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COURSE

Master(s):

Master in Finance / Master in Management / Master in Economy - 2014-2015

Course name:

Corporate Finance / Financial Management

Lecturer:

Miguel Augusto Gomes Sousa

e-mail:

msousa@fep.up.pt
corporatemif@gmail.com

LECTURER

Academic Background:

Graduated in Business Management from the School of Economics, University of Porto


PhD in Financial Economics from Sad Business School, University of Oxford.

Publications:

Why SPAC investors should listen to the market (joint with Tim Jenkinson), Journal of
Applied Finance, 21 (2), 2011
Private Equity in Portugal - An analysis of the portfolio companies operating performance
(joint with Jos Pedro Mendes), Cadernos do Mercado de Valores Mobilirios, 45, Agosto
2013
Working Papers:
Why do private equity firms sell to each other?
Keep taking the private equity medicine? How operating performance differs between
secondary deals and companies that return to public markets? (joint with Tim Jenkinson)
How Fair are the Valuations of Private Equity Funds ? (joint with Tim Jenkinson and Rdiger
Stucke)
Does transparency overcome conflicts of interest? Evidence from investment managers and
their brokers (joint with Tim Jenkinson and Mark Abrahamson)
Is there still a Berlin wall in the post-issue operating performance of European IPOs? (joint
with Tiago Pereira)
Determinants of Banks Capital Structure - Voluntary or involuntary decisions, what really
matters? (joint with Manuel Oliveira Marques and Filipe Domingues)
Is Internet industry facing an IPO bubble 2.0? (joint with Marta Pinho)

OBJECTIVES

The objective of the discipline is to go through the major problems of Corporate Finance, formulating the most important
issues arising from the financial activity of a corporation, that is, the concepts, methods and decision tools which serve as a
basis for financial analysis and decision-making in the company, namely investment and financing decisions. It will be sought
always a direct support on the contributions of the most relevant academic work on each issue.
The program is developed following a perspective of the value of the corporation. As a basic paradigm, it has been adopted
the one of the maximization of the value of the corporation for its shareholders, partners or owners. Every financial issue will
thus be approached in terms of its potential for generating corporate value.
The program of the discipline is divided into the themes of financial analysis, the strategic and structural issues in financial
decision-making, the most important decisions of value creation and value stabilization and the phenomena of corporate value
reallocation.

METHODOLOGY

Students who are contacting the discipline for the first time are advised to begin by studying carefully the recommended text
book, as proposed in the bibliography. The same can be said with respect to those who might have acquired their financial
education too long ago and might need an updating.
The tuition method in the discipline consists in a combination of theoretically based tuition with the critical analysis of decisionmaking problems and situations and the study of real world cases chose to illustrate each major issue.
The direct participation of students in the classroom is encouraged. Moreover, the classes are organized into working groups,
each one of which must submit an applied research work on a subject that will be proposed to them.
The program of the discipline will extend through fourteen lectures divided in two parts. Each lecture will be object of a
summary text and of the indication of specific readings.

STUDENTS EVALUAT ION

Students are evaluated on a continuous basis, taking into consideration their work across the whole course, either in the form
of individual weekly assignments or applied group assignments, from their active participation during lectures and weekly
assignments.
Moreover, every student will sit for a final performance evaluation exam.
Students final marks will result from the weighted average of the marks assigned to the following factors:
Attendance and participation in lectures
Individual weekly assignments
Group assignment
Final examination

5%
15%
40%
40%

Individual weekly assignments


Each week 3 or 4 topics will be presented to students who should choose just ONE and write a small essay (1 or 2 pages) and
e-mail it to corporatemif@gmail.com, before the start of the lecture.
Group assignment
The students must form groups of two and must perform an economic and financial evaluation of a company. The company
will be assigned to each group in the beginning of October and is due on December 15.
Final examination
All students must sit for a final exam on January 12 (re-sit on February 6).

PROGRAM

1 . Introduction
1.1 .
1.2 .
1.3 .
1.4 .

The Financial Paradigm of the Corporation


The Financial Environment of the Corporation
Financial Instruments and Asset and Capital Securitization
A Review of the Main Concepts

2 . The Main Concepts and Models from the Perspective of Corporate Value
2.1 .
2.2 .
2.3 .
2.4 .

Value, Return and Risk


Asset Pricing Models
Option Pricing Models
The Flexibility Factor as a Driver for Value Creation with Incomplete Contracts

3 . Valuation
3.1 .
3.2 .
3.3 .
3.4 .
4.

The Analysis and Valuation of Debt and Equity Securities


The Different Concepts of Value
The Financial Analysis of a Corporation
Theoretical and Practical Issues in Valuating Companies and Projects

The Financial Architecture of the Corporation


4.1 .
4.2 .
4.3 .
4.4 .
4.5 .

