Sloan School of Management
Massachusetts Institute of Technology
15.402 Finance Theory II
Introduction to Corporate Finance E62 – 641
Spring 2014 [email protected]
Introductory Corporate Finance takes as its viewpoint the CFO of a firm. We assume in this course
the CFO’s job is to maximize the value of the firm and deal with three types of decisions; which projects to
invest in, how to finance that investment, and how to manage the cash flows of the firm. This is an applied
“tools” course that will primarily use case studies to introduce and use finance tools to make corporate
A. Course structure – the course consists of three main modules.
1) Cash Flow Management: The course starts with the tools of cash flow management. Cash flow
management is necessary to forecast financing needs and to value assets. Tools include ratio analysis, pro
forma statements, working capital management, and cash budgets.
2) Capital Structure and Financing Needs: The course continues with analyzing the factors that determine
a company’s need for external financing. We then move on to a consideration of the optimal mix of debt and
3) Project and Company Valuation: In the third module, we develop the tools needed for valuing
investment projects. We use several different valuation methods including the determination of the relevant
cash flows and the appropriate discount rate. We will then use these tools to value companies, and to select
B. Administrative Structure
Teaching assistant: Mike Travalini, [email protected]
Administrative Assistant: Ariel Leitao, [email protected]
, 617-715-4178, E62-671
Prerequisites: Finance Theory I (15.401) and Accounting (15.515/501).
Section A: MW 1:00-2:30 PM (E62-223)
R. Brealey, S.C. Myers, and F. Allen, Principles of Corporate Finance, 10 ed., Irvin, McGraw-Hill
R.C. Higgins, Analysis for Financial Management, 9 ed., Irvin, McGraw-Hill
Course packet: Contains the case studies and some supplementary readings for the course. Get it from the
Copy Tech Center in the basement of the Sloan building (E52).
Additional reading material will be distributed in class and posted on Stellar
Make sure you join the class in Stellar!
Recommended but not required: Barron’s Dictionary of Finance and Investment Terms, 8 ed. th
1 C. Class Procedures
For class meetings, I will assign study questions on either a case study or on academic articles. For classes
involving a case study, we will consider the study questions and the material in the case. This includes the
next meeting, which covers Wilson Lumber.
You are allowed and encouraged, but not required, to meet in groups outside of class to discuss and analyze
Each student will submit a two page memorandum of analysis and recommendations at the beginning of each
class. If you are working in a group, I will accept one memorandum from the group and count it for all
students in the group. If you choose to do this, the group cannot be larger than four students. Each
memorandum should be typed. The two-page limit is for text only; You may attach as many numerical
calculations as you wish. Write these as if you were writing a recommendation to a CEO or other major
decision maker in a corporation. Memoranda will not be accepted after the class has met. The memoranda
will be given credit if it is handed in and no credit if it is not. The memoranda will be given either a plus,
satisfactory, or minus grade. In particular, the memoranda will be use to determine final grades for those
students who are on the border of an A, B, C or D. Case memoranda are due for all cases covered in the
The articles which we will assign are not overly technical in nature and they should be read with the intent of
understanding the findings of academic research on corporate finance. These articles are not meant to be
closely analyzed. You should argue your points in class as if you were in a corporate boardroom rather than
in a doctoral seminar; i.e., using the logic of modern finance but not necessarily quoting from the footnotes
of academic papers. Finally, the process of arriving at an answer is as important as getting the answer. In
most situations there are many definite wrong answers but also more than one correct answer.
Because of the nature of this course (and the grading criteria), it is extremely important that you attend every
class, arrive on time and be prepared to participate. You should bring your name cards to each class, to
facilitate the discussion and receive appropriate credit for your remarks.
Computer spreadsheets can be used to analyze many of the case situations but they are not necessary.
Spreadsheets are most valuable with repetitive capital budgeting decisions or when numerous "sensitivity"
runs are desired for one decision. In class we will discuss finance techniques and highlight the key
assumptions, but we will not generate numbers for every possible situation.
Case Write-ups: 20 %
- Students should form teams of 2 to 4, and hand in a single write-up per team.
- Write-ups are due at the beginning of class (make copies to refer to during the class).
- Each team is required to hand in all write-ups.
- Grading of homework will be on the basis of effort, not correctness. Our view is that if students
can do the homework perfectly before class there is little reason to attend. The purpose of
homework is to ensure preparation before class.
Final: 60 %, the final examination will be a case analysis during finals week. The best way to prepare
for a case exam is to prepare for the course every day, attend class, and actively participate.
Class participation: 20% , your performance will be judged based both on the quality and the number of
your comments. Because so much of the learning in this course occurs in the classroom, it is very
important that you attend class.
E. Course Policies are Designed to Ensure Fairness:
My goals are to meet the course objectives and to ensure that the course is graded fairly. By remaining
enrolled in the course, you agree to abide by the policies detailed below.
2 Exams cannot be rescheduled or made up. Treat these dates as you would an important meeting in the
business world. In the unlikely event that you are faced with unforeseeable and unavoidable circumstances
that will cause you to miss the exam, you must talk to me immediately. Travel is not an acceptable reason
for exam rescheduling.
Re-grades: The TA and I will w