FIN 301 A1 Introduction to Finance

(1)

Fall 2019 (3 Sept 2019 – 6 Dec 2019)

Keith Godfrey

Department of Finance and Statistical Analysis update: 26 August 2019

Contacts

Class Class Times Instructor Office Hours

Lectures A1 Tuesdays + Thursdays 3:30-4:50pm in TL B 1

Keith Godfrey BUS 1.23(b) Thurs. 11:30-1:00pm

Seminars E1 Mon 2:00-2:50pm BUS 1 5 Joseph Decoste BUS 4.27 Mon. 11:30-1:00pm E2 Wed 2:00-2:50pm BUS 1 5 Cristina Infante BUS 2.33 Wed. 10:30-12:00pm E3 Wed 4:00-4:50pm BUS 1 10 Cristina Infante BUS 2.33 Wed. 10:30-12:00pm E4 Friday 2:00-2:50pm BUS 2 9 Joseph Decoste BUS 4.27 Mon. 11:30-1:00pm Office hours are as listed above, and by appointment. In most cases we will also be available to answer questions immediately after each class.

E-mail address for all queries: [email protected]

Each email should have a subject line which is directed to a particular instructor and purpose.

We will normally respond within 48 hours on business days.

Description

This course is intended to provide a market-oriented framework for analyzing the major types of financial decisions made by corporations. Lectures, seminars, readings, and assignments will provide an introduction to discounted cash flow techniques, financial asset valuation, capital budgeting principles, capital structure, dividend policy, and an introduction to derivative securities.

This course provides the basis for all other classes in Finance as well as the basic financial tools for students in business, engineering, and sciences to be successful in their corporate career. The financial tools discussed in this course can also help in making personal financial decisions.

Textbook and Class Materials

The textbook is: “Fundamentals of Corporate Finance”, 3^rd Canadian Edition, by Berk, DeMarzo, Harford, Stangeland, and Marosi. This is available from the university Bookstore, or online from Pearson, and there are copies in the Library on reserve.

Class materials such as lecture slides, assignments, and solutions to the recommended end-of-chapter

(2)

Readings and Lecture Schedule

The proposed class schedule is as follows. The schedule may be modified as the semester progresses if topics take more or less time than planned. Readings and/or chapters from the text may be added or deleted at a later date.

Please ensure you have read the relevant materials before each session.

Week Date Topic Textbook Readings

1 Tue Sept 3 Introduction to corporate finance

- corporations, markets, financial statements

Ch 1 Ch 2 Thur Sept 5 Financial mathematics

- TVM, single CFs, CF streams, EAR, APR

Ch 3

plus initial reading of Ch 4 No seminar

2 Tue Sept 10 Financial mathematics

- annuities due, deferred, loan amortization

Ch 4 Thur Sept 12 Financial mathematics

- interest rates, inflation

Ch 5

Mon 9 / Wed 11 / Fri 13 September: Seminar 1: Time Value of Money #1 3 Tue Sept 17 Bonds (debt)

- terminology, markets, valuation

Ch 6

Ch 15.2, 15.3 Thur Sept 19 Bonds (debt)

- price relations, duration

Ch 6

Mon 16 / Wed 18 / Fri 20 September Seminar 2: Time Value of Money #2 4 Tue Sept 24 Stocks (equity)

- valuation models, growth

Ch 7 except 7.9 Thur Sept 26 Stocks (equity)

- cash flows, market efficiency

Ch 7 except 7.9 Mon 23 / Wed 25 / Fri 27 September Seminar 3: Bonds

5 Tue Oct 1 Mid-term Exam 1 in class Ch 1 to 6, 15.2,15.3 (not ch 7) Thur Oct 3 Project valuation

- decision rules

Ch 8 No seminar

6 Tue Oct 8 Project valuation

- decision rules, project relations

Ch 8 Thur Oct 10 Project valuation

- cash flows

Ch 9.1-9.4 Mon 7 / Wed 9 / Fri 11 October Seminar 4: Equity

(3)

7 Tue Oct 15 Project valuation

- project analysis, real options

Ch 9.5, 9.6 Thur Oct 17 Risk and return

- maths of diversification

Ch 10 Mon 14 / Wed 16 / Fri 18 October Seminar 5: Project Valuation 1 8 Tue Oct 22 Risk and return

- CML, Sharpe Ratio, CAPM, SML

Ch 11 Thur Oct 24 Cost of capital

- capital structure, WACC, components

Ch 12 Mon 21 / Wed 23 / Fri 25 October Seminar 6: Project Valuation 2

9 Tue Oct 29 Mid-term Exam 2 in class Ch. 7 to 9 (not chs 11, 12) plus knowledge of ch. 1 to 6 Thur Oct 31 Cost of capital (continued)