The Concept of Financial Architecture


Organizational Design and Corporate Governance
The Importance of the Capital Structure Problem
Theories of Capital Structure
Searching for an Optimal Capital Structure

5 . Dividend Policy
5.1 .
5.2 .
5.3 .
5.4 .
6.

Investment Decisions and the Enterprise Value


6.1 .
6.2 .
6.3 .
6.4 .

7.

The Dividend Puzzle


Dividend Policy in Frictionless Markets
The Effect of Market Imperfections
Theories of Dividend Policy

Investment Decisions and Value Creation


Value, Risk and Flexibility in Investment Decisions
Theoretical and Practical Issues of Investment Decisions
The Flexibility Factor in Investment Decisions and in Project Management

Financing Decisions and the Enterprise Value


7.1 .
7.2 .
7.3 .
7.4 .
7.5 .
7.6 .
7.7 .

Financing Decisions and Financial Innovation


Equity Financing Operations
The Initial Public Offers
Medium and Long Term Debt Financing Operations
Hybrid Financing Operations
Leasing Financing Contracts
Flexibility and Contracting in Financing Decisions

8 . Short-Term Financial Decisions


8.1 .
8.2 .
8.3 .
8.4 .

Financial Planning and Short-Term Financial Management


Cash Management
Trade Credit Decisions
Short-Term Financing

9 . The Stabilization of Enterprise Value


9.1 .
9.2 .
9.3 .
9.4 .

The Financial Risks as a Factor of Value Destruction


Asset Liability Management in Non-Financial Companies
Financial Term Contracts and their Valuation
The Process of Corporate Risk Management

10 . The Reallocation of Enterprise Value


10.1 .
10.2 .
10.3 .
10.4 .

Financial Restructuring of Companies


Bankruptcy and Liquidation
The Market for Corporate Control
Buy-Outs and Takeovers

BIBLIOGRAPHY

Ross, Stephen A., Randolph W. Westerfield and Jeffrey Jaffe, Corporate Finance. Boston: McGraw-Hill Irwin, 9th. edition
2010.

COMPLEMENTARY BIBLIOGRAPHY

Maness, Terry S. and John T. Zietlow, Short-Term Financial Management. St. Paul, Minneapolis: West Publishing Company,
1993.
Marques, Manuel de Oliveira, Importncia do Correcto Entendimento do Conceito de Cash-Flow para a Anlise e a Tomada
de Decises Financeiras, Estudos de Economia, vol. IV, n. 4, July-Sept 1984.
Marques, Manuel de Oliveira, "The Formulation of a Strategy for Short-Term Financial Decision-Making: A Goal Programming
Model with a Piecewise-Linear Objective Function", Economia, vol. 9, n. 2, May 1985, pp. 257-276.
Marques, Manuel de Oliveira, Contributos para Uma Nova Metodologia de Anlise Financeira da Empresa, Revista de
Contabilidade e Comrcio, n. 226 (2000), pp. 215 a 236.
Marques, Manuel de Oliveira, Contributos para uma Nova Metodologia de Analise Financeira da Empresa Parte 2, Revista
de Contabilidade e Comercio, n. 234/235 (2003), pp. 255 a 286.

LECTURES PLANNING
Lecture 1
15 September 2014
Syllabus:

The Financial Paradigm of the Corporation


The Financial Environment of the Corporation
Financial Instruments and Asset and Capital Securitization in the Corporation
A Review of the Main Concepts

Readings:

Ross et al., pp. 1-19, 87-134 , 300-370 and 392-427.


Jensen, Michael C., Value Maximization, Stakeholder Theory and The Corporate
Objective Function, European Financial Management, vol. 7, n. 3, 2001, pp.
297-317.
Brennan, Michael J., Corporate Finance Over the Past 25 Years, Financial Management,
vol. 24, n. 2 (Summer 1995), pp. 9-22.
Marques, Manuel de Oliveira, A Importncia do Correcto Entendimento do Conceito de
Cash-Flow para a Anlise e a Tomada de Decises Financeiras, Estudos de Economia, vol.
IV, n. 4, July-Sept 1984.

Lecture 2
22 September 2014
Syllabus:

The Company Financial Balance-Sheet


The Analysis and Valuation of Debts and Equity Securities

Readings:

Ross et al., pp. 234-299 .


Hawkins, David F., Basic Ratio Analysis and Equity Valuation, Notes of Harvard Business
School, n. 9-185-149, June 1985.
Gompers, Paul A., A Note on Valuation in Entrepreneurial Ventures, Notes of Harvard
Business School, n. 9-298-082, January 1999.
Roberts, Michael J., Valuation Techniques, Notes of Harvard Business School, n. 9-384185, August 1988.
Luehrman, Timothy A., A Note on Valuing Equity Cash-Flows, Notes of Harvard Business
School, n. 9-295-085, December 1994.
Harvard Business School, Note on Free Cash Flow Valuation Models, Notes of Harvard
Business School, n. 9-288-023, October 1987.

