ROLE AND PURPOSE This subject aims to introduce to students a range of basic concepts and ideas in modern finance. After completing this subject, participants should know the principles involved in making investment and financing decisions, understand functions of financial markets and financial managers, and possess basic knowledge of option pricing and financial planning. This foundation course prepares students for more in‐depth studies at a later stage. LEARNING OUTCOMES Upon completion of the subject, students will be able to: a. Understand the role of financial managers and the functions of the financial market; b. Understand the concept of present value and its applications in investment appraisal; c. Understand the risk‐return relation and the determination of cost of capital; d. Possess broad knowledge of financing decision‐making under uncertainty and conditions of market imperfection; e. Apply basic finance theory to solve practical problems. ASSESSMENT METHODS Specific assessment methods/tasks Continuous Assessment 1. Written Assignment (15%) and Tutorial Participation (5%) 2. Midterm Test Final Examination Total % weighting 50% 20% 30% 50% 100 % √ √ √ √ √ √ √ √ √ √ √ √ √ Intended subject learning outcomes to be assessed a b c d e

Note that under the Double-D policy, students have to obtain at least a “D” in both continuous assessment and final examination in order to pass the course. 1

WRITTEN ASSIGNMENT As required by the Faculty of Business, each student has to submit an individual written assignment for assessment of English proficiency. Further details are available on the Blackboard. Assignments will be collected in lecture on May 2, 2013. Late assignments will NOT be accepted. TEXTBOOK Main Text: Ross, Westerfield, Jordan, Lim, Tan, Fundamentals of Corporate Finance, Asia Global Edition, 2012. INDICATIVE CONTENTS Topic 1: Introduction to Finance Learning objectives: 1. Define finance 2. Why is finance worth studying 3. Main players in...

...currently paying dividends
* Not applicable if dividends aren’t growing at a reasonably constant rate
* Extremely sensitive to the estimated growth rate – an increase in g of 1% increases the cost of equity by 1%
* Does not explicitly consider risk
SECURITIES MARKET LINE OR CAPM
Advantages
* Explicitly adjusts for systematic risk
* Applicable to all companies, as long as we can compute beta
Disadvantages
* Have to estimate the expected market risk premium, which does vary over time
* Have to estimate beta, which also varies over time
* We are relying on the past to predict the future, which is not always reliable
WACC
* The WACC for a firm reflects the risk and the target capital structure to finance the firm’s existing assets as a whole.
* WACC is the return that the firm must earn on its existing assets to maintain the value of its shares.
* WACC is the appropriate discount rate to use for cash flows that are similar in risk to the firm.
LECTURE 9: FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY
MM 1958
ASSUMPTIONS
• Homogeneous Expectations
• Homogeneous Business Risk Classes
• Perpetual Cash Flows
• Perfect Capital Markets:
– Perfect competition
– Firms and investors can borrow/lend at the same rate
– Equal access to all relevant information
– No transaction costs
– No taxes
IMPLICATION:
Proposition I – Capital structure do not affect the value of...

...UBFF2013 BUSINESS FINANCE
Question:
1.
(a)
Frodo Baggins has RM1,500 to invest. His investment counselor suggests an investment that pays no stated interest but will return RM2,000 at the end of 3 years. (i) (ii) What annual rate of return will Frodo earn with this investment? Frodo is considering another investment, of equal risk, that earns an annual return of 8%. Which investment should he make and why?
(b)
Samwise Gamgee was seriously injured in an industrial accident. He sued the responsible parties and was awarded a judgment of RM2,000,000. Today, he and his attorney are attending a settlement conference with the defendants. The defendants have made an initial offer of RM156,000 per year for 25 years. Samwise plans to counteroffer at RM255,000 per year for 25 years. Both the offer and the counteroffer have a present value of RM2,000,000. Assume both payments are at the end of each year. (i) (ii) (iii) What interest rate assumption have the defendants used in their offer (rounded to the nearest whole percent)? What interest rate assumption have Samwise and his lawyer used in their counteroffer (rounded to the nearest whole percent)? Samwise is willing to settle for an annuity that carries an interest rate assumption of 9%. What annual payment would be acceptable to him?
2.
Gandalf Enterprise must consider several investment projects, A through E using the capital asset pricing model (CAPM) and its graphical representation, the...

...Subject Code
:
AF3313
Subject Title
:
Business Finance
Level
:
3
Credits
:
3
Mode of Study
:
Lectures
Seminars
Pre-requisites
:
Financial Accounting (AF2108)
Accounting for Decision Making (AF2111) OR equivalent
Assessment
:
Coursework
Final Examination
40%
60%
Minimum Pass Grade
:
Coursework
Final Examination
(D)
(D)
28 hours
14 hours
ROLE AND PURPOSE
This subject aims to provide a solid and rigorous introduction to the basic fundamentals of
finance. Topics covered in the module provide students with a foundation for other subjects
and a foundation of professional-specific skills and knowledge. Students are expected to
learn and understand Business Finance in the context of integrated business environment.
They will be able to analyse the financial function in business and its strategic role in corporate
management. They will also develop strong analytical skills and critical thinking.
LEARNING OUTCOMES
On successfully completing this subject, students will be able to:
•
•
•
•
•
•
Describe the major function of financial managers;
Compare investment appraisal techniques and understand the limitations of those
techniques;
Evaluate the various sources of finance available in Hong Kong;
Examine the factors affecting capital structure and dividend policy and their effect on the
cost of capital;
Interpret the key...

