Department of Economics
Faculty of Liberal Arts and Professional Studies
ECON 5520A 3.0 Economics of Financial Markets
Fall 2014
Course Director: Professor Xiaofei Li
Class Hours and Room: Thursdays, 2:30 pm – 5:30 pm, in TBA
Office: Atkinson 235A
Office Hours: Wednesdays, 3 pm – 5 pm, or by appointments
Tel: (416) 736-2100 ext. 30119
E-mail: XiaofeiL@yorku.ca
Course Description
The objective of this course is to undertake a rigorous study of the theory and empirical
evidence relevant to Corporate Finance. Topics covered include: determinants of
interest rates, bond duration, risk and return, capital budgeting, cost of capital, capital
structure, dividend policy, options and futures for hedging risk, corporate governance,
and venture capital etc. This course is both rich in content and fast in pace. Therefore,
significant out of class work is required for each of you.
Student Evaluation
Midterm Exam
Final Exam
40%
60%
Required Textbook
Cultivation of individual interests and pursuits is encouraged, but please study the
material given in Tentative Course Schedule. Remember, the course material is
cumulative and requires a steady "digestion of the installment plan". Few people can
master the material just before the exam. Solid foundations are necessary and much
depends on you. If you proceed "step-by-step", then you will find the subject much
easier.
Fundamentals of Corporate Finance, seventh Canadian edition, Stephen A. Ross,
Randolph W. Westerfield, Bradford D. Jordan, and Gordon S. Roberts, McGraw-Hill
Ryerson Limited, 2010 (hereafter, RWJR).
Please note: For nearly every class you are required to read and study a number of
articles. These articles are listed in Additional Reading Material. You can download them
at the course web site.
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Method of Instruction
A combination of lectures, discussions and problem solving will be used. PowerPoint
slides used in the lectures are available from a link on the course website. Throughout the
course, your active participation is encouraged. You are required to think, to analyse, to
evaluate, and to apply problem-solving techniques.
Midterm and Final Exams
Both midterm and final exams are closed book and involve problem-solving and short
answers. If you miss a midterm exam for a legitimate reason, your final exam
performance relative to other students in the class will be used to estimate your midterm
exam mark. There is NO make-up midterm exam. The estimation and any further
adjustments will be entirely at the discretion of the Course Director/Graduate Program
Director and not subject to any appeal. Students with a conflict due to religious reasons
will be accommodated. Please inform the Course Director in writing by the fourth class if
you have such a conflict. The final exam is cumulative (you could be tested on any aspect
of the course), with the majority covering material after the midterm exam. All students
who need a passing grade for the course must take the final exam.
Formula Sheets
The midterm exam formula sheet will be posted on the course web site in early October.
Similarly, the final exam formula sheet will be posted online in middle November. Please
do not bring the formula sheets to the exams with you since you will be provided with
copies of the formula sheets at the exams.
Financial Calculator
A financial calculator is required. If you will pursue the Chartered Financial Analyst
(CFA) designation in the future, then please note that only two types of calculator are
currently allowed for the CFA exams: the Texas Instruments BAII Plus (BAII Plus) and
the Hewlett-Packard 12C (HP-12C). Instructions for using several models of financial
calculators can be found on the course web site.
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Tentative Course Schedule
The topic order will be as stated below. However, if we cannot finish the material listed
in a week, the remainder will be carried forward to the following week. Depending on
time constraint some topics may be subject to minor changes.
1. September Introduction and Deterministic Valuation I: review of time value of
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money, discounted cash flow valuation, and long-term financial planning
RWJR Chapters 4, 5, 6, and Appendix 6A; Chapters 1, 2, and 3 (selfstudy)
2. September Deterministic Valuation II: determinants of interest rates, bond
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valuation, bond duration, and stock valuation
RWJR Chapters 7, 8, and Appendix 7A; Appendix 8A (self-study)
3. September Risk and Return: capital market stylized facts, the equity premium
25
puzzle, Markowitz portfolio theory, and CAPM
4. October 2
RWJR Chapters 12, 13, and Appendix 13A
Deterministic Capital Budgeting: NPV, payback, IRR, EAC, and
PVCCATS
RWJR Chapters 9, 10, and Appendices 9A, 10A, and 10B
5. October 9
Capital Budgeting with Uncertainty and Real Options: scenario,
sensitivity & break-even analysis, operating leverage, and managerial
options
RWJR Chapter 11
6.
