From valuing a project to valuing a whole company — and deciding how to fund it. Two master skills here: finding the right mix of debt & equity, and putting a defensible price on a business.
1The big idea
Two questions every CFO faces
Module 7 gave you the machinery (time value, NPV, WACC). This module aims it at the two biggest corporate decisions:
FinancingHow should we fund the business — borrow (debt) or sell ownership (equity)? This is the capital structure question.
ValuationWhat is a company actually worth? Needed for M&A, investing, IPOs, fundraising. This is the valuation question.
Memory hook 🧠"How do we pay for it?" and "what's it worth?" — capital structure and valuation. The rest of the module is just tools for these two.
2Two ways to raise money
Debt vs Equity
Every euro of funding comes from one of two sources, each with very different rights, costs, and risks.
Debt 💳
Borrowed; must be repaid with interest
Cheaper (lower risk to lender)
Interest is tax-deductible (tax shield)
No ownership given up
But: fixed obligation → bankruptcy risk
Equity 📜
Sell ownership stakes (shares)
More expensive (higher risk to investor)
No repayment obligation
But: dilutes ownership & control
Shareholders paid last (residual claim)
Why debt is "cheaper"Lenders take less risk than owners (they're paid first and have contracts), so they accept a lower return. Plus interest is tax-deductible. That's why a little debt usually lowers WACC.
3The sweet spot
Optimal Capital Structure
If a little debt is good (cheap + tax shield), why not 100% debt? Because too much debt brings financial distress — the risk of not meeting payments. The trade-off creates a U-shaped WACC with a sweet spot at the bottom.
Adding debt first lowers WACC (cheap + tax shield); past the optimum, distress risk pushes it back up.
Trade-off theoryOptimal debt balances the tax shield benefit against financial distress costs. The bottom of the U = max firm value.
Modigliani–MillerIn a perfect world (no taxes/distress), capital structure wouldn't matter at all. It's the baseline; the real world's frictions are what create an optimum.
Memory hook 🧠Lowest WACC = highest firm value. Since value = cash flows ÷ WACC, shrinking the denominator to its minimum maximises the company's worth.
4The cost of equity
CAPM: pricing risk
WACC needs the cost of equity (Re) — but equity has no stated interest rate. The Capital Asset Pricing Model derives it from risk: start with the risk-free rate, then add a premium scaled by how risky the stock is (its beta).
The CAPM equation
Re = Rf + β · (Rm − Rf)
risk-free rate + beta × market risk premium. The (Rm − Rf) term is the extra return investors demand for holding the whole market over a safe bond.
Every stock sits on this line: zero beta earns the risk-free rate; beta of 1 earns the market return.
Worked exampleRf = 3%, market premium (Rm−Rf) = 6%, stock's β = 1.2 → Re = 3% + 1.2 × 6% = 10.2%. That's the return its shareholders demand.
5The risk number
Beta (β)
Beta measures how much a stock moves relative to the whole market — its sensitivity to systematic risk. It's the only risk CAPM rewards.
β > 1More volatile than the market. Amplifies market moves (e.g. tech, luxury). Higher risk → higher required return.
β = 1Moves in line with the market. The market portfolio itself has β = 1.
0 < β < 1Less volatile than the market (e.g. utilities, consumer staples). Defensive.
β < 0Moves opposite to the market (rare — e.g. gold sometimes). A natural hedge.
Memory hook 🧠Beta = the volume knob on the market's moves. β=2 turns market swings up to double; β=0.5 turns them down by half.
6The only free lunch
Diversification & Portfolios
Why does CAPM ignore company-specific risk? Because you can diversify it away for free by holding many different assets. What's left — market-wide risk — is all that earns a premium.
Adding stocks crushes company-specific risk toward a floor — the market risk you can never escape.
The mechanismDifferent companies' specific shocks (a lawsuit, a fire, a bad CEO) are partly uncorrelated — they cancel out across a big portfolio. ~20–30 varied stocks remove most diversifiable risk.
Memory hook 🧠"Don't put all your eggs in one basket" — but you can't escape the risk that the whole henhouse burns down (the market). That's systematic risk.
7★ The gold-standard valuation
DCF: valuing the whole company
Discounted Cash Flow is NPV applied to an entire business. Forecast its free cash flows, estimate a terminal value for everything beyond the forecast, discount it all back at the WACC, and sum. That total = the company's intrinsic value.
