5 ECTS; 2º Ano, 2º Semestre, 60,0 TP
- Eduardo Fontão MontAlverne Brou
There are no prerequisites but good foundations of Financial Calculus, Corporate Finance and English would be helpful.
Study of the most important concepts on Investment Analysis. Special attention will be given to investment decision rules and to uncertainty and risk in the capital budgeting process. One wants that the students master the main concepts, models and tools on investment analysis.
I INTRODUCTION TO CORPORATE FINANCE
1. The 3 major decisions in Corporate Finance.
2. First principles of Corporate Finance.
3. The objective in Corporate Finance
II THE TOOLS OF CORPORATE FINANCE
1. Present value (Revision)
1.1. The intuitive basis for the time value of money.
1.2. Cash Flows and time lines.
1.3. Compounding and discounting.
1.4.Annuities and perpetuities.
2. Fundamentals of Valuation
2.1. Discounted cash-flow valuation.
2.2. Valuing a finite-life asset.
2.3. Valuation with infinite life.
III THE BASICS OF RISK AND COST OF CAPITAL ESTIMATION
1. What is risk?
2. The C.A.P.M. model (Capital Asset Pricing Model).
3. The importance of diversification; risk types.
4. Cost of Equity.
5. Cost of Debt.
6.Cost of capital.
7. Choosing a hurdle rate.
IV INVESTMENT PROJECTS
1. Project definition.
2. Project categorization.
3. Hurdle rates for Projects and Investments.
4. Estimation earnings and cash-flows on projects.
V INVESTMENT DECISION RULES
1. What is an Investment Decision Rule?
2. Categorizing investment decision rules.
2.1. Accounting income-based decision rules.
2.2. Cash-flow-based decision rules.
2.3. Discounted cash-flow measures.
3. Comparing investment decision rules.
3.1. Net Present value and Internal rate of return: a closer look
4. Project Interactions..
4.1. Mutually exclusive projects.
4.1.1. Projects with equal lives.
4.1.2. Projects with different lives. .
4.2. Capital Rationing.
4.2.1. Reasons for capital rationing.
4.2.2. Profitability Index.
4.3. Side Costs of Projects.
4.3.1. Opportunity Costs.
4.3.2. Product Cannibalization.
VI UNCERTAINTY AND RISK IN CAPITAL BUDGETING.
1. Sensitivity analysis.
2. Breakeven analysis.
3. Scenario analysis.
5. Decision trees.
VII INVESTMENT RETURNS AND CORPORATE STRATEGY
1. The relation between Corporate Strategy and Investment Returns.
2. Analyzing a Firm`s Project portfolio.
3. Underperforming Projects: reasons and response.
- 2 Written Tests (90%)
- Class participation (10%)
- Barros, C. (2007). Avaliação Financeira de Projetos de Investimento. Lisboa: Escolar Editora
- Damodaran, A. (2015). Applied Corporate Finance. U.S.A.: Wiley
- Damodaran, A. (2001). Corporate Finance: Theory and Practice. U.S.A.: John Wiley & Sons
Method of interaction
Conventional theoretical-practical sessions supported by powerpoint presentations covering the key concepts and theories in the field and how they can be applied to real business situations.
Software used in class