National University of Singapore NUS Business School Financial Management BMA 5008 Fall 2016

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1 National University of Singapore NUS Business School Financial Management BMA 5008 Fall 2016 Professor: Dr. Adonis Antoniades Office: BZ1 #07-06 Phone: (ext = 64675) Office Hours: Wednesday 2:00 pm 3:00 pm and by appointment (via ) Class Times: FM1: Monday12-3pm, Room#3-1 P1: Monday 6 9pm, Room #3-3 FM2: Tuesday 12-3pm, Room #3-1 COURSE DESCRIPTION This is an introductory course that aims to provide a strong conceptual foundation for finance. Finance theory will be used to solve practical problems faced by financial managers. We will go somewhat deeper into topics that are important to all managers regardless of whether they have a finance focus or not, but we will also introduce a wider breadth of topics that some of you may choose to study in more depth in advanced courses. You will find it beneficial to have some basic knowledge of accounting, algebra, and statistics prior to enrolling in this course. By the end of the course you should be able to: Understand the conflicts between shareholders and managers Understand the time value of money and calculate the present value of future cash flows Value bonds Value stocks Estimate cash flows for a project Calculate the cost of capital Use the net present value rule and other methods to evaluate a project Measure the risk of individual securities and portfolios Evaluate different sources and methods of financing Analyze a firm s capital structure Set the payout policy of a firm Understand the basic mechanics of mergers COURSE STRUCTURE The lectures will focus on the major points introduced in the textbook. The lectures will provide general background information on the topics covered. You are expected to access the course page on IVLE (ivle.nus.edu.sg) for course-related information including announcements, homework assignments, and PowerPoint slides for the lectures. 1 NUS Business School

2 Prior to class you should read the relevant material in the textbook, the PowerPoint slides, and any additional assigned readings. You are expected to attend class regularly and to come to class on time. You are encouraged to ask questions and to be an active participant in class. After the lecture, you should review your lecture notes and work on the assignments. REQUIRED COURSE MATERIALS (1) Textbook: Principles of Corporate Finance, Richard A. Brealey, Stewart C. Myers, and Franklin Allen (11th GLOBAL EDITION), McGraw-Hill. Please purchase the 11 th Global Edition, emphasis on both 11 th and Global. There are also the 11 th and 12 th editions of the regular textbook, but those would not necessarily be consistent with the chapter sections and homework problems assigned for the class. (2) Case studies: 1) East Meets West: Rothschild s Investment in Indonesia s Bakrie Group (NUS / INSEAD) 2) Alibaba s IPO Dilemma: Hong Kong or New York (NUS/Ivey) (3) Calculator: It would be good to bring a calculator to every class, as sometimes you may be asked to try your hand at practice problems during class time. COURSE EVALUATION The assessment policy for this course is specified in the following paragraphs. Please read it carefully. The final course grade will be computed based on the following weights: (1) Class participation: 15% (2) Homework: 25% (3) Test 1: 30% (4) Test 2: 30% ATTENDANCE AND CLASS PARTICIPATION You are responsible for all material and announcements made in class. All students should display their name sign during the class AND during the test. Simply attending the class is not enough to get a favorable class participation grade. In evaluating class participation, I will look for comments that are thoughtful and lead the discussion forward. You can improve your participation grade considerably by coming to class prepared. Only lack of active participation can compromise your participation grade, nothing else. Even though the real world can sometimes be less forgiving, the classroom is a laboratory whose raison d'être is to serve your learning needs. This means that you should definitely ask questions during class if something is not clear. I don t particularly care if the question is too smart/not smart enough/relevant/irrelevant. And if I don t care, neither should you. If the thought of asking a 2 NUS Business School

3 question in front of the whole class makes you feel anxious, by all means use the classroom to practice the very important skill of question-asking; not every learning outcome needs to be about finance! In line with the laboratory theme, some of the more quantitatively involved topics will be introduced in a learning-by-doing manner. That is, after I demonstrate how to tackle a sample problem, you will get the chance to work one out for yourselves during class time. There is no expectation that you should be able to solve everything (anything even) during class. In fact, (a) becoming better at quickly mapping out where the challenge/gap is, and (b) becoming more comfortable operating within the uncertainty inherent in having to tackle a problem in an area you know not much about, are excellent outcomes of these exercises. TESTS The exams will take place at a time and location to be determined later in the semester based on room availability. The format for both the midterm exam and the final exam will likely be a combination of multiple-choice questions, short problems, long problems, and essay-type questions. These questions will be designed to test your analytical and problem solving skills, and your knowledge of conceptual and qualitative material. The final exam will be cumulative but will emphasize topics covered after the mid-term exam. More information will be provided closer to the test dates. You are allowed to have a calculator and formula sheet (and nothing else) to all tests. You may bring in an 8 x11 formula sheet. You are allowed to write only formulas on a formula sheet (this should be self-explanatory). Each formula sheet will be submitted with your test when you turn it in; failure to do so will result in a point penalty. If you know that you have a conflict with an upcoming engagement, such as a job interview, you must notify me several days in advance and provide supporting documentation or a make-up test will be denied. Students on athletic scholarships have to provide supporting material in the first week of the semester. Last minute requests for a make-up test will be denied except in the case of medical emergencies. In these cases, you must provide supporting documentation. TEAMS You will form groups of 4-6 students to work on the cases and homework assignments. Groups should be formed during the first week of classes (that is immediately after the first lecture), and the group composition should remain fixed until the end of the semester. Once you have formed a group please me a list of the group members, along with information about which section of the course you are attending. If by the end of the first week you have not been successful in joining a group, please come and talk to me and I will assign you to a group. CASE STUDIES Case studies will be utilized to further explore topics presented in the lectures and/or to introduce new topics. They aim to document a real life business challenge, where the reader is presented with much of the relevant information needed to make a decision, but typically also with the kinds of superfluous references, ambiguity, and incompleteness one encounters in the real world. 3 NUS Business School