Lecture 3
29 September 2014
Syllabus:

The Analysis and Valuation of Debts and Equity Securities


The Presence of Options in the Company Financial Balance-Sheet
The Different Concepts of Corporate Value

Readings:

Ross et al., pp. 44-86 and 676-718.


Marques, Manuel de Oliveira, A Importncia do Correcto Entendimento do Conceito de
Cash-Flow para a Anlise e a Tomada de Decises Financeiras, Estudos de Economia, vol.
IV, n. 4, July-Sept 1984.
Marques, Manuel de Oliveira, "Contributos para uma Nova Metodologia de Anlise
Financeira da Empresa" Revista de Contabilidade e Comrcio, n. 226, pp. 215-239 and n.
234-235, pp. 225-286.
Marques, Manuel de Oliveira, Contributos para Uma Nova Metodologia de Anlise
Financeira da Empresa II Parte, Revista de Contabilidade e Comrcio, n. 234/235 (2003),
pp. 255-286.

Lecture 4
6 October 2014
Syllabus:

The Financial Analysis of a Corporation


Theoretical and Practical Issues in Company Valuation
The Company Value Drivers
The Cash-flow Generation Process in a Company
Financial Risks Analysis of a Corporation

Readings:

Ross et al., pp. 44-134, 268-299 and 553-574.


Marques, Manuel de Oliveira, Contributos para Uma Nova Metodologia de Anlise
Financeira da Empresa, Revista de Contabilidade e Comrcio, n. 226 (2000), pp. 215-239.
Marques, Manuel de Oliveira, Contributos para Uma Nova Metodologia de Anlise
Financeira da Empresa II Parte, Revista de Contabilidade e Comrcio, n. 234/235 (2003),
pp. 255-286.

Lecture 5
13 October 2014
Syllabus:

The Financial Analysis of a Corporation


The Cash-flow Generation Process in a Company
Financial Risks Analysis of a Corporation

Readings:

Ross et al., pp. 44-134 and 553-574.


Marques, Manuel de Oliveira, Contributos para Uma Nova Metodologia de Anlise
Financeira da Empresa, Revista de Contabilidade e Comrcio, n. 226 (2000), pp. 215-239.
Marques, Manuel de Oliveira, Contributos para Uma Nova Metodologia de Anlise
Financeira da Empresa II Parte, Revista de Contabilidade e Comrcio, n. 234/235 (2003),
pp. 255-286.

Lecture 6
20 October 2014
Syllabus:

The Financial Architecture of the Corporation


Organizational Design and Corporate Governance
The Importance of the Capital Structure Problem
Theories of Capital Structure
Searching an Optimal Capital Structure

Readings:

Copeland et al., pp. 488-552.


Myers, Stewart C., Financial Architecture, Financial Management, vol. 5, n. 2 (1999), pp.
133-141.
Myers, Stewart C., Capital Structure, Journal of Economic Perspectives, vol. 15, n. 2
(2001), pp. 81-102.

Lecture 7
27 October 2014
Syllabus:

Dividend Policy
The Dividend Puzzle
Dividend Policy in Frictionless Markets
The Effect of Market Imperfections
Theories of Dividend Policy

Readings:

Copeland et al., pp. 575-615.


Holder, Mark E., Frederick W. Langrehr and Lawrence Hexter, Dividend Policy
Determinants: An Investigation of the Influences of Stakeholder Theory, Financial
Management, vol. 27, n. 3 (Autumn 1998), pp. 73-82.
Hobbes, G., G. Partington and M. Stevenson, A General Model of Earnings, Dividends and
Returns, Working Paper, Macquarie University, January 1997.
Dybvig, Philip H. and Jaime F. Zender, Capital Structure and Dividend Irrelevance with
Assymetric Information, Review of Financial Studies, vol. 4, n. 1 (1991), pp. 201-219.

Lecture 8
3 November 2014
Syllabus:

The Decisions of Value Creation in a Company


Investment Decisions and Value Creation
Value, Risk and Flexibility in Investment Decisions
Theoretical and Practical Issues of Investment Decisions
The Flexibility Factor in Investment Decisions and in Project Management

Readings:

Ross et al., pp. 135-233.


