University of Washington Business School
Finance 453A Financial Theory and Analysis, Summer 2005
Professor Lawrence Schall
Office: 255 Mackenzie Hall
Telephone: 206-543-7689
E-mail:
Class Time and Location: Tuesday/Thursday, 10:50 a.m. – 1:00 p.m. in Balmer Hall, Room 304
Purpose and Structure of Course: This course is for advanced undergraduate students who are familiar with basic finance, economics and accounting principles (please see Prerequisites below). The topics that are covered include financing methods, dividend policy, debt policy, valuing debt, real options, and risk management. The focus is on concepts and tools that are used in practice by top financial managers.
Prerequisites: The two prerequisites for this course are Finance 350 and Business Economics 300 (or Economics 300). It will be assumed that you know the material presented in those courses. In addition to the prerequisites, you will be expected to have a basic knowledge of financial accounting principles. An unfortunate fact is that most of us forget much of what we once knew. If this has happened to what you learned in Finance 350, Business Economics 300, and in your basic financial accounting course, it will be your responsibility to recover this knowledge by reviewing the appropriate books and notes from those courses.
Conduct of the Course: This is a relatively difficult course. Your goal and the instructor’s goal is that you gain a solid command of the material covered. You are most likely to achieve this if you regularly attend class. Other students also benefit from your questions and participation in the discussions. The course is designed to provide you with a knowledge and skill advantage in making business decisions. Lecture is combined with class discussion. The style is informal, and questions and comments are welcome at all times. The topics and class assignments are listed later in this syllabus. Because every class discussion is different, we will adjust the exact timing of the material to what works for us. You are strongly urged to read the material before the lecture that addresses that material. You should also bring to class the Brealey, Myers & Allen textbook and any other assigned materials for that class session.
Extra Sessions: There will be an extra Q&A session before the Midterm and also before the Final. These sessions are completely optional and are meant solely to prepare you for the exams. We will schedule the extra sessions at times that work best for the majority of the class.
Timing of Readings and Lecture: The Course Outline included in this Syllabus states the dates on which classroom coverage of each topic will occur. Depending on the class discussion, we may move at a slightly different pace than that shown in the Course Outline. However, we will proceed through the course material in the order shown in the Course Outline.
Name-cards: To facilitate a collegial environment, when you attend class please place your name-card on the desk in front of you. This approach, which is taken in some MBA classes, allows other students and the instructor to address you by name during class. A failure to present your name-card when you attend class can result in a reduction in your course grade.
Required Reading: The course textbook is: R. A. Brealey, S. C. Myers, F. Allen, Principles of Corporate Finance, 8th edition, McGraw-Hill, 2006. Required reading includes the assigned chapters and Practice Questions in the textbook, the course lecture notes. The Brealey, Myers & Allen textbook is available at the University Bookstore. A solution book containing the answers to the Practice Questions will be distributed in class.
Brealey, Myers & AllenEnd-of-Chapter Quizzes: A set of quiz questions appears the end of each chapter. The solutions are at the end of the Brealey, Myers & Allen text. You are encouraged to review all of the quiz questions for each chapter that has been assigned.
Brealey, Myers & AllenEnd-of-Chapter Questions: The Course Outline indicates end-of-chapter questions in Brealey, Myers & Allen that you should attempt to answer. The answers will be distributed in class. The purpose of these questions is two-fold. First, it is to help you learn the material by working through the questions to arrive at the answers that you have been provided. Second, it is to motivate you to review the material in Brealey, Myers & Allen or in other books (the instructor will be glad to recommend other sources) when you cannot figure out how the Brealey, Myers & Allen solution was derived. When you have difficulties with a problem, you are also encouraged to discuss the problem with classmates.
Grading: The Midterm Examination is on Thursday July 21; the FinalExamination is on Thursday August 18. The Midterm will cover material up through the July 12 session (Introduction to Options). The Final will cover all material addressed in this course, that is, the Final is comprehensive. However, the Final will emphasize the material covered in Sessions after July 12. You have two grading options in the course. You must take the exams when scheduled; there will be no individually scheduled exams (see below).
Grading Option I: Your final grade based on your performance on the Midterm Exam and the Final Exam. If your performance is better on the Midterm than on the Final, the Midterm will weigh 40% and the Final 60%. If your performance is better on the Final than on the Midterm, the Midterm will weigh 20% and the Final 80%.
Grading Option II: Your grade based only on the Final Exam. If you plan not to take the Midterm, you must notify the instructor by e-mail by noon on the day of the Midterm, July 21. If there is no e-mail notification and no Midterm exam turned in, you will receive a zero on the Midterm.
