Financial Investments and Corporate Finance (supplementing course for MSc Economics and Business Administration) / Financial Investments and Corporate Finance (supplementing course for MSc Economics and Business Administration)

The Academic Board of Business Administration, Odense
Teaching activity id: 8210001.
Teaching language: English.ECTS / weighting: 5 ECTS / 0.083 full-time equivalent.
Examination language: English.
Exam activity id: 8210002.Approved: 16-03-17.
Period: Autumn 2017.
Grading: Internal grading.
Assessment: Pass/not pass.
Offered in: Odense.

Subject director:
Assistant Professor Thiago de Oliveira Souza, Department of Business and Economics.

Prerequisites:
Students who follow this course are expected to have mathematical skills within functional analysis (basic calculus: differentiation and integration (in the Riemann sense)), the Lagrange method as well as linear algebra. These competences have typically been obtained in the course Tools for Quantitative Analysis (course id: 8077001) and the course Mathematics (course id: 9331201). Moreover, the student must have knowledge of consumers’ utility maximization and corporations’ cost minimization and profit maximization. These competences have typically been obtained in the course Microeconomics (course id. 8076801). Furthermore, the student must understand and be able to apply central concepts from probability theory such as: probability, random variables and processes, expected values (the mean), variance, covariance, and correlation, and the student must be able to apply these concepts independently in concrete problems. These competences have typically been obtained in Tools for Quantitative Analysis (course id: 8077001). In addition, the student must be able to perform basic operations in the spreadsheet program Microsoft Excel.

Purpose:
The purpose of the course is to provide the student with knowledge about investors’ and corporations’ financial decision problems subject to uncertainty regarding the economic consequences in the future caused by financial decisions. Financial decisions require knowledge of the financial market, its instruments, and the valuation of these. Financial problems are, e.g., investors’ portfolio choice and corporations’ capital budgeting (real investment) and capital structure decisions.

It is central for a graduate in business administration (and hence business management) that he/she is capable of understanding the above mentioned financial decision problems and that the graduate has an idea about how to deal with these issues. This is important in relation to running a corporation as well as for playing an advisory role for investment decisions.

The course provides sufficient knowledge within finance for enrolment in the graduate finance profiles offered at SDU.

Content - Key areas:
The purpose of the subject is achieved by the fact that the subject, i.a., contains the following areas of study:

1. Interest rates
  • Discounting
  • Annuities and perpetuities
  • Internal rate of return and effective yield
  • Accrual of interest and interest compounding
  • Continuous rates

2. Financial markets, financial instruments and their pricing
  • Interest rate risk -- duration
  • Investment theory under uncertainty in financial assets (optimal portfolio choice)
  • Risk and return
  • Pricing of financial assets

3. Valuation of real assets, corporations’ choice of investment (capital budgeting), and capital structure
  • Valuation of risk free assets and projects
  • Valuation of risky assets and projects;
  • Stock and bonds and (simple) valuation of these
  • Tax effects in valuation of real investments as well as choice of real investment
  • Capital structure theory and costs of capital; overview of agency conflicts between, for example, shareholders and debt holders (creditors).

Goals description (SOLO taxonomy):
A central part of the objective for this course is that the student can relate a problem to a theoretical framework, can relate to its assumptions as well as master the tools, models, and methods listed under “Key Areas.”

Thus, the student, after following the course, must be able to:

1. Interest rates
  • Use discounting, annuities, and perpetuities wrt. the time value of money and valuation of streams of cash flows
  • Calculate internal rate of return and effective yield
  • Set up various streams of cash flows for different types of standard bonds and compare these by calculating net present values
  • Can use interest rate in cases of non-annual terms of payments, e.g., with continuous compounding

2. Financial markets, financial instruments and their pricing
  • Can describe the different types of debt and equity
  • Can perform simple bond analyses and term structure analyses
  • Can calculate simple risk measures, e.g. duration, and use these in hedging strategies
  • Can compare discount factors, zero coupon bond rates and forward interest rate and perform calculations with these
  • Can analyze an investor’s portfolio choice under uncertainty in simple settings; e.g., to analyze variants of mean-variance analysis
  • Can explain return and risk and describe the implications of these in the pricing of financial assets as well as be able to use this in specific problems, e.g., in the CAPM and in factor models.

