HE3014 Economics of Corporate Finance

Semester 2, 2013/2014
Course Description and Scope
Corporations face two broad financial questions: What investments should the firm
make? And how should it pay for those investments? The first question involves spending
money; the second involves raising it.
This course studies the economic mechanisms on how a financial manager makes these
decisions in the modern corporation and the resulting implications to resource allocation. The
key topics include: how to value assets, in particular bonds and common stocks, what is the link
between risk and value, what are the patterns of corporate financing, how debt and equity
securities are issued, how does a firm decide on dividend payments, does capital structure matter
and how much a firm should borrow.

Pre-requisite 4-digital new system (3-digital old system)

HE2001 (HE201), HE2002 (HE202), HE2004 (HE204B) or HE2005 (HE204A)
HE3007 is not a pre-requisite but will be a useful foundation.

Learning Objective
This course serves students who are interested in understanding why companies and the financial
markets behave the way they do from the orientation of economics, by providing a solid
economic foundation to the theory and practice of corporate finance in a modern world.

Learning Outcome
Students establish a solid understanding on what central financial decisions a financial
manager makes and how these decisions are made.
On one hand, students are guided to apply the principles of microeconomics,
macroeconomics, probability and statistical inference they have learned in year 1 and 2 into a
new and more specialized course; on the other hand, students will further develop their skills in
abstraction, logical deduction and critical thinking through constructing models, analyzing
arguments and testing empirical predictions in the context of corporate finance.
Students who desire an intellectual stimulation will command the core theory of
corporate finance at a rigorous level. Students who are interested in doing research may develop
potential research topics for their FYP. Students who are curious about real world problems will
gain insights into the modern corporate environment and be more prepared for the competitive
job market.

Textbooks/References
The main reference is the most widely used classical corporate finance textbook: Richard A.
Brealey, Stewart C. Myers, and Franklin Allen, 2010, Principles of Corporate Finance, 10th
edition, McGraw-Hill. NTU Library Call Number: HG4026.B828. BMA hereafter.
The other two useful books are:
Page 1 of 3

Steve Lumby and Chris Jones, 2011, Corporate Finance, 8th edition, South-Western. LJ
hereafter.
Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe, 2010, Corporate finance, 9th edition,
McGraw-Hill. NTU Library Call Number: HG4026.R826. RWJ hereafter.
BMA has an excellent balance between theory and practice. Students with a taste of theory will
find LJ more concise and quantitative, while students with a more practical mind will find RWJ
more intuitive and qualitative.
Students who have a particular interest in the agency theory, capital structure and M&A may find
Jean Tirole: The Theory of Corporate Finance and Oliver Hart: Firms, Contracts, and Financial
Structure most useful.
Materials
Lecture notes and tutorial questions will be uploaded in EdveNTUre the day before the lectures;
tutorial answers will be uploaded the day after the tutorials.

Method of Instruction
Lectures: 2 hours per week, Thursday, lecturer presentation
Tutorials: 1 hour per week, Friday, group presentation + lecturer instruction

Course Assessment
Final examination:
Tutorial presentation:
Quiz:
Participation:

60%
20%
10%
10%

Coordinator/Lecturer/Tutor
Assistant Professor Guiying Laura Wu
Office Room: HSS-04-77;
Tel: 6592-1553;
Email: guiying.wu@ntu.edu.sg

Page 2 of 3

Syllabus
Lecture
1. Introduction
1.1. Why Choose this Course?
1.2. What is Corporate Finance?
1.3. An overview of Financial Statements
1.4. The Hirshleifer Separation Theorem
2. How to Calculate Present Value?
2.1. Future Values and Present Values
2.2. Perpetuities and Annuities
2.3. Growing Perpetuities and Annuities
3. Valuing Bonds
3.1. Using PV Formula to Value Bonds
3.2. Duration and Volatility
3.3 Term Structure of Interest Rates
4. The Value of Common Stocks
4.1. How Common Stocks are Valued
4.2. Estimating the Cost of Equity capital
4.3. Valuing a Business by DCF
5. The link between Value and Risk
5.1. Risk, Return and Opportunity Cost of
Capital
5.2 Portfolio Theory and the CAPM
QUIZ
6. An Overview of Corporate Finance
6.1 Patterns of Corporate Finance
6.2 Common Stocks and Debt
6.3. Financial markets and Institutions
7. How Debt and Equity Securities are
Issued?
7.1 Venture Capital
7.2 The IPO
7.3 Securities Sales by Public Companies
8. How does a Firm Decide on Dividend
Payments?
8.1 How Dividends are Paid?
8.2 The Dividends Controversy
9. Does Debt Policy Matter?
9.1 MM Proposition I
9.2 MM Proposition II
10. How much should a Firm Borrow?
10.1 Corporate and Personal Taxes
10.2 The Trade-off Theory
10.3 The Pecking Order Theory
11. Conclusion and Revision
11.1 Revision of the Course
11.2 Final Exam Information

Lecture
Date

Tutorial

Tutorial
Date

Textbook
Coverage

16 Jan

no tutorial

17 Jan

ch. 1; 28

23 Jan

self-introduction
and grouping

24 Jan

ch. 2

06 Feb

group
presentation for
Lecture 1 and 2

07 Feb

ch. 3

13 Feb

group
presentation for
Lecture 3

14 Feb

ch. 4

20 Feb

group
presentation for
Lecture 4

21 Feb

ch. 7-8

27 Feb

no tutorial

28 Feb

13 Mar

group
presentation for
Lecture 5

14 Mar

ch. 14

20 Mar

group
presentation for
QUIZ

21 Mar

ch. 15

27 Mar

group
presentation for
Lecture 6 and 7

28 Mar

ch. 16

03 Apr

group
presentation for
Lecture 8

04 Apr

ch. 17

10 Apr

group
presentation for 11 Apr
Lecture 9 and 10

ch. 18

17 Apr

no tutorial

Page 3 of 3

18 Apr