The Lee Kong Chian School of Business Academic Year 2015 /16 Term 1

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The Lee Kong Chian School of Business

Academic Year 2015 /16

Term 1

FNCE101 FINANCE

Instructor : Dr Chiraphol New Chiyachantana Tittle : Assistant Professor of Finance (Education)

Tel : 6828 0776

Email : chiraphol@smu.edu.sg Office : LKCSB #4047

COURSE DESCRIPTION

This course serves as an introduction to managerial finance. The aim is to provide students with a strong foundation in finance. Students will be exposed to key financial concepts and tools commonly used by managers in making sound financial decisions, which include time value of money, risk-return analysis, asset pricing and cost of capital. The course focuses on basic financial activities undertaken by a firm to create value for its shareholders. These activities include financial planning and management, investing and financing.

LEARNING OBJECTIVES

By the end of this course, students will be able to:

 Describe important financial management decisions and forms of business organizations; explain the goal of financial management; explain agency problems; and describe the characteristics of a well-functioning securities market;

 Interpret balance sheets, income statements; compare and contrast cash flows from operating, investing, and financing activities; and conduct ratio analyses to analyse various aspects of a company’s financial health;

 Calculate and interpret annual percentage rate and effective annual rate; solve time value of money problems for both single cash flow and multiple cash flow problems (Ordinary annuity, annuity due, growing annuity, and perpetuity); and understand the calculation of fixed-payment amortization;

 Calculate and interpret results using each of the following methods to evaluate capital projects: payback period, discounted payback period, net present value (NPV), internal rate of return (IRR) (and the potential problems with IRR), and profitability index; identify various types of costs, such as sunk costs, opportunity costs, and side effects; and forecast future cash flows with Pro Forma financial statements;

 State various forms of investment returns; calculate and interpret the difference of arithmetic average and geometric average returns; calculate sample and population mean and standard deviation of returns on a single asset; explain risk-return tradeoffs across asset classes based on historical evidence;

 Calculate mean and standard deviation of returns on portfolios; understand the correlation between assets and diversification benefit; differentiate systematic vs. unsystematic risk; explain the capital asset pricing model (CAMP), security market line (SML), and asset beta, and the effects on asset expected returns and risk tradeoff; estimate asset beta using tools such as Excel spreadsheet; explain various forms of efficient market hypotheses and their practical implications;

 Estimate the values of common stocks and preferred stocks, using the discount dividend models (DDM), free cash flow valuation models, and market ratio models;

 Contrast the theoretical irrelevance of dividend policy with how it is often relevant in practice, including high, low, and residual dividend policies; explain the basic properties stock repurchase and its relation with cash dividend;

 Explain contractual properties of bonds, special bond features, and bond quotations; calculate and interpret various bond yields (current yield, yield-to-maturity, and realized return); explain the steps in the bond valuation process; explain the difference between nominal and real rate and the effect of inflation; explain factors driving the bond yields; and explain the interest rate risk and the term structure of interest rate, and the effects on bond valuation;

 Calculate and interpret the cost of equity, cost of debt, and the weighted average cost of capital (WACC) of a company; explain the effect of tax subsidy on cost of debt and WACC; calculate and interpret flotation costs; explain the pure play approach of estimating WACC for multi-sector companies;

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 Explain the basic processes for venture capital investment, IPO, SEO, and rights offerings; explain Modigliani and Miller (MM) theory of optimal capital structure choice under various tax and bankruptcy costs scenarios; solve problems of firm valuation and cost of capital with and without corporate taxes; explain the basic concepts of the peck-order theory of capital structure choice;

 Define European option, American option, and moneyness, and compute and interpret option payoffs; explain the upper and lower bounds of option prices; value options in a one-period model; explain how factors such as underlying asset price, strike prices, volatility, time to maturity, interest rate affect option prices; explain the put-call parity and calculate call (put) prices applying the put-call parity formula; view the equity portion of the company as a call option of its total assets.

PRE-REQUISITE/ CO-REQUISITE/ MUTUALLY EXCLUSIVE COURSE(S)

Please refer to the Course Catalogue on OASIS for the most updated list of pre-requisites / co-requisites for this particular course.

Do note that if this course has a co-requisite, it means that the course has to be taken together with another course. Dropping one course during BOSS bidding would result in both courses being dropped at the same time.

