Class times: MWR, 3.30-4.20pm, DSB C118
Instructor: Dr. Paul Schure, BEC 336, Email: schure@uvic.ca
Office hours: by email appointment (see email notes below)
Course website: http://web.uvic.ca/~schure/econ454/econ454.html
Goal
A student who learns successfully in this course will have the capability to:
1.
Clarify the meaning of key concepts in corporate finance
2.
Identify the key questions of the subject area of corporate finance, and understand their practical importance
3.
Identify the sources and discuss the pros and cons of the most important financial assets that constitute a firm’s capital structure.
4.
Explain the irrelevance theorem of Modigliani and Miller, clarify the relevance of the assumptions that drive the theorem, and explain the predictions for a firm’s capital structure of the theorem and several of its extensions
5.
Identify the main factors affecting a firm’s capital structure, and explain the precise mechanism through which these factors affect the choice of a firm’s capital structure
We will approach the course from a micro economic perspective. For example, according to one theory, the firm’s optimal capital structure arises from a trade-off between factors such as the tax benefits of debt, personal taxes, and/or a variety of agency costs. I encourage students to constantly ask themselves how a firm’s capital structure interacts with its other strategic decisions, e.g. investment decisions and pricing decisions. This is a fundamental question and currently a hot topic in corporate finance.
Text
Hillier, David, Mark
Grinblatt
and Sheridan Titman, 2011, Financial Markets and
Corporate Strategy , 2 nd
European Edition, McGraw-Hill Higher Education, 978-
0077129422 [HGT]
We won’t use all the chapters as will become clear below. The UVic bookstore offers a custom-made book of these chapters and also an e-book. I recommend an actual copy of the text for students people who would like to continue to study finance after they graduate. The UVic bookstore has second-hand copies as well.
Besides the textbook we will discuss in class several journal articles. Students will have to print out their own hardcopies of these.
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Brief description
This course introduces students to the field of corporate finance. We will focus on the factors that determine a firm’s capital structure. The starting point of the discussion on capital structure is the famous Modigliani and Miller theorem that shows that under some assumptions the firm’s capital structure is irrelevant. In the remainder of the course we will discuss the departures of the Modigliani-Miller assumptions that make a firm’s capital structure decision actually relevant. The most important departures relate to the presence of taxation and agency problems between various stakeholders in the firm. The theories discussed in class are quite widely applicable. For example they will help you to piece together the story of the global financial crisis, and to understand the causes of possible drastic stock and bond price reactions to announcements by corporations.
Econ 454 was originally designed for students in our BSc stream. The material is at times technical and students are expected to be able to solve problems independently. I assume that students have a decent understanding of the material covered in the prerequisites, among which basic knowledge of Game Theory (Extensive-form representations, the concepts of
Nash equilibrium and subgame perfect Nash equilibrium, etc) and familiarity with basic terminology and concepts used in finance.
Students will also actively engage with the material through class discussions on selected topics. Each class discussion is initiated by group presentations by students on relevant articles, topics, and/or news events.
Tentative Outline [Readings HGT in brackets]
Week 1: Overview [Readings: Chapter 1 of Brealey, Myers and Allen & Greenwood and
Scharfstein (2013): http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.2.3
]
Week 2: Capital structure in a “perfect world”: The Modigliani-Miller Theorem [Ch.14]
Week 3: MM Theorem (contd.) & Payout policy [Ch.15]
Week 4: Moral hazard and capital structure [Chapter 16]
Week 5: MT1 (Overview, Ch 14 & 15) & MH and capital structure (contd.).
Week 6: Reading break (no classes)
Week 7: Capital structure and corporate strategy [Chapter 17] & Separation of ownership and control [Chapter 18 & Jensen (1986)]
Week 8: The information conveyed by financial decisions (and the signaling model)
[Chapter 19 and Myers and Majluf (1984)]
Week 9: MT2 (Ch.16-18) & Ch.19 (continued)
Week 10: Topics: Team presentations & class discussions
Week 11: Topics: Team presentations & class discussions
Week 12: Topics: Team presentations & class discussions
Week 13: Topics: Team presentations & class discussions, exam preparation
Class discussion topics may include the market for corporate control (M&A’s), corporate governance, risk management, syndicated loans, venture capital, entrepreneurial finance. I am open for suggestions made during the first three weeks of classes.
