UNIVERSITY OF ALBERTA School of Business
Department of Finance & Management Science FINANCE 422 – CAPITAL INVESTMENT
Dr. Barbara Jamieson Winter 2010
Office: BUS 3-40C Telephone: 780-492-5721 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: 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:
Ross, Stephen A., Randolph W. Westerfield, Jeffrey F. Jaffe, and Gordon S. Roberts, Corporate Finance, McGraw-Hill Ryerson, fifth Canadian edition, 2008 (ISBN-13:
978-0-07-096531-7; ISBN-10: 0-07-096531-5)
A copy of the textbook has been placed on Reserve at Rutherford North library. The call number is HG4026 C64 2008.
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.
Reference Books: The following books are available at Rutherford North library. Use of these materials is strictly optional. The call numbers are given below.
Tim Koller, Valuation: measuring and managing the value of companies, fourth edition, John Wilely & Sons, Inc., 2005 (ISBN: 0-471-70221-8) Call number: HG 4028 V3 C67 2005
Copeland, Tom and Vladimir Antikarov, Real Options, New York: Texere, 2001 (ISBN:
1-58799-028-8) Call number: HG 6024 A3 C78 2002
Richard Shockley, An Applied Course in Real Options Valuation, Thomson South- Western, 2007 (ISBN: 0-324-25963-8) Call number: HG 6024 A3 S56 2007 Grading: The marking scheme for the course is as follows:
Assignments 12%
Case Presentation & Written Submission 15%
Class Participation 3%
Midterm Exam 30%
Final Exam 40%
TOTAL 100%
Assignments: Three assignments will be given. 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 28 Assignment 2 Friday, February 12 Assignment 3 Thursday, March 18
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 25). 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. 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 tentative date for the final exam (subject to confirmation by the University) is 2 p.m. – 4 p.m. on Friday, April 23.
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.
Questions about Marking: If you have a question about marking, speak to the instructor within two working days 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 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 6, 8 Introduction Chapter 1 and Section 9.4
January 11, 13 Discounted Cash Flow Analysis
Ch. 2; Ch. 4; Ch. 5; section 7.1; Sections 8.1, 8.2, 8.4, 8.5, Appendix 8A and Appendix 8B
January 15, 18 Dealing with Inflation Section 8.3 January 20, 22, 25 Investment under
Uncertainty
Sections 10.1 – 10.5 (for background information);
Ch. 11; Sections 13.1 – 13.4 January 27, 29; February 1 Estimating the Cost of
Capital
Sections 6.1 – 6.5; Section 10.6; Section 13.5; Chs. 16 and 17 (for background information); Sections 18.5 and 18.7
February 3 Sensitivity and Scenario Analyses
Section 9.2 February 5, 8 Approaches to Valuation
(APV, FTE, and WACC)
Sections 18.1 – 18.4, 18.6 February 10, 12 Valuation of Firms Section 5.5
February 15 – 19 Reading week
February 22 Decision Tree Analysis Section 9.1 February 24 Monte Carlo Simulation Section 9.3
February 26 Midterm Exam
March 1 Monte Carlo Simulation Section 9.3
March 3 – March 22 (9 classes)
Real Options Analysis Sections 9.4, 23.1 - 23.3, 23.8, 23.12, and Ch. 24 (excluding Section 24.1) March 24, 26 The Buy or Lease Decision Ch. 22
March 29, 31; April 7, 9, 12 Case Presentations