Universiti Tenaga Nasional

College of Business Management

and Accounting
Course Outline
Finance Theory
FICB 353
Semester II Academic Year 2016/2017
Prerequisite:
FICB213

Noriza Mohd Saad

Room: AB-2-18,
Tel: 09 455 2020 ext 3346
Fax: 09 455 2006
Email: Noriza@uniten.edu.my

Subject Synopsis
This subject has two parts. The first half of the subject begins with an introduction to the
framework of financial theory. It next explores the theory of financial decision making where
all outcomes are known with certainty. The focus is then drawn upon the utility theory how
individuals make choice among risky alternatives: the state preference theory individuals
making choices in uncertain conditions within theoretical frameworks; and the use of meanvariance as choice criteria under uncertainty. Next, the concept of market equilibrium and the
appropriate measure of risk in determining asset prices are discussed in two pricing models: the
Capital Asset Pricing Model(CAPM) and the Arbitrage Pricing Theory(APT); followed by a
discussion of the theoretical concept of efficient capital markets.
The second half of the subject focuses on applications of financial theories in a corporate
environment. Various empirical studies related to the efficient market hypothesis are exploded.
This is followed by a discussion of the theory of capital structure and the cost of capital, and the
empirical evidence of the effect of the type of financing to the value of the firm. Next, competing
theories of dividend policy are discussed, along with empirical evidence in the relationship
between dividend policy and the value of the firm. The subject concludes by considering the
merges phenomenon in theory and empirical tests on the topic.
Course Objectives
At the end of this course, students should be able to;
1. Able to explain the importance of financial marketplaces for economic development.
2. Able to describes the appropriate investment criterion in the simplest of all possible worlds-a
world where all outcomes are known with certainty and describes the theory of capital
markets using appropriate concept of risk and shows how it will be priced in equilibrium,
including the very general arbitrage pricing theory.

3. Able to distinguish the concept and the empirical evidence of efficient capital markets,
capital structure and dividend policy.
4. Able to demonstrates the theory of mergers and restructuring and discuss the M&A cases in
Malaysia and analyzes the international dimension of financial theory and corporate policy

Course Outcomes
At the end of this course, students should be able to;
1. Describes why the existence of financial marketplaces is so important for economic
development.
2. Describes the appropriate investment criterion in the simplest of all possible worlds-a
world where all outcomes are known with certainty.
3. Describes the theory of capital markets to include equilibrium framework with uncertain
outcomes and, even more importantly, describes the appropriate concept of risk and
shows how it will be priced in equilibrium, including the very general arbitrage pricing
theory.
4. Distinguishes the concept and the empirical evidence of efficient capital markets.
5. Demonstrates the concept and the empirical evidence of capital structure.
6. Describes the theory and support with empirical evidence on dividend policy.
7. Demonstrates the theory of mergers and restructuring and able to discuss the M&A cases
in Malaysia.
8. Analyzes the international dimension of financial theory and corporate policy such high
volatility in foreign exchange rates, the evolution of the international financial systems,
the analysis of international transactions, international asset pricing models, and the cost
of capital and currency risk.
Mapping of Learning Outcomes (LO) and Program Outcomes (PO)

PO
CO
CO1 Describes why the existence of
financial marketplaces is so important for
economic development.
CO2
Describes
the
appropriate
investment criterion in the simplest of all
possible worlds-a world where all
outcomes are known with certainty.
CO3 Describes the theory of capital
markets
to
include
equilibrium
framework with uncertain outcomes and,
even more importantly, describes the

P P P P P P P P Delivery
&
O O O O O O O O Assessment
1 2 3 4 5 6 7 8
Lecture & class

discussions.
Assessment through
Quiz 1
Lecture & class
discussions.

Assessment through
Quiz 1

Lecture, class
discussions and
presentations.
Assessment through
2

appropriate concept of risk and shows

how it will be priced in equilibrium,
including the very general arbitrage
pricing theory.
CO4 Distinguishes the concept and the
empirical evidence of efficient capital
markets.

Mid-term, and final

exam

CO5 Demonstrates the concept and the

empirical evidence of capital structure

CO6 Describes the theory and support

with empirical evidence on dividend
policy.

