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)

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Two cases: Nike Corporation The min-case in chapter 22

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Valuing a writing-reportThe instructor will use the following criteria

to value a writing-report • understanding the case• clear writing• apply concepts correctly• convincing arguments

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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)

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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.

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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.

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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

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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

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Corporate finance: what is it? A set of concepts, theories and

approaches that help the firm make financial decisions.

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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

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Course organization This course is broken-down into 4

modules• Valuation • Assets pricing theory• Option pricing theory and its applications• Capital structure theory

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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

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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

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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