Department of Finance
National Chengchi University
Fall 2008
Financial Theory and Policy
Wednesday 09:10AM – 12:00AM
Room: 研究 250307
Instructor: 徐燕山
Office: 商學院 261246
Office Hrs.: Tue. 14-16
Email:
Phone:
ysshiu@nccu.edu.tw
81246
Course Description:
This course covers the major topics in corporate finance such as capital budgeting,
cost of capital, capital structure, dividend policy, merger and acquisitions, and real
option. In addition, other advanced topics such as security design and risk
management will be covered. The objective of the course is to provide an
understanding of both the theory of corporate finance and how it applies to the real
world. Every effort will be made to integrate current business news into the
presentation and discussion of the material.
Required and Recommended Materials:
The textbook for the course is
S. Ross, R. Westerfield, J. Jaffe, and B. Jordan, Modern Financial
Management, 8th edition, McGraw-Hill, 2008.
There are also six required HBS cases:
“The Super Project”
“Arundel”
“Netscape’s Initial Public Offering”
“American Home Products Corp.”
“Avon Products”
“Interco”
“MW Petroleum Corporation (A)”
In addition, there is a recommended collection of articles:
Joel M. Stern and Donald H. Chew, Jr., editors, The Revolution in Corporate
Finance, Fourth Edition, Blackwell, 2003.
Some of the readings from this book (or an earlier edition) will be covered in class.
They often provide a different or more detailed treatment of the material covered in
the textbook.
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Finally, there is one required article which we will not use until the last class:
1. John R. Graham and Campbell R. Harvey, 2001, “The theory and practice of
corporate finance: Evidence from the field,” Journal of Financial Economics 60, p.
187-244. (GH)
Lecture Notes:
You can download the lecture notes from the University’s e-learning website (WM3).
Course Requirements:
The course requirements consist of both group and individual assignments. Groups
should consist of 3-4 students. Each group will be responsible for preparing all the
cases, which will be discussed extensively in class, and writing a short analysis.
Case write-ups must be handed in at the beginning of class the day they will be
discussed. The case write-ups should consist of answers to the case questions, which
will be handed out approximately 2 week prior to the due date. Write-ups should be
limited to three pages, plus appendices with spreadsheet printouts, etc.
Everyone should come to class prepared to contribute and express their opinions.
Please keep a copy of your write-up to help you answer questions during class
discussion. Specific groups will also be assigned case questions for which they are
expected to lead the discussion. In contrast to problem sets and exams, cases do not
have a single correct answer. Moreover, they are often ambiguous, do not provide
complete information, and require you to make assumptions.
In grading the case write-ups, I will not be looking for an answer; rather I will judge
the process that went into getting to the answer. I will be looking for logic,
consistency, thoughtful application of finance theory, and justification for any
assumptions that you need to make. Preparing cases can be a time-consuming and
frustrating experience. It is best to start as early as possible. There will be a
discussion board on the course homepage on WM3 where I and your classmates can
respond to questions that arise as you prepare the cases.
The individual assignments consist of an in-class midterm and a final exam. The
midterm will be held during class on November 12th. The final exam will be held
on January 14th, 2009, from 9:10am to 11:00am. There will be no make-up exams,
so mark these dates in your calendar. There are also several problems sets for the
article readings. The answers to the problem sets should be handed in at the
beginning of class the day they are due.
In addition, students should attempt to do end-of-chapter problems from the textbook.
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Some representative problems are listed on the course outline. Answers to these
problems will not be collected, and I shall provide you the solutions to the problems.
Finally, students are expected to contribute, in a constructive manner, to classroom
discussions. The assigned reading should be done before the corresponding class
week.
Grading Policy:
The final grade will be determined as follows:
Class participations 5%
Problem sets
10%
Case Write-ups
Midterm
Final
20%
30%
35%
Class Schedule:
The cases are listed in the week when they will be due, and the due dates of all
assignment will also be announced in class. RWJJ refers to Ross, Westerfield, Jaffe,
and Jordan, Modern Financial Management, and SC refers to Stern and Chew, The
Revolution in Corporate Finance. Readings should be done prior to the class week
in which the material is discussed.
