Valuation and Investment provides the students with a general introduction to the theory of Finance. The first part develops a theory of valuation to aid managers in financial decision making. We apply this theory to the valuation of financial assets, such as bonds and stocks, as well as to the real investment decision (projects) of the firm. Next we develop a theory of risk which can be used to compute and compare the expected returns (discount factors) of different assets and projects.
Corporate Finance and Options continues the tour through finance begun within the Valuation and Investments part. In this second part students will learn about the financial and operating leverage along with how they are connected. Other topics include what information stock prices contain, cash flow valuation in the presence of taxes, and option pricing.
Examinations and grading policy
There will be a closed book midterm and final exam.
| Assignment | % of Grade |
| Class Participation | 5 |
| Midterm | 25 |
| Final | 35 |
| Homework | 10 |
| Team Project | 25 |
Homework: has to be handed in to the TA's. Please put your answers into their mailboxes (please leave your homework answers in the first TA's mailbox for your Section if your last name ends in A - L, and in the second TA's mailbox for your Section if your last name ends in M - Z.). While I encourage you to help each other out with the assignments you must produce your own individual writeup.
Team Project: this is a semester long project in which you will value a firm. Teams should contain three or four people, preferably four. Each team will produce one writeup. While I give a standard project for you to work on, you are welcome to find your own project for a start-up company (based on its business plan) subject to your TA's written approval. Additional details will be given out during the course.
News
You can get updates regarding the class from the web site at http://www.som.yale.edu/faculty/zc25/financecore.html. Also available on the site are copies of classroom handouts, review session assignments, and other information and developments related to this class! Check the web site early and often.
TA Sessions
Starting the second week of classes there will be weekly review sessions to discuss homework problems and the lectures. Each review session will cover some problems from the book. You can find the weekly list on the web site during the weekend prior to the review session.
There is one textbook and a reader for the course. The reader contains copies of the lecture notes, and the answers to the end of chapter questions from Brealey and Myers. Please note, the answers are copied out of the Instructor's Manual. I did not write them up. Given the number of problems involved there are undoubtably some errors in the answer key. If you find one please let me know so that I can notify both the class and the publisher.
Texts and Readings
Reader:
Spiegel, and Stanton (2000), Lecture Notes to Accompany Principles
of Corporate Finance, McGraw Hill, 5th Edition.
Recommended:
If you find that the classroom vocabulary is getting out of hand, try
reading:
Kenneth M. Morris, Virginia B. Morris, Alan M. Siegel (1999), The
Wall Street Journal Guide to Understanding Money & Investing, ISBN:
0684869020, or go to the Yahoo Finance site for an online financial glossry:
http://biz.yahoo.com/f/g/g.html
For more investment basics, you can take advantage of the wealth of
free financial websites: http://finance.yahoo.com/?u;
http://www.fool.com/;
http://www.morningstar.com/;
and my own favorite http://www.ValuEngine.com/
(which
I co-founded and own a stake in).
