policy range and triggers for revisiting it.

Case-style example

Orchard Media generates £45 million of EBITDA and £30 million of annual operating cash flow. It has £60 million of debt at 5.5% and is considering a £120 million acquisition. The board can fund it with new debt, an equity issue or a 50:50 mix. Students calculate pro-forma debt/EBITDA and interest burden, then defend a structure under a 20% EBITDA downside. They discover why leverage policy must preserve room for adverse operating outcomes.

Where students struggle

Students can recite trade-off theory yet still recommend maximum debt because it raises expected EPS or equity returns. Require them to state the downside case, refinancing risk and future investment needs before they discuss an optimal structure.

Reading and a quick check

Assign DeAngelo on the capital structure puzzle and the core textbook capital-structure chapters. Quick check: ask what could make a company with unused debt capacity rationally choose not to borrow.

Where a simulation fits

The LBO Simulation becomes relevant after students can assess leverage, debt capacity and sponsor returns. The Debt Financing Simulation can also be used here when the emphasis is lender-borrower negotiation and the full financing package.

Where it leads

Students now move from capital-structure policy to the detailed terms, covenants and refinancing trade-offs that make debt financing operational.

Central question: What makes a debt package sustainable, and how should borrowers and lenders trade price against protection and flexibility?

Debt is not just an interest rate. A financing package combines amount, pricing, maturity, repayment, seniority, security, covenants and optionality. Teaching these terms together helps students see why the cheapest coupon can be an expensive choice if it removes flexibility or creates refinancing pressure.

What this concept covers

• Debt instruments, seniority, security and repayment structures.
• Pricing, maturity, amortisation, prepayment and guarantees.
• Maintenance and incurrence covenants and covenant headroom.
• Refinancing risk, credit conditions and lender return requirements.
• Borrower-lender negotiation and package-level trade-offs.

Learning outcomes

By the end of this concept, students should be able to:

• Compare debt packages on total economic and control terms.
• Evaluate covenant headroom under downside cases.
• Recommend a refinancing structure consistent with debt capacity.
• Explain how lender and borrower incentives differ.

Supports the relevant course-level learning outcomes above.

How to teach it

• Give three debt term sheets where the lowest coupon has the tightest covenants.
• Ask teams to calculate covenant headroom rather than merely identify covenant names.
• Run a borrower-lender negotiation with one hidden priority per side.
• Debrief the final package as a whole, not term by term.

Case-style example

Pioneer Software needs to refinance £75 million. Bank A offers 5.8% for five years with 35% annual amortisation and a 3.0x leverage covenant. Fund B offers 7.1% bullet maturity with a 4.25x covenant and a 1% prepayment fee. Current EBITDA is £28 million but a downside case is £22 million. Students compute headroom, cash repayment and flexibility, then recommend a package. They discover why headline interest cost can conflict with resilience.

Where students struggle

Students often compare only coupon and maturity. Require a one-page debt package comparison that includes cash burden, covenant room, security, refinancing date and management flexibility.

Reading and a quick check

Use the debt-financing chapters of the core text and Korteweg, Schwert and Strebulaev on real-world capital-structure adjustments. Quick check: ask which covenant would become binding first under a 15% EBITDA fall.

Where a simulation fits

The Debt Financing Simulation fits directly: lender and borrower teams use company, financial and market evidence to negotiate debt capacity, pricing, maturity, repayment, seniority, security and covenants. It can also serve as preparation for the financing work inside the Investment Banking Simulation.

Where it leads

Financing decisions lead naturally to liquidity management because even a solvent firm can fail to fund operations if cash becomes trapped in receivables or inventory.

Central question: How should a CFO balance growth, customer service, supplier relationships and liquidity in day-to-day financing decisions?

Working capital is often taught as a ratio chapter, but it is better framed as a sequence of operating-finance decisions. Receivables, inventory and payables create a cash conversion cycle that can finance growth or consume liquidity. This concept lets students connect policy choices to cash, margins, resilience and financing needs.

What this concept covers

• Operating working capital and the cash conversion cycle.
• Days sales outstanding, days inventory outstanding and days payable outstanding.
• Receivables policy, credit risk, inventory service levels and supplier terms.
• Liquidity buffers, revolving facilities and short-term funding.
• Growth, working-capital investment and cash forecasting.

Learning outcomes

By the end of this concept, students should be able to:

• Calculate and interpret DSO, DIO, DPO and the cash conversion cycle.
• Estimate the cash effect of changes in working-capital policy.
• Evaluate trade-offs between liquidity and operating performance.
• Recommend a working-capital policy consistent with growth plans.

Supports the relevant course-level learning outcomes above.

How to teach it

• Start with a cash-rich P&L and a cash-poor balance sheet to create the puzzle.
• Ask teams to release a specific amount of cash without damaging operations.
• Introduce one supplier shock or customer delay and require a policy response.
• Connect the working-capital decision to debt capacity and expansion funding.

