Finance (Bachelor-Program: Management VII (5077))

Prof. Dr. Andrea Gaunersdorfer


Time and place:

Lectures: 20 207   L2 first week, Oct. 16:   Tue, 09-11, G05-H4
from second week:   Wed, 11.00 -12.30, G22A-020  
(time and place have been changed with the lecture of Prof. Luhmer, Management Accounting)
20 219   L2 Thu, 11.00-12.30, G52-H2
Tutorials: 20 228   Tut 2 Wed, 17-18.30, G22A-020 (start: Oct 24, 2001)
20 220   Tut 2 Thu, 15-17, G22A-013 (room has changed!)   (start: Oct 25, 2001)
Question time
 Mon, Feb. 2, 14-16, G22A-013
If you have further questions send me an e-mail
Inspection of examination
by appointment (till end of April)

Go to the schedule to download slides and problem sets.

The slides and problem sets can also be found as hard copies in a file in the copy shop.

  Material is now complete!   (Note supplementation in problem 69 and further corrections!)


  Lecture notes:   Contents   (complete)
  1. Part 1
  2. Part 2
  3. Part 3   (version: Jan 30; corrections)

Overview:

The course covers modern Capital Market Theory and its applications to Corporate Finance. The three main areas that will be addressed are:

  1. Introduction: Why Finance matters
  2. Valuation of cash flows and capital budgeting
    1. Introduction to net present value
      (Time value of money / A comment on risk and present value)
    2. Foundations of NPV
    3. Valuing long-lived assets
      (Valuing cash flows in several periods / Capital budgeting / Why the disount factor declines as futurity increases / Compound vs. simple interest / Nominal and real rates of interest / Using NPV to value bonds and common stocks)
    4. Other criteria for making investment decisions
      (Review of the key features of the NPV rule / (Discounted) payback period / Internal rate of return)
    5. Making investment decisions with the NPV
      (What to discount / Timing of investment / Projects with different lives: equivalent annual costs, machinery replacement)
  3. Pricing of risk
    1. Reward and Risk
      (Asset returns / Measuring risk / Return and risk of a portfolio / Diversification)
    2. Mean-variance portfolio theory
      (Markowitz portfolio theory / Efficient portfolios (with and withour a risk-free security))
    3. Choice unter uncertainty: general principles
    4. Market equilibrium: CAPM and APT
    5. Capital budgeting and risk
  4. Corporate financing
    1. Introduction
      (Patterns of corporate financing / Overview of financial instruments / Some classifications of financial markets)
    2. Effects of dividend policy on the value of a firm
      (Modigliani/Miller: Irrelevance of dividend policy in perfect capital markets)
    3. Effects of debt policy on the value of a firm
      (Modigliani/Miller: Propositions I and II)
    4. Valuing debt - bond pricing and the term structure of interest rates
      (Bond pricing / Term structure of interest rates / Yield to maturity / Price volatility characteristics of bonds / Duration / Immunization / Semiannual coupon payment / Determinimg the price when the settlement falls between coupon dates / Risk associated with investing in bonds)

Text:

Further reading:

Links


Schedule:

Lecture:

Date
Topics
(BM = Brealey/Myers, CW = Copeland/Weston)
Download slides
(choose between 4 slides on 1 page: click "4", or
  8 slides on 1 page: click "8")
Tue, Oct. 16, 2001 0. Introduction  
BM ch.1: Finance and the Financial Manager 1. Valuation of Cash Flows and Capital Budgeting  
  1. Introduction to net present value  
    BM ch.2.1: Introduction to Present Value
ch. 0 (7 slides): 4 / 8 (Version: Oct. 16, 12 a.m.)
ch. 1.1 (7 slides): 4 / 8 (Version: Oct. 16, 3.50 p.m.)
Thu, Oct. 18, 2001
  1. Foundations of NPV
    BM 5th ed., ch.2.2: Foundations of the Net Present Value Rule
    CW ch.1: Introduction: Capital Markets, Consumption, and Investment
    CW ch.2: Investment Decisions: The Certainty Case: 2.A:Introduction,
    2.B: Fisher Separation: The Separation of the Individual Utility Preferences from the Investment Decision
 ch.1.2 (8 slides): 4 / 8
(Version: Oct. 18, 4 p.m.: graphics discussed in the lecture has been added)
see also:
Wed, Oct. 24, 2001
  1. Valuing long-lived assets  
    BM ch.3: How to Calculate Present Values
ch.1.3 (8 slides): 4 / 8 (Version: Oct. 22, 6.30 p.m.) - Table slide no.26
Problems 11-14 (Version: Oct. 24, 12.50 p.m.)
(The formulas of the hints in problems 12(a) and 14(a) have been corrected.)
Thu, Oct. 25, 2001
Wed, Oct. 31, 2001Holiday
Thu, Nov. 1, 2001 Valuing long-lived assets (cntd.)  
BM ch.4.2: How Common Stocks are Valued
Wed, Nov. 7, 2001
  1. Other criteria for making investment decisions  
    BM ch.5: Why Net Present Value Leads to Better Investment Decision than Other Criteria:
    5.1: A Rieview of the Basics / 5.2: Payback / 5.4: Internal (or Discounted-Cash-Flow) Rate of Return
ch.1.4 (7 slides): 4 / 8 (Version: Nov. 7, 3.15 p.m.)
Thu, Nov. 8, 2001
  1. Making Investment Decisions with the NPV Rule
    BM ch.6
ch.1.5 (8 slides): 4 / 8
Wed, Nov. 14, 2001
Thu, Nov. 15, 2001 2. Risk
  1. Reward and risk
    BM ch.7: Introduction to Risk, Return, and the Opportunity Cost of Capital:
    7.1: 72 Years of Capital Market History in One Easy Lesson, 7.2: Measuring Portfolio Risk, 7.3: Calculating Portfolio Risk
    CW ch.6: Objects of Choice: Mean-Variance Uncertainty:
    6.A: Measurung Risk and Return for a Single Asset, 6.B: Measuring Portfolio Risk and Return (sections 2 and 3)