...Financial Management (Assignment 1):
This is an individual continuous assessment that carries 15% of the overall assessment in this course. You are required to answer ALL questions below.
Notes:
1. Deadline of submission is 16 October 2013. (***No Extension will be granted except extenuating circumstances can be shown). 5 marks will be deducted for every one day delay of submission.
2. Plagiarism will be penalized in according to the standing regulations of the Open University of Hong Kong.
Question 1
Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into discussion with Kim McKenzie, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have.
Although Chris is aware of the bond features, he is uncertain about the costs and benefits of some features, so he isn’t sure how each feature would affect the coupon rate of the bond issue. You are Kim’s assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature:
1. The security of the bond – that is, whether the bond has...

...FINANCE 6301
AMME
Individual Assignment #2
FORMAT: You can use a Word document, an Excel spreadsheet or both. If you use Excel, submit the Excel file rather than embedding Excel into a Word document. Please use single-space, 11 pt. or 12 pt. font.
Multiple Choice: Select the best response (3 points each). You may add comments to explain your reasons.
1. If the correlation coefficient is 0,
A) You can completely eliminate risk by short selling the riskier asset and investing the proceeds in the less risk one.
B) You can completely eliminate risk by investing positive amounts in each security.
C) You cannot completely eliminate the risk.
ANSWER IS C
2. Which factor(s) influence a firm’s business risk (and therefore, its asset beta)?
A) Cyclical revenues
B) Operating leverage
C) Both A and B influence business risk.
ANSWER IS C
3. In a world with only corporate taxes, firm value is maximized by
A) All equity financing
B) All debt financing
C) A weighted average of debt and equity financing
D) Capital structure is irrelevant in this case
ANSWER IS B
4. The ____ theory states that there is a tradeoff between the benefits of debt (interest tax shield) and the costs of debt (financial distress, agency costs).
A) Pecking order
B) Tradeoff theory
C) Signaling theory
ANSWER IS B
5. The value of a resource in its next best...

...your business?
Your Answer Score Explanation
20060181.
18099548.
Do not have enough information to value. Correct 10.00 Correct. You know what information you need to value.
Total 10.00 / 10.00
Question Explanation
Understanding the valuation of a new business.
Question 6
(10 points) You have just returned to your job after completing your MBA, generously funded by the CEO. A few days later, your CEO requests you to evaluate the following news release he will issue to analysts. "For years we have thought about our business strategy, without worrying about financing. Times have changed and we need to think about our cost of capital. Since (a) debt is always cheaper than equity; (b) we have decided to use debt to finance our next major projects." What is your assessment of this statement?
Your Answer Score Explanation
The statement is false.
The statement is true.
The statement is partly true/false.
Total 0.00 / 10.00
Question Explanation
The basics of financing.
Question 7
(10 points) Two firms, Alpha, Inc., and Beta, Inc., are in the same business. Alpha, Inc., has debt that is viewed by the market as risk-less with a market value of $500 million. Beta, Inc., has no debt. Both firms are expected to generate cash flows of $100 million per year for the foreseeable future and the market value of the equity of Beta, Inc is $1 billion. Estimate the return on equity of Alpha, Inc. Assume there are no taxes,...

...Entrepreneurial finance assignment 1
Problem 4.4.
Introduction
The CAPM model can be used to analyze the performance of a portfolio of investments. The model should be calculated by comparing the return of assets (Ri) minus the return of risk-free cash (Rf) of the fund against those numbers of a known index with historical data (Rm). With least-squares regression, a straight line has to be drawn through the points to finish the model. Alpha represents the point where the graph starts and beta the slope of the regression line. Alpha is the number that represents the fact of how well the fund did against the CAPM model. A positive alpha means the fund did better than CAPM predicted and negative the opposite. R² represents the ‘fit’ of the model, so how much of the data fits the straight line.
(a) Al thinks that the estimated alpha is too high because of survivor bias.
This concern is valid. This is due to several reasons. First, the R² presented is relatively low as the model fits only 32%. This means that 68% of the data is not explained by the model. Another point is the height of alpha. The monthly Sand Hill Index shows an average alpha in % per year of 4.92 at the significance level of 1, 5 and 10% level. The quarterly CA Index shows an alpha of 6.1 in % per year. According to the book ‘Venture capital and the Finance of Innovation (Wiley, 2010), these are lower and upper bounds of abnormal gross returns. The CA Index is...

...ACF 214 – Principles of Finance
Weekly coverage:
S. No. | Week | Coverage |
1 | Week 1-2 | Project Evaluation Criteria |
2 | Week 3 | EVA (Making Sure Managers Maximize NPV) |
3 | Week 4-6 | Risk, Return and the Cost of Capital |
4 | Week 7-9 | Corporate Financing and Capital Structure |
5 | Week 10 | Payout Policy |
6 | Week 11 | The Efficient Markets Hypothesis and Behavioural Finance |
7 | Week 12-15 | Introduction to Option Pricing Theory |
Coverage:
1. Project Evaluation Criteria
Market-based project evaluation criteria, Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI) Relevant costs in capital budgeting, Break-even, sensitivity and scenario analysis, the concept