CO7 Demonstrates the theory of mergers

and restructuring and able to discuss the
M&A cases in Malaysia.

CO8
Analyzes
the
international
dimension of financial theory and
corporate policy such high volatility in
foreign exchange rates, the evolution of
the international financial systems, the
analysis of international transactions,
international asset pricing models, and
the cost of capital and currency risk.

Lecture, class
discussions and
presentations.
Assessment through
Mid-term, and final
exam
Lecture & class
discussions.
Assessment through
Final Exam
Lecture & class
discussions.
Assessment through
Final Exam, Quiz 2
Lecture & class
discussions.
Assessment through
Final Exam
Lecture & class
discussions.
Assessment through
Final Exam

Class Assessment
Assessment will be done on a continuous basis throughout the semester, which will be divided
into the followings:

Assessment Methods

CO1

CO2

Final Examination
Mid Semester Exam

CO3

CO4

CO5

CO6

CO7

CO8

Case
Studies/Assignments
Quiz 1

X
X

Quiz 2

Percentage of Assessment
Final Examinations
Continuous Assessment:

Mid Semester Exam

Case Studies/Assignments

Quiz 1

Group Presentation & Report

Total (100%)
60%
40%

Attendance
Attendance at any and all sessions is mandatory. Periodic attendance checks will be made and
absence will detract from a students ability to achieve high grade. Absence from class meetings
will indicate a lack of active intellectual involvement and result in reduction in the grade for
class participation. Students absent for more than 20% of classes will be recommended to the
university to be barred from taking the final exam.
Academic Integrit
The university code of students right and responsibilities establishes the rights to which the
student is entitled and the responsibilities, which a student must assume. Along with preparing
for and attending class, each student has the responsibility of promoting high academic standard.
College of Business Management supports the university policy on academic dishonesty.
Academic dishonesty includes:

Cheating
Fabrications and falsifications
Multiple submission
Plagiarism
Complicity in academic dishonesty

Proven cases of academic dishonesty can and will result in the student being denied admission to
or dismissal from the college. Inappropriate classroom behaviour may result in the student being
withdrawn from the class. To enhance a student academic capacity, as a rule of thumb, a student
should spent at least three hours of study on their own to every one hour of class lecture.
Week
1-2

Topics
1.0 INTRODUCTION

IL

TOTAL

12

12

Consumption and Investment Decisions

without Capital Market
Consumption and Investment Decisions with
Capital Market
Fisher Separation Theorem
Breakdown of Separation : Transaction Costs
Asymmetric Information
Agency Theory

3
2.0 INVESTMENT DECISION - MAKING
UNDER CERTAINTY
Shareholders' Wealth Maximisation
Capital Budgeting Techniques in Theory
Capital Budgeting Techniques in Practice
4-5
3.0 MARKET EQUILIBRIUM : CAPM AND
APT

The Efficiency Of The Market Portfolio

Derivation of the capital assets pricing model
(CAPM)
CAPM in single-period valuation models
CAPM in uncertainty conditions
Applications of the CAPM for corporate policy
Empirical tests of the CAPM
Roll's critique
The arbitrage pricing theory (APT)
5

Week

Topics

IL

TOTAL

12

12

Empirical tests of the APT

6-7
4.0 EFFICIENT CAPITAL MARKETS

Theory
Definition of capital market efficiency
Formal definition of the value of information
Relationship between the value of information
and efficient capital markets
Rational expectations and market efficiency
Statistical tests unadjusted for risk
The joint hypothesis of market efficiency and
the CAPM

Evidence
Accounting information
Block trades
Insider trading
New issues
Stock splits
Performance of managed portfolios
Anomalies
8-9
5.0 CAPITAL STRUCTURE
Theory
Value of the firm given corporate taxes
only
Value of the firm with both personal and
corporate taxes
Introducing risk - A synthesis of
Modigliani - Miller and CAPM
The cost of capital with risky debt
The effect of other financial instruments on
the cost of capital
An "optimal" mix of debt and equity
Evidence
Empirical evidence on capital structure
Cost of capital : applications

