Lahore University of Management Sciences FINN 200 Intermediate Finance

Fall 2012
Instructor Room No. Office Hours Email Telephone Secretary/TA TA Office Hours Course URL (if any) Dr. Bushra Naqvi 148 Academic Block TBA Bushra.naqvi@lums.edu.pk 042-35608321 Khasif Saeed TBA LMS

Course Basics Credit Hours Lecture(s) Recitation/Lab (per week) Tutorial (per week) Course Distribution Core Elective Open for Student Category Close for Student Category

3 Nbr of Lec(s) Per Week Nbr of Lec(s) Per Week Nbr of Lec(s) Per Week

2 Lectures/Week

Duration Duration Duration

80 minutes

Core ACF Sophomore

COURSE DESCRIPTION This course is the second in the series of required courses for the B.Sc. Accounting & Finance Degree and builds on the concepts covered in Principles of Finance (FINN 100). The course shall focus on corporate financing decisions of the firm. Towards a later part of the course, the class shall look at the valuation issues and derivative, and their implications for the decision making process in a firm. An assessment of capital structure, debt financing and dividend policies and their implications will be carried out in depth.

COURSE PREREQUISITE(S) Principles of Finance (FINN 100)

COURSE OBJECTIVES Key objectives of this course are: To broaden students understanding of capital budgeting to the introduction of project risk and how various options can create value in a project To learn how financial managers make financing decisions and what are the different forms of market efficiency To gain an in-depth understanding of the complete computation of a firms cost of capital and its implications towards firm value To understand what factors are important in determining the optimal mix of debt and equity financing for a firm To understand how dividend policy can affect firm value and why different firms can have different optimal distribution policies

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Learning Outcomes After taking this course the students should be able to thoroughly understand the modern theory of finance and its implications of corporate finance, payout policy & capital structure decisions and capital budgeting decisions amongst other topics discussed in the course. He/She should be able to apply the concepts in decision making for corporate financing or investment analysis.

Grading Breakup and Policy Assignment(s) & cases: 15% Home Work: Quiz(s): 15% Class Participation: 10% Attendance: 5% Midterm Examination: 25% Project: Final Examination: 30%

Class Participation and Attendance: Students are expected to attend all classes. If you are not present at the beginning of a class or leave class during the session without instructors prior permission, you will be considered absent for the day. You must review the assigned materials in advance of the class in order to contribute meaningfully to class discussions. A significant portion of the course grade depends on the quality and level of your involvement and input in class discussions. Quizzes: There shall be several announced and unannounced quizzes from the assigned and the last reading, Best 3 shall be counted. No Makeup quizzes shall be allowed whatsoever. Assignments: There will be several graded assignments during the term to reinforce financial concepts and to encourage usage of spreadsheets such as Excel in performing financial analysis. The format and other requirements will be specified by the instructor. All assignments must be submitted on the due date. Late submissions will not be accepted. In addition, non-graded end-of-chapter problems may be assigned to stimulate class discussions. Case Analyses: One or Two written case analyses reports by groups of 4-5 students (depending on class size) will be required. Case groups will be formed by the second week of the term. The case reports must adhere to the format and other requirements specified by the instructor. The written case reports must be submitted at the beginning of the class session on due date. Late submissions will not be accepted. A peer evaluation form will be distributed for rating case group members. Your peer evaluation will impact your grade on the case report. Cases designated as in-class discussion case are intended for general class discussion and do not require written reports. However, each student is expected to study and analyze the case material in advance in order to participate meaningfully in class discussions. Examinations: Both exams (mid-term and final) will comprise a blend of MCQs and open-ended questions/problems or case-like situations. Calculator Requirement: You will need a financial calculator capable of performing present value/future value functions. For example, Texas Instrument BA II meets these criteria. You are required to purchase financial calculator by the end of first week.

