introduction to financial management

Financial management: Lecture 1

Introduction to Financial Management

Administrative Issues and Course Overview


Today’s plan

administrative issues• syllabus

• prerequisite

• add, drop and withdraw

• Mid-term exams

• In-class work

• final grade

course overview basic probability concepts


The instructor My name is George Li Office: DTC 582 Website: http://online.sfsu.edu/~li123456 Email: [email protected] Office hours:

• Monday 11:30 a.m. – 1:30 p.m. • Thursday 4:15 p.m. - 6:15 p.m.

Research interest:• Corporate finance: real options, technological innovations, and

valuations

• Asset pricing: information and stock prices


Textbook

fundamentals of corporate finance, by Brealey, Myers and Marcas (6th edition) sorry about the cost this is a pretty popular textbook used in many

major schools for the first course in corporate finance


Prerequisite

You are required to finish Bus 780, Ds 510 and Ds 512.

It is the school’s policy that all the students in this course must satisfy this requirement and there is no exception


Add, drop and withdrawal policy

The business school has the policy for add, drop and withdrawal• In the first four weeks, you have to get enrolled in the

class, if you want.

• Students can withdraw once

• Please read the bulletin for detail information Please refer to this semester bulletin for

detailed information.


Pass or no pass grade

BUS 785 is a letter graded course. Please don’t change to pass or no-pass

course unless you have talked to me to get my permission; otherwise you will get a no-pass grade, if you change it without permission.


Homework

To help you understand the concepts taught in class, and prepare for the two mid-term exams and the final exam, there is a weekly homework set, which is not graded, but its solution will be posted in my website.


Two mid-term exams

There are two mid-term exams, which are in the form of multiple choice questions and take about 120 minutes.

There are no makeup or in-advance mid-term exams.

The mid-term with a higher score will have a weight of 0.8; the lower mid-term will have a weight of 0.2.


Case discussion

There are three in-class case discussion. The three cases are from the textbook. They are from chapters 5, 7 and 13.


The final exam The final exam will be in class (closed book), with the

form of multiple choice questions. There are no makeup or in-advance final exams. The final exam is cumulative, based on the two mid-

term exams, homework and in-class case discussion.

The final has the same time and classroom as regular lectures


Final grade

Your overall course grade will be based on your performance in the class, the mid-term exams, and the final exam.

Class attendance: 5 pts Two mid-term exams: 45

pts Final exam: 50 pts Total 100 pts


Grading policy

Your grades are based on the distribution of the scores of the class. Specifically, your final grade is based on the following table.

Ranking Grade 0%-10% A range

10%-50% B range 50%-85% C range 85%-95% D range

95%-100% F


Why do you want to take this course

Why are you taking BUS 785?• nothing better to do today ?

• become a millionaire overnight?

• the instructor is a nice guy for a good grade?

• get a “stamp of approval” to get a job ?

• learn finance for fun ?

• simply a required course ?

• learn finance to be more successful?


My objective in this course

I want everyone in the room to learn finance very well this semester• i want you to understand the concepts / issues

• i want you to feel comfortable talking about finance and answering finance questions.

• i want you to gain a set of tools that will help you look at the world in a slightly different way.

What is standing in the way of those objectives?• Over-confidence

• Under-confidence


Two ways of learning

Positive • Can be a fun, since it is an opportunity to improve your

future career, open your mind and broaden your vision

• Look at each difficult question as an opportunity to learn new things

• Good performance Negative

• Can be boring, since it is regarded as a burden, a task

• Look at each difficulty as a “torture” or pain

• Bad performance


My approach of teaching BUS 785

Focus on several fundamental, important concepts,

Applications and economic intuitions Avoid too many materials Help understand finance better.


Academic integrity The instructor has zero tolerance for cheating in all

exams. During the exams, please don’t look over each other. During the exams, computers, cell phones, books and

previous exams are absolutely not allowed During each exam, pencils, one cheat sheet (8.5*11) on

both sides, a calculator (financial or non-financial) are permitted.

During each exam, you can use the exam as the scratchy paper.

In each exam, you have to use scantrons to put your solution.


Corporate finance: what is it?

A set of concepts, theories and approaches that help the firm make financial decisions


Financial decisions

Capital budgeting (use of the capital)• Real investments

• Mergers; acquisitions

Financing (capital structure decision)• Equity

• Debt

Risk management• Diversification

• hedging


BUS 785: course organization

BUS 785

Module 1Fundamentals of valuation

Module 2Valuing risky investments

Risk and return

Module 3 Corporate financial decisions

Module 4 Market efficiency and options

Fundamentals of PVFinancial decision

Interest rates

Perpetuities and annuities calculation

Valuing stocks and bonds

NPV and other criteria

Portfolio theoryDiversification and covariance

Modigliani-Miller theorem 1Pizza size is independent of

how sliced

Tangency portfolio, CAPMrisk and return

Effect of leverageWACC and discount rate

Binomial model, replicationRisk-neutral probabilities

Options and Black-Scholes

Weak, semi-strong and strong form efficiency

Information and stock prices

Types of securitiesStocks, bonds and other

Modigliani-Miller theorem 2WACC


Course organization (2)

This course is broken-down into four modules

Module 1: time value of money Module 2: risk and return Module 3: capital structure Module 4: financial markets


Time value of money

This module is a “skill building” block in this course

We will soon have the necessary skills needed to value stocks and bonds

In this module, we don’t explicitly consider risk• Cash flows forecasts are given

• The discount rate is given


Risk and return

This part teaches us about uncertainty How do we measure risk? How much is a risky cash flow in the

future worth (today)? There are both:

• skill building sections

• conceptually more difficult sections


Financing decisions

If you are the CEO of an industrial company• you can make your company more valuable

by choosing “better” projects

• we want to know if you (and the CFO) can make your company more valuable by changing the mixture of your financing (i.e. the ratio of debt to equity)


The efficiency of financial markets

We will look at how information gets into security prices

We will learn three forms market efficiency

We will examine the implication of market efficiency on financing

introduction to financial management

Documents

exception financial

advance final exams

advance midterm exams

final examthe final

midterm examsthere

lower midterm

overall course grade

class case discussion