A short explicit forecast plus a terminal value (often the bulk of the worth), all pulled back to today.
Terminal value — Gordon growth model
TV =
FCF × (1 + g)WACC − g
Values a perpetual stream of cash flows growing at a steady rate g forever (g must be below WACC). Then discount the TV back like any other future cash flow.
Garbage in, garbage out ⚠️DCF is theoretically perfect but brutally sensitive to assumptions — small changes in WACC or g swing the value wildly. Always run a sensitivity analysis across a range of inputs, never a single number.
8The quick cross-check
Relative Valuation (Multiples)
DCF is bottom-up and slow. Multiples are the fast, market-based alternative: value a company by comparing it to similar ones, using a ratio of price to some fundamental.
P/E ratioPrice ÷ Earnings per share. "How many euros per €1 of profit?" The most quoted multiple. High P/E = high growth expectations.
EV/EBITDAEnterprise Value ÷ EBITDA. Capital-structure-neutral, so better for comparing firms with different debt levels. A banker favourite.
P/B ratioPrice ÷ Book value. Common for banks & asset-heavy firms.
How you actually use itFind comparable companies, take their average multiple, and apply it to your target's earnings/EBITDA. E.g. peers trade at 15× earnings, your firm earns €10m → implied value ≈ €150m.
Memory hook 🧠DCF asks "what's it intrinsically worth?"; multiples ask "what are similar ones selling for?" Pros use both — DCF for rigour, multiples for a market sanity-check.
9Putting it together
The valuation toolkit, assembled
You now have the full chain. Watch how every piece of Phase 2 links into one valuation:
4 · TVM & WACC (M7)Build the discount rate via CAPM + capital structure.
5 · DCF + multiples (M8)Discount the cash flows → an intrinsic value, cross-checked against peers.
The whole of finance 🧠Value = expected cash flows ÷ a risk-adjusted discount rate. Every tool in Phase 2 is just a more precise way to estimate one of those two pieces.
🎉 Phase 2 complete — The Money Engine
Modules 4–8 done. You can now read financial statements, judge a company's health, run break-even & pricing decisions, and value an entire business. That's the hardest stretch of the MBA behind you.
🎯 Active recall
Cover the answer, say it aloud, then tap to check. The big ones: re-draw the WACC U-curve, the CAPM line, and the DCF diagram from memory. Revisit today, +3 days, +1 week.
Why is debt usually "cheaper" than equity?
Lenders bear less risk (paid first, contractual), so they accept a lower return — and interest is tax-deductible (a tax shield). Hence a little debt lowers WACC.
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Why isn't 100% debt optimal? Describe the WACC curve.
Too much debt brings financial distress/bankruptcy risk, which raises costs. WACC is U-shaped: it falls then rises, with an optimum (minimum WACC = maximum firm value) in the middle.
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Write the CAPM formula.
Re = Rf + β(Rm − Rf): risk-free rate plus beta times the market risk premium.
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Rf=4%, market premium=5%, β=1.4. Cost of equity?
Re = 4% + 1.4 × 5% = 4% + 7% = 11%.
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What does a beta of 0.6 tell you?
The stock is less volatile than the market — it moves about 60% as much. A defensive stock with lower systematic risk and lower required return.
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Systematic vs unsystematic risk in a portfolio?
Unsystematic (company-specific) risk diversifies away as you add stocks. Systematic (market-wide) risk remains — the floor you can't escape. Only systematic risk is rewarded.
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★ What are the two main pieces of a DCF valuation?
(1) The explicit forecast of free cash flows for several years, and (2) the terminal value capturing everything after — both discounted back at the WACC and summed.
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Write the Gordon-growth terminal value formula.
TV = [FCF × (1 + g)] ÷ (WACC − g), where g is the perpetual growth rate (must be less than WACC).
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DCF vs multiples — what does each answer?
DCF: "what is it intrinsically worth?" (bottom-up). Multiples: "what are similar companies selling for?" (market-based). Use both as a cross-check.
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Sum up all of finance in one equation.
Value = expected cash flows ÷ a risk-adjusted discount rate. Every tool just estimates one of those two pieces more precisely.
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Module 8 of your MBA · Phase 2 complete · Re-draw the WACC U-curve, CAPM line & DCF diagram from memory. 🏛️