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: li123456@sfsu.edu

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 4Market efficiency and options

Fundamentals of PV

Financial decision

Interest rates

Perpetuities and

annuities calculation

Valuing stocks

and bonds

NPV and other criteria

Portfolio theory

Diversification and covariance

Modigliani-Miller theorem 1

Pizza size is independent of

how sliced

Tangency portfolio, CAPM

risk and return

Effect of leverage

WACC and discount rate

Binomial model, replication

Risk-neutral probabilities

Options and Black-Scholes

Weak, semi-strong and

strong form efficiency

Information and stock prices

Types of securities

Stocks, bonds and other

Modigliani-Miller theorem 2

WACC

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