3. Valuation of real assets, corporations’ choice of investment (capital budgeting), and capital structure
  • Can understand and explain concepts such as present value and net present value
  • Can define and set up cash flows for a given real investment and calculate the (net) present value of this
  • Can understand and explain the concept of costs of capital and use these in calculation in specific examples
  • Can value risk free and risky projects and real investments with or without taxes; can understand the implications of taxes on the valuation of real investments
  • Can understand and explain the concept capital structure and its importance for the firm
  • Can understand and explain the implications of taxes on the cost of capital and for the firm’s choice of capital structure
  • Can valuate equity and debt under specific conditions
  • Can describe and (in simple cases) analyze incentive problems for a firm; i.a., agency conflicts between stock holders and bond holders (creditors).

Literature:
Example:
  • Jonathan Berk and Peter DeMarzo: Corporate Finance - Pearson International Edition - Global edition, latest edition with myFinanceLab.

Time of classes:
Autumn.

Scheduled classes:
2x2 lecture hours and 2 class exercises per week for 9 weeks.

Form of instruction:
becomes capable of analyzing specific financial problems from a financial modern point of view.

The student is expected to carry out studies of literature throughout the course to learn the concepts, methods and theories contained in the course. The learning from these studies is supported by lectures giving overview of the area and highlighting and discussing important and/or difficult areas.

To help the student acquire the skills to be learnt in the course, exercises will be available during which the students share their solutions to problems aided by a teaching assistant.

Finally, the students will evaluate their own learning continuously in the course through work with a number of mandatory exercises comprising an assignment. Joint feedback on the performance in the exercises will be given during the lectures or class exercises.

Lectures: 36 hours.
Preparation for lectures: 36 hours.
Class exercises: 18 hours.
Preparation for class exercise: 42 hours.
Examination: 3 hours.
In total: 135 hours.

Time of examination:
Ordinary exam in January.
Re-exam in february.

If the course is taken as a supplementary course after admission to the master's programme (cand.merc.):
In this case, the student must sit for and pass the exam in this course no later than 6 months after commencing their studies. There are two exam attempts: Ordinary exam and the re-exam following the ordinary exam.
If the course is taken as an elective on a bachelor programme:

Registration for the course is automatically a registration for the ordinary examination in the course. Cancellation is not possible. If the student does not participate in the examination, the student will use an examination attempt.
The university may grant an exemption from the rules in case of exceptional circumstances.

The form of the reexam is subject to change. The students are informed about the change in format after the students have signed in the reexam.

Since registration for this course is binding and the course will not be offered again, you will automatically be signed up for all three examination attempts. The ordinary exam will be held in continuation of the teaching period and will take place in January 2018. The re-exam in the same examination period is held in February 2018. Last and final examination attempt will be held in January 2019.


Examination conditions:
None.

Form of examination for the certificate:
Written exam (own pc).

Supplemental information for the form of examination:
Duration: 3 hours written exam.
Location: At the University. The students have to bring their own computer.
Internet Access: Necessary.
Hand out: In the examination room.
Hand in: Via SDU-assignment in the course page in Blackboard.
Extent: No limitations.
Exam Aids: All aids allowed except for communication with others inside or outside the examination room.

Supplemental information about the re-exam:

Oral examination with 20 min preparation.
The exam will take 20 minutes including grading.
Preparation room: You take whatever you want (computers, books, etc), the same material that is allowed to the ordinary written exam.
Examination room: You can only bring one small (yellow) paper with short notes to yourself if you need it.


Programmes:
supplementary courses for master
1st semester, Not chosen, mandatory. Offered in: Odense