Download FE 620: FINANCIAL THEORY WITH CORPORATE APPLICATIONS

FE 620: FINANCIAL THEORY WITH CORPORATE APPLICATIONS
Charles S. Tapiero
Lecture periods:
Laboratory periods:
Recitation periods:
Credits:
2 ½ hours
0 hours
0 hours
3
This course prepares students with an understanding of financial theory and how modern finance is used by
firms for strategic and tactical decision making. The course is divided into two parts. The first part applies
scientific principles to financing, valuation, investment and capital budgeting decisions. The critical issue
of how these decisions impact market value and return on assets is addressed. The scientific tools used are
primarily mathematical, but only a modest level of mathematics is required to understand the primary
concepts.
In today’s fast-pace, growth-driven business arena, students must understand that the most valuable
investment opportunities often involve risk. Investors need a flexible and a risk sensitive strategy, yet
many current financial assessment tools frustrate this type of decision making because they fail to identify
what individuals need to capitalize on unexpected events. Financial engineering and the use of contingent
claims analysis offer an innovative and disciplined approach to these problems and how to mitigate the
negative effects of risk.
The second half of the course applies derivatives (options) thinking — the theory behind financial options
valuation, risk neutral pricing and complete markets is elaborated on. Real options, options on real (nonfinancial) assets, bringing the financial market discipline to the valuation and evaluation of companies’
opportunities. Using real options theory, decision makers can more effectively target crucial opportunities
to finance, re-focus, delay, modify, or even abandon their projects as events unfold. The realm of
applications includes the following.
• Evaluation of investments in R&D, information technology, start-up ventures, and product design
• Licensing
• Product development
• Mergers and acquisitions
Throughout the course, problems and exercises are used to highlight the techniques and the theory of
financial decision theory to corporate decision making and management.
Prerequisites
Students will use mathematical concepts from calculus, probability and statistics in this course. Students
will be supplied basic lecture notes for each of the mathematical topics used.
Grading
Midterm
Final
Homework
Class Participation
40%
40%
10%
10%
Textbook(s):
Tapiero Charles S., Lectures Notes to be distributed on selected topics
Tapiero Charles S., Risk and Financial Management: Mathematical and Computational Methods, Wiley
2004
Breasley and Myers, Corporate Finance, Mc-Graw-Hill, latest edition
Software:
@RISK, Student Version, Palisade Corporation.
1
Additional Readings:
Ross, Westerfield and Jaffe, Corporate Finance, Fourth Edition, Irwin
Timothy A. Luehrman. Investment Opportunities as Real Options: Getting Started on the Numbers.
Harvard Business Review, July 1998.
Timothy A. Luehrman. Strategy as a Portfolio of Real Options. Harvard Business Review, September
1998.
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Syllabus:
Topics
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Topic and Assignment
Introduction and overview of the course
What is Financial Theory, What is Corporate Finance and how does one support the other.
Corporate Firms: organization, objectives and financial instruments
Techniques and outline of selected for financial Corporate problems.
Value, Risk, Discounting, yield, Interest Rates and Term structure of interest rates
Fixed income securities and Bonds, traditional valuation, NPV valuation
Corporate and Rated Bonds
Selected problems: Cash flows valuation, Capital budgeting, Case Problems
Exercises and Solutions
Review of Probability Theory and the Random Walk
Review of Utility, risk, Expected utility and valuation
Case studies, Problems and exercises
Principles of Asset Pricing, The Capital Asset Pricing Model
The CAPM and the CCAPM (SDF)
Case Studies and Problems of Corporate Finance and Asset Pricing
Exercises
Financial Theory: Arbitrage, Risk neutral pricing and complete markets defined
Arbitrage Pricing Theory: Theory and Practice
Models of Asset Dynamics
Basic Forwards, Futures and Options Theory
RNP and Corporate Finance
Selected Problems: Miller-Modigliani; Capital Structure; Dividend Policy; Investment
Management
Read Lecture Notes
Midterm Examination
Applied Corporate Risk Finance
Risk, Finance and Corporate Financial Risk Management in Practice
Options and Derivatives Products: Theory and Data based.
Corporate Rated Bonds Management; Real Options and Credit Risk
Real Options Practice: Four-Step Solution Process:
Calculating Option Values and Adjusting for Leakage in Value Corporate Financial
Management
Discussion of selected Case Problems: Theory and Practice
Review Case Studies:
Case Study 1: Valuing a Start-Up Firm
Case Study 2: Investing in a Start-Up Firm
CASE STUDIES on Options and Real Options
Case Study 1: Buying Flexibility
Case Study 2: Combining Real and Financial Flexibility
Case Study 3: Strategy as a Portfolio of Real Options
Covers the Teaching Notes (Product Number 294109) Real Options: Valuing Managerial
Flexibility by Michael E. Edleson. These notes have a description and taxonomy of real
options followed by several examples of valuing and using real options to make better
value-enhancing decisions.
Covers Teaching Notes (5-295-117) Corporate Financial Management: Options Exercises,
by Timothy A. Luehrman.
Final Examination
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