    see also:

ch.2.1 (8 slides): 4 / 8 (Version: Nov. 20, 14.50 p.m.)

Computing the variance of a portfolio
(Version: Nov. 22, 10.30 a.m.)

Tue, Nov. 20, 2001
9 a.m. G05-H4
Thu, Nov. 22, 2001
  1. Mean-Variance Portfolio Theory
    BM ch.7.1: Calculating Portfolio Risk
    8.1: Harry Markowitz and the Birth of Portfolio Theory
    CW ch.6: Objects of Choice: Mean-Variance Uncertainty

    see also:

Wed, Nov. 28, 2001 Mean-Variance Portfolio Theory (cntd.)  

  1. Choice unter uncertainty: general principles
    CW ch.4: The Theory of Choice: Utility Theory Given Uncertainty
ch.2.2 and 2.3: 4 / 8 (8 slides) (Version: Dec. 5, 8.15 p.m.)
(Nov.22: on slide no.61 a definition has been added; no.62-65 are new;
Dec.5: distribution of real stock returns has been added (see Dec.6))
Thu, Nov. 29, 2001 Choice unter uncertainty: general principles (cntd.)   Taylor series (Version: Dec. 5, 8.00 p.m.)
(Corrections: Nov.28: p.1, line 3; p.2, lines 1,3;
Nov.29: p.1, line 5;
Dec.5: p.3, last line)

  see also:
  Introduction into Taylor Series
  Tool for computing Taylor polynomials

Tue, Dec. 4, 2001
9 a.m. G05-H4
 Choice unter uncertainty: general principles (cntd.)   graphics: utility function (discussed in last lecture)
Thu, Dec. 6, 2001 Choice unter uncertainty: general principles (cntd.)  

see also:

  1. Market equilibrium
    CW ch.4.E.5: A Description of Equilibrium
    CW ch.7: Market Equilibrium: CAPM and APT:
    7.A Introduction / 7.B The Efficiency of the Market Portfolio / 7.C Derivation of the CAPM / 7.D Properties of the CAPM
graphics: distribution of real stock returns

see also:

  • Modern Portfolio Theory
  • The Captial Asset Pricing Model
  • In 1990 Prof. Harry Markowitz received the Nobel Prize for having developed the theory of portfolio choice, Prof. William Sharpe received the Nobel Prize for his contributions to the theory of price formation for financial assets, the Capital Asset Pricing Model (CAPM).
    See Links above
Wed, Dec. 12, 2001 no lectures due to illness
Thu, Dec. 13, 2001
Wed, Dec. 19, 2001 no lectures due to illness
Thu, Dec. 20, 2001
Since the lectures before Christmas had to be cancelled, all lectures in January will be hold from 11 till 13 o'clock.
There will be an additional lecture on Thursday, January 17, 15.15-17.00, instead of the tutorial.

Please attend the tutorials on Wednesday and on Thursday.

Wed, Jan. 9, 2002 Market equilibrium (cntd.)  

ch.2.4: 4 / 8 (16 slides)
(Version: Dec.19: slides 70 and 72 have been corrected; slides 74-81 are new)
correction: formula on slide 72:

Thu, Jan. 10, 2002
Wed, Jan. 16, 2002

  1. Capital budgeting and risk
    BM ch.9; ch.10: A project is not a black box
ch.2.5 (4 slides)
Thu, Jan. 17, 2002 3. Corporate financing
  1. Introduction
    BM ch.13.1: We Always Come Back to NPV
    BM ch.14: An Overview of Corporate Financing
    BM ch.15.Appendix A: The Privileged Subscription or Rights Issue
ch.3.1: 4 / 8 (14 slides) (Version: Jan. 25)

BM ch.14 (Power Point slides)

see also:
Wed, Jan. 23, 2002
  1. Effects of dividend policy on the value of a firm
    BM ch.16: The Dividend Controversy

