FIN 819: Lecture 1
FIN 819: Financial Management
Administrative Issues Course Overview
FIN 819: Lecture 1
Today’s plan
Administrative issues • prerequisite
• add, drop and withdraw
• projects
• case writing and discussion
• final exam
• final grade
Course overview Team formation
FIN 819: Lecture 1
The instructor
My name is George Li Office: DTC 582 and BUS 315 Email: [email protected] Office hours:
Monday: 1:30 p.m. to 3:30 p.m. at BUS 315
Thursday: 3:30 a.m. to 5:30 p.m. at DTC 582 Research interest:
• Corporate finance: real options
• Asset pricing: information and stock prices
FIN 819: Lecture 1
My website
All the lecture slides, solution to homework problems, sample final exam will be posted on my website:
http://online.sfsu.edu/~li123456 I only use ilearn to send you emails.
FIN 819: Lecture 1
Textbook
The textbook for background reading• Principles of Corporate Finance, 9th Edition, by
Richard A. Brealy and Stewart C. Myers, published by Irwin McGraw-Hill, 2008.
FIN 819: Lecture 1
Prerequisite
You are required to take BUS 785 with a grade of at least B-, or have a waiver of this course.
It is the school’s policy that all the students in this course must satisfy this requirement and there is no exception, unless you get the waiver of this prerequisite
FIN 819: Lecture 1
Add, drop and withdrawal policy
The business school has the policy for add, drop and withdrawal• Students can withdraw once
• If you like to withdraw, you have to do it in the first two weeks
• Please read the Spring 2012 bulletin for detail information
FIN 819: Lecture 1
Homework problems
In the first several lectures, I will review most important concepts in corporate finance
In order to help you to understand these concepts, homework problems are assigned.
I will not grade homework but its solution will be posted on my website.
FIN 819: Lecture 1
The two projects
There is one project for each team. A project is the presentation of a case. For each of the two cases to be discussed, every team must write a report, which is 2-10 pages long in single space and typed.
Each team has about 4 students so that we have 4 teams.
Form your own teams after the break. For each case, two teams are assigned to present.
FIN 819: Lecture 1
The two projects (continue)
If your team is to present a project, your team has to use PowerPoint to present your analysis, and bring in a computer and a USB, with the PowerPoint file copied on it.
Each member in the team will get the same score unless there is a “free-rider” problem.
FIN 819: Lecture 1
The cases
One case will be reserved electronically in the library. It is supposed to be available in the third week of this semester.
I will tell you the password to access this case.
The second case is from the end of chapter 22 (Bruce Honiball’s invention)
FIN 819: Lecture 1
Two cases:
Nike Corporation The min-case in chapter 22
FIN 819: Lecture 1
Valuing a writing-report
The instructor will use the following criteria to value a writing-report • understanding the case
• clear writing
• apply concepts correctly
• convincing arguments
FIN 819: Lecture 1
Valuing the oral presentation
The instructor will use the following criteria to value the oral presentation• Clear presentation ( 5pts)
• Answer questions precisely and concisely (6 pts)
• Understand the concepts and theories (2 pts)
• Have convincing arguments (2 pts)
FIN 819: Lecture 1
Solution to the free-rider problem
In theory, all members in each team should get the same score.
If more than two members in a team complain about the free-rider problem, the team member valuation for that team will be used to decide on the project score for each student in that team.
FIN 819: Lecture 1
The mid-term and final exams
There will be a mid-term and a final exams, which are closed-book.
The mid-term exam has only multiple choice questions, but the final has only essay questions.
The mid-term exam is closely related to lectures and homework problems.
The final is closely related to the lectures, homework problems, and 2 cases to be discussed in the class.
There is no makeup or in-advance final.
FIN 819: Lecture 1
Class attendance and performance
It is the instructor’s strong preference that you attend each class and be actively involved, unless you are very familiar with the basic concepts discussed in the first several review lectures.
FIN 819: Lecture 1
Total points
Your overall course grade will be based on your performance in the class, four cases, final project, and the final exam.• Class attendance and performance: 10 pts
• Case write-ups: (each 5) 10 pts
• Case presentation: 15 pts
• Mid-term exam: 25
• Final 60 pts
• Total 120 pts
FIN 819: Lecture 1
Curve grading
Grading policy: Your ranking Letter grades
• Top 15% A range (A-, A, A+)
• 15% - 75% B range (B-, B, B+)
• 75% - 95% C range (C-, C, C+)
• Bottom 5% D range (D+, D, D-)
FIN 819: Lecture 1
FIN 819: course organization
FIN 819
Module 1Fundamentals of valuation
Module 2Valuing risky investments
Risk and return
Module 3 Corporate financial decisions
Module 4 Market efficiency and options
Fundamentals of PVFinancial decision
Interest rates
Perpetuities and annuities calculation
Valuing stocks and bonds
NPV and other criteria
Portfolio theoryDiversification and covariance
Modigliani-Miller theorem 1Pizza size is independent of
how sliced
Tangency portfolio, CAPMrisk and return
Effect of leverageWACC and discount rate
Binomial model, replicationRisk-neutral probabilities
Options and Black-Scholes
Weak, semi-strong and strong form efficiency
Information and stock prices
Types of securitiesStocks, bonds and other
Modigliani-Miller theorem 2WACC
FIN 819: Lecture 1
Corporate finance: what is it?
A set of concepts, theories and approaches that help the firm make financial decisions.
FIN 819: Lecture 1
Financial decisions Capital budgeting (use of the capital)
• Real capital investments• Mergers; acquisitions
Financing (capital structure decision)• Equity• Debt
Risk management• Hedging to reduce the risk• Portfolio diversification
FIN 819: Lecture 1
Course organization
This course is broken-down into 4 modules• Valuation
• Assets pricing theory
• Option pricing theory and its applications
• Capital structure theory
FIN 819: Lecture 1
Valuation
This module covers the fundamentals of valuation. The topics include• Present value concept and its application
• Unlevered assets and betas
• Levered assets and betas
• Two approaches for valuing a real project• WACC
• APV.
FIN 819: Lecture 1
Asset pricing theory
This module is the fundamental of corporate finance• Corporate finance is simply the application of
asset pricing theories It covers the most fundamental theories
in finance• Portfolio diversification, mean-variance
analysis, risk and return
• CAPM, WACC and its calculation
FIN 819: Lecture 1
Option pricing theory and its applications
This module, together with the first module, provides a complete picture about asset pricing.• asset pricing based on equilibrium concept
• relative asset pricing, using no arbitrage argument It covers
• Black-Sholes valuation and its use in industries
• Binomial tree valuation in single and multiple stages
• Applications of option theory in valuing managerial flexibility: waiting, expansion, and shutting down
FIN 819: Lecture 1
Financing decision (capital structure theory)
If you are the CEO of an industrial company• you can make your company more valuable by
choosing “better” projects (capital budgeting)
• we want to know if you (and the CFO) can make your company more valuable by changing the mixture of your financing (i.e. the ratio of debt to equity)
It covers• Modigliani-Miller theorems 1 and 2