UNIVERSITY OF ALBERTA School of Business
Department of Finance & Statistical Analysis FINANCE 422 – CAPITAL INVESTMENT
Barbara Jamieson Winter 2013
Office: BUS 3-40C Telephone: 780-492-5721 e-mail: [email protected]
Office hours: Tuesdays 12 noon – 1:30 p.m.,Wednesdays 10:00 a.m. – 11:30 a.m.
Class section: B1
Class times: MWF 1:00 p.m. – 1:50 p.m.
Class room: BUS 2-05
Prerequisite: FIN 301 Pre- or co-requisite: MGTSC 312
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.
The course has the following objectives:
1. To provide an understanding of the theory of finance related to the allocation of a firm’s long-term capital resources.
2. To provide insight into and 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. To provide an opportunity to apply the theory and tools to real-world problems.
This will be achieved through the use of case studies.
Textbook: The textbook for the course is:
Berk, Jonathan, Peter De Marzo, David Stangeland, Corporate Finance, second Canadian Edition, Pearson Canada, 2012, ISBN: 978-0-321-70872-4
The textbook can be purchased at the University bookstore.
Cases: Six cases will be used. Copies of the cases will be made available by the
instructor on a cost-recovery basis for $30.00 ($5.00 each). This amount covers copyright fees, photocopying charges, and GST.
Note: Once students are notified of the cases that will be used in this course, they are required to advise the instructor promptly if they have read any of the cases previously or have discussed any of the cases in another course. Failure to advise the instructor of previous exposure to a case would be grounds for a charge of academic misconduct to be brought. Students are not to have access to the teaching notes for any of the cases, and any evidence that the teaching notes were available to a student would also be grounds for a charge of academic misconduct.
Grading: The marking scheme for the course is as follows:
Assignments (3 assignments, 4% each) 12%
Case Presentation & Written Submission 15%
Class Participation 3%
Midterm Exam 30%
Final Exam 40%
TOTAL 100%
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 B1 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.
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 Thursday, January 24 Assignment 2 Thursday, February 7 Assignment 3 Thursday, March 21
Group Work: This course requires students to participate in group work for the case 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 case 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 case reports are due (Thursday, March 28). 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 (April 12).
Class Participation: The mark for class participation will be based on participation in the classes when the case presentations are made. Participation will include attendance and participation in discussion of the cases.
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 www.ualberta.ca/secretariat/appeals.htm) 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." (Section 23.4 of the University Calendar)
Examinations:
1. The exams will be on:
The material discussed in class.
The material in the class notes, including 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, estimating the cost of capital, and sensitivity and scenario analyses.
3. Students who have written the midterm exam will write a 2-hour final exam focused 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. Students with an Excused
Absence from the midterm exam will write a 2.5-hour final exam. They will write the same 2-hour final exam as other students but will, in addition, write a 0.5-hour exam on the material covered on the midterm exam.
4. The tentative date for the final exam (subject to confirmation by the University) is 2:00 p.m. – 4:00 p.m. or 4:30 p.m. on Wednesday, April 17.
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.
Note: Students who write the 2.5-hour final exam may bring two “formula” sheets to that exam, one dealing with earlier topics (covered on the midterm exam) and the other dealing with later topics (covered on the 2-hour final exam).
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.
Questions about Marking: If you have a question about marking, speak to the instructor within one week of the date that the assignment, case report, or exam is returned to the class.
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 the case of absence from the final exam, the student must apply through the Undergraduate Office to write a deferred exam.
Final Grade: Your final grade for the course will be based on the marks you accumulate during the term and will depend on both your absolute and relative standings. Once all the course marks are compiled, students will be ranked and grades will be assigned. If you achieve a course mark of at least 50%, you will receive a passing grade (that is, a grade of at least D).
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 the Berk, DeMarzo, Stangeland textbook are indicated below.
Date Topics and Events Readings
January 7, 9 Introduction Chapters 1 and 2; Section
20.6 January 11, 14, 16, 18 Discounted Cash Flow
Analysis
Chapters 3 – 7; pages 797 – 799, Comparing Mutually Exclusive Investments with Different Lives and
Equivalent Annual Benefit Method
January 21, 23 Dealing with Inflation Pages 145 – 147 and 202 January 25, 28, 30 Investment under
Uncertainty
Chapters 10 – 11;
Multifactor model 13.7
February 1, 4, 6, 8 Estimating the Cost of Capital
Sections 9.1, 9.2; Chapter 12; Section 13.8; and Chapters 14 – 16 February 11 Sensitivity and Scenario
Analyses
Section 7.5 February 13, 15 Approaches to Valuation
(APV, FTE, and WACC)
Sections 18.1 – 18.7 February 18 – 22 Reading Week
February 25, 27 Valuation of Firms Sections 9.3, 9.4, 9.5;
Chapter 19
March 1 Midterm Exam
March 4 Monte Carlo Simulation
March 6 Decision Tree Analysis Section 22.2
March 8 – March 22 (7 classes)
Real Options Analysis Chapters 21 and 22 March 25, 27 The Buy or Lease Decision Chapter 25
April 3, 5, 8, 10, 12 Case Presentations