  2. Effects of debt policy on the value of a firm
    BM ch.17: Does Debt Policy Matter?
ch.3.2 and 3.3: 4 / 8 (8 slides) (Version: Jan. 25)
see also:
  • In 1990 Prof. Merton H. Miller received the Nobel Prize for his fundamental contributions to the theory of corporate finance.
    See Links above
Thu, Jan. 24, 2002

  1. Valuing debt - bond pricing and the term structure of interest rates
    BM ch.23

see also: 		ch.3.4: 4 / 8 (18 slides) (Version: Jan. 25)
Wed, Jan. 30, 2002
Thu, Jan. 31, 2002   tutorial instead of lecture

Tutorial:

Wed, Oct. 24, 2001   Problems 1-10   (Version: Oct. 15, 3 p.m.)    
  Problem 7(a) has been solved in the lecture
Thu, Oct. 25, 2001
Wed, Oct. 31, 2001
  Holiday - please attend the tutorial on Thursday, Nov. 1
Thu, Nov. 1, 2001  Problems 11-14: 12(b), 13, 14(c)
  (the other problems of this set were discussed in the lecture)
  Problems 15-27: 15
Wed, Nov. 7, 2001  Problems 15-27: 16-27
Thu, Nov. 8, 2001
Wed, Nov. 14, 2001  Problems 23-27
  (Problem 26, last paragraph: it should be 10% instead of 19%)
Thu, Nov. 15, 2001
Wed, Nov. 21, 2001  Problems 28-36

  Bloomberg (Government Bonds)
  Financial Times (benchmark government bonds)
  Wall Steet Journal (Treasury Quotes: U.S. Government Bonds and Notes)

Thu, Nov. 22, 2001
Wed, Nov. 28, 2001  Problems 35-36
  Problems 37-42
Thu, Nov. 29, 2001
Wed, Dec. 5, 2001  Problems 40-42
Thu, Dec. 6, 2001
Wed, Dec. 12, 2001  no tutorials due to illness
Thu, Dec. 13, 2001
Wed, Dec. 19, 2001  no tutorials due to illness
Thu, Dec. 20, 2001
Wed, Jan. 8, 2002
Please attend both tutorials!
   Problems 43-47    (Solution of Problem 47: Excel - German version)
  (Problem 44: NPV = 13,932 (instead of 13,92)
   4.Revenue: These figures assume sales of 2,000 motors in 2002, 4,000 in 2003, ...)  
Thu, Jan. 9, 2002   Problems 48-51    (Solutions)
Wed, Jan. 15, 2002
  Participants of Thursday-tutorial:
 Please attend tutorial on Wednesday
  Problems 50 (cntd.), 52
  Problems 53-62
Thu, Jan. 16, 2002  lecture instead of tutorial
Wed, Jan. 22, 2002   Problem 52    (Solution)
  Problems 57-62    (Solution: problem 61d)
  Problems 63-65
Thu, Jan. 23, 2002  lecture instead of tutorial
Wed, Jan. 30, 2002
Please attend both tutorials!

 

on Thursday
the tutorial starts at 15.00
  Problems 62-65
correction of problem 62:
beta of preferred stock = 0.20 (instead of 0.02)

  Problems 66-77 (Version: Jan. 28)

problem 69:
The stock has a price-earnings ratio (multiple) of 10 ...

supplementation:
(g) Assume that the operating profit of firm C is expected to remain constant.
Give the percentage increase in earnings per share and the new price-earnings multiple.

Thu, Jan. 31, 2002   Problems 71-77   (Solution of Problem 76: Excel - German version) correction of problem 71(a):
How is the market price of the stock affected by the announcement?

Check the yields of the
5.5 % Bundesanleihe 1999-2010/4 and Fungible Tranche of the 5.5 % Bundesanleihe 1999-2010/4
check also reduced coupon and accrued interest

Corrections in the lecture notes:

p.78 (38th page of document): see last formula in item 1
  first formula in item 3: bPkk

p.80 (40th page of document): mik; mik = systematic or market risk

p.88, last line: 8.6% (instead of 9.6%)

p.91, last but one line: 125,000 (instead of 150,000)

p.129, last line 1000/1.0825

p.130, line 3 from bottom: -4.25 . 0.002 = -0.0085

The following corrections are relevant for copies from the copy shop:

p.97: paid-in capital

Remark for section 3.4: CB means coupon bond

p.117: table at bottom: CB3, CB4 (instead of BC3, BC4)
CF at t=0: -99.45, -99.64

p.118: interest rate used to discount a risky cash flow = interest rate on a theoretical risk-free PD bond with a maturity equal to the time of receipt of the risky cash flow + spread that reflects credit risk

p.119:
2. the complicated way:
(a) invest 100 in 1-year PD bonds

p.120: figure at top has slightly been changed
last line: PD bonds p.121: table at bottom: CF of B3 at t=1:   -y; -227.3

p.125: last bracket of formula has been corrected

p.126: figure at bottom: CF at t=1: 110 (instead of 100)

p.129: formula in last line of Proof has been corrected

p.131: Taylor series

p.133, caption: Determining the price when settlement falls between coupon dates