- components, using WACC, project WACC

Ch 12 No seminar

10 Tue Nov 5 Derivatives

- forwards and futures

Ch 13 Thur Nov 7 Derivatives

- options

Mon 4 / Wed 6 / Fri 8 November Seminar 7: Risk and return Tue Nov 12

Thur Nov 14

Reading week – no classes

11 Tue Nov 19 Capital structure - Modigliani and Miller

Ch 16 Thur Nov 21 Capital structure

- realities of leverage

Mon 18 / Wed 20 / Fri 22 November Seminar 8: Options 12 Tue Nov 26 Raising capital

- raising equity capital

Ch 14 Thur Nov 28 Raising capital

- raising debt capital

Ch 15 Mon 25 / Wed 27 / Fri 29 November Seminar 9: Capital structure

13 Tue Dec 3 Personal finance Ch 7.9 and not in textbook

Thur Dec 5 Review All chapters above

Tue Dec 10 Thur Dec 12

Study week – no classes

(4)

or 3

^rd

Canadian editions.

Note: These numbers are end-of-chapter “Problems” not “Review Questions”.

Fundamentals of Corporate Finance, Berk, De Marzo, et. al.

Week Topic 2^nd Canadian Edition 3^rd Canadian Edition 1 Corporations, markets

Financial statements Single cash flows

Ch 1: 1, 2, 9, 10, 16, 17, 18, 19 Ch 2: 1, 4, 8, 19

Ch 3: 9-13, 15-28

Ch 1: 1, 2, 9, 10, 17, 18, 19, 20 Ch 2: 1, 4, 8, 19

Ch 3: 9-10, 12-16, 18-32 2 Cash flow streams

Interest rates

Ch 4: 3-14, 16-28, 31-35 Ch 5: 1, 2, 6, 8, 12, 14, 23, 24

Ch 4: 3, 7-21, 39-43

Ch 5: 1, 2, 6, 11, 15, 17, 28, 29 3 Bonds (debt) Ch 6: 1-3, 9, 11-19, 21-23,

25, 26

Ch 6: 1-3, 9, 11-19, 21-23, 25, 26

4 Stocks (equity) Ch 7: 4-10, 12-15, 17-20, 34, 37ab

Ch 7: 4-11, 13-16, 18-21, 36, 39ab

5 Decision rules Ch 8: 1-10, 13-14, 17, 19-20, 23-26, 29, 30, 32

Ch 8: 1-10, 13-14, 17, 19-20, 23-26, 33, 34, 36

6 Project cash flows Real options

Ch 9: 4, 8, 9, 10b, 13, 15-17 Ch 9: 20, 21, 22

7 Risk and return Ch 10: 1-4, 6, 7a, 10acd, 16 Ch 10: 1-4, 10, 11a, 12acd, 18 8 CML, Sharpe, CAPM Ch 11: 1-4, 6-19, 22-30 Ch 11: 1-5, 7-13*, 16, 19-21,

23-25, 28-36

*P13 should refer to P12 9 Cost of capital Ch 12: 1-3, 5-12, 14-23

(YTM is EAR unless stated)

Ch 12: 1-3, 6-24

(YTM is EAR unless stated)

10 Derivatives Ch 13: 2-10 Ch 13: 2-7, 9-11

11 Capital structure Ch 16: 3abc, 4-6, 10, 11, 13-17, 19

Ch 16: 3abc, 4-6, 10, 12, 13, 15-19, 21

12 Raising equity capital Raising debt capital

Ch 14: 1, 2, 7,10, 14, 15 Ch 15: 3, 7

Ch 14: 1, 2, 7,10, 15, 16 Ch 15: 9, 13

13 Personal finance Ch 7: 44

but otherwise not in textbook

Ch 7: 49

but otherwise not in textbook

(5)

Grading

Course grades will be determined by combining points on online practice, two midterm exams, and a final exam. The following table shows the component marks available to students. Grades will be allocated after considering the relative performance of each student.

Online Practice 10% Online practice is provided at https://GradeChaser.com. Please register using your ualberta.ca email address (or if you have ever changed this email address please ensure you use the one that is currently registered on eClass).

You performance will be recorded three times corresponding to the three examinations (two midterm and one final). You should complete the new topics for each exam in time for that exam. The snapshot will be taken during or after each exam so that you can use GradeChaser.com during your revision and continue to earn your marks.

In the event that you are granted a deferred exam, your deadline for the online practice will also be deferred to match the deferred exam.

Midterm exams (275 minutes)

40%

(2×20%)

The examinations are closed-book. See below for permitted materials.

While the second midterm exam is intended to be non-cumulative, finance is a cumulative subject and the questions may use concepts from the earlier parts of the course.

Final exam (120 minutes)

50% The examinations are closed-book. See below for permitted materials.

While the final exam is intended to be non-cumulative, finance is a cumulative subject and the questions may use concepts from the earlier parts of the course.

TOTAL 100%

Permitted Examination Materials and Tools

You may bring pencils, pens, calculator(s), and transparent bottled water. You must display your ONECard identification on your desk.