ASSESSMENT METHOD

Class Participation: 10% Project: 20% Quizzes: 10% Midterm exam: 20% Final Exam: 40%

ACADEMIC INTEGRITY

All acts of academic dishonesty (including, but not limited to, plagiarism, cheating, fabrication, facilitation of acts of academic dishonesty by others, unauthorized possession of exam questions, or tampering with the academic work of other students) are serious offences.

All work (whether oral or written) submitted for purposes of assessment must be the student’s own work. Penalties for violation of the policy range from zero marks for the component assessment to expulsion, depending on the nature of the offence.

When in doubt, students should consult the course instructor. Details on the SMU Code of Academic Integrity may be accessed at http://www.smuscd.org/resources.html.

INSTRUCTIONAL METHODS AND EXPECTATIONS

Class Participation

Participation is a central part of the learning process for you and your classmates. Your participation mark reflects your contribution to your classmates learning. You are expected to attend weekly class meetings, prepare for reading materials and other assignments before class, and actively participate in class discussion. Group Project:

There will be a group project on a firm’s financial health analysis, emphasizing risk-return tradeoffs and valuation. The project will be executed in groups of about 4-5 students each. Group project will be graded based on a written final report. Details will be provided in class.

Quizzes:

There will be in-class mini quizzes aimed to help you better understand the class materials and prepare for the exams. The quizzes will be open-book unless otherwise mentioned.

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Examinations:

There will be a midterm exam and a final exam. Both are 2-hour, closed-book exams (financial calculators will be allowed). The final exam will be cumulative of all content covered in this course. No make-up exams will be allowed without prior permission.

FINANCIAL CALCULATOR

A financial calculator is needed for various materials covered in class and for the exams. I’ll give a brief instruction on the operations of Texas Instruments BA II Plus in class. I encourage you to buy or borrow the same model (many of your seniors have this model). You can use other brands/models, provided that you know how to use them appropriately.

WEEKLY LESSON PLANS

This schedule is extremely tentative, and subject to change. Any change will be announced in class in advance.

Week Topic Readings

1 Introduction to Corporate Finance  Financial Management Decisions  Forms of Business Organization  The Goal of Financial Management

 The Agency Problem and Control of the Corporation  Financial Markets and the Corporation

Review of Financial Statement Analysis  The Balance Sheet

 The Income Statement  Statement of Cash Flow

 Standardized Financial Statements

Ch 1

Ch 2, 3

2 Risk and Return

 Capital Market History  Calculating Returns

 Expected Returns and Variances  Risk: Systematic and Unsystematic  Diversification and Portfolio Risk  Systematic Risk and Beta

 The Security Market Line and CAPM

Ch 12, 13

3 Time Value of Money and Its Applications  Financial Calculator

 Future Value and Compounding  Present Value and Discounting  Discount Rate and Number of Periods  Annuities and Perpetuities

 Present/Future Values of Uneven Cash Flows  EAR and APR

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4 Stock Valuation and Dividend Decision  Common and Preferred Stocks

 Determining common stock values  Cash Dividends and Dividend Payment  Does Dividend Policy Matter?

 Dividend Policy in Practice

 Determining preferred stock values

Ch 8, 18

5 Bond Valuation

 Bonds and Bond Valuation  Determinants of Bond Yields  Inflation and Interest Rates  Bond Ratings

 More on Bond Features  Quiz I (Wk 1-4)

Ch 7

6 Option Valuation

 Fundamentals of Option Valuation  Valuing a Call/Put Option

 Factors affecting Call/Put Option

Ch 14

7 The Cost of Capital  The Cost of Capital  The Cost of Equity

 The Costs of Debt and Preferred Stock  The Weighted Average Cost of Capital

 Midterm Exam (Wk 1-6) Date: TBA Venue: TBA Ch 15 8 Recess 9 Investment Criteria  Capital Budgeting  The Payback Rule  The Discounted Payback  Net Present Value

 The Internal Rate of Return  The Practice of Capital Budgeting

Project Analysis and Investment Decision  What is Break-Even Analysis?

 Accounting Break-even quantity  Cash Break-even quantity  Financial Break-even quantity

Ch 9, 10, 11

10-11 The Capital Structure

 The Effect of Financial Leverage  Business vs. financial risk  What is capital structure?  Finding Optimal Capital Structure  M&M Propositions

 Quiz II (Wk 7-11)

Ch 17

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13 Student Project Presentation II 14 Revision and Q&A

The Lee Kong Chian School of Business Academic Year 2015 /16 Term 1