[MUSIC] Hi, and welcome to the Corporate Finance Essentials course that I will be doing with you. My name is Javier Estrada, I'm a professor here at IESE Business School in Barcelona, Spain. And we're going to have these six sessions on corporate finance related issues. Very broad issue as a matter of fact, of which we're going to cover as the title indicates the essentials. And the essentials are the six sessions that you probably have already seen in the syllabus, and those six sessions before we get into the first one I'd like to give you a very, very quick overview of what we're going to do. And the first session will be basically on risk and return. As a matter of fact let me just go back for a second and say what corporate finance is all about, and then we go back and think a little bit about what we're going to do in each of the sessions that we're going to have. Corporate finance is basically about the interaction between companies and investors, and that interaction happens in securities markets. corporations, they manufacture products and services which they sell and we consumers actually buy, and investors actually finance the production of those goods and services. And they interact in a securities market. And so, what corporations do is basically evaluated by investors and depending on that evaluation, investors are going to require a return, depending on the risk that they perceive from those operations. And that interaction actually happens in securities markets. Corporations need capital, investors provide that capital, and the return they require on that capital will be depending on the restate perceived from the company's operations. And that's why in corporate finance, we always talk about investors and we always talk about corporations, more on the side of corporations than we do on the side of investors. But typically we're going to talk about a little bit of both. So we're going to start session one and two focusing on investors. And sessions three to six we will focus on corporations. Sessions one to two are basically one running into the other. What we're going to discuss is basically Risk and Return in the first, correlation and diversification in the second. But again, this instead of thinking of this as two different sessions we can think of a very long session one running into each other. In the first one we're going to discuss how investors actually estimate the return and the risk of the different assets in which they invest. We're going to focus a little bit more on securities markets, but when, then when we move to corporations we're going to be talking about debt, or bonds too. So for the time being we're going to try to come up with two ways of assessing mean returns, and two ways of assessing risk. That's what we'll do in the first session. In the second, we'll actually talk a little bit about when you go from investing in individual securities, to investing in portfolios. And that, when that happens, there's another variable that becomes critical, and that is what we call correlation. So we're going think a little bit about what that correlation means, why it is important and how it actually builds into one of the most important issues for investors, which is diversification. So we're going to define what diversification means, and we're going to look at a couple of examples of why it is actually important for investors. And that will, for the time being, sort of round up what we're going to discuss for, for investors. Then we're going to move to talk about corporations. And we're going to start, again with two sessions that basically run into each other. Both of them are on the cost of capital. In the first one we're going to focus on the theory, although, you know, maybe it's a little bit too ambitious to call it theory. Let's say that we're going to focus on the intuition of the cost of capital, what are the components what at the variables that go into the building of the cost of capital, what is the intuition behind each of those variables? And we'll set up the ground for, in the fourth session, estimating the cost of capital of a company. We're going to look at Starbucks a few months ago, and we're going to look at the position and the situation of Starbucks. And we're going to calculate its cost over equity, its cost of debt, and we're going to bring everything together into the cost of capital. So basically sessions three and four pretty much like sessions one and two, run into each other. Three and four again will, will look at the intuition and then we will look at the application of the cost of capital. And so we, we will argue a few minutes from now as a matter of fact, in the, at the beginning of the third session what we're going to do is to emphasize that, that cost of capital is sort of a beacon. Is the guiding light for a company in order to assess whether they should go ahead or not with the different process in which they, they plan to invest or they consider investing. And finally in the last two sessions of this course we're going to focus on other two corporate issues which are project evaluation and corporate value creation. And the reason for choosing these two, is not only because they're essential, but also because they are extensions of the application of the cost of capital. As a matter of fact once we understand the cost of capital, then the next step would be actually to use that cost of capital to evaluate whether a company should go ahead with a project or not. And we're going to do that by means of the two most widely used tools, which are NPV or Net Present Value, and IRR, or Internal Rate of Return. And in our last session, we'll talk about corporate value creation. And in that session, we'll basically think about what it means to create or destroy value, the role that the cost of capital plays in that value creation or destruction, and basically, we will look at this whole thing through the lens of a variable called EVA, or Economic Value Added. And as a matter of fact we'll, define what EVA is, we'll calculate if for a couple of companies, and we'll discuss why it is actually an important valuable to look at, in order to determine whether companies are creating or destroying value. So, that's what we're going to do in the six sessions of the course, and now we're going to start with the first one, which is basically a session on risk and return. [MUSIC]
