FACULDADE DE ECONOMIA
UNIVERSIDADE NOVA DE LISBOA
1203 Finance
1st Semester 2007/2008
Undergraduate Programmes in Management and Economics
Instructor: Paulo Soares de Pinho
Short Biography:
Lic. Economia (UNL); MBA (UNL); PhD Banking and Finance (Cass Business
School). Associate Professor (UNL); Coordinator of the Post-Graduate Programmes in
Finance and in Law and Management; Former Director of the MBA Programme
(UNL). Senior Advisor at Profit Technologies Inc (USA) and Venture Valuation
(Zurich); President of the General Council of Fundo de Sindicação de Capital de Risco.
Contacts: email: pjpinho@fe.unl.pt
COURSE AIMS
This course aims to introduce the fundamental principles of Corporate Finance. Although the course will be
mostly devoted to the theoretical aspects of the field, a strong emphasis is made on real-life applications.
We cover all the elementary tools of finance, with a focus on value creation and measurement, the
importance of risk evaluation and its impact on value and the main determinants of corporate capital
structure. A modest use of case-studies is employed to reinforce the understanding of practical applications.
LEARNING OBJECTIVES
A. Knowledge and Understanding:
 The aims of corporate finance
 The role of financial markets in the economy
 Time-value of money
 Value creation and destruction and capital budgeting analysis
 Risk and return on financial markets
 Capital market efficiency
 Optimal corporate capital structure
 The impact of leverage on risk and return
 The interaction between investment and financial decisions
 Dividend policy
B. Subject-Specific Skills:
 Financial calculus
 Capital budgeting
 Risk-return analysis
 Analysis and decision on corporate financial structure and dividend policy
 Evaluate the role of corporate debt on value, risk and return
C. General Skills:
 Understanding how risk is measured and affects corporate decisions
 Understanding the concept of firm value and what really “value creation” effectively means
 Understand the inter-relation between strategic and financial analysis of corporate decisions
TEACHING AND LEARNING METHODS
Students are expected to:
Attend classes and actively participate in discussions
Get actively involved in group analysis of the case-studies
Make oral presentations of their reports
Devote to home-study about 2 hours per class
ASSESSMENT
(optional) Midterm Exam 30% (only if it has a positive impact on student’s grade)
Group (4 people per team) solution reports of the case-studies: 20%
Ocean Carriers (Harvard 9-202-027)
Lex service PLC – Cost of Capital (Harvard 9-296-003)
Final Exam: 50% or 80% (depending on midterm’s result)
minimum exam grade: 8.5
COURSE CONTENT
1. Introduction to Corporate Finance and the financial markets
The object of corporate finance
The finance function of the firm
The basic corporate financial cycles
The corporation and the limited liability effect
Corporate securities as contingent claims
The goal of the corporate firm
The agency problem in finance (introduction)
Capital structure and opportunistic strategies
The role of the financial system
Introduction to financial intermediation
Primary and secondary markets for debt, equity and derivatives
Stock and bond trading
Short and long positions and margin accounts
Investment banks versus commercial banks
Readings: Ross, chpt 1.
2. Capital budgeting
Basic investment decision rules: NPV, IRR, ROI, payback
Net Present Value and the value of the firm
The determination of incremental cash-flows
Where does a positive NPV come from?
The treatment of inflation
Replacement chains
The role of simulation
Capital projects as real options (introduction)
Readings: Ross, chpts 2, 6, 7 and 8.
3. Risk and return in capital markets
What do capital markets tell us about risks and returns?
The risk-return profile of individual stocks and portfolios
The diversification effect
The efficient frontier for a portfolio with two assets
The efficient frontier with multiple assets
The Capital Market Line
Market equilibrium: the Security Market Line and CAPM
The fundamental determinants of betas
The cost of capital for individual projects
Readings: Ross, chpts 9, 10 and 12.
4. Market efficiency and corporate financing decisions
Can financing decisions create value?
Market efficiency
Long-term financing and the determinants of capital structure
Optimal capital structure in a simple world
Cost of capital for the leveraged firm
Readings: Ross, chpts 13, 14 and 15.1-15.4.
5. Capital structure: theory and practice
Corporate taxes, firm value and the optimal capital structure:
Modigliani-Miller Proposition I
Taxes and the cost of capital: the Proposition II
Costs of financial distress and the optimal capital structure
Agency costs of debt: examples and protective covenants
The pecking order theory
The impact of growth on financial strategy
Capital structure in practice
Readings: Ross, chpts 15.5, 16
6. Capital budgeting for the levered firm
The tax shields of debt and the adjusted present value (APV) approach
The weighted average cost of capital (WACC) approach
The flow to equity approach (FTE)
Capital budgeting in practice
Cost of capital: CAPM and Modigliani-Miller compared
Readings: Ross, chpt 17.
7. Dividend policy
Cash dividends and stock dividends
The irrelevance arguments
The impact of dividend taxation
Dividend policy in practice
Readings: Ross, chpt 18.
BIBLIOGRAPHY
Main textbook:
Ross, Westerfield and Jaffe Modern Financial Management, 8th ed, McGraw-Hill, 2006.
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RESOURCES
Course web page: http://docentes.fe.unl.pt/~pjpinho
Powerpoint slides available at the course page