Corporate Finance I

Class 1: Rules of the game,

Introduction and Review of
Fundamentos de Finanzas
August 16th, 2022
Rules of the Game
⬥ 4 hours a week of Lecture + Cases +Application
⬦ Questions in class are encouraged and part of the evaluation
⬦ There will be cold calling. It is always expected that students have read in
advance the material for class (except for Class 1)
⬦ Clarifying questions should be submitted in the moment
⬦ For other questions, I will allocate time in each class
⬦ Off the class questions could be done sending me an e-mail, or appointing a
virtual date
⬥ 2 hours a week of “Practicas Dirigidas”

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My duties
⬥ Be punctual
⬥ Be respectful with you
⬥ Be available for your questions
⬥ Be prepared for the class
⬥ Give you all the tools for learning
⬥ If possible, make you love finance, but if not, give you the tools to
discuss with anyone about the main Corporate Finance topics
⬥ Do not let that you fell asleep (really challenging)

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 Your duties
⬥ Be punctual. Unless you work at night, there are no excuses to be late. If you know
you’re gonna be late for personal reasons, let me know in advance.
⬥ Be respectful with your classmates and with me
⬥ Be prepared for the class (there are assigned readings and/or cases, and I expect that
you have already read them during the class. I do not expect that you understood
everything, but I can know if you read or not)
⬥ Ask me or your Jefe de Practicas any question you could have
⬥ If you’re interested in pursuing a career in Finance, pay extra attention to this class it
will be super useful. BELIEVE ME
⬥ If you’re not interested in pursuing a career in Finance, pay attention. You can’t avoid
Finance, we’re everywhere and it’s important that you can speak the same language
⬥ Do not be afraid of speaking English. I’m more scared than you, and I won’t judge
you accent of your pronunciation. For most of us, English isn’t our native language
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Evaluation (exams should be similar in
all sections)
⬥ Midterm 30%
⬥ Final Exam 30%
⬥ Prácticas 40%
⬦ PC1: 6%
⬦ PC2: 6%
⬦ PC3: 7%
⬦ PC4: 7%
⬦ Class participation: 14%
⬩ Includes: your questions, cold call questions, presentation
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of news and exercises resolution
The Bible

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How to find out about the news?
⬥ Bloomberg
⬥ Financial Times
⬥ Marketwatch
⬥ Wall Street Journal
⬥ Gestion
⬥ Semana Económica
⬥ Reporte de Inflacion BCRP

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 INTRODUCTION TO
CORPORATE
1 Source: Aswath Damodaran FINANCE
 “
“The objective is maximize the
Value of the Firm”
“All other goals are
intermediate ones”

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The Classical Objective Function

Stockholders

Hire & Fire Maximize

managers Stockholder wealth

Lend Money No Social Cost

Debt holders Managers Society
Protect Debt Costs can be
holders interests traced to the firm
Reveal
information Markets are
honestly and on efficient
time
Financial
Markets 10
 THE INVESTMENT
DECISION AND TIME
2 VALUE
NET
PRESENT
VALUE
It’s the MOST POWERFUL
finance tool
Why do we use it?
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Common applications: Perpetuities and
Annuities
Perpetuity Annuity
Stream of equal cash flows Stream of equal cash flows
that occur at regular intervals that occur at regular intervals
and last forever and have an ending date.

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Example 1
⬥ Imagine that you want to retire and you want to
have a pension of S/5,000 monthly starting now. If
the insurance company gives you a perpetuity rate
of 6%. How much money would you have to give
them to receive your desired pension?
Example 2
⬥ Each six months you receive a CTS equivalent to
S/3,000. If the next and first payment is exactly in
two months, and you can only retire if you
accumulate 4 years of contributions, how much
will you have accumulated after 4 years of
contributions?
Common applications: Perpetuities and
Annuities with growth
Perpetuity with growth Annuity
Stream of cash flows that Stream of cash flows that grow at
grow at a constant rate constant rates at regular
regular intervals and last intervals and have an ending
forever date.

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Homework 1
⬥ Use the same information of example 1, but now
imagine that the pension should grow to the
average inflation rate that is 2%. How much
money will you need to retire?
Homework 2
⬥ Use the same information of example 2, but now
imagine that your salary, and subsequently your
CTS grows at a 2.5% semestral rate. How much
money will you have after your 8th contribution?
NPV vs IRR
⬥ NPV is the King. End of the discussion

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NPV
⬥ It’s unbeatable for stand-alone projects
⬥ No limit for investments
⬥ So if it’s so useful why do people use IRR?
⬥ Because NPV is not easy to read. It’s easier to say
that a Project has an IRR of 14%, than say that has
an NPV of $2.5 million (are $2.5 million a lot of
money?)

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IRR
⬥ The internal rate of return is very popular, and
under certain circunstances is very useful
⬥ When is IRR flawed?
⬦ Delayed investments
⬦ Multiple IRR (change of inflows and outflows)
⬦ There is no IRR (one side either of inflows or
outflows)

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On the next class..
⬥ Fundamentals of capital Budgeting
⬥ Read Chapter 8

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