| Lecture | Topic | B&M Chapters |
| Module 1 - Fundamentals of Valuation | ||
| 1 | Introduction and Vocabulary | 14 |
| 2, 3 | Theory of Value - How investors make decisions, present value, definition of an interest rate. Discuss the U.S. Railway Association case (see the course website for a description). | 2, 3 |
| Module 2 - Security Valuation | ||
| 4, 5 | Valuing Bonds, and the Term Structure of Interest Rates - Interest rates over various time periods. Spot rates and forward rates. Calculating the term structure from bond prices. Real and nominal rates. U.S. Railway Association Case in lecture 5. | 3, 23 (pages 669-678) |
| 6, 7 | Stock Valuation - Perpetuities and annuities. Stock pricing via the perpetual growth model and decomposition of value into the present value of current operations and growth opportunities. | 4 |
| 8 | Alternative valuation methods, with an emphasis on internal rate of return. | 5 |
| 9, 10 | Capital Budgeting - U.S. tax code, general rules for making investment decisions. | 6 |
| Module 3 - Risky Investments and the CAPM | ||
| 11 | Statistics Review | 7 |
| 12, 13 | The Capital Asset Pricing Model - Portfolio theory and the relationship between risk and return. | 8 |
| 14 | MIDTERM | |
| 15 | Why the market portfolio has a beta of 1. Short sales. Real world risk return tradeoffs. | 8, 9 |
| 16 | Operating leverage and financial leverage. | 9 |
| Module 4 - Efficient Markets | ||
| 17, 18 | What information is contained in prices? Weak, semi-strong, and strong form informational efficiency. | 13 |
| 19 | Team Project - Question and Answer Session | |
| Module 5 - Capital Structure and the Valuation of Cash Flows in the Presence of Taxes | ||
| 20 | When does a firm's capital structure matter? When is it irrelevant? | 16, 17, 18 |
| 21, 22 | Weighted Average Cost of Capital, and Adjusted Present Value. When is one valuation method more appropriate than another. | 19 |
| Module 6 - Options | ||
| 23 | What is an option? Some basic option pricing relationships. | 20 |
| 24 | Option strategies: how to lose or make $one million? | 20 |
| 25 | Binomial option pricing, the Black-Scholes option pricing formula. | 20 |
| 26 | Complex options. Options hidden within various financial settings. | 21 |
| Module 7 - Miscellaneous | ||
| 27 | On Monday November 27, Helene Meisler will give
a presentation regarding technical analysis and charting, a subject not
much covered in our regular courses. Her talk will replace the Tuesday
Nov. 28 lecture, and there is only one presentation at 4:00 pm on Monday
Nov. 27. I will announce the classroom for this lecture at a later time.
Helene Meisler writes a technical analysis column on the U.S. equity markets
for TheStreet.com.
In the second half (in the spring), Ezra Zask will give a presentation on the financial services industry and in partciular hedge fund management. His background covers hedge fund management, financial services consulting, and e-finance consulting and book-writing. |
|
| 28 | Course Review. Team Projects Due. |
Suggested Homework Problems
NOTE: These are not graded. I actually recommend you do as many problems from the book as you can. The answers to the problems from Brealey and Myers can be found at the back of the reader.
| B&M Chapter | Problems |
| 2 | Q: 1-5, and 8
P: 3, 4, 5, and 9 C: 2, and 3 |
| 3 | Q: 1-15, 17
P: 1-8, 10-22, 25, 26, 28, 29, and 30 C: 3, and 5 |
| 4 | Q: 1-11
P: 6-10, 13, 17, and 18 C: 1 |
| 5 | Q: 2, 7, and 8
P: 6-8 C: 3 |
| 6 | Q: 1-3
P: 4-6, 8-12, and 14 C: None |
| 7 | Q: 3, 5-12
P: 1, 2, 6, 8-14, and 16 C: 1, and 2 |
| 8 | Q: 1, 3, 4, 6, and 7
P: 1, 3-10 C: 2 |
| 14 | Q: 3, and 6
P: 8, and 10 C: None |
| 23 | Q: 4, 5, 7, and 10
P: 3, 5-9, 10a, and 12 C: 5 |
| 9 | Q: 1, 2, 4, 5, 6, 8
P: 1, 4, 6, 9, 13-17 C: 3 |
| 13 | Q: 1-5
P: 1-4, 8, 9 C: None |
| 16 | Q: 5-8
P: 4, 5, 8-12 C: 2 |
| 17 | Q: 1-4, 6, 8-11
P: 1, 3-6, 11, 12, 13 C: None |
| 18 | Q: 1, 2, 7
P: 4 C: None |
| 19 | Q: 2, 9 ,12
P: 1-5, 8, 15 C: None |
| 20 | Q: 1-4, 6, 11, 13, 16
P: 2, 6, 7, 14, 19, 22 C: None |
| 21 | Q: 1, 4a-c, 5
P: 1, 4, 5, 10, 13 (harder), 18 C: 4 |