FINANCE 422 – CAPITAL INVESTMENT UNIVERSITY OF ALBERTA School of Business
Department of Finance & Statistical Analysis
Instructor: András Marosi Fall 2017
Office: BUS 2-20 Telephone: 780-492-5365
e-mail: [email protected]
Office hours: before class, Monday and Wednesday 08:30 a.m. – 9:00 a.m. in BUS 3-10 after class, Monday and Wednesday 10:20 a.m. – 10:50 a.m. in BUS 3-10 and by appointment
Class section: A1 Class times: MW 9:00 a.m. – 10:20 a.m. Class room: BUS 3-10
Course Description and Objectives: This course discusses the capital investment decisions of firms. These are decisions about the size, allocation, and financing of capital expenditures, the relatively large, long-term investments that may be tactical or strategic in nature. Taken in the aggregate, these decisions determine the economic future for a society. To the firm, they constitute one of the most demanding challenges confronting management. (Prereq: FIN 301, MGTSC 312)
Learning Objectives: This course incorporates the learning goals of the BCom Program, in particular critical thinking, oral communication, teamwork, quantitative skills, and written communications. At the end of this course, you will have developed the following course-specific knowledge:
1. You should understand the theory of finance related to the allocation of a firm’s long-term capital resources.
2. You should acquire tools to deal with the practical application of theory. Special emphasis will be placed on decision-making under uncertainty. Real options analysis will be discussed.
3. You should have gained experience applying the theory and tools to real-world problems. This will be achieved through a company valuation project.
Textbook: Berk, De Marzo, Stangeland: Corporate Finance, 3rd Canadian Edition, Pearson Canada, 2015, ISBN: 978-0- 13-305529-0 (The 2nd edition is also acceptable but it is your responsibility to monitor differences between the editions.) Additional required and suggested readings may be handed out in class or posted on the class web site.
Company Valuation Project: A list of companies will be made available.
Method of Evaluation: Final grading in the course is done on the basis of individual student achievement.
Individual student achievement is measured by the following assessments:
Assignments (3 assignments, 5% each) 15%
Valuation (Presentation & Write-up) 15%
Class Participation 10%
Midterm Exam 25%
Final Exam 35%
TOTAL 100%
Final grades in the course will follow generally the historical distribution of grades in a FIN course that includes third-year and fourth-year students.
The following is the link to the official University of Alberta Assessment and Grading Policy:
https://policiesonline.ualberta.ca/PoliciesProcedures/Pages/DispPol.aspx?PID=101
Assignments: Three assignments will be given. Each person in the class must submit his/her individual assignments.
The due dates are listed below. Assignments must be submitted to the FIN 422 A1 assignment slot located outside the General Office on the third floor of the School of Business building. The cutoff time for dropping off assignments on the due dates is 3:00 p.m. Assignments handed in after 3:00 p.m. on the stated due dates will not be accepted.
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Academic Integrity: “One way to work appropriately with your colleagues is to discuss concepts, research and ideas together and then go your separate ways to write your individual assignments … When two or more students submit identical work claiming it is their own, it is a clear sign of inappropriate collaboration. … Having someone write, rewrite, extensively edit or correct your work for you is Cheating”. (University of Alberta, Truth in Education)
Due Dates for Assignments: Assignment 1 Monday, October 2 Assignment 2 Friday, October 20 Assignment 3 Friday, November 24
Group Work: This course requires students to participate in group-work for the valuation project presentation and written submission. This work accounts for 15% of the final grade in the course. Students will be given the opportunity to select the members of their group and groups will consist of about five students each. 15% of the group mark will be based on a peer evaluation in which all group members will be given the opportunity to evaluate the performance of the other members of their group. Students who fail to participate adequately in their group are liable to lose part or all of these marks. If problems arise during the term with any of the members of your group, please advise the instructor promptly.
Students who make no contribution to their group stand to lose all of the marks allocated for the valuation project presentation and written submission. In this circumstance, the instructor may penalize nonparticipating members of a group based upon complaints received from other group members. Such complaints must be made to the instructor prior to the day that valuation project reports are due (Wednesday, November 29). A student will not lose any marks for nonparticipation, in excess of the 15% based on the peer evaluation, without the instructor giving that student an opportunity to explain her/his lack of participation. A student who wishes to explain her/his lack of participation should contact the instructor before the last day of classes (December 8).
Class Participation: The mark for class participation will in large part be based on participation in the classes when the valuation project presentations are made. Participation will include attendance and participation in the discussion of the valuation projects.
Academic Integrity: “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 http://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.”
Please be aware that writing help is available at the following sites:
Centre for Writers: http://www.c4w.ualberta.ca/
Student Conduct and Accountability: http://www.deanofstudents.ualberta.ca/AcademicIntegrity.aspx
Examinations:
1. The exams will be on:
The material discussed in class.
