Financial economics

The central aim of this subject is to present the different financial instruments that a firm may use to raise capital. Once these financial instruments are introduced, the concept of cost of capital is defined as a necessary parameter for defining a firm's value. The final aim of the course is that students understand how to value companies, by analyzing and projecting their cash flows, and discounting them at the adquate cost of capital. The knowledge that the student has to achieve can be divided in the following objectives: - Understand that a firm is a portfolio of financial instruments which is closely connected to a portfolio of investment projects. - Distinguish a firm¿s cost of capital from a project cost of capital. - Be able to value companies as well as investment projects. - Connect the different shareholders¿ compensation mechanisms with the different financial instruments that a firm uses for raising capital. Specific capacities: - Understand the concept of firm value. - Be able of using comparables as well as different ways to compute a firm value. - Define a flexible methodology for computing the cost of capital of firms and projects. - Define a criterium for distinguishing the situation in which is optimal to use dividends instead of share repurchases for compensating shareholders. General capacities: - The capacity to use reasonable approximations for achieving a financial objective - The ability to tackle uncertainty issues, while making sensibility analyses in such uncertain freameworks. - The relevance of approaching a financial objective through different ways in order to have more sound financial results. The attitudes that a student should acquire: - A flexible view in order to change a decision if new information has arrived. - A critical view of managers in order to understand that a firm value is not always what the managers pursue. - A collaborative attitude in order to obtain from the different agents the information required for achieving difficult objectives. - Understand that behind any managerial decision there is an ethical code.

The progam is divided in six chapters: FIRST CHAPTER: Description of the main financial instruments. Pros and cons of each financial instrument SECOND CHAPTER: A firm's financial structure. The Modigliani-Miller framework THIRD CHAPTER: Firm valuation FOURTH CHAPTER: Firm's weighted average cost of capital and projects' cost of capital. Differentiation between standard and non-standard projects. FIFTH CHAPTER: Shareholders' compensation and its relationship with financial structure.

The methodology is a combination of the following items: (1) Theoretical classes. There are 14 classes in which the main theoretical foundations are presented. The students will have the slides in advance in order to makes these classes as efficient as possible. (2) Case studies. There are 3 case studies that the students distributed in groups will have to solve-discuss. These cases change every year and try to be as actual as possible. (3) Use of on-line information sources in order to obtain the calibration in the main parameters needed for computing a firm's cost of capital as well as its value. (4) Lists of exercises that will be corrected every week. These lists are uploaded one week before the correction in class. The students will have to hand in their solutions to the teacher at the beginning of each class.