Department of Finance
National Chengchi University
Fall 2011
Financial Theory and Policy Instructor: 徐燕山
Tuesday: 09:10AM – 12:00AM Office: 商館261246
Room: 商館260311 Office Hrs.: Wed. 14-16
Email: Phone: 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, and J. Jaffe, Corporate Finance, 9th edition, McGraw-Hill, 2010.
There are also six required cases from the textbook
“Cash Flows at Warf Computers, Inc.” in chapter 2
“Bunyan Lumber, LLC” in chapter 7
“The Cost of Capital for Goff Computer, Inc.” in chapter 13
“Stephenson Real Estate Recapitalization” in chapter 16
“The Leveraged Buyout of Cheek Products, Inc.” in chapter 18
“The Decision to Lease or Buy at Warf Computers” in chapter 21
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 4-6 students. Each group will be responsible for preparing the group project and 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. Write-ups should be limited to three pages, plus appendices with spreadsheet printouts, etc. The group project is a small project on estimating the WACC for TSMC. The report for this project should be handed in at the beginning of the semester’s final class.
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. The report for the group project should be handed in at the beginning of the semester’s final class.
The individual assignments consist of an in-class midterm and a final exam. The midterm will be held during class on November 22nd. The final exam will be held on January 10th, 2012, from 9:10am to 11:00am. There will be no make-up exams, so mark these dates in your calendar.
In addition, students should do the end-of-chapter problems from the textbook. Some problems are listed on the course outline. The answers to these problems should be handed in at the beginning of class the day they are due. Please also keep a copy of your answers to help you answer the problems during class discussion.
Grading Policy:
The final grade will be determined as follows:
Class participations 5%
Problem sets 10%
Case write-ups 18%
Group project 7%
Midterm 30%
Final 30%
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. RWJ refers to Ross, Westerfield, and Jaffe, Corporate Finance. Readings should be done prior to the class week in which the material is discussed.
Week / Topics / Readings and Assignments1 / Introduction
Course overview
Group formation
Corporate finance
Corporate organization
Goals of the corporation
Corporate Governance
Capital Markets / RWJ: Chapter 1
2 / Capital Budgeting I
Introduction to capital budgeting
Estimating cash flows
Example: The Baldwin Company
The time value of money
Why NPV? / RWJ: Chapters 2, 3, 4, 6.1, 6.2
Problems: 4.24, 4.48, 4.54, 6.1
3 / Capital Budgeting II
Alternative decision rules
Inflation and capital budgeting
Scenario/sensitivity/breakeven analysis
Investments of unequal lives / Case: Chapter 2
RWJ: Chapters 5, 6.3, 6.5, 7
Problems: 5.1, 5.8, 6.6, 6.13, 7.10
4 / Long-Term Financing I
Types of financing
Historical financing patterns / Case: Chapter 7
RWJ: Chapters 15, 20
Problems: 20.5, 20.8
5 / Long-Term Financing II
Raising equity capital
Raising debt capital
Review of Risk and Return
Portfolio theory and diversification
The CAPM
Beta and leverage / RWJ: Chapters 20, 10, 11
Problems: 11.24, 11.37, 11.38
6 / Cost of Capital
Costs of equity and debt
WACC
Equity beta and leverage / RWJ: Chapter 13
Problems: 13.7, 13.10, 13.12, 13.14
7 / Market Efficiency
The EMH
Implications for corporate finance / Case: Chapter13
RWJ: Chapter 14
8 / Capital Structure I
Review of stock valuation
Irrelevance and Modigliani/Miller
Tax effects
Recapitalization: an example / RWJ: Chapters 9.1-9.3, 16, 17
Problems: 16.4, 16.7, 16.16, 16.20, 17.5, 17.6
9 / Capital Structure II
Agency and financial distress costs
Optimal capital structure
Bankruptcy and reorganization
Valuation with leverage
APV, FTE, and WACC / Case: Chapter 16
RWJ: Chapters 18, 30
Problems: 18.3, 18.9, 18.10
10 / Dividend Policy
Theory and evidence
Dividend decision in practice
Stock dividends, splits, and repurchases / Case: Chapter 18
RWJ: Chapter 19
Problems: 19.4, 19.5, 19.17
Study and study!
11 / MIDTERM
12 / Mergers and Acquisitions
Introduction to M&A
Valuation
Stock vs. cash acquisitions
The empirical evidence
Takeover defenses / RWJ: Chapter 29
Problems: 29.4, 29.10
13 / Options and Corporate Finance I
Review of option pricing
Debt and equity as options / RWJ: Chapter 22
Problems: 22.26, 22.27
14 / Options and Corporate Finance II
Real options
Warrants and convertible bonds / RWJ: Chapters 23, 24
Problems: 23.7
15 / Hedging and Risk Management
Review of hedging instruments
Ways to mitigate financial risk
Risk management irrelevant
Risk management relevant / RWJ: Chapter 25
Problems: 25.9, 25.10
16 / Leasing
Lease Analysis
Why leasing works / RWJ: Chapter 21
Problems: 21.4, 21.14
17 / Conclusions and Review / Case: Chapter 21
Group project
Study and study!
Assignment 1:
Financial Theory and Policy Student Data Sheet
To be returned by September 27. 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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