Examination Detail Yes/No: Yes Combine Separate: Combine Duration: 2 -3 hours Preferred Date: Exam Specifications: Close Book, Close Notes, TVM Tables and Calculator allowed

Midterm Exam

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Final Exam Yes/No: Yes Combine Separate: Combine Duration: 2 3 hours Exam Specifications: Close Book, Close Notes, TVM Tables and Calculator allowed

COURSE OVERVIEW Week/ Lecture/ Topics Module Module 1: Valuation and Capital Budgeting Week 1 Working with Financial Statements (Recap) A Review of corporate finance Week 2 &3 Net present value and other investment criteria (Recap) Making Capital investment decisions

Recommended Readings

Objectives/ Application Sources and uses of cash and the Statement of Cash Flows, Standardized financial statements for comparison purposes, review of financial ratios Review of core concepts and selected topics from earlier course (TVM, discounted cash flows, bond valuation and stock valuation) Payback, discounted payback, NPV, IRR, ARR Projected Cash Flows, Investment Cash Flows, Pro Forma financial Statements, Estimating NPV Estimates Scenario and other what-if analysis, Operating leverage, Capital rationing, Accounting vs. Financial Break-Even Review of core concepts and selected topics from earlier course (Risk & Return, CAPM)

RWJ - Ch: 3 BMA - Ch: 1,2,3 & 4

RWJ - Ch: 9 BMA Ch: 5 RWJ - Ch: 10

RWJ - Ch: 11 Project analysis and evaluation Module 2: Risk and Return Week 4 Risk and Return Risk, Return and Security Market Line BMA - Ch: 7,8 & 9

Module 3: Financing Decisions and Market Efficiency Corporate Financing and the Six Lessons of Week 5 & 6 Market Efficiency An Overview of Corporate Financing

BMA - Ch: 13 BMA - Ch: 14

How Corporations Issue Securities Module 4: Payout Policy and Capital Structure

BMA - Ch: 15

We Always Come Back To NPV, The Six Lessons Of Market Efficiency All Topics: Patterns of Corporate Financing (Common Stock, Debt, Financial Markets & Institutions) Venture Capital, IPO, Other new issue procedures, Securities Sales by Public Companies Choice of Payout Policy, Dividend Payment & Stock Repurchases, How do Companies decide on the Payout? Information Content of Dividends & Stock Repurchases, The Payout Controversy The Base Case: Effect of Financial Leverage in a Competitive Tax Free Economy, Financial Risk & Expected Returns, WACC Corporate taxes, personal taxes, cost of financial distress, The Pecking order of Financing choices The After Tax WACC, Valuing Businesses, Using WACC in practice, The Adjusted Present Value (APV) Financial planning models, External financing and growth, Internal growth and sustainable growth

BMA - Ch: 16 Week 7, 8, 9 & 10 Payout Policy BMA - Ch: 17 Does Debt Policy Matter? Mid term Exam BMA - Ch: 18 How Much Should a Firm Borrow? BMA - Ch: 19 Financing and Valuation Long-term financial planning & growth RWJ - Ch: 4

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Module 5: Working Capital Management Working capital management planning and Week 11 policies Credit and inventory management Module 6: Derivatives and Risk Management Week 12, 13 Risk Management: An introduction to Financial & 14 Engineering Options and corporate finance Valuing Options Warrants and convertible securities Review of Final exam Final exam Textbook(s)/Supplementary Readings Recommended Texts: Principles of corporate finance, 8th edition by Brealey, Myers and Allen (BMA) Fundamentals of Corporate Finance, 9th edition by Ross, Westerfield and Jordan (RWJ) Supplementary Texts: Financial Management Theory and Practice By Brigham& Earhart; Intermediate Corporate Finance, by Brigham and Davis, or any book on Corporate Finance RWJ Ch: 19, 20 & 21 Short-term financing, working capital management planning and policies.

RWJ Ch: 23 RWJ Ch: 14 RWJ Ch: 24 Assigned reading

Types of volatility companies can manage, Understanding forwards, futures, swaps and option Link between options and corporate finance How to value those options, different models and techniques Applications of derivatives in corporate finance and risk management