If, for any reason, you miss the Midterm when scheduled, your entire grade will be based on the Final Exam (that is, you will be graded based on Grading Option II).
Because the Midterm and the Final may differ in difficulty, the exam scores will be computed so that the mean score on the Midterm and the Final are identical. Grades are based on a curve and, to some extent, on an absolute standard. There is always a 4.0 given in the course. The median grade will be somewhere in the range of 3.2 to 3.5, and is typically 3.3 or 3.4.
No Individually Scheduled Exams: If you take the Midterm, you must take it when scheduled. Similarly, you must take the Final Exam when scheduled. There will be no individually scheduled exams (Midterm or Final).
Information at Instructor Website: The course syllabus and lecture notes will be posted at the course website. The School computer system had major problems about a week ago and many items have not yet been moved to the correct server. When this has been completed, you will be given the URL, user name and password for the website. Sorry about the delay.
Contacting the Instructor: As noted on the first page of this syllabus, my e-mail address is: and my telephone number is 206-543-7689. On the phone, or in e-mails, I will answer logistical questions about the course. In most cases, I will answer substantive questions about course topics only in person because this is most effective. My office hours are by appointment; except in unusual cases, I am readily available and flexible in setting up an appointment. I will also generally answer questions after class. In addition, as indicated above, there will be a question and answer session before the Midterm and also before the Final.
Finance 453 Course Outline
June 21: Introduction; Market Efficiency and Firm Financial Decisions
Assignment:
Brealey, Myers & Allen: Chapter 13
Brealey, Myers & Allen Chapter 13 End-of-Chapter Questions: Practice Questions 1 through 4 and 6 through 8. Challenge Questions 1 and 2.
June 23: Overview of Corporate Financing; How Corporations Issue Securities
Assignment:
Brealey, Myers & Allen: Chapters 14 and 15
Brealey, Myers & Allen Questions:
Chapter 14 End-of-Chapter Questions: Practice Questions 1 and 8.
Chapter 15 End-of-Chapter Questions: Practice Questions 1 through 9. Challenge Question 1.
June 28:Payout Policy
Assignment:
Brealey, Myers & Allen: Chapter 16
Brealey, Myers & Allen Questions:
Chapter 16 End-of-Chapter Questions: Practice Questions 1 through 13. Challenge Questions 1 and 2.
June 30: Debt Policy I
Assignment:
Brealey, Myers & Allen, Chapter 17
Brealey, Myers & Allen Chapter 17 End-of-Chapter Questions: Practice Questions 1,3, 4, 6, 7, 8, 10 and 13.
July 5: Debt Policy II
Assignment:
Brealey, Myers & Allen, Chapter 18
Brealey, Myers & Allen Chapter 18 End-of-Chapter Questions: Practice Questions 1, 3, 5, 7, 8, 9, and 11.
July 7: Debt Policy II continued
July 12:Introduction to Options
Assignment:
Brealey, Myers & Allen, Chapter 20
Brealey, Myers & Allen Chapter 20 End-of-Chapter Questions: Practice Questions 1, 2, 3, 4, 5, 8, 9, 11, 12, 13, 14, 16, and 17.
July 14:Option Valuation
Assignment:
Brealey, Myers & Allen, Chapter 21
Brealey, Myers & Allen End-of-Chapter Questions: Chapter 21, Practice Questions 1, 2, 4, 5, 7, 8, 10, 11, 12, and 14. Challenge Question 1.
July 19:Option Valuation continued;
Assignment: See July 17 Assignment (Chapter 21)
JULY 21: MIDTERM EXAMINATION
July 26:Real Options in Financial Analysis
Assignment:
Brealey, Myers & Allen Chapter 22 End-of-Chapter Questions: Practice Questions through 7 and 9.
July 28:Real Options In Financial Analysis continued
August 2:Valuing Government Bonds
Assignment:
Brealey, Myers & Allen, Chapter 23
Brealey, Myers & Allen Chapter 23 End-of-Chapter Questions: Practice Questions 1 through 10, and 13.
August 4:Valuing Government Bonds continued; Credit Risk
Assignment:
Brealey, Myers & Allen, Chapter 24, Sections 24.1, 24.2 and 24.4 (skim Section 24.3)
Brealey, Myers & Allen Chapter 24 End-of-Chapter Questions: Practice Questions 1, 2, 3 and 6. Challenge Question 1. .
August 9:Credit Risk continued; Managing Risk
Assignment:
Brealey, Myers & Allen, Chapter 27
Brealey, Myers & Allen Chapter 27 End-of-Chapter Questions: Practice Questions 1 through 19 except omit 7.
August 11:Managing Risk continued
August 16: Managing Risk continued
AUGUST 18:FINAL EXAMINATION
6/20/2005
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