University of Texas at Dallas School of Management

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1 University of Texas at Dallas School of Management Finance 6301 Professor Yexiao Xu Financial Management Spring 2005 Course Objectives: Course Syllabus Financial management can be broadly defined as how to efficiently manage assets, liabilities, and equity in order to maximize the wealth of the owners. In general, this applies to individuals as well as organizations. In order to study the subject in a general but concrete environment, we will focus the financial management of a corporation, or corporate finance. In other words, you will be introduced to various issues concerning corporate financial decision-making. In order to help you understanding these issues from a big picture, we will divide our subjects into three areas, the investment decision, valuation, and the financing choices of firms. On the investment side, we will study how a firm should commit its resources to various projects to achieve the maximum value. This is carried out through two stages. First, we examine the financial aspect of the investment decisions, or capital budgeting in an ideal world with certainty. After developing necessary theory to quantify risks, we then apply a similar approach to capital budgeting in an uncertainty environment. Given a firm s decision to invest in certain projects, it is equally important to know how financing decision of using debt vs. equity will affect the firm s value. Perhaps, a more fundamental question to ask is whether different means of financing matters. Much of the theory in this part relies on the valuation issue of different financial claims. Therefore, we will also learn how to price various types of securities, including stocks, bonds, and options, in an efficient market. With the globalization, the world markets are increasingly integrated. Therefore, it is very useful to expose yourself to some of the issues in international finance. Because of the risky nature of firms investment, most financial decisions are made under uncertainty about firms future cash flows. Therefore, statistical knowledge is required, especially knowledge on probability distributions, mean, variance and covariance. I strongly recommend you to take STAT 5311 first. Accounting information is also important for managers to make sound decisions. Knowledge about accounting statement is also required. Course Requirements: There will be one lecture (Monday 7:00-9:45PM) per week. You should make every effort to attend each lecture. In addition, I will hold my office hours on Monday from 5:00PM to 6:30PM, or by appointment. My office is located in room SM3.812 on the third floor of the new School of Management building. I can be reached by phone at (972) or at yexiaoxu@utdallas.edu. If you are interested in my research, my current working papers are available for downloading at Registered students can also download my lecture notes and problem sets from my website. We will have about five problem sets distributed during the semester. No late homework will be accepted. Solutions to the problem sets will be posted on my website after the due date. There will be one in-class midterm and a final exam. In order to be fair to everyone, exams must be taken on

2 the specified dates. For those who can not take the midterm on the date of exam due to business travel, you should take it before leaving the town. No additional credit or make up final will be granted. The grading breakdown is as follows: Problem Sets 30% Midterm Examination 30% Final Examination 40% In addition to fill out the survey sheet at the end of this syllabus, you are required to send me an in order to put you on my mailing list for updates and hints to problem sets Readings: The required textbook is Ross, Westerfield and Jaffe, Corporate Finance, 6th edition. I also recommend Random Walk Down Wall Street by Burton G. Malkiel. This is an entertaining book to understand the basics of financial markets. It is also an excellent guide for your personal financial planning. Finance is an emerging filed of economics. One will never truly understand it without constantly expose to the real world. Therefore, it is crucial to read Wall Street Journal or financial section of major newspapers such as the New York Times, and watch financial programs. Assignments and Course Outline: Introduction Jan.: 10 Lecture 1 An introduction to corporate finance The functions and objections of financial management Financial markets Basic accounting information RWJ, Chapters 1, 2 Jan. 17: Martin Luther King, Jr. Day Capital budgeting under certainty: The Investment Decision Jan. 24: Net Present Value (NPV) Analysis Note: Problem Set 1 Due in Class Lecture 2 Financial planning Financial markets economics and NPV analysis Compounding and discounting Perpetuity and annuity calculation RWJ, Chapter 3, 4

3 Jan. 31: Lecture 3 Why use NPV analysis? Some alternatives to NPV analysis and their drawbacks Strategy and analysis in using NPV Capital rationing, decision tree, and sensitivity analysis RWJ, Chapter 6, Feb. 07: Cash flow calculation Note: Problem Set 2 Due in Class Lecture 4 Incremental cash flow Replacement theory RWJ, Chapter 7 Capital budgeting under uncertainty: Feb. 14: Lecture 5 Portfolio Theory Introduce to risk and return Measuring risk and return Diversification and different types of risks Efficient portfolio and Capital Market Line RWJ, Chapter 9, Feb. 21: Asset pricing models Note: Problem Set 3 Due in Class Lecture 6 The Capital Asset Pricing Model (CAPM) Systematic v.s. nonsystematic returns The Arbitrage Pricing Theory (APT) CAPM v.s. APT RWJ, Chapters , 11 Mar. 28: Mar. 07: Midterm exam during the lecture time Spring Break Valuation Mar. 14: Lecture 7 Efficient markets Three notions of efficiency Implications for corporate finance RWJ, Chapter 13 Mar. 21: Valuation of stocks and bonds Note: Problem Set 4 Due in Class Lecture 8 Bonds pricing Models for common stocks valuations RWJ, Chapter 5, 14

4 Mar. 28: Lecture 9 Introduction to modern finance theory Introduction to options Option pricing theory Real options RWJ, Chapters , 22.12, 23.1, 23.4, 8.4 The Financing Decision Apr. 04: The capital structure Note: Problem Set 5 Due in Class Lecture 10 Introduction to capital structure Financial leverage and firm value The role of taxes The MM theory RWJ, Chapters 15 Apr.11: Limits to the use of debt Lecture 11 Cost of financial distress The MM theory with personal tax Capital budgeting with leverage APV, FTE, and WACC approaches RWJ, Chapter 16, 17 Apr. 18: International finance Note: Problem Set 6 Due in Class Lecture 12 Terminology Foreign exchange markets Purchasing-power parity International capital budgeting RWJ, Chapters 31 Apr. 25: Final examination

5 University of Texas at Dallas School of Management Fin 6301 Prof. Yexiao Xu Section 501 Spring 2005 About Yourself In order for me to better organize the course, and to adapt the materials to your background, would you please tell me more about yourself? Your Name Your Phone Number Your Address (Please send me an with your full name, so that I can compile a mailing list) Your Job Your Background Survey: Finance Class Economics Class Accounting Courses Statistics and Math Courses Other related Courses Do you read sports section of a newspaper? Do you read financial newspapers, such as the Wall Street Journal, the Financial Times, the financial section of the New York Times, etc.? Do you read financial magazines, such as Money Magazine, Business Week, Forbs, etc.? Do you watch financial programs, such as Nightly Business News, CNBC, Wall Street Week with Louis Rukeyser, etc.? Your Comments: