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Finance (M.B.A. – Full time)
Fall 2007
Professor André Farber
Course Description:
This course is intended to introduce students to the basic concepts and tools of financial
analysis. Corporations are confronted with two main types of decisions: capital budgeting
decisions (how much to invest and what real assets to invest in) and financing decisions (what
securities to issue in order to raise the cash required). This course will mainly deal with
valuation and capital budgeting decisions. Financing decisions will be examined in one of the
electives (Advanced Corporate Finance).
The first part covers present value analysis and its link with stock valuation.
Risk and uncertainty are dealt with in the second part.
An introduction to financing decisions will be provided in the third part.
Recommended Textbook
Berk, P and DeMarzo, P. Corporate Finance Pearson 2007 (BD)
Website: www.ulb.ac.be/cours/solvay/farber
Tutorials
Teaching assistant: Céline Vaessen (cvaessen@ulb.ac.be)
Exams and Grading
The grade will be based on two problem sets (15% each) and a final exam (70%).
Solutions to problem sets can be prepared in groups of maximum 4 students. The composition
of each group should not vary. Solution should be sent by email to Céline.
Course outline
As the time that we have for this introductory finance course is limited, I plan to use the “Boeing
7E7” case (UVA-F-1449SSRN) throughout the course. I will refer to it in each session. Read the case
a first time before the first session. Don’t go into details and do not worry if many notions remain
obscure. They will become clearer (hopefully) as the course proceeds.
Session 1 (Mo Oct 29, 10-12AM) : Introduction (Chap 1) - Financial Statement Analysis
(Chap 2)
This session will provide a general introduction to finance. We will identify the main financial
decisions and analyse the objective of value creation (or shareholders' wealth maximization).
Financial markets will be introduced and their central role for financial decision making will
be stressed. The DuPont system of financial control will be presented and we will analyse at
the impact of leverage on ROE. The Statement of Cash Flows will be reviewed.
Session 2 (Mo Oct 29, 1-3 PM) : Arbitrage and Financial Decision Making (Chap 3)
We will introduce the Net Present Value (NPV) as THE measure of value creation. We will
explain, in a simplified setting, its meaning. We will show its relationship to the Law of One
Price which states that no arbitrage opportunities exist in competitive markets.
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Session 3 (Mo Nov 5, 10-12 AM) : Present Value (Chap 4 & 5)
We will introduce present and future values, present the general present value formula and
examine its meaning. We will then present some simplifying formulas for specific streams of
cash flows. These formulas will be used to analyse some simple investment decisions.
Tutorial 1 (Mo Nov 5 2-5 PM) Financial Statement Analysis, Present Value
Session 4 (Tu Nov 6 10-12 AM) Bonds valuation(Chap 8)
We will apply our newly acquired knowledge of present value calculation to the valuation of
discount bonds and level-coupon bonds. We will then examine the relation between bond
prices and interest rates.
Session 5 (Mo Nov 12, 10-12 AM) : Stock valuation: Dividend Discount Model + FCF
(Chap 9)
We will show that the share of a stock is worth the present value of future dividends. Several
situations will be analyzed: zero growth of dividend and constant growth of dividend. A
formula for calculating the growth rate will be presented. We will then go beyond the
dividend discount model and identify free cash flows as the main determinant of the value of a
company.
Session 6 (Tu Nov 13, 10-12 AM): Investment Rules and Capital Budgeting (Chap 6)
Even though the net present value rule is the best for evaluating capital budget projects, this
rule has contenders that are commonly used by companies. In this session, they will be
analyzed. We will then examine how to apply the NPV rule: identifying the cash flows to be
discounted and taking inflation into account.
Tutorial 2 (We Nov 14, 9-12 PM) Bonds and Stock Valuation
Session 7 (Mo Nov 15, 9-12 AM) Capital budgeting (Chap 7)
This session is the follow up of the previous one. We will analyze investment of unequal lives
and have a closer look at the economic significance of a positive net present value. We will
also develop various useful technique to assess the relialibility of NPV calculations.
We will then appproach the topic of valuation when the future payoff are risky. The statistical
properties of past returns will be examined, a statistical measure for the risk of a portfolio.
Mo Nov 15 PS1 distributed – Deadline for solution: Nov. 25, 12 PM
Tutorial 3 (Mo Nov 26, 9-12 AM) Capital budgeting+ correction PS 1 (15%)
Session 8 (Tu Nov 27, 9-12 AM) Capital Markets and The Pricing of Risk(Chap 10)
In this session, we appproach the topic of valuation when the future payoff are risky. The
statistical properties of past returns will be examined, a statistical measure for the risk of a
portfolio. We will examin the importance of diversification for measuring the risk of an
individual securities.
Session 9 (Mo Dec 3, 10-12 AM) Optimal Portfolio Choice (Chap 11)
We will analyze in this session in more detail the choice of an optimal portfolio.
Session 10 (Tu Dec 4, 10-12 AM) The Capital Asset Pricing Model CAPM(Chap 12)
In this session, we will explore the most widely used model to determine the cost of capital of
companies. It has become the most important model of the relationship between risk and
return.
Mo Nov 15 PS2 distributed – Deadline for solution: Dec. 10, 12 PM
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Session 11 (Mo Dec 10, 10-12 AM) Capital Structure in a Perfect Market (Chap 14)
Drawing upon the CAPM, we will discuss in this session capital budgeting analysis when
future cash flows are uncertain. The distinction between the average cost of capital and the
cost of equity will be introduced.
Session 12 (Tu Dec 11, 10-12 AM) Review session
Tutorial 4 (We Dec 12, 9-12 AM To be confirmed) Portfolio Choice, CAPM, Capital
Stucture +Correction PS 2 (15%)
FINAL EXAM: Mo Dec 17 10 AM - 1 PM (70%)
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