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Grading
Your final grade is based on (i) a problem set (10 percent), (ii) two midterm exams (30 percent), (iii) a final exam (40 percent), (iv) the team presentation hand-out and the team presentation (20 percent) .
The grade of your best midterm carries a weight of 20% and that of the other one 10%.
The final exam is comprehensive. If the grade on your final is lower than 37.5 percent you fail the class (F). If it is between 37.5 and 42.5 percent your maximum grade is D.
Provided you score at least 42.5 percent on your final, your percentage grade translates to a UVic letter grade as follows:
A+ 90-100
A
A-
85-89
80-84
B+ 77-79
B 73-76
B- 70-72
C+ 65-69
C 60-64
D 50-59
F 0-49
Deadlines and test dates :
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Thursday 16 January: Problem Set 1 (PS1 must be hand-written and submitting it is mandatory. Submit in the Econ 454 course box by the Econ office by 11.59pm
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Monday 3 March: Midterm 2 [Chapters 16-18]
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Final exam (2 hours): [Covers material of the entire course] TBA by record services
).
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Wednesday 5 February: Midterm 1 [PS1 & Chapters 14-15] (MT1 is mandatory as well)
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Policies
You are expected to visit and review http://www.uvic.ca/socialsciences/economics/undergraduate/home/courses/coursepolicies.php
for the applicable Departmental Policies on:
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Academic Integrity
Attendance
Term assignments and debarment from exams
Grading
Late assignments
Academic Concession
Travel plans
(but, see the additional note below)
Students with a disability
Policy on inclusivity and diversity
In addition, note the following:
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Plagiarism.
You and I understand that plagiarism is a bit of a fuzzy concept. So before you start your research project, make 100% sure you understand what it means. The Library website has an excellent resource page on plagiarism: http://library.uvic.ca/site/lib/instruction/cite/plagiarism.html
. If you have any questions, do ask me. Note that I may use plagiarism detection software and search engines to detect plagiarism in your written work in this course.
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Class attendance . I expect students to attend classes, but will not normally monitor attendance nor unsubscribe students if I observe they have not been there. The exceptions will be the team presentations and class discussion sessions which students must attend. Failing to attend a few of these classes will cost up to 5% towards your final percentage grade on the course.
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Waitlisted students . Waitlisted students are to write the tests while on the waitlist. The exact same grading schedule applies as to students on the class list.
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Tests . There are no retake exams. Bring your UVic identity card to the tests.
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Calculator.
Only the standard Math 100/102 calculator, i.e. the Sharp EL-510L, is allowed.
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Academic concession (e.g. illness).
Besides the instructions stated on the web address provided above, students to which this applies should also (a) contact the instructor no later than the time or due date of the test, assignment, or exam (b) supply the instructor with both a phone number and an email address . [Contact the instructor by either by email ( schure@uvic.ca
) or leaving a voice mail message (250-721 8535). Check the ground rules on emailing below].
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Grading concerns. You must inform us within a week from the date the class got the test back. There is only one way to inform us, namely by email to both the TA and the instructor. Normally your concern
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Students on a UVic sports team.
Your instructor may well be sympathetic as long as you follow a path which is analogous to the path to be followed by students with a disability. Students on a UVic sports team get in touch with their head coach or manager, rather than the Resource Centre for
Students with a Disability. This is to happen ASAP, so that the instructor knows who you are and knows your schedule by the end of the second week of classes.
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Web access . I will assume you frequently check the course website as well as the email address you passed on to UVic. If web access is an issue for you, then let me know on the first day of classes.
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Emails . When sending emails always identify yourself and always make up an appropriate header that starts with “Econ454”. If not, we will assume your email has not been written and I won’t process it.
Let us from both ends make sure to get back to emails within 24 hours (send me a reminder if I haven’t). If you ask a relatively complex question, then try to leave a call back number.
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