4 Prior to discussing the case in the class, you will be given a list of questions that will guide your reading of the case. You should work on the cases in teams, and come to class prepared to engage in a meaningful discussion that extends beyond the basic foundation that the preparatory questions aim to lay. After the discussion of the case, additional work may be assigned as part of the corresponding week s homework assignment. HOMEWORK You will be asked to complete and hand in a series of homework assignments, working in teams of 4-6 students (see note above, regarding teams). The homeworks will consist of a number of practice problems that you are required to work on, and they aim to give you a sense for what kinds of questions you should be able to answer if you have mastered the material presented in the lecture. Homeworks will be due in class in hard copy, unless otherwise specified. Please note that you are still responsible for material that was taught/assigned but did not make it to the homework assignment. Each homework will be graded in the following manner: 1. 50% of the grade will be allocated to smaller problems. You will receive a full grade for this part just by showing evidence of a serious attempt to solve each problem. Once the solutions are posted, you can check whether you got the right answer or not % of the grade will be allocated to 1-3 longer problems that will be corrected in detail. These problems will be clearly indicated when you receive the homework assignment. 3. Late submissions will not be accepted. 4. All homework assignments carry the same weight. 5. At the end of the course, for each group, the homework with the lowest grade will be dropped, and the overall homework grade will be derived from the remaining ones. Solutions to all homework problems will be posted online, and I will be available during office hours to discuss any questions you may have about the solutions. Two pieces of advice: 1. You need to aim to solve the homework problems on your own. Group work will help you learn from each other, support each other, and economize a bit on write-up time. However, if you do not spend time ensuring that you can tackle the problems on your own, you will likely find the exam quite challenging. 2. In preparing for the exams, you need to aim to solve the homework problems without referring to the solutions. Being able to follow the posted solution is no guarantee that you can reproduce the solution yourself come exam time. You can think of the solutions as a map. With a bit of effort, most of us could follow directions on a map to go from A to B. The exam, however, is where we take the map away and still ask you to go from A to B, or more realistically to go from some specific point in the neighborhood of A to one in the neighborhood of B. This is a considerably harder task. CLASS SCHEDULE: The following is a list of some of the topics that we will cover in this course. Based on the progress of the class, minor changes (additions or deletions) may be made to this list. Introduction to finance 4 NUS Business School

5 What is a corporation? The objectives of a firm What is the role of a financial manager? Separation of ownership and management Valuation Introduction to present value and the opportunity cost of capital Valuation of stocks and bonds Capital Budgeting Making investment decisions with the Net Present Value (NPV) rule NPV vs. alternative criteria for making investment decisions such as the Internal Rate of Return Rule and Payback Period Rule Estimation of cash flows and valuing a project using discounted cash flows Risk, Return, and Cost of Capital The benefits of diversification Measures of risk for individual securities and portfolios Capital Asset Pricing Model and alternative pricing models The cost of equity and the weighted average cost of capital (WACC) Market Efficiency Efficient markets theory Stock market anomalies and behavioral finance Corporate financing Financing a company using common stock, preferred stock, and debt How corporations issue securities (e.g. IPOs) Venture Capital and Private Equity Payout policy How dividends are paid and how firms repurchase stock The payout controversy Capital Structure How much should a company borrow? The trade-off theory of capital structure The pecking order of financial choices Mergers What are some of the motives for a merger? Is a merger value creating? Mechanics of and defenses against mergers Special topics Investing in weak legal environments Shareholder activism Strategic considerations 5 NUS Business School

6 TENTATIVE CLASS SCHEDULE FM1 (Monday 12-3pm), P1 (Monday 3-6pm) WEEK LECTURE TOPIC 1: Aug 8 Introduction & Overview of Financial Management 2: Aug 15 Time Value of Money 3: Aug 22 Capital Budgeting 4: Aug 29 Bonds 5: Sept 5 Stocks 6: Sept 12 Holiday: Hari Raya Haji Sept RECESS WEEK 7: Sep 26 Review Oct 1 (Saturday) Test 1 (to be confirmed) 8: Oct 3 Risk and Return I 9: Oct 10 Risk and Return II Market efficiency 10: Oct 17 Corporate Financing 11: Oct 24 Payout Policy 12: Oct 31 Mergers 13: Nov 7 Review Case: Alibaba s IPO Dilemma: Hong Kong or New York (NUS/Ivey) Case: East Meets West: Rothschild s Investment in Indonesia s Bakrie Group (NUS / INSEAD) Nov 14 (Monday) Test 2 (to be confirmed) 6 NUS Business School

7 TENTATIVE CLASS SCHEDULE FM2 (Tuesday 12-3pm) WEEK LECTURE TOPIC 1: Aug 9 Holiday: National Day 2: Aug 16 Introduction & Overview of Financial Management 3: Aug 23 Time Value of Money 4: Aug 30 Capital Budgeting 5: Sept 6 Bonds 6: Sept 13 Stocks Sept RECESS WEEK 7: Sept 27 Review Oct 1 (Saturday) Test 1 (to be confirmed) 8: Oct 4 Risk and Return I 9: Oct 11 Risk and Return II Market efficiency 10: Oct 18 Corporate Financing 11: Oct 25 Payout Policy 12: Nov 1 Mergers 13: Nov 8 Review Case: Alibaba s IPO Dilemma: Hong Kong or New York (NUS/Ivey) Case: East Meets West: Rothschild s Investment in Indonesia s Bakrie Group (NUS / INSEAD) Nov 14 (Monday) Test 2 (to be confirmed) 7 NUS Business School