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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 spendingmoney; 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. Thekey 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 matterand 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 financialmarkets 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 financialmanager 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 inabstraction, 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 ofcorporate 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:

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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 willfind 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 presentationTutorials: 1 hour per week, Friday, group presentation + lecturer instruction

Course Assessment

Final examination: 60%

Tutorial presentation: 20%

Quiz: 10%Participation: 10%

Coordinator/Lecturer/Tutor

Assistant Professor Guiying Laura Wu

Office Room: HSS-04-77;Tel: 6592-1553;

Email: guiying.wu@ntu.edu.sg 

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Syllabus 

Lecture Lecture

DateTutorial

Tutorial

Date

Textbook

Coverage

1. Introduction1.1. Why Choose this Course?

1.2. What is Corporate Finance?

1.3. An overview of Financial Statements1.4. The Hirshleifer Separation Theorem

16 Jan no tutorial 17 Jan ch. 1; 28

2. How to Calculate Present Value?2.1. Future Values and Present Values2.2. Perpetuities and Annuities

2.3. Growing Perpetuities and Annuities

23 Janself-introductionand grouping

24 Jan ch. 2

3. Valuing Bonds

3.1. Using PV Formula to Value Bonds3.2. Duration and Volatility

3.3 Term Structure of Interest Rates

06 Febgroup presentation for

Lecture 1 and 2

07 Feb ch. 3

4. The Value of Common Stocks

4.1. How Common Stocks are Valued4.2. Estimating the Cost of Equity capital

4.3. Valuing a Business by DCF

13 Feb

group

 presentation forLecture 3

14 Feb ch. 4

5. The link between Value and Risk

5.1. Risk, Return and Opportunity Cost ofCapital

5.2 Portfolio Theory and the CAPM

20 Febgroup presentation for

Lecture 4

21 Feb ch. 7-8

QUIZ 27 Feb no tutorial 28 Feb

6. An Overview of Corporate Finance6.1 Patterns of Corporate Finance

6.2 Common Stocks and Debt6.3. Financial markets and Institutions

13 Mar

group

 presentation forLecture 5

14 Mar ch. 14

7. How Debt and Equity Securities areIssued?

7.1 Venture Capital7.2 The IPO7.3 Securities Sales by Public Companies

20 Mar

group

 presentation forQUIZ

21 Mar ch. 15

8. How does a Firm Decide on Dividend

Payments?8.1 How Dividends are Paid?

8.2 The Dividends Controversy

27 Mar

group

 presentation forLecture 6 and 7

28 Mar ch. 16

9. Does Debt Policy Matter?

9.1 MM Proposition I

9.2 MM Proposition II

03 Apr

group

 presentation for

Lecture 8

04 Apr ch. 17

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

10 Apr

group

 presentation for

Lecture 9 and 10

11 Apr ch. 18

11. Conclusion and Revision

11.1 Revision of the Course11.2 Final Exam Information

17 Apr no tutorial 18 Apr