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Instructor: Sana Tauseef Email: sasghar@iba.edu.pk Counseling hours: Mondays and Wednesdays (10:00 a.m. to 12:30 p.m.) Tuesdays and Thursdays (11:30 a.m. to 12:30 p.m.) Fridays (9:00 a.m. to 12:00 p.m.)
COURSE OBJECTIVES: The course is designed to provide the undergraduate students with a deeper understanding of how firms finance, invest and manage themselves in the real world. Starting with a review of basic topics covered in introductory business finance course, this course moves on to explain how specific techniques and decision rules can be used to maximize the value of the firm. The course, with the combination of finance concepts and computations, will give the students a taste of various electives in finance that they will choose later. Students who do not plan to major in finance will also enjoy working with valuation models, rates of returns and risk analysis, which are part of the course. As a consequence of this course, I expect to enhance the analytical skills of students. COURSE OUTCOMES: Successful completion of this course will enable the student to: Calculate the expected return and risk for a portfolio of two assets and explain the minimum-variance and efficient frontiers. Compare and contrast dividends, free cash flow and residual income as alternative measures in discounted cash flow models and identify the investment situations for which each measure is suitable. Calculate the value of the common stock using the dividend discount and free cash flow models. Compute the annual cash flows for an expansion and a replacement project and evaluate and select the optimal capital project. Discuss the MM propositions concerning the capital structure and explain the impact the impact of leverage, taxes, financial distress, and agency costs on a companys cost of equity, cost of capital and optimal capital structure. Compare and contrasts different theories of dividend policy and discuss the factors which affect the dividend payout. Understand the basic features of forward and future contracts and contrasts the different option strategies.
SESSION 1 2-4
DISCUSSION TOPIC Discussion of the Course Outline; Review of the Basic Finance Concepts Risk and Return for Individual Stocks and Risk diversification for portfolios; Optimal portfolio and Efficient Frontier (Two-asset case); CAPM Model; Beta Coefficient Cost of Capital: Component Costs (Debt, Preferred Stock, Retained Earnings, New Common Equity); Marginal Cost of Capital: Short Case Study Features of Equity Securities; Overview of different stock valuation models; Dividend Discount Model for Stock Valuation FCFF and FCFE Model for Stock Valuation; Comparing the DDM and FCFF model Spreadsheet Session: Scenario Analysis in Stock Valuation Capital Budgeting Projects: Projecting the Cash flows; Evaluation Techniques: Payback, NPV and IRR; Evaluating projects with unequal lives: least common multiple of lives approach and Equivalent annual annuity approach; Short Case Study Spreadsheet Session: Risk Analysis of Capital Investments Types of real options, evaluating a capital project using real options Capital Structure Decisions: Business and Financial Risk, Estimating the Optimal Capital Structure under the MM Theory; Cost of Equity and Firms value with and without leverage; Trade-off Theory, Signaling Theory Dividend Theories; Dividend payout policies; factors affecting the dividend policy; Stock Dividends and Repurchases. Financial Risk Management; Introduction to Forwards, Futures and Options: strategies and payoff figures. Revision of Course Work
CHAPTER/ READING
TEXT
4, 5
Brigham
5-7
15
Ross
8-9
42
10-12
43
13 14-16
9, 10
Ross
17 18
29
19-22
30
23-24
18
Brigham
25-27
1, 2/ 37
28
TEXT BOOKS:
Fundamentals of Corporate Finance. Stephen A. Ross, Randolph W. Westerfield & Bradford D. Jordan, 8th edition. Fundamentals of Corporate Finance. Brealey Myers Marcus, 4th edition.
Financial Management: Theory and Practice. Eugene F. Brigham & Michael C. Ehrhardt, 11th edition. Corporate Finance. CFA-II Program Curriculum. Equity. CFA-II Program Curriculum. Alternative Assets and Application of Derivatives. CFA-III Program Curriculum. Options, Futures and Other Derivatives. John C. Hull, 6th edition. Compiled chapters can be obtained from IBA photocopier. Course folder comprising of additional practice questions and class material will be uploaded on Learning Management System (SAKAI).
COURSE REQUIREMENTS:
You must bring the course folder (with practice questions) in every session. Many of the concepts you encounter are continuation of what you learned in IBF course. It is assumed that you have clearly understood the basic finance concepts in the introductory course, and advance concepts will be discussed without or with little revision. Active class participation will be rewarded by adjusting the grade upwards when it is on the margin. Since subsequent topics build on previously learned material, it is imperative that students keep up with the material. In addition, you should ensure that lectures are understood properly. A student who misses a class is responsible for obtaining any handouts and information on course content, assignments, due dates, test dates, etc. Financial calculator is mandatory for the course. If you are planning to buy the financial calculator, Texas Instruments, BA II Plus is recommended. The quizzes may be in advance or from the previous topic. There will be a perfect zero if you miss the quiz. You are expected to complete the assignments on the due date. No excuses will be entertained in late submission unless there is some extreme case. Everyone should bring the laptop for the spreadsheet sessions.
GRADING: First Term Exams Second Term Exams Final Exam Quizzes Assignments Class Participation 15% 20% 35% 15% 10% 5%