Financial management: Lecture 1 Introduction to Financial Management Administrative Issues and Course Overview

Financial management: Lecture 1 Today’s plan administrative issues syllabus prerequisite add, drop and withdraw Mid-term exams In-class work final grade course overview basic probability concepts

Financial management: Lecture 1 The instructor My name is George Li Office: DTC 582 Website: 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

Financial management: Lecture 1 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

Financial management: Lecture 1 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

Financial management: Lecture 1 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.

Financial management: Lecture 1 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.

Financial management: Lecture 1 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.

Financial management: Lecture 1 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.

Financial management: Lecture 1 Case discussion There are three in-class case discussion. The three cases are from the textbook. They are from chapters 5, 7 and 13.

Financial management: Lecture 1 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

Financial management: Lecture 1 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

Financial management: Lecture 1 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

Financial management: Lecture 1 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?

Financial management: Lecture 1 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

Financial management: Lecture 1 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

Financial management: Lecture 1 My approach of teaching BUS 785 Focus on several fundamental, important concepts, Applications and economic intuitions Avoid too many materials Help understand finance better.

Financial management: Lecture 1 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.

Financial management: Lecture 1 Corporate finance: what is it? A set of concepts, theories and approaches that help the firm make financial decisions

Financial management: Lecture 1 Financial decisions Capital budgeting (use of the capital) Real investments Mergers; acquisitions Financing (capital structure decision) Equity Debt Risk management Diversification hedging

Financial management: Lecture 1 BUS 785: course organization BUS 785 Module 1 Fundamentals of valuation Module 2 Valuing risky investments Risk and return Module 3 Corporate financial decisions Module 4 Market efficiency and options Fundamentals of PV Financial decision Interest rates Perpetuities and annuities calculation Valuing stocks and bonds NPV and other criteria Portfolio theory Diversification and covariance Modigliani-Miller theorem 1 Pizza size is independent of how sliced Tangency portfolio, CAPM risk and return Effect of leverage WACC and discount rate Binomial model, replication Risk-neutral probabilities Options and Black-Scholes Weak, semi-strong and strong form efficiency Information and stock prices Types of securities Stocks, bonds and other Modigliani-Miller theorem 2 WACC

Financial management: Lecture 1 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

Financial management: Lecture 1 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

Financial management: Lecture 1 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

Financial management: Lecture 1 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)

Financial management: Lecture 1 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