Week

Topics

10-11

IL

TOTAL

12

12

6.0 DIVIDEND POLICY

Theory
Dividend policy Irrelevancy in a world
without taxes
Valuation, growth, and dividend policy
Dividend policy in a world with personal
and corporate taxes
Theory of optimal dividend policy
Evidence
Behavioural models of dividend policy
Clientele effects
Ex date effects
Signalling hypothesis
Relationship between dividends and value
Corporate equity repurchases via Tender
Offer
Valuation and corporate policy

12-13
7.0 MERGERS AND RESTRUCTURING

Theory
Corporate restructuring and control
Efficiency theories
Information theories
Agency problems
Market power
Tax considerations
Theories of restructuring
Conglomerate mergers

Evidence
Tests of merger and tender offer returns
Studies of antitrust cases
Corporate governance
Signalling hypothesis
7

Week

Topics

14

IL

TOTAL

8.0 INTERNATIONAL FINANCIAL

MANAGEMENT :

International diversification
Asset pricing models
Exchange risk and purchasing power parity
Market efficiency
Interest rate and currency swaps
Foreign currency translation
Current Issue - Dinar Currency
TOTAL

84

Table 2: Assessments SLT

Assessment
Quiz
Mid Semester Exam
Case Studies/Assignment
Term Paper
Presentation
Final Exams
Total Assessment SLT

AT

IL

SLT

1
2

2
4
15

3
6
15

1
3

2
12
42

3
15

AT: Attempt Time

IL: Independent Learning
SLT: Student Learning Time
Required Textbook
1. Copeland and Weston, (2014) Financial Theory and Corporate Policy, 4th Edition,
Addison Wesley.
Other Recommended References
2. Contemporary Research Articles
8

a. Journal of Finance
b. Journal of Financial Economics
c. Journal of Banking & Finance
d. Capital Market Review
3. Megginson, William M, (Aug. 1997) Corporate Finance Theory, Addison Wesley.
4. Brealey and Meyers, (Nov. 2002) Principles of Corporate Finance, 7th Edition, McGrawHill.
5. Martin, Cox and MacMinn, (1997) The Theory of Finance (Evidence & Application)
International Thomson Publishing.
TEACHING PLAN SEMESTER 2 2016/2017
FICB 353 FINANCE THEORY
Wk

Date *

From
1/6/2015

To
5/6/2015

8/6/2015

12/6/2015

15/6/2015

19/6/2015

22/6/2015

26/6/2015

29/6/2015

3/7/2015

6/7/2015

10/7/2015

13/7/2015

17/7/2015

20/7/2015
27/7/2015

24/7/2015
31/7/2015

3/8/2015

7/8/2015

10

10/8/2015

14/8/2015

11

17/8/2015

21/8/2015

12

24/8/2015

28/8/2015

13

31/8/2015

4/9/2015

14

7/9/2015

11/9/2015

Lecture

Tutorial

Topic 1
INTRODUCTION
Topic 1
INTRODUCTION
Topic 2 INVESTMENT
DECISION - MAKING
UNDER CERTAINTY
Topic 3 MARKET
EQUILIBRIUM : CAPM
AND APT
Topic 3 MARKET
EQUILIBRIUM : CAPM
AND APT
Topic 4 EFFICIENT
CAPITAL MARKETS

Discussion questions
Topic 1
Discussion questions
Topic 2
Discussion questions
Topic 2

Topic 4 EFFICIENT
CAPITAL MARKETS

Discussion questions
Topic 4
Semester Break
Discussion questions
Topic 5

Topic 5 CAPITAL
STRUCTURE
Topic 5 CAPITAL
STRUCTURE
Topic 6 DIVIDEND
POLICY
Topic 6 DIVIDEND
POLICY
Topic 7 MERGERS
AND
RESTRUCTURING
Topic 7 MERGERS
AND
RESTRUCTURING
Topic 8
INTERNATIONAL
FINANCIAL
MANAGEMENT

Discussion questions
Topic 3
Discussion questions
Topic 3
Discussion questions
Topic 4

Discussion questions
Topic 5
Discussion questions
Topic 6
Discussion questions
Topic 6
Discussion questions
Topic 7
Discussion questions
Topic 7
Discussion questions
Topic 8 & Revision

Assessment

* Excluding Saturdays and Sundays

10