MBA Programme 2006/2007
Period 1 – September-October 2006
Financial Markets and Valuation
Professor: Harald Hau
harald.hau@insead.edu
PMLS 2.10
Ext 4484
Assistant: Melanie Sebag
melanie.sebag@insead.edu
PMLS OSP 2.05
Ext 4214
Course Objectives
The purpose of this course is to acquire an overall understanding of corporate financial
management. The course is structured in three main parts
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Value-Based Management
Pricing of Risk
Financial Structure.
At the end of the course, you should be able to
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

Evaluate investment projects and value a company
Determine the project-specific price of risk for investment projects
Understand the relationship between capital structure and the cost of capital.
Summary of Course Content
The course is a blend of lectures, exercises and case discussions. The lectures are
designed to summarise, clarify and extend the assigned material, while the exercises and
cases are intended to illustrate the computations and complications in applying finance
concepts to reasonably realistic problems. Study materials, cases and exercises should be
prepared before the sessions during which they are discussed.
The password protected course web site is:
http://faculty.insead.fr/hau/teaching.htm.
You log in by typing “finance1” and the password (provided in class). The course web site
contains additional reading material as well as spreadsheets to the exercises.
Required or Recommended Textbook(s)
Pre-Readings:
Chapters 1-4 of “Finance for Executives” by Gabriel Hawawini and Claude Viallet (2nd
Edition, South-Western)
Required Course Textbook:
“Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield and Jeffrey Jaffee (7 th
edition 2004, Irwin/McGraw-Hill), referred to as RWJ7th
Additional Book Recommendation:
“A random walk down Wall Street”, Burton G. Malkiel, Norton & Co.
This is a best selling book on portfolio investment.
Financial Calculator:
For the final exam and some of the exercises you need a (financial) pocket calculator (like
the Texas Instruments BA II Plus or Hewlett Packard 12) which allows you to calculate the
nth power or nth root as well as the internal rate of return (IRR) and the net present value
(NPV). Information can be found on http://www.hp.com/calculators/business/.
The Grading Scheme
The final course grade is determined based on
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

Quality of class participation (10%)
Three group reports
o Voodoo Love mini-case due in session 5 (5%)
o MRC case due in session 7 (10%)
o Boeing 777 case due in session 15 (10%)
Final exam (65%)
All participants are expected to prepare the assigned readings, exercises and cases for inclass discussions.
Description of Examinations and Assignments which will be set
The written group reports should answer the questions provided in the handout ‘Exercises
for Sessions 2-7, 9-15’. The MRC and Boeing 777 case reports are limited to five, doublespaced typed pages each, exclusive of exhibits and appendices. Your report must include
an ‘executive’ summary (250 words maximum, this should summarize your main
conclusions and any important assumptions) and a brief table of contents. The report
should be written as if you were presenting it to your business colleagues. The reports will
be graded on the basis of accuracy and reporting quality. Each participant must keep a
copy of the reports for class discussion. The report is due before the beginning of the first
session which discusses the case report. No late reports will be accepted.
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The final exam will be open book. Bring your pocket calculator. Laptops are not permitted
in the exam. A sample exam will be given out in the second half of the course.
Tutorial:
To be announced
3
Outline of Class Sessions
Session 1
Course Introduction
Required Reading:
- RWJ7th, Chapters 4.1-4.2Hayek, Friedrich, “The use of knowledge in society”,
American Economic Review, XXV, no 4, September 1945, 519-530
- Friedman, Milton, “The Social Responsibility of Business is to Increase its
Profits”, The New York Times Magazine, September 13, 1970.
PART I: VALUE-BASED MANAGEMENT
Session 2
Present Values and Investment
Required Reading:
- RWJ7th, Chapters 4.3-4.4
- “GM relies on revamp to escape pensions gap”, Financial Times, 4/10/2002
- “Ticking Bomb”, Economist, 14/11/2002
Prepare:
- Exercises for Session 2 and bring pocket calculator to class
N.B. the set of exercises will be handed out in the first class.
Session 3
Bond Markets and Term Structure
Required Reading:
- RWJ7th, Chapters 5.1-5.3, RWJ7th Appendix 5A (pp. 134-140 only)
- RWJ7th, Chapter 27.4
Recommended Reading:
- “Ford and GM’s bonds looking less roadworthy”, Financial Times, 3/10/2002
- “Flight to bonds sends yields sliding to new lows”, Financial Times, 20/1/2003
Prepare:
- Exercises for Session 3
Session 4
NPV and Value Creation
Required Reading:
- RWJ7th, Chapter 6
- “In their Own Words – Samuel Weaver on Capital Budgeting at the Hershey
Foods Corporation”, Ross, Westerfield and Jordan (p.320)
Recommended Reading:
- “Forget Formulae and trust gut instinct, advises Buffett”, Financial Times,
04/05/2003
Prepare:
- Exercises for Session 4
4
Session 5
Free Cash Flow and Project Valuation
Required Reading:
- RWJ7th, Chapter 7
Prepare:
- Exercises for Session 5
- ‘Voodoo Love’ case is due before class and to be deposited in the box in front of
my office (PMLS 2.10)
Session 6
Company Valuation Methods
Required Reading:
- RWJ7th, Chapters 5.4-5.6, 5.8-5.9
Prepare:
- Exercises for Session 6
Session 7
Case Study: MRC
Required Reading:
- Langohr, H., “Valuation as a source of insight”, in Mastering Entrepreneurship,
2000, pp. 135-139
Prepare:
- MRC case (see Exercise 7) is due before class and to be deposited in the box in
front of my office (PMLS 2.10)
Session 8
Review Session
Prepare:
- Self-Assessment Exercises 8
PART II: THE PRICING OF RISK
Session 9
Portfolio Theory I
Required Reading:
- RWJ7th, Chapters 9, 10.1-10.4
Prepare:
- Exercises for Session 9
5
Session 10
Portfolio Theory II and the Capital Asset Pricing Model
Required Reading:
- RWJ7th, Chapters 10.5-10.10, 11.5
Prepare:
- Exercises for Session 10
Session 11
The CAPM in Practice
Required Reading:
- RWJ7th, Appendix 10A, Chapters 12.1-12.3
- “Counting the Cost”, Financial Times - Lex Column, 24/03/2003
- “Great expectations”, The Economist, February 2, 2000, pp. 68-69.
Prepare:
- Exercises for Session 11
Session 12
Market Efficiency
Required Reading:
- RWJ7th, Chapter 13
- Clements, Jonathan, “The truth investors don’t want to hear on index funds and
market soothsayers”, Wall Street Journal Europe, May 15, 1998, p. 12.
Prepare:
- Exercises for Session 12
Optional Reading:
- See the course web page for latest academic research on mutual fund
performance (includes some of my own work).
PART III: FINANCIAL STRUCTURE
Session 13
Value and Capital Structure
Required Reading:
- RWJ7th, Chapter 15
Prepare:
- Exercises for Session 13
Session 14
Weighted Average Cost of Capital
Required Reading:
- RWJ7th, Chapters 12.4-12.5, 17
Prepare:
- Exercises for Session 14
6
Session 15
Case Study: Boeing 777
Prepare:
- Boeing 777 case due before class and to be deposited in the box in front of my
office (PMLS 2.10)
Optional Reading:
- “Boeing to cut another 5,000 jobs”, Financial Times, 18/07/2003
Session 16
Review Session or Guest Speaker
Prepare:
- Self-Assessment Sample Exam
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