Graduate School of Management & Economics Sharif University of Technology

Financial Management

44311 Spring Semester 2012

Instructor: Shiva Zamani (zamani@sharif.edu) Office phone: 66022755

Ext: 147 ]

Teaching Assistants: Hooman Karami, Behrang Asadi

Course Objective & Overview

Upon completion of this subject, the student will understand

What finance is and how financial system works.

The time value of money and the discounted cash flow analysis.

The capital structure.

The importance of asset valuation, the Law of One Price, and the meaning and

role of valuation models.

A conceptual framework of risk management, and the application of hedging,

insuring, and diversifying.

The process of personal portfolio selection, and building a quantitative model

of the trade-off between risk and reward.

The theory and practice of asset pricing including, Capital Asset Pricing

Model (CAPM).

Course materials

The assigned texts for this course are:

1. Bodie and Merton, FINANCIAL ECONOMICS, Prentice Hall, Upper Saddle

River, New Jersey 07458 (2009).

2. Brealey, Myers, and Allen, PRINCIPLES OF CORPORATE FINANCE, 9th

Edition, McGraw- Hill Higher Education (2007).

3. Ross, Westerfield, Jordan, and Roberts, Fundamentals of CORPORATE

FINANCE, Fourth Canadian Edition, McGraw-Hill Ryerson (2002).

4. Ross, Westerfield, and Jaffe, CORPORATE FINANCE, Sixth Edition,

McGraw-Hill Irwin (2002).

The course packet contains the supplementary materials from the following references:

1. Companion Website of the Book: FINANCE, by Zvi Bodie, and Robert C.

Merton, Prentice Hall (2000), www.prenhall.com/bodie

2. Companion website of the Book: Fundamentals of CORPORATE FINANCE,

Fourth Canadian Edition, by Ross, Westerfield, Jordan, and Roberts, McGraw-

Hill Ryerson (2002), www.mcgrawhill.com/rossfund4

3. Companion website of the Book: CORPORATE FINANCE, Sixth Edition, by

Ross, Westerfield, and Jaffe, McGraw-Hill Irwin (2002), www.mhhe.com/rwj

Syllabus and Course Schedule

Week Date Session Topics

1 Sunday 16/11/90 Introduction and Class Schedule

Finance

Definition of Finance, Forms of Business Organization, Separation of Ownership

and Management, The Goal of Management, Takeovers.

• (1) Ch 1: pp 1-20.

2 Sunday 23/11/90

Financial Markets and Institutions

The Financial System, The Flow of Fund, The Functional Perspective, Financial

Markets, Financial Market Rates, Financial Intermediaries, Financial Infrastructure and Regulation, Governmental and Quasi-Governmental Organizations.

• (1) Ch 2: pp 23-70.

3 Sunday 30/11/90

Allocating Resources over time Compounding, Discounting, Multiple Cash Flows, Annuities, Perpetuities, Loan Amortization, Exchange Rates and TVM, Inflation and DCFA, Taxes and Investment Decisions.

• (1) Ch 4: pp 108-147.

4 Sunday 7/12/90

The Analysis of Investment Projects

The Net Present Value Rule, Estimating Projects' Cash Flows, Cost Reducing

Projects, Projects with Different Lives, Mutually Exclusive Projects.

• (1) Ch 6: pp 171-196.

5 Sunday 14/12/90

The Analysis of Investment Projects Examples, Questions and Answers.

6 Sunday 21/12/90

Principles of Asset Valuation

The Law of One Price and Arbitrage, Efficient Markets Hypothesis

• (1) Ch 7: pp 193-214.

7 Tuesday 15/1/91 Valuation of Known Cash Flows: Bonds

Using Present Value Formula, Pure Discount Bonds, Coupon Bonds, Current

Yield, Yield to Maturity.

• (1) Ch 8: pp 222-233.

8 Sunday 20/1/91

Valuation of Known Cash Flows: Bonds

Maturity, Time, Interest Rate

• (1) Ch 8: pp 233-243.

Valuation of Common Stocks

The Discounted Dividend Model

• (1) Ch 9: pp 244-255.

9 Sunday 27/1/91

Valuation of Common Stocks

Earning and Investment Opportunities, Price/Earning Multiple Approach,

Dividend Policy.

• (1) Ch 9: pp 255-264.

Question and Answers

10 Sunday 3/2/91

Principles of Risk Management

What is Risk, Risk and Economic Decisions, The Risk Management Process, The

Probability Distributions of Returns, Standard Deviation as a Measure of Risk.

• (1) Ch 10: pp 267-295.

Hedging, Insuring, Diversifying

The Diversification Principle, Diversifiable Risk, Nondiversifiable Risk.

• (1) Ch 11: pp 296-332.

11

Sunday 10/2/91

Wednesday 13/2/91

Portfolio Opportunities and Choice

The Process of Personal Portfolio Selection, The Trade-Off between Expected

Return and Risk, Efficient Diversification with Many Risky Assets.

• (1) Ch 12: pp 333-358.

Questions and Answers

Midterm Exam

12

Tuesday 19/2/91 Portfolio Opportunities and Choice

Examples

Capital Market Equilibrium

The Capital Asset Pricing Model (CAPM), Risk Premium, Beta, Using CAPM in

Portfolio Selection.

• (1) Ch 13: pp 359-370.

13 Sunday 24/2/91

Capital Market Equilibrium CPM and Asset Valuation, CAPM and Cost of Capital, Alternatives of CAPM. Examples

• (1) Ch 13: pp 370-376.

14 Sunday 31/2/91

Financial Structure of the Firm

Equity Financing, Debt Financing, The Irrelevance of Capital Structure in a Frictionless Environment, Creating Value Through Financing Decisions, Reducing Costs, Dealing with Conflicts of Interest.

• (1) Ch 16: pp 433-450.

15 Sunday 7/3/91

Financial Structure of the Firm

How to Evaluate Levered Investments, Examples

• (1) Ch 16: pp 451-454. Questions and Answers

Instructional method

Each session is capped by a lecture and discussion. The main reference book (Bodie & Merton) is meant to be studied carefully, and I would emphasize that the handouts and discussions are certainly not sufficient to complete the course.

Grading (Evaluation)

Assignments 20%

Midterm Exam 40%

Final exam 40%

Examinations

The midterm exam will be held on Wednesday 13/02/91, and the final exam will be held on Date. The Exams are based on lectures and readings presented during the term.

Assignments

Four home works are designed for this semester. All students must deliver their

home works at the due dates as handwritten hardcopies. For a delay up to 2 days,

one will loose 30% of the points, and for more than 2 days, one will not get the

points. The due dates of the home works are as follows.

Homework No. Due Dates

1 7/12/90

2 21/12/90

3 27/1/91

4 31/2/91

Office hours

With rare exceptions announced in advance, I will be available on Sundays and Tuesdays 12:15-13:00. For setting an appointment, you can call Ms. Khoyvandi Ext: 137 or e-mail me (zamani@sharif.edu).

This course is delivered in the framework of "Official Educational Rules for Graduate

Programs in Sharif University of Technology".