The material in the class notes (incl. suggested questions from the textbook listed at the beginning of each note).
The material covered in the three assignments.
2. The midterm exam will be on the following topics: introduction, discounted cash flow analysis, dealing with inflation, investment under uncertainty and estimating the cost of capital.
3. The 2-hour final exam focuses on the following topics: sensitivity and scenario analyses, approaches to valuation, valuation of firms, Monte Carlo simulation, decision tree analysis, real options analysis, and the buy or lease decision.
4. The tentative date for the final exam (subject to confirmation by the University) is:
9:00 a.m. – 11:00 a.m. on Wednesday, December 20
5. You may bring a “formula” sheet to each exam. One standard-sized sheet (or two pages) will be allowed. The only restriction with respect to form and content (other than size) is that the “formula” sheet must be in your own handwriting.
6. You may use a calculator, but use of the text storage feature or any programming feature will not be allowed.
7. More information about the exams will be posted to the class web site closer to the exam dates.
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Questions about Marking: If you feel that your grade is incorrect, you must notify me in writing within one week of the date that the assignment, valuation project report, or exam is returned to the class. After that, the problem will not be researched. Please note that a request to have a question on your exam re-graded entails a request to have the entire exam re-graded.
Missed Term Work:
1. Any student who misses term work for a valid reason will be permitted to transfer the weight of that term work onto the final exam. Supporting documentation (either a form from the student’s faculty or a Statutory Declaration) may be required to demonstrate valid cause.
2. In case of absence from the final exam, the student must apply through the Undergraduate Office to write a deferred exam.
Recording of Lectures: Recording is permitted only with the prior written consent of the professor or if recording is part of an approved accommodation plan.
Tentative Class Schedule (readings from Berk, et al. third Canadian edition, are indicated below):
Date Topics and Events Readings
September 6, 11 Introduction;
NPV and other Investment Criteria
Chapters 1 – 5, 8; Section 14.6, pages 571 – 574, Comparing Mutually Exclusive Investments with Different Lives and Equivalent Annual Benefit Method September 13, 18 Discounted Cash Flow Analysis Chapter 9;
September 20 Dealing with Inflation Pages 148 – 152 and 285
September 25, 27 Investment under Uncertainty Chapters 10 – 11;
Multifactor models 13.7 October 2, 4 Estimating the Cost of Capital Sections 7.1, 7.2; Chapter 12;
Section 13.8; and Chapters 17 – 19 October 11 Sensitivity and Scenario Analyses Section 9.5
October 16, 18 Approaches to Valuation (APV, FTE, and WACC)
Sections 21.1 – 21.7
October 23 Midterm Exam
October 25 Valuation of Firms Sections 7.3, 7.4, 7.5; Chapter 22
October 30 Monte Carlo Simulation
November 1 Decision Tree Analysis Section 16.2
November 6, 8 Real Options Analysis Chapters 15 and 16
November 13 – 17 Reading Week
November 20, 22 Real Options Analysis Chapters 15 and 16
November 27 Buy or Lease Decision (if time allows), Final Exam Review
Chapter 25 November 29; December 4, 6 Valuation Project Presentations
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Tentative Class Schedule (readings from Berk, et al. second Canadian edition, are indicated below):
Date Topics and Events Readings
September 6, 11 Introduction;
NPV and other Investment Criteria
Chapters 1 – 6; pages 797 – 799, Comparing Mutually Exclusive Investments with Different Lives and Equivalent Annual Benefit Method; Section 20.6
September 13, 18 Discounted Cash Flow Analysis Chapter 7
September 20 Dealing with Inflation Pages 145 – 147 and 202
September 25, 27 Investment under Uncertainty Chapters 10 – 11;
Multifactor model 13.7
October 2, 4 Estimating the Cost of Capital Sections 9.1, 9.2; Chapter 12; Section 13.8;
and Chapters 14 – 16 October 11 Sensitivity and Scenario Analyses Section 7.5
October 16, 18 Approaches to Valuation (APV, FTE, and WACC)
Sections 18.1 – 18.7
October 23 Midterm Exam
October 25 Valuation of Firms Sections 9.3, 9.4, 9.5; Chapter 19
October 30 Monte Carlo Simulation
November 1 Decision Tree Analysis Section 22.2
November 6, 8 Real Options Analysis Chapters 21 and 22
November 13 – 17 Reading Week
November 20, 22 Real Options Analysis Chapters 21 and 22
November 27 Buy or Lease Decision (if time allows), Final Exam Review
Chapter 25 November 29; December 4, 6 Valuation Project Presentations