Case-style example

Elmbridge Homeware has annual sales of £96 million, DSO of 58 days, DIO of 72 days and DPO of 38 days. The CFO wants to fund a £7 million expansion without new debt. Students estimate the cash released if DSO falls to 50, DIO to 64 and DPO rises to 44, then identify operational risks of each move. They discover that cash conversion improvements have different commercial costs even when the cash effect looks similar.

Where students struggle

Students can calculate the cash conversion cycle yet miss why it changes. Require them to connect every proposed metric improvement to an operating action and a stakeholder consequence.

Reading and a quick check

Use the core text chapters on working capital and short-term planning plus Erel et al. on corporate liquidity and acquisitions. Quick check: ask which working-capital lever is most controllable in a given business and why.

Where a simulation fits

The Working Capital Management Simulation fits directly. Each student acts as CFO of Northwood Furnishings across a simulated 12-month period, calculates DSO, DIO, DPO and the cash conversion cycle, makes sequential policy choices and reaches an expansion recommendation.

Where it leads

With investment, financing and liquidity in place, the course can turn to large strategic transactions that combine valuation, financing and control.

Central question: When does an acquisition create value, and how should a buyer separate strategic logic from overpayment?

M&A is an integrative corporate-finance decision because it combines strategy, valuation, financing, negotiation and governance. The key teaching move is to separate stand-alone value from synergy value and then ask who captures the synergy through the price and terms.

What this concept covers

• Acquisition rationale, strategic fit and value-creation hypotheses.
• Stand-alone valuation, synergy valuation and deal premium.
• Cash versus share consideration and financing implications.
• Accretion/dilution as a communication metric rather than a value rule.
• Negotiation, control, execution risk and post-deal integration.

Learning outcomes

By the end of this concept, students should be able to:

• Estimate stand-alone value and a defensible synergy range.
• Evaluate whether the proposed premium leaves value for the acquirer.
• Compare cash and share consideration.
• Recommend transaction terms and identify conditions that should stop the deal.

Supports the relevant course-level learning outcomes above.

How to teach it

• Give buyers and sellers different views of the same synergy assumptions.
• Ask students to create a walk-away price before negotiation begins.
• Use EPS accretion as a deliberate trap and ask whether it proves value creation.
• Finish with a board memo that separates strategic rationale, valuation and execution risk.

Case-style example

Cedar Cloud is considering buying Shield Analytics. Cedar values Shield stand-alone at £210 million and expects annual after-tax synergies of £13 million, growing 2% with an 8.5% discount rate. The seller wants £335 million. Students value the synergy perpetuity, calculate the maximum value Cedar can pay without destroying value, then debate whether execution risk justifies a lower walk-away price. They discover that positive synergies do not make any acquisition price acceptable.

Where students struggle

Students often justify a deal with strategic language after the valuation fails. Require a separate stand-alone value, synergy value, premium and buyer value-creation bridge before any recommendation.

Reading and a quick check

Assign Dasgupta, Harford and Ma on EPS sensitivity and mergers plus the M&A chapters of the textbook. Quick check: ask why an EPS-accretive acquisition can still destroy shareholder value.

Where a simulation fits

The M&A Simulation fits after students can value earnings, adjustments and synergies. Buyer and Seller teams model the transaction and negotiate five linked terms. The Investment Banking Simulation can extend the topic into buy-side and sell-side advisory, roadshows, bids and execution across multiple rounds.

Where it leads

M&A teaches how firms buy assets and control. The next concept examines a different major capital-market decision: issuing equity and transitioning into public ownership.

Central question: When should a company issue equity, and how do valuation, investor demand and control shape an IPO?

Equity financing introduces a different set of trade-offs from debt. Students need to understand dilution, information asymmetry, issuance costs, investor signalling and the mechanics of an IPO. The aim is to show that the final offer price and allocation emerge from valuation and demand, not from a single spreadsheet output.

What this concept covers

• Seasoned equity issuance, rights issues and private placements.
• Dilution, control and financing flexibility.
• IPO readiness, underwriter role, price range and new-share structure.
• Roadshow, bookbuilding, final pricing and allocation.
• Market timing, underpricing and post-IPO financing considerations.

Learning outcomes

By the end of this concept, students should be able to:

• Evaluate equity issuance against debt and internal funding.
• Calculate ownership dilution from a new-share issue.
• Assess IPO readiness and a proposed price range.
• Explain how investor demand informs final pricing and allocation.

Supports the relevant course-level learning outcomes above.

How to teach it

• Give students a funding need and three financing routes, then require a dilution calculation.
• Use a mock IPO where investor teams question the company narrative.
• Ask underwriter teams to justify both price and number of new shares.
• Debrief why maximum issue price can conflict with aftermarket performance and execution certainty.

