UNIVERSITY OF ALBERTA School of Business
Department of Finance & Management Science FINANCE 422 – CAPITAL INVESTMENT
Dr. Barbara Jamieson Winter 2007
Office: BUS 3-40C Telephone: 492-5721 e-mail: [email protected]
Office Hours: Tuesdays 1:30 p.m. – 3:00 p.m., Wednesdays 10:00 a.m. – 11:30 a.m.
Class section: B2
Class times: MWF 2:00 p.m. – 2:50 p.m.
Class room: BUS 1-09
Prerequisite: FIN 301 Pre- or co-requisite: MGTSC 352
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:
Ross, Stephen A., Randolph W. Westerfield, Jeffrey F. Jaffe, and Gordon S. Roberts, Corporate Finance, McGraw-Hill Ryerson, fourth Canadian edition, 2005 (ISBN: 0-07- 09653-X)
A copy of the textbook has been placed on Reserve at Rutherford North library. The call number is HG 4026 C64 2005.
Course package: A package consisting of eight cases can be purchased at the University of Alberta Bookstore.
Reference Books: The following books and papers are available at Rutherford North library. Use of these materials is strictly optional. The call numbers are given below.
Amram, Martha and Nalin Kulatilaka, Real Options, Harvard Business School Press, 1999 (ISBN: 0-87584-845-1) Call number: HG 6024 A3 A47 1999
Copeland, Tom, Tim Koller, and Jack Murrin, Valuation, third edition, John Wilely &
Sons, Inc., 2000 (ISBN: 0-471-36190-9) Call number: HG 4028 V3 C67 2000
Copeland, Tom and Vladimir Antikarov, Real Options, New York: Texere, 2001 (ISBN:
1-58799-028-8) Call number: HG 6024 A3 C78 2002
Copeland, Thomas E. and Vladimir Antikarov, “Real Options: Meeting the Georgetown Challenge”, Journal of Applied Corporate Finance, Volume 17, Number 2, Spring 2005, pages 32 – 51.
Dixit, Avinash and Robert Pindyck, Investment under Uncertainty, Princeton University Press, 1994 (ISBN: 0-691-03410-9) Call number: HG 4028 C4 D59 1994
Stulz, Rene M., Risk Management and Derivatives, Thomson South-Western, 2003 (ISBN: 0-538-86101-0) Call number: HD 61 S785 2003
Trigeorgis, Lenos, Real Options, MIT Press, 1996 (ISBN: 0-262-20102-X) Call number:
HG 4028 C4 T73 1996
Grading: The marking scheme for the course is as follows:
Homework Assignments 12%
Case Presentation & Written Submission 15%
Class Participation 3%
Midterm Exam 30%
Final Exam 40%
TOTAL 100%
Homework Assignments: Three homework assignments will be given. The due dates are listed below. Assignments must be submitted to the FIN 422 B2 assignment slot outside the general office located 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.
Due Dates for Homework Assignments:
Homework 1 January 25
Homework 2 February 15
Homework 3 March 22
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 upon the complaint of other members.
Such complaint must be made to the instructor prior to the day that case reports are due (March 27). 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 13).
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(2) of the University Calendar)
Examinations:
1. The exams will be on:
• The material discussed in class.
• The material in the class notes.
• The material covered in homework assignments.
2. The midterm exam will be on the following topics: introduction, net present value and investment decisions, dealing with inflation, investment under uncertainty, sensitivity and scenario analyses, and estimating the cost of capital.
3. The final exam will focus on the following topics: adjusted present value and flow to equity, valuation of firms, decision tree analysis, Monte Carlo simulation, real options analysis, and the buy or lease decision.
4. The final exam is scheduled for 2 p.m. – 4 p.m. on Friday, April 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.
Rereading a homework assignment or exam: If you have a question about marking, speak to the instructor about this within one week of the date that the homework assignment or exam is returned to the class.
Missed Term Work:
1. Any student who misses a homework assignment for a valid reason (medical or other) will be permitted to transfer the weight of that assignment onto the other homework assignments. A student who misses any other term work for a valid reason will be permitted to transfer the weight of that term work onto the final exam. A medical note or other documentation (such as a Statutory Declaration) will be required to prove valid cause. The documentation must be given to the instructor within one week following the missed term work. In the case of absence from the final exam, the student must apply through the Undergraduate Office to write a deferred exam.
2. In the event of illness, if you visit the University Health Centre or your family doctor for medical treatment, they will provide a medical note. But be aware that the University Health Centre will no longer provide a medical note in the
following circumstances:
• Where the missed term work or exam is worth less than 20% of the final course mark.
• Where the student requests a note “after the fact”, that is, after s/he is no longer ill.
3. In the event that you miss term work for a valid reason and do not have a medical note (perhaps you did not go to your family doctor or to the University Health Centre or perhaps your reason for missing the work was not due to illness), you might, in that circumstance, make a Statutory Declaration. You make a sworn Declaration at the Office of the Registrar, Examinations/Timetabling, room 120, Administration Building.
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).
Tentative Class Schedule: Readings from the Ross, Westerfield, Jaffe, Roberts textbook are indicated below. Where you are instructed to read “for background information”, it is not necessary to absorb the material in detail. There will be
insufficient time in the course to discuss those topics in the detail that is provided in the textbook.
Date Topics and Events Readings
January 8, 10 Introduction Sections 1.1, 1.2, and 1.4 and Section 9.4
January12, 15, 17 Net Present Value and Investment Decisions
Ch. 2; Ch. 4; Ch. 5; section 7.1; Sections 8.1 – 8.3 and 8.5 and Ch. 8 appendix A January 19, 22 Dealing with Inflation Section 8.4
January 24, 26, 29 Investment under Uncertainty
Ch. 10 (for background information); Ch. 11, including Appendix 11A;
Ch. 12; sections 13.1 – 13.4 January 31; February 2, 5, 7 Estimating the Cost of
Capital
Sections 6.1 – 6.5; section 13.5; Sections 18.5 and 18.7; Chs. 16 and 17 for background information February 9 Sensitivity and Scenario
Analyses
Section 9.2 February 12, 14 Adjusted Present Value and
Flow to Equity
Sections 18.1 – 18.4, 18.6 February 16, 26 Valuation of Firms Section 5.5
February 19 – 23 Reading Week
February 28 Decision Tree Analysis Section 9.1
March 2 Midterm Exam
March 5, 7 Monte Carlo Simulation Section 9.3
March 9 – 23 (7 classes) Real Options Analysis Sections 9.4, 23.1 - 23.3, 23.8, 23.12, and Ch. 24 (excluding section 24.1) March 26, 28 The Buy or Lease Decision Ch. 22, including Appendix
22A March 30; April 2, 4, 11, 13 Case Presentations
