University of Piraeus

Msc. in Banking and Financial Management

Financial Management II

Prof. Emmanuel D. Tsiritakis

Ass. Prof. Dimitris Voliotis

2nd Semester

E-mail: manolis@unipi.gr Email: dvoliotis@unipi.gr

Tel: 2104142187 Tel:2104142227

Room:331 Room:331

Office Hours: By Appointment Office Hours: By Appointment

Course Description

Modern Corporate Finance is analyzed in an environment of asymmetric information where conflicts of interest among the major firm stakeholders may arise. These conflicts introduce frictions

which hamper the value maximization process on which most corporate financing decisions are based. The structure of Corporate Governance and the Institutional Setting of the Capital Markets

in which firms operate, can provide the means to ameliorate these frictions. Behavioral Finance may also offer valuable insights about the causes and interpretation of these frictions.

Corporate Finance is the subject of study that includes all the business decisions involving money. This multitude of financial decisions could be decomposed in three basic variably interrelated

strands. The Investment Decision is about acquiring assets that will produce profits. This must be done optimally, increasing firm revenue and reducing costs. It is about the effective management

of the investment portfolio for any kind or size of business firm. Management is termed efficient, when investment returns are higher than a minimum acceptable hurdle rate. The central theme

here is investment valuation and subsequently firm valuation The Financing Decision is ultimately about the optimal mix the firm will use to fund its investments.

Borrowing funds from the banking system, issuing bonds or new shares are among an ever widening set of alternative funding options. The analysis involves delineating the optimal

mix and mapping the way for the firm to get from its existing capital structure to the desired one. The Payout or Dividend Decision analyzes the distribution of profits to shareholders versus

retaining them for recapitalization. Firms may decide to repurchase shares instead of paying earnings out as dividends. Rather than a residual financial decision, the decision to pay dividends

revolves around the fundamental problem of trust between shareholders and managers. Corporate Finance is founded on the firm value maximization principle which underlies the

optimality criteria. The course is introduced via a thorough discussion of possible conflicts of interest among firm stakeholders as well as other market frictions and inefficiencies that may interfere with value maximization.

Required Material

Textbooks

[D ] Damodaran, A., Applied Corporate Finance, 3rd edition, WILEY 2011.

[RWJ ] Ross, S., Westerfield, R., Jaffe, J., Corporate Finance , 10th edition, McGraw-Hill / Irwin 2013

[BMA ] Brealey, R., Myers, S., Allen, F., Principles of Corporate Finance, McGraw Hill/ Irwin, 10th ed 2011.

[BE ] Brigham, E., Ehrhardt, M., Financial Management, Theory and Practice, South -Western, 13th ed. 2011.

[T ] Tirole, J., The Theory of Corporate Finance , Princeton University Press, 2006.

Journal Articles

[BW ] Baker, M. and J. Wurgler, 2007. “Investor Sentiment in the Stock Market”, Journal of Economic Perspectives.

[LR ] Loughram T. and J. Ritter, 2004., “Why has IPO underpricing changed overtime?, Financial Management.

[SV ] Shleifer A. and R. Vishny, 1997. “A Survey of Corporate Governance”. Journal of Finance.

Course Schedule

The schedule is tentative and subject to change.

Week 1 Asymmetric information -agency problems – corporate governance Study [DAM] Ch.2, [T] Ch.1, [SV]

Week 2 Cost of capital for investment and firm valuation [DAM] Ch.4, C [RWJ] Ch.13, [BMA] Ch.19

Week 3 Efficient markets and behavioral finance Study [RWJ] Ch.14, [BMA] Ch.13, (BW), (HT)

Week 4 Corporate Financing [RWJ] Ch.15,20, [BMA], Ch.14,15, (LR), (DGKT)

Week 5 Capital Structure [RWJ] Ch. 16,17,18, [BMA] Ch.17,18, The Merton model

Week 6 Outside Financing Capacity – Credit Rationing, The Holmstrom-Tirole model [T], 3.1, 3.2

Week 7 Outside Financing Capacity – Debt Overhang, [T], 3.3

Week 8 Outside Financing Capacity – Borrowing Capacity, [T], 3.4

Week 9 Pledgeable Income and Control Rights, The Aghion-Bolton model, [T], 10.1, 10.2

Week 10 Consumer Liquidity Demand, The Diamond-Dybvig model and the term strucutre of

interest rates, Runs, [T], 12.1, 12.2, 12.3