The Lee Kong Chian School of Business

Academic Year 2013/14 Term 2

FNCE101 FINANCE
Instructor Title Tel Email Office : Professor WANG Rong : Assistant Professor of Finance : 6828 0148 : rongwang@smu.edu.sg : LKCSB #4042

COURSE DESCRIPTION
This course serves as an introduction to managerial finance. The aim is to provide students with a strong foundation in finance. Students will be exposed to key financial concepts and tools commonly used by managers in making sound financial decisions, which include time value of money, risk-return analysis, asset pricing and cost of capital. The course focuses on basic financial activities undertaken by a firm to create value for its shareholders. These activities include financial planning and management, investing and financing.

LEARNING OBJECTIVES
By the end of this course, students will be able to: Describe important financial management decisions and forms of business organizations; explain the goal of financial management; explain agency problems; and describe the characteristics of a well-functioning securities market; Interpret balance sheets, income statements; compare and contrast cash flows from operating, investing, and financing activities; and conduct ratio analyses to analyse various aspects of a companys financial health; Calculate and interpret annual percentage rate and effective annual rate; solve time value of money problems for both single cash flow and multiple cash flow problems (Ordinary annuity, annuity due, growing annuity, and perpetuity); and understand the calculation of fixed-payment amortization; Calculate and interpret results using each of the following methods to evaluate capital projects: payback period, discounted payback period, net present value (NPV), internal rate of return (IRR) (and the potential problems with IRR), and profitability index; identify various types of costs, such as sunk costs, opportunity costs, and side effects; and forecast future cash flows with Pro Forma financial statements; State various forms of investment returns; calculate and interpret the difference of arithmetic average and geometric average returns; calculate sample and population mean and standard deviation of returns on a single asset; explain risk-return tradeoffs across asset classes based on historical evidence; Calculate mean and standard deviation of returns on portfolios; understand the correlation between assets and diversification benefit; differentiate systematic vs. unsystematic risk; explain the capital asset pricing model (CAMP), security market line (SML), and asset beta, and the effects on asset expected returns and risk tradeoff; estimate asset beta using tools such as Excel spreadsheet; explain various forms of efficient market hypotheses and their practical implications; Estimate the values of common stocks and preferred stocks, using the discount dividend models (DDM), free cash flow valuation models, and market ratio models; Contrast the theoretical irrelevance of dividend policy with how it is often relevant in practice, including high, low, and residual dividend policies; explain the basic properties stock repurchase and its relation with cash dividend; Explain contractual properties of bonds, special bond features, and bond quotations; calculate and interpret various bond yields (current yield, yield-to-maturity, and realized return); explain the steps in the bond valuation process; explain the difference between nominal and real rate and the effect of inflation; explain factors driving the bond yields; and explain the interest rate risk and the term structure of interest rate, and the effects on bond valuation;

Calculate and interpret the cost of equity, cost of debt, and the weighted average cost of capital (WACC) of a company; explain the effect of tax subsidy on cost of debt and WACC; calculate and interpret flotation costs; explain the pure play approach of estimating WACC for multi-sector companies; Explain the basic processes for venture capital investment, IPO, SEO, and rights offerings; explain Modigliani and Miller (MM) theory of optimal capital structure choice under various tax and bankruptcy costs scenarios; solve problems of firm valuation and cost of capital with and without corporate taxes; explain the basic concepts of the peck-order theory of capital structure choice; Define European option, American option, and moneyness, and compute and interpret option payoffs; explain the upper and lower bounds of option prices; value options in a one-period model; explain how factors such as underlying asset price, strike prices, volatility, time to maturity, interest rate affect option prices; explain the put-call parity and calculate call (put) prices applying the put-call parity formula; view the equity portion of the company as a call option of its total assets.

PRE-REQUISITE/ CO-REQUISITE/ MUTUALLY EXCLUSIVE COURSE(S)

Please refer to the Course Catalogue on OASIS for the most updated list of pre-requisites / co-requisites for this particular course. Do note that if this course has a co-requisite, it means that the course has to be taken together with another course. Dropping one course during BOSS bidding would result in both courses being dropped at the same time.