Case-style example

Ardent Robotics needs £60 million of new capital and has 40 million shares outstanding. Bankers propose an IPO of 10 million new shares at £7.00 to £8.50. A private investor offers the full £60 million at £6.80 per share with governance rights. Students calculate dilution under both routes, compare gross proceeds and debate control, pricing risk and future access to capital. They discover why the highest headline valuation may not be the strongest financing choice.

Where students struggle

Students sometimes treat an IPO as a valuation event rather than a financing process. Make them connect price, share count, dilution, demand, governance and proceeds in one decision.

Reading and a quick check

Use the equity-financing and IPO chapters of the core textbook. Quick check: ask what evidence would make a CFO prefer an equity issue even when debt is currently cheaper.

Where a simulation fits

The IPO Simulation fits directly. Underwriter teams structure, market, price and allocate offerings while Investor teams value, question and bid across three companies. The Investment Banking Simulation can be used as the broader capital-markets capstone around financing and advisory decisions.

Where it leads

The final concept stress-tests the entire course by asking what happens when leverage, operating performance or market access breaks the original financing plan.

Central question: How do leverage and ownership structure change returns in the upside and bargaining power in the downside?

Closing with LBOs and distress allows students to integrate valuation, debt capacity, cash flow, covenants and stakeholder incentives. They see how leverage can amplify sponsor returns in a successful buyout and then how the same capital structure reallocates bargaining power when enterprise value falls below claims.

What this concept covers

• LBO sources and uses, sponsor equity, debt capacity and target returns.
• IRR, leverage, deleveraging, operating improvement and exit assumptions.
• Financial distress, liquidity pressure and covenant breach.
• Priority of claims, recovery analysis and restructuring negotiations.
• Recapitalisation, debt amendment, debt-for-equity exchange and stakeholder trade-offs.

Learning outcomes

By the end of this concept, students should be able to:

• Interpret the drivers of LBO equity returns.
• Assess whether a proposed buyout capital structure is resilient.
• Calculate stakeholder recoveries in a distressed capital structure.
• Defend a restructuring or financing recommendation under competing claims.

Supports the relevant course-level learning outcomes above.

How to teach it

• Run the same company first as a successful LBO and then under a downside scenario.
• Require students to identify how much return comes from operations, deleveraging and exit assumptions.
• Map the capital structure before discussing negotiation power in distress.
• End with an integrated board or creditor-committee recommendation.

Case-style example

Ironbridge Services is acquired for £300 million using £120 million sponsor equity and £180 million debt. Five years later base-case enterprise value is £410 million, but a recession case reduces it to £155 million while debt outstanding is £165 million. Students calculate sponsor proceeds in the base case, creditor and equity recoveries in the downside, then recommend amend-and-extend, new equity or restructuring. They discover how leverage that boosts upside returns can eliminate equity bargaining power in distress.

Where students struggle

Students may celebrate high modeled IRR without tracing the downside. Require every LBO recommendation to include a break case and every restructuring recommendation to begin with the claim waterfall.

Reading and a quick check

Use the LBO, financial-distress and restructuring chapters of the core textbook and Graham on corporate finance in practice. Quick check: ask which assumption creates the most sponsor return in the base case and which stakeholder loses first when enterprise value falls.

Where a simulation fits

The LBO Simulation is a primary fit after students know valuation, debt capacity and target IRR. The Debt Restructuring Simulation fits the downside: students represent first-lien, second-lien or equity positions, set haircuts, calculate recoveries and work toward an out-of-court agreement. The final round of the Investment Banking Simulation also includes fairness-opinion and restructuring work.

Where it leads

This closes the lifecycle. Students can now integrate investment, valuation, financing, liquidity, transaction and distress decisions into one defensible corporate-finance recommendation.

10-week course structure

A 10-week version should compress adjacent foundations rather than remove the decision lifecycle. Combine statements with the objective, combine risk with time value, and integrate debt capacity with LBO teaching. Preserve valuation, investment, financing, liquidity, transactions and downside response.

14-week course structure

A 14-week version creates room for a separate valuation workshop, a dedicated debt-negotiation session and more debrief time. Use the extra sessions to increase judgement and evidence, not simply to add more formulas.

The Investment Banking Simulation is the broadest Corporate Finance application in the approved set. Students apply DCF valuation, debt financing, derivatives and buy-side and sell-side advisory across the 20-year lifecycle of two companies. The activity runs through four linked rounds, so it works best as a capstone thread rather than a one-off exercise.

Why it fits here

Start after enterprise valuation, then use later rounds to connect capital structure, acquisition work, fairness opinions and restructuring. This sequencing lets students see how a model becomes a financing choice, a counterparty selection, an Enterprise Value bid and eventually a transaction or restructuring recommendation.