Week
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Topics
Readings and Assignments
Introduction
Course overview
Group formation
Corporate finance
Corporate organization
Goals of the corporation
Corporate Governance
RWJJ: Chapter 1
SC: “The Role of Corporate
Governance in South Korea
Economic Reform” (pp.526-534)
Capital Markets
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Capital Budgeting I
Introduction to capital budgeting
Estimating cash flows
Example: The Baldwin Company
The time value of money
Why NPV?
RWJJ: Chapters 2, 3, 4, 7.1, 7.2
Problems: 3.7, 4.24, 4.48, 7.1
SC (2nd ed.): “Corporate Strategy
and the Capital Budgeting
Decision” (pp.59-71)
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Capital Budgeting II
RWJJ: Chapters 6, 7.3, 7.5, 8
3
Alternative decision rules
SC: “Finance Theory and
Inflation and capital budgeting
Scenario/sensitivity/breakeven
analysis
Investments of unequal lives
Financial Strategy” (pp.54-62)
Problems: 6.1, 6.8, 7.6, 7.13, 8.10
4
Options and Corporate Finance I
Review of option pricing
Debt and equity as options
Case: The Super Project
RWJJ: Chapter 22
Problems: 22.26, 22.27
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Options and Corporate Finance II
Real options
Warrants and convertible bonds
RWJJ: Chapters 23, 24
SC: “Convertible Bonds:
Matching Financial and Real
Long-Term Financing I
Types of financing
Historical financing patterns
Options”(pp.291-305)
RWJJ: chapters 14, 19
SC: “Raising Capital: Theory
and Evidence” (pp.242-259)
Problems: 14.10, 19.6, 19.8
Long-Term Financing II
Raising equity capital
Raising debt capital
Case: Arundel
RWJJ: Chapters 20, 9, 10, 11
SC: “In Defense of Beta”
(pp.63-69)
6
Review of Risk and Return
Portfolio theory and diversification
The CAPM
Beta and leverage
The APT
Problems: 10.24, 10.38, 11.10
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Cost of Capital
Costs of equity and debt
WACC
Equity beta and leverage
Case: The Netscape IPO
RWJJ: Chapter 12
Problems: 12.7, 12.10, 12.12,
12.14
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Market Efficiency
The EMH
RWJJ: Chapters 13
SC: “The Theory of Stock Market
Implications for corporate finance
Efficiency” (pp.10-24)
Study and study!
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MIDTERM
10
Capital Structure I
Review of stock valuation
Irrelevance and Modigliani/Miller
Tax effects
Recapitalization: an example
4
RWJJ: Chapters 5.4-5.7, 15, 16
SC: “Still Searching for Optimal
Capital Structure” (pp.142-152)
Problems: 15.4, 15.7, 15.16, 15.20,
16.5, 16.6
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Capital Structure II
Agency and financial distress costs
Optimal capital structure
Bankruptcy and reorganization
Valuation with leverage
APV, FTE, and WACC
RWJJ: Chapters 17, 30
12
Dividend Policy
Theory and evidence
Dividend decision in practice
Stock dividends, splits, and
repurchases
Case: American Home Product
Corp.
RWJJ: Chapter 18
Problems: 18.4, 18.5, 18.17
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Mergers and Acquisitions
Introduction to M&A
Valuation
Stock vs. cash acquisitions
The empirical evidence
Takeover defenses
Case: Avon Products
RWJJ: Chapter 29
Problems: 29.4, 29.10
14
Hedging and Risk Management
Review of hedging instruments
Ways to mitigate financial risk
Case: Interco
RWJJ: Chapter 25
HBR: “A Framework for Risk
Risk management irrelevant
Risk management relevant
Management”
Problems: 25.7, 25.10, 25.20
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Leasing
Lease Analysis
Why leasing works
RWJJ: Chapter 21
Problems: 21.4
Case: MW Petroleum Corporation
16
Case Wrap-ups
Article: GH
17
Conclusions and Review
Study and study!
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Problems: 17.3, 17.9, 17.13
Assignment 1:
Financial Theory and Policy Student Data Sheet
To be returned by September 24. This will count as much as the problem
assignments you will be handing in.
Name
Email address
Working experience
Please include below a small photo of yourself.
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