The examinations are closed-book, meaning that no books or notes of any kind are allowed. A formula sheet will be provided to you in the examination. The formula sheet will be discussed in class and shown in advance on eClass.

Computers, notebooks, laptops, tablets, and any devices with communication facilities are not allowed in exams. Programmable calculators must be "de-programmed" before exams. If you want to retain programmed information then you should bring a different calculator to the exams.

Ensure that you know how to drive your calculator(s) and that your batteries have sufficient power. You can bring multiple calculators (for example you can bring both a financial calculator and a scientific calculator) provided that each calculator is deprogrammed. A financial calculator, while useful in this class, and allowed during exams, is not mandatory. A calculator that has y^x, e^x, and ln(x) functions should be sufficient.

(6)

Further Practice

In addition to the graded work, there are also end-of-chapter problems and exercises for you to work on throughout the term to gain a greater understanding of the material, without credit. The solutions will be placed on eClass.

Sample representative exam questions will be discussed in class prior to the examinations. Many past exam questions with randomization are available at https://GradeChaser.com.

Missed Assessment and Deferred Exams

The rules for attendance and absence from term work and examinations are specified in the Academic Regulations (http://calendar.ualberta.ca/content.php?catoid=6&navoid=806). If you know you are going to miss any term work or exam for a reason that is acceptable to the university (such as an incapacitating illness, a severe domestic affliction, a religious belief, and so on) then please supply supporting evidence as soon as possible. You will receive a mark of zero in a missed assessment unless appropriate supporting documentation is received in a timely manner.

If you miss online practice or a homework assignment for a reason that is acceptable to the university, please supply supporting documentation to me within two days (or as soon as practical in cases of extenuating circumstances). With appropriate evidence provided in time, the deadline for online practice can be changed, or its weight can be redistributed to the other components.

If you miss a midterm exam for a reason that is acceptable to the university, please supply supporting documentation to me within two days (or as soon as practical in cases of extenuating circumstances).

With appropriate evidence provided in time, you may be granted a deferred midterm exam or the weight from the missed exam may be distributed to the final exam.

If you miss the final exam for a reason that is acceptable to the university, please contact the Undergraduate Office promptly in accordance with the procedures in Section 23.5.6 of the University Regulations and Information for Students in the University Calendar. It is the Undergraduate Office that decides whether to award a deferred final exam.

The deferred final exam will be held on Wednesday 15 January 2020 at 3:00pm unless an alternative arrangement is agreed.

Disagreements with Assessments

Your grades will stand as posted online unless any mistakes are drawn to my attention in a timely manner. Grades will normally be available within one week of exams. Once a final grade is assigned, it will not be changed except in the case of a recording error.

If you feel that any midterm or final grade is incorrect, please notify me by email within one week from the posting of the grades online (or as soon as practical in cases of extenuating circumstances).

Please note that any query about an exam mark will normally result in the entire exam being remarked which may lead to your mark going up or down. I may send your paper for remarking by a different marker, or I may invite you to come and witness me remarking the paper if your perception of your mark is substantially different from ours.

(7)

Academic Integrity

I expect honesty and integrity from students. Cheating of any kind will be dealt with sternly as university policy allows.

All exams and homework assignments are individual work. To help you judge what we consider acceptable and nonacceptable collaboration on individual assignments, consider the following examples of DOs and DON’Ts:

DO

 discuss the course material with other students;

 ask classmates for help when you are stumped;

 offer help to other students;

 your own work;

 participate in study groups; and

 participate in the discussion board and give hints, explanations, and clarifications (but without disclosing full or partial solutions).

DON’T

 view or copy someone else’s online practice or homework solutions;

 allow someone else to view or copy or enter your online practice or homework solutions;

 exchange online practice or homework solutions (e.g. via e-mail, Facebook groups, other social networks, on paper, etc.);

 communicate with anyone other than the course officials during the exams; or

 gain access to course materials from prior semesters that have not been provided to all students by the instructor. This may include exams, assignments, and problem solutions.

University of Alberta Rules

Policy about course outlines can be found in Course Requirements, Evaluation Procedures and Grading of the University Calendar.

The University of Alberta is committed to the highest standards of academic integrity and honesty.

Students are expected to be familiar with these standards regarding academic honesty and to uphold the policies of the University in this respect. Students are particularly urged to familiarize themselves with the provisions of the Code of Student Behaviour (online at www.governance.ualberta.ca) and avoid any behaviour which could potentially result in suspicions of cheating, plagiarism, misrepresentation of facts and/or participation in an offence. Academic dishonesty is a serious offence and can result in suspension or expulsion from the University.

Audio or video recording, digital or otherwise, of lectures, labs, seminars or any other teaching environment by students is allowed only with the prior written consent of the instructor or as a part of an approved accommodation plan. Student or instructor content, digital or otherwise, created and/or used within the context of the course is to be used solely for personal study, and is not to be used or distributed for any other purpose without prior written consent from the content author(s).

FIN 301 A1 Introduction to Finance - University of Alberta