Lahore University of Management Sciences Econ 261 Principles of Finance

Spring 2013

Instructor Room No. Office Hours Email Telephone Secretary/TA TA Office Hours Course URL (if any)

Ushna Akber 265 TBA ushna@lums.edu.pk EXT 2263 TBA TBA

Course Basics Credit Hours Lecture(s) Recitation/Lab (per week) Tutorial (per week) Course Distribution Core Elective Open for Student Category Close for Student Category COURSE DESCRIPTION

4 2 Per Week N/A TBA

Duration Duration Duration

110

No Yes Sophomore/Junior

This course introduces the theory and practice of finance to students who are largely unfamiliar with finance. This course explores the first part of Financial Management and introduces the framework, tools and techniques for making Investment decisions. Specifically, we will cover Time Value of Money, Stock and Bond Valuation, Capital Budgeting, Modern Portfolio Theory and RiskReturn Relationship. At the end of the course students should have a clear understanding of financial decision making practices required to be an effective manager. COURSE PREREQUISITE(S) Principles of Microeconomics Principles of Macroeconomics Statistics

Grading Breakup and Policy Quizzes: 25% (Announced) Midterm Examination: 25% Project/Presentation: 15% Final Examination: 35%

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Examination Detail Yes/No: Yes Combine Separate: Combine Duration: In class Preferred Date: TBA Exam Specifications: Closed books and closed notes; help sheet not allowed; formula sheet not allowed; calculators allowed.

Midterm Exam

Final Exam

Yes/No: Yes Combine Separate: Combine Duration: TBA Exam Specifications: Closed books and closed notes; help sheet not allowed; formula sheet not allowed; calculators allowed.

Session

2,3,4 5 6

7, 8

9, 10 11,12 13 14 15 16 17 18 19 20, 21 22 23 24, 25 26, 27, 28

COURSE OVERVIEW Topics Introduction to the course An Introduction To Finance The firm and the financial manager. An Overview of Financial Environments (Capital Markets and Corporate Finance) An Introduction to Financial Markets, Financial Institutions and Financial Instruments, Consumption, Savings and Investment. Accounting and Finance Balance Sheet; Income Statements and Cash Flow Statements; Taxes Ratio analysis and DuPont. Time Value Of Money Compounding and Discounting; Future and present value. Perpetuities and Annuities; Various Application of TVM; TVM as Basis of Valuation of Financial Instruments, Effective interest rate; Inflation and real interest rate. TVM and Bond Valuation Bond Characteristics; Basic Valuation Model; Bond Prices and Yields; Different Types of yields. Valuation Valuing Bonds Bond Prices and Interest Rates: Price Volatility: Price Sensitivity; Bond Duration and Convexity. Valuation Stocks Different Type of Stocks and markets they are traded in; Some Stock Classifications. Book Value and Market Value;Dividend Discount Models and Other Models Valuation Valuing Bond & Stocks DDM with constant growth ; Intro to technical and fundamental analysis; Puzzles in stock valuation Investment Criteria; Net Present Value NPV; Other Investment Criteria(IRR, payback); Mutually Exclusive Projects; Capital Rationing. Discounted Cash Flow Analysis DCF; Sunk Costs and Opportunity Costs; Discount Nominal Cash Flow by Nominal Cost of Capital; Separate Investment and Financing Decision; Calculating Cash Flows. Project Analysis How Firms organize the Investment Process; Sensitivity Analysis and Scenario Analysis; Accounting Breakeven Analysis; Operating Leverage and Financial Leverage; Real Options. Mid term An Introduction to Risk and Return Risk and Return Basics; Opportunity Cost of Capital; A Review of Rate of Return; Measuring Risk; Risk and Diversification; Different Varieties of Risks.; Expected Risk & Return. An Introduction To Portfolio Theory Risk and Return , Portfolio of Risky and Risk less Assets; Efficient Frontiers; Capital Market Line. Risk, Return and Capital Budgeting Measuring Market Risks; The CAPM Model; Beta and Security Market Line; Use of CAPM for Estimating and Calculating Risk, Company vs Project Risk. Cost of Capital Weighted Average Cost Of Capital; Measuring Capital Structure; Calculating Required Rate of Return; Calculating and Interpreting the Weighted Average Cost of Capital; Beta levering and re levering. Debt Policy Dividend Policy International Financial Management (optional) Options Presentations

Readings

BMM Ch 1 and 2

BMM Ch 3 and 4 BMM Ch 5 BMM Ch 5

BMM Ch 6

BMM Ch 7

BMM Ch 8 BMM Ch 9 BMM Ch 10

BMM Ch 11

BMM Ch 12 BMM Ch 13 BMM Ch 16 BMM Ch 17 BMM Ch 22 BMM Ch 23

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Textbook(s)/Supplementary Readings Brealey, Myers & Marcus, 2009, 6 edition, Fundamentals of Corporate Finance, McGrawHill Irwin.
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