[SOUND] In this course we learned a lot about how companies make financial management decisions. What I want to do in this summary is to point out some the key concepts that I would like to remember as you leave this course and go on to your future career, to your future endeavors. The first one is that there are many mistakes, there are many shallow arguments that might affect how you think about payout and financial decisions and I don't want you to get fooled by them. For example, we talked about the fact that dilution is an illusion, there is no such thing as dilution. Changing the number of shares outstanding per se, has absolutely no effect on stock prices. This is a bogus argument that is very common in practice and I think after taking this course, you'll be able to understand why dilution is an illusion and why the number of shares outstanding is irrelevant. The other issue we talked about here in the middle, is that that does not mechanically reduce the cost of capital. That was the logic behind the Modigliani and Miller Theorem that we covered in module one that has this very practical application, which is that it shows us that there is no such thing as cheap debt. The fact that debt is cheaper than equity does not mean that a company should issue debt. Okay, so that again is a very important concept that I would like you to remember as you go forward. We also talked about the trade off model of capital structure, which we summarized it in this picture, right, essentially there is an optimal leverage ratio, there is a point, a leverage ratio at which a real world company is going to maximize its value. For a medium US firm, as we learned, that leverage ratio is 30%. A medium US firm gains 5% in value by moving from 0 leverage, to a 30% leverage ratio. That's based on the most current research, as we discussed in module one. And in the other modules, especially module four, we talked about how we can use the trade-off model of capital structure to make financial decisions in the real world. We use this model to talk about the financial management of MMA and the financial management of RND. So if you want to see how we apply the trade-off model in the real world, go back to module four. As I pointed out in the introduction, this course allowed me to bring a lot of evidence from recent research, including mine. So that made me happy and it would make any researcher happy to be able to talk about research in an MBA course that's the ideal interaction between teaching and research. Some of the key points we learned from research is, for example, that debt financing is the most important source of marginal funds for most companies. So companies are usually reluctant to issue equity, unless it's a special event like mergers and acquisition. Partly, that happens because stock prices tend to decrease if firms issue equity or cut dividends, and they tend to increase when firms repurchase equity. So that again is the key facting about corporate finance that we discussed in this course. We talked about why this happens. So you can go back to module 1 and module 2 if you need a refresher on this. So I really want you to remember this fact. The third fact that we talked about and we actually use the data a lot when we're thinking about optimal financial management of R&D. And especially when we make decisions is that credit ratings matter. When you make capital structure decisions in the real world, it's not so efficient to just use the trade off model. We also have to incorporate the fact that companies target credit ratings. Credit ratings affect companies access to capital. So a credit rating downgrade is a very important consideration when you're thinking about the optimal financial management of an M&A transaction, for example. I think that really came through in the course. Another point that I think we learned in this course that I use it in practice in our cases, is that there is a fundamental trade off between bank and bond financing. Bank debt is one way that companies can reduce interest expenses at the cost of giving additional control to the bank. So it's a tradeoff between interest payments and control. That control comes in the form of covenants and collateral. Those are the two most important mechanisms. And that was a key insight between the financial management of M&A decisions, for example, we talked about the fact that private equity funds use bank debt as a way to relax financial constraints to allow them to raise more debt to finance leveraged buyouts. That's a very important concept to take to real world data as well. We talked about the payout trade-off, and I want you to remember the key idea is that paying out cash on one hand can help companies control over-spending and signal good prospects, right? But on the other hand, payout is going to compete with other uses of cash, such as debt payment. Right, interest payments and principle payment, that repayment in general. Because of this, we talked about, when we did the M&A cases, right, one issue that came out is that M&A investments, in some cases, may require reductions in payout. That's especially true for leveraged buyouts, but it also happens for strategic views. So you can go back to those cases and revisit that discussion, but this is really the fundamental pay out trade-off that drives prey pay out the seasons in the real world. In module 3, we talked about risk management and the key idea really is that hedging is there are good and bad reasons to hedge. And there are many bad arguments in practice that after taking this course you should avoid, okay? Hedging is about choosing which risks to take and not necessarily about reducing risks. If you ask people, why do companies hedge, the answer that comes to mind, if you haven't heard about hedging, right? Is that companies had to reduce risk, that is actually not true. And if this still sounds puzzling to you, please go back to module 3 and revisit that. For example a good reason to hedge is choosing which risks to take, choosing not to face currency risk or distress risk. You are avoiding those specific risks right? Whereas reducing volatility, reducing the volatility of earnings is a bad reason to have. For example, we mentioned the fact that shareholders can do that on their own, right? It's not clear that reducing volatility is good. Companies have to take risks in order to create value. The other point is, beware of speculation. One way that companies can hedge is by using traded instruments, such as futures, and that creates a temptation to speculate, right? So maybe let me invest in oil futures because I think the oil prices are going to go up. That is something that company's CFOs should not do. If you want to do that, move to Wall Street. There's nothing wrong with working Wall Street, of course. But you should not speculate with company's resources. Company's should use futures, forwards, and other mechanisms to hedge and not to try to make trading profits. The other key idea that we mentioned, that we talked about in module three is that hedging is more than just derivative. When we think about hedging, the first thing that comes to mind is the futures contract of the Chicago Board of Trade. But in practice, companies will very often use additional tools such as liquidity, purchase obligations, operational hedging. In module three we learn how companies do that. We learned the specific strategies that companies, the specific position that companies have to enter in order to use these alternative tools. As well as futures and forwards, we also talked about that. But really there is this key idea that hedging goes beyond futures, so you remember that as well. In module four, we did several M&A cases. And one of the key ideas that came up, that I want you to remember. Is that M&A, because of the size of M&A transactions, large acquisitions are the most important exception to that rule that companies usually don't issue equity to finance new investments. It's a basic fact of corporate finance. Companies are reluctant to go to the equity market, but for M&A deals that's not true. Companies do pay for M&A deals with stock, and there are several reasons for that. One reason is leverage, of course, to reduce leverage, but there is also the risk sharing aspect that we've emphasized in module four. And then there's private equity, right? Private equity, unfortunately, usually, they cannot access public equity, a private equity fund cannot issue equity to finance the deal, because that's the reason why it's called private equity, right? So we talked about how private equity, they use their own money and then creates your financial strategies to address high leverage issues, and to get you financed. That is specifically true for leveraged buyouts, okay? Private equity deals, I call this having finance. Because it's really a situation where financial management becomes really really important. Because of this, private equity deals are a great laboratory no matter what you think about private equity, if it's good or bad for the economy. That's actually an issue we discuss in corporate finance one. From the point of view of learning and research, private equity is great because it's a great laboratory to study financial policy. If you go back to module four, you'll see how private equity deals really force us think about issues like, what is the optimal leverage ratio? What do we do if we have to go beyond optimal leverage? How do we address high leverage problems with a mechanism such as bank debt? How do we change the payout policy if we have the high leverage problem and all that? So I think going back to those cases is really going to allow you to see how these financial concepts we talk about in the course, apply to the real world. And we can do that because of private equity. Finally, the last thing we talked about is, financing R&D. Again, that's a very important investment in the real world. That's how companies innovate, create new products,.and it's also very important to think about the financial management of R&D. The two key ideas that we discussed in module four is that an R&D investment usually cannot support a very high leverage ratio. So these investments have to be financed with equity. And then also, the idea that R&D because the investments are staggered over time, you invest today, you also invest in the future, debt creates a risk management road for such as liquidities. So when you think about financing R&D, it's not just how you finance R&D today, it's also about how you manage the future risk. That you might have to make an R&D investment, or that you might have to make an investment in a product in a time when your financing dries out. So if you want to review those concepts, please go back to module four. Again, I think one of the key issues we learn in this course is that the financing of R&D is also special. It's another example that we can use from the real world to understand how we use these financial policy ideas to manage real-world investments. And really the last thing I want to talk about is, it sounds like we know everything but of course, that's not true. It would be a very boring world, it would be a very boring situation for a researcher, if we had already learned everything and there are many open questions in finance. Let me just talk about a few that we did discuss in this course. Right, that came out when were thinking about real world financial policies. For example, we don't really have a quantitative tradeoff model of capital structure. We don't know how much debt should a company have exactly, right? We know the medium form. We use it to trade off in a qualitative way. But it would be better if had the quantitative model. We don't have that. We also don't know why credit ratings should matter so much. We know that they matter. Right, and there is some regulatory arguments behind it, but there is this question that perhaps credit ratings matter too much. Why do companies should care so much about credit rating? When we talked about payout, we talked about the dividend puzzle, right? We really don't know in corporate finance, why do companies pay dividends. So at this point, the best we can do is to say that companies pay dividends because investors like it. If you cut dividends, your stock price will go down. But we really don't know the underlying reason why companies pay dividends, because most of the reasons why a company would pay dividends can be replicated with a stock report. And finally, in module three, at the end of module three, we talked about this big puzzle in finance which is that we really don't know how to adjust the cost of capital for unhedged currency risk. We gave a few examples, and we talked about the Goldman model which is used in practice, but it's not a great model. So this again is an issue I think we will learn more, hopefully next time I teach this course, we're going to have better answers for this question. I just want to end with a big thank you for every student who took this course, especially for students who have hanged on for two courses. I know it's a lot of material, but I really put my heart into this. Every topic that I thought about, it took me a long time to think about it and think about how am I going to teach? Which papers am I going to talk about? I really put my heart into this and I want to thank you for hanging out with me and being here. And I hope you learned as much as I did. I actually learned a lot from teaching this course and I hope you also learned. And I hope to see you in the future, in the future course in Coursera or somewhere else. Good luck to everybody. [SOUND]