Ross, Stephen A., Uses, Abuses, and Alternatives to the Net-Present-Value Rule,
Financial Management, vol. 24, n. 3 (Autumn 1995), pp. 96-102.
Welch, Ivo, "Interest Rates, Capital Budgeting and Valuation", Working Paper, April 1997.
Myers, Stewart C., Interactions of Corporate Financing and Investment Decisions:
Implications for Capital Budgeting, Journal of Finance, vol. 29, n. 1 (May 1974), pp. 1-25.
Schall, Lawrence D., Gary L. Sundem e William R. Geijsbeek, Jr., Survey and Analysis of
Capital Budgeting Methods, Journal of Finance, vol. 33, n. 1 (March 1978), pp.281-287.

Lecture 9
10 November 2014
Syllabus:

Financing Decisions and the Creation of Corporate Value


Financing Decisions and Financial Innovation
Equity Financing Operations
The Initial Public Offers
Medium and Long Term Debt Financing Operations

Readings:

Ross et al., pp. 467-486, 520-552 and 616-651.


Welch, Ivo, "Raising Capital", Working Paper, October 1996.
Mello, Antnio S. and John E. Parsons, Going Public and the Ownership Structure of the
Firm Journal of Financial Economics, vol. 49 (1998), pp. 79-109.
Delbreil, Michel, Jos Ramn Cano, Hans Friderichs, Benoit Gress, Bernard Paranque,
Franz Partsch and Franco Varetto, Net Equity and Corporate Financing in Europe. European
Committee of Central Balance Sheet Offices, Working Group on Net Equity, 1997.

Lecture 10
17 November 2014
Syllabus:

Medium and Long Term Debt Financing Operations


Hybrid Financing Operations
Leasing Financing Contracts
Flexibility and Contracting in Financing Decisions

Readings:

Ross et al., pp. 676-718 and 744-762.


Weston, J. Fred, The Management of Corporate Capital: A Review Article, Journal of
Business, vol. 34, n. 2 (April 1961), pp. 129-139.
Miller, Merton H., Leverage, Journal of Finance, vol. 46, n. 2 (June 1991), pp. 479-488.
Welch, Ivo, Why is Bank Debt Senior?, Review of Financial Studies, vol. 10, n. 4 (1997).
Marsh, Paul, "The Choice Between Equity and Debt: An Empirical Study", Journal of
Finance, vol. 37, n. 1, March 1982, pp. 121-144.

Lecture 11
24 November 2014
Syllabus:

Financial Planning and Short-Term Financial Management


Cash Management
Trade Credit Decision Making
Short-Term Financing
Options in Short-Term Financing Contracts

Readings:

Ross et al., pp. 795-874.


Opler, Tim, Lee Pinkowitz, Ren Stulz and Rohan Williamson, "The Determinants and
Implications of Corporate Cash Holdings", Journal of Financial Economics, vol. 52 (1999),
pp. 3-46.
Atanasova, Christina, "Access to Institutional Financing and the Use of Trade Credit",
Financial Management, Spring 2007, pp. 49-67.

Lecture 12
1 December 2014
Syllabus:

The Stabilization of Corporate Value


The Financial Risks of the Corporation as a Factor of Value Destruction
Asset Liability Management in Non-Financial Companies
Financial term Contracts and their Valuation
The Process of Corporate Risk Management

Readings:

Ross et al., pp. 763-794.


Holton, Glyn A., "Defining Risk", Financial Analysts Journal, vol. 60, n. 6, NovemberDecember 2004, pp. 19-25.
Dowd, Kevin, "Financial Risk Management", Financial Analysts Journal, July-August 1999,
pp. 65-71.

Lecture 13
15 December 2013
Syllabus:

The Reallocation of Corporate Value


Financial Restructuring of Companies
Company Bankruptcy and Liquidation

Readings

Ross et al., 917-932.

Lecture 14
5 January 2015
Syllabus:

The Market for Corporate Control


Company Buy-Outs and Takeovers

Readings:

Ross et al., pp. 875-916.


Jarrell, Gregg A. James A. Brickley and Jeffry M. Netter, "The Market for Corporate Control:
The Empirical Evidence Since 1980", The Journal of Economic Perspectives, vol. 2, n. 1,
Winter 1988, pp. 49-68.
Roll, Richard, "The Hubris Hypothesis of Corporate Takeovers", Journal of Business, vol. 59,
n 2 (April 1986), pp. 197-216.
Miles, James A. and J. Randall Woolridge, Spin-Offs and Equity Carve-Outs. Financial
Executives Research Foundation Inc., 1999.
Jensen, Michael C. and Richard S. Ruback, "The Market for Corporate Control: The
Scientific Evidence", Journal of Financial Economics, vol. 11 (1983), pp. 5-50.
Jensen, Michael C., "Agency Costs of Free Cash Flow, Corporate Finance and Takeovers",
The American Economic Review, vol. 76, n. 2 (May 1986), pp. 323-329.