16
October Applications of Capital Budgeting Techniques: leasing, and mergers &
acquisitions
RWJR Chapters 22 and 23
7.
23
October
Cost of Capital: WACC, and flotation (underwriting) costs
RWJR Chapter 14, and Appendices 14A and 14B
October 24, Midterm exam
Friday, 2 pm
The midterm exam will test the topics studied in the first six lectures
– 4 pm
8. November Capital Structure: M&M, impact of corporate taxes, financial distress &
3
6
bankruptcy, trade-off & pecking-order theories, and effects of personal
taxes
RWJR Chapter 16 and Appendices 16A and 16B
9. November Dividends: dividend dates, and tax policy effects on payout policy
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RWJR Chapter 17
10.
November
20
Derivatives: options, forwards, futures, hedging, risk management, and
options and corporate securities
RWJR Chapters 24 and 25
11.
November
27
Corporate Governance and Capital Structure Arbitrage
12.
December 4
Venture Capital
Please refer to the additional reading material for Week 11
Please refer to the additional reading material for Week 12
Additional Reading Material
Week 1
Brennan, M. J., 1995, Corporate finance over the past 25 years, Financial Management
24 (2), 9 – 22.
Zingales, L., 2000, In search of new foundations, Journal of Finance 55 (4), 1623 – 1653.
Week 2
None.
Week 3
Fama, E. F. and K. R. French, 1993, Common risk factors in the returns on stocks and
bonds, Journal of Financial Economics 33, 3 – 56.
Week 4
Graham, J. R. and C. R. Harvey, 2001, The theory and practice of corporate finance:
Evidence from the field, Journal of Financial Economics 60, 187 – 243.
Week 5
4
Triantis, A., 2005, Realizing the potential of real options: Does theory meet practice?
Journal of Applied Corporate Finance 17 (2), 8 – 16.
Week 6
Mitchell M. and T. Pulvino, 2001, Characteristics of risk and return in risk arbitrage,
Journal of Finance 56 (6), 2135 – 2175.
Week 7
Cooper, I. A. and S. A. Davydenko, 2007, Estimating the cost of risky debt, Journal of
Applied Corporate Finance 19 (3), 90 – 95.
Week 8
Graham, J. R., 2000, How big are the tax benefits of debt? Journal of Finance 55 (5),
1901 – 1941.
Graham, J. R., 2001, Estimating the tax benefits of debt, Journal of Applied Corporate
Finance 14 (1), 42 – 54.
Harris, M. and A. Raviv, 1991, The theory of capital structure, Journal of Finance 46 (1),
297 – 355.
Week 9
Kalay, A. and M. Lemmon, 2007, Payout policy, Chapter 10 in Handbook of Empirical
Corporate Finance, Volume 2, B. Espen Eckbo (edited), Elsevier B.V., 2008.
Week 10
Froot, K. A., D. S. Scharfstein, and J. C. Stein, 1993, Risk management: Coordinating
corporate investment and financing policies, Journal of Finance 48 (5), 1629 – 1658.
Smith, C. W., Jr., Managing corporate risk, Chapter 18 in Handbook of Empirical
Corporate Finance, Volume 2, B. Espen Eckbo (edited), Elsevier B.V., 2008.
Week 11
Shleifer, A. and R. W. Vishny, 1997, A survey of corporate governance, Journal of
Finance 52 (2), 737 – 783.
Yu, F., 2006, How profitable is capital structure arbitrage? Financial Analysts Journal 62
(5), 47 – 62.
Week 12
5
Gompers, P., 2004, Venture capital, Chapter 9 in Handbook of Empirical Corporate
Finance, Volume 1, B. Espen Eckbo (edited), Elsevier B.V., 2008.
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