ASSESSMENT METHOD
Class Participation Project Oral Presentation Final Report Quizzes Midterm exam Final Exam 10% 5% 15% 10% 20% 40%

ACADEMIC INTEGRITY
All acts of academic dishonesty (including, but not limited to, plagiarism, cheating, fabrication, facilitation of acts of academic dishonesty by others, unauthorized possession of exam questions, or tampering with the academic work of other students) are serious offences. All work (whether oral or written) submitted for purposes of assessment must be the students own work. Penalties for violation of the policy range from zero marks for the component assessment to expulsion, depending on the nature of the offence. When in doubt, students should consult the course instructor. Details on the SMU Code of Academic Integrity may be accessed at http://www.smuscd.org/resources.html.

Homework Assignments:
Suggested practice problems will be posted by the end of each class. Solutions will be posted on Vista. You do NOT need to turn in the homework assignments. However, solving problems is the key to master the material.

Class Participation:
Class participation is strongly encouraged. In each session, I will ask a lot questions. Note that you are not entirely judged on the quality of your answer. Rather, you are judged on earnest and honest attempts to help the rest of the class learn the material. If you actively answer questions and solve problems in class, I reserve the right to raise your grade. If you behave badly (e.g. surfing internet, chatting with friends, answering your cell phone, sending SMS, etc.) in class, I have the right to lower your participation grade. Participation grades are not awarded based on mere class attendance.

Group Project:
There will be a group project on a firms financial health analysis, emphasizing risk-return tradeoffs and valuation. The project will be executed in groups of about 4-5 students each. Group project will be graded based on a written final report and an oral presentation. Details will be provided in class.

Quizzes:
There will be two in-class quizzes (each about 20 minutes) aimed to help you better understand the class materials and prepare for the exams. The quizzes will be closed-book unless otherwise mentioned. There are no make-up quizzes. If you are unable to take quizzes due to a serious health problem (with MC), the first and the second quizzes (the third and the fourth quizzes) will be cumulated to your midterm (final exam).

Examinations:
There will be a midterm exam and a final exam. The midterm exam is one and half hours, and the final exam is two hours. Both are closed-book exams (financial calculators will be allowed). Formula sheet will be provided. The final exam will be cumulative of all content covered in this course. No make-up exams will be allowed without prior permission. If you miss the midterm exam due to a serious health problem (with MC), your midterm will be cumulated to you final exam.

Financial Calculator:
You will need a financial calculator for this course. There are many different types of financial calculators. For example, HP-10B, Sharp EL-733A, and Texas Instruments BA II Plus are all good ones. You are responsible for understanding how to operate your own calculator. In class, I will use Texas Instruments BA-II Plus for the illustration. Other financial calculators work similarly.

OFFICE HOURS: TBA TEACHING ASSISTANTS

TBA

RECOMMENDED TEXT AND READINGS

Required: Corporate Finance Fundamentals by Stephen A. Ross, Randolph Westerfield, Bradford D. Jordan, Joseph Lim, and Ruth Tan, Asia Global Edition, McGraw-Hill. Lecture notes will be available on eLearn the day before class. Recommended: Additional readings will be assigned. Students are expected to keep abreast of current developments in the Asia-Pacific region by reading leading business dailies/weeklies like the Asian Wall Street Journal, Far Eastern Economic Review, The Economist, Business Times and Business Week.

WEEKLY LESSON PLANS

This schedule is extremely tentative, and subject to change. Any change will be announced in class. Week No. Topics Readings 1 (6 Jan 12 Jan) 2 (13 Jan 19 Jan) 3 (20 Jan 26 Jan) 4 (27 Jan 2 Feb) 5 (3 Feb 9 Feb) 6 (10 Feb 16 Feb) 7 (17 Feb 23 Feb) 8 (24 Feb 2 Mar) 9 (3 Mar 9 Mar) 10 (10 Mar 16 Mar) 11 (17 Mar 23 Mar) 12 (24 Mar 30 Mar) 13 (31 Mar 6 Apr) 14 (7 Apr 13 Apr) 15, 16 (14 Apr 24 Apr) Final Exam Study Break Cost of Capital Long-term financing choice Quiz 2 Capital Structure Option Valuation Student Presentations (Groups 1-5) Report Due Student Presentations (Groups 6-9) Chapter 16 Chapters 24,25 Chapters 14, 15 Risk and Return Chapters 12, 13 Valuing Stocks Free Cash Flow Model (not in the book) Midterm Exam (Feb 21th, Friday, 6pm-7:30pm) Recess Chapters 8, 17 Valuing Bonds Chapter 7 Capital Budgeting (II) Chapter 10 Capital Budgeting (I) Quiz 1 Rescheduled to week 7 Chapters 9, 10.6 Introduction Financial Statements Financial Tools Chapters 5, 6 Chapters 1,2,3