COMM 371 – THEORY OF FINANCE – Section 101, Sep - Dec 2007
Instructor: Oliver Boguth
Phone: (604) 822-2032
Office: Henry Angus 873C
Email: oliver.boguth@sauder.ubc.ca
Course Web Page: All materials are available on WebCT ( http://www.webct.ubc.ca )
Classes: Tuesday & Thursday, 8:30-9:50, SWNG 109
Office Hours: Tuesday & Thursday, 10:30 – 12:00, and by appointment
I. Description
This course undertakes in-depth study of specific financial decisions and events that are important in the
life of a corporation. The objective is to help the student develop an understanding of the underlying
economic issues, and to gain experience applying empirical and theoretical tools. The course builds on
the foundation provided by Commerce 370. The course balances theoretical content and practical
applications by using several case-studies that are useful for real-life decisions you may need to make.
The basic topics are financial planning and working capital management, project valuation, sources of
capital, types of securities, and capital structure, moral hazard and adverse selection in financial
markets, the effect of real options on valuation, and risk management.
II. Course Materials
Text
Because our course touches upon different topics that are not contained in any single book, we will rely
heavily on the lecture notes. Thus, there is no required text for the course; however, it will be helpful to
have one of the standard corporate finance texts for background reading. I can recommend
(RWJR) Ross, Westerfield, Jaffe, and Roberts, Corporate Finance, Fourth Canadian Edition, McGrawHill Ryerson, 2005.
This text will be the basis for several lectures. Several copies of this text are on reserve in the David
Lam Library for your exclusive use. You should make copies of the chapters you plan to read and return
it to the library.
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Reading Packet
This is required and available from Duplication Services Center in Henry Angus 423. The packet
contains the cases that we will use throughout the course. Articles that appear as required readings in the
course outline but are not included in this packet are available for download on the course home page.
Lecture notes and supplements
Lecture notes and supplements will be posted on the course web page several days before they are
discussed in class. You should check the course website for updates regularly, and print and bring the
lecture notes to class. In addition, it will often be helpful for you to read these notes before coming to
class. Lecture notes are made available for your convenience, but be aware that these notes may contain
typos and other problems.
III. Evaluation
Group Project
Groups of 3-4 students will work on a project that will be announced at the end of October. This project
will take about 2 weeks, and completion is required for a passing grade. Try to form your own groups as
soon as possible, and contact me if you have any difficulties.
For evaluation purposes, style and presentation are as important as quantitative factors. Marks are based
on the project, and thus all members of a group will receive the same mark. No solution will be posted
for this project.
Exams
There will be a mid-term and a (cumulative) final examination. You are required to take both exams. If
you miss an exam, you must contact the Undergraduate Office immediately and provide them with the
documentation necessary to justify your absence. You will keep good standing in the course only if the
Undergraduate Office confirms the validity of your excuse. Any student who misses the mid-term will
have all of the weight from that exam transferred to the final exam. The midterm is tentatively booked
for Thursday, October 11th during class. Date and time for the final exam will be announced later.
Homework & Class Participation
Short homework assignments, to be completed individually, will be given approximately once a week. I
will collect and mark the homework about 3 times during the term at random days. Active class
participation is expected and encouraged. Grades for homework and participation are based on effort.
Weighting
Project
10%
Midterm Exam
35%
Final Exam
55%
Homework and Class Participation: If your homework and class participation grade exceeds your lowest
exam grade, the exam weight will be reduced by 15% and substituted by the participation grade.
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Course Outline (subject to changes)
TOPIC
BACKGROUND MATERIAL
Introduction & Overview
Lecture 0
Financial Planning
Lecture 1
Working Capital
Short-Term Financial Planning
Lecture 2 / RWJR 27
Financing Growth
Lecture 3 / Clarkson Lumber case
ABC example & simulation
Lecture 4 / Excel spreadsheet
Capital Budgeting with Debt
The basics: WACC, APV, & FTE
Lecture 5 / RWJR 18
APV Example: Valuation of Delphi
Lecture 6
When to use APV & Example
Lecture 7
RWJR 16 & 17 (background)
Capital Structure
Raising Capital
Lecture 8
Review of Theory & Empirical Facts
Lecture 9
Financial Distress Costs
Lecture 10 / Cutler & Summers article
Capital Structure & Product Market Competition
Lecture 11 / Massey-Ferguson, 1980 case
Information Asymmetries in Financial Markets
The Moral Hazard Problem
Lecture 12
The Adverse Selection Problem
Lecture 13
RWJ 23, 24
Real Options and Valuation
Valuation of a Call Option Review
Lecture 14
Managerial Options & Capital Budgeting
Lecture 15
Risk Management
Why and How Firms Manage Risk
Lecture 16
Managing Risk in Practice
Lecture 17
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