What students do

• Round 1: lender teams propose debt packages while PE teams forecast Frametastic and Star Hotel, complete required model assumptions, calculate Enterprise Values, select financing providers and submit acquisition bids.
• Round 2: lender teams deepen debt and derivative terms; sell-side teams prepare pitches, conduct roadshows and manage the Data Room; PE teams select counterparties, update models, submit bids and upload models and Approval Memoranda.
• Round 3: teams work across debt capital markets, derivatives, buy-side and sell-side advisory, acquisition and divestiture tasks, with continued modelling, roadshows, information requests and transaction inputs.
• Round 4: teams prepare fairness opinions using an FCFF-based DCF approach and negotiate a restructuring for Eco Frames among first-lien, second-lien and equity positions.
• After each round, teams review outcomes and comparative performance information, giving the lecturer a natural debrief point.

Recommended course placement

• Begin preparation after Session 6 enterprise valuation.
• Use selected rounds or milestones through Sessions 7-12 as the integrated capstone.
• Pair team outputs with an individual assumptions note, model defence or oral viva.
• Use the final round to connect fairness, distress and restructuring to the end of the course.

Knowledge students should have before the simulation

• Basic finance and DCF valuation.
• Financial-statement interpretation and forecasting.
• Enterprise Value versus Equity Value.
• Basic debt-financing and transaction-rationale concepts.

Delivery format

Suggested debrief questions

• Which model assumption changed your bid or financing choice most?
• Where did your assigned role change what you treated as material?
• What did the model answer clearly, and what did it fail to answer?
• Which counterparty term looked attractive in isolation but weak as part of the full package?
• What evidence would a board or investment committee still need before approving the transaction?
• How did later-round restructuring change your view of earlier leverage decisions?

The LBO Simulation places students into a competitive buyout process. They normalise and forecast three target companies, calculate Equity Value and Enterprise Value, assess debt capacity and submit acquisition bids against a target IRR. The flow is Analysis - Roadshow - Bidding, with financing terms and valuation choices interacting throughout.

Why it fits here

Students should already understand DCF valuation, enterprise-to-equity bridges, leverage and debt capacity. The simulation then forces them to decide how much to pay, which lender terms to accept and how much sponsor equity is needed, rather than treating the LBO model as the final answer.

What students do

• Normalise historical results and forecast P&L and cash flow for the target companies, including FCFE, Equity Value and Enterprise Value calculations.
• Assess debt capacity and compare term-sheet variables including debt amount, pricing, maturity, amortisation, covenants, prepayment, guarantees and security.
• Participate in the roadshow and information process, with target-company positioning affecting bidder views and financing decisions.
• Select a lender, decide equity contribution and submit an Enterprise Value acquisition bid against a target IRR.
• Upload models and Approval Memorandums and compare final bids, lender selections and outcomes during the debrief.

Recommended course placement

• At the end of Session 7 after capital structure and debt-capacity teaching.
• In Session 8 as the main LBO workshop.
• Before a written board or investment-committee memo so students convert the live process into a defendable recommendation.

Knowledge students should have before the simulation

• Basic DCF knowledge.
• Equity Value and Enterprise Value.
• Debt capacity and financing terms.
• Sponsor equity, target IRR and downside sensitivity.

Delivery format

Suggested debrief questions

• Which assumption drove your Enterprise Value bid most strongly?
• Did winning the target require a price you could still defend?
• Which financing term constrained the sponsor more than the coupon suggested?
• How much of expected return came from operating improvement, leverage, deleveraging or exit assumptions?
• What downside case would make your chosen capital structure unsafe?

The simulations are evidence sources, not automatic grades. Use clear rubrics, keep a moderation record for high-stakes work and pair team evidence with an individual component where individual attribution matters. Free-riding is best managed by requiring an assumptions note, oral defence, individual reflection or peer evidence rather than trying to infer contribution from a team outcome alone.

Grading with the Investment Banking Simulation

Teams produce models, Approval Memoranda, financing terms, Enterprise Value bids and round outcomes across a four-round process. Assess the quality of the analysis and decisions, not leaderboard position alone.

• Model quality and internal consistency, including DCF assumptions and valuation logic.
• Quality of financing, counterparty and transaction decisions relative to role objectives.
• Approval Memorandum or board-style rationale linking evidence to action.
• Ability to explain why new information changed, or did not change, the teams position.
• Individual defence identifying what the model could not establish.

Grading with the LBO Simulation

Teams forecast targets, assess debt capacity, select financing and submit Enterprise Value bids against target IRR. A winning bid is not automatically the strongest academic performance.

• Historical normalisation and forecast discipline.
• Enterprise Value and Equity Value logic.
• Debt-capacity and term-sheet judgement.
• Bid discipline and interpretation of target IRR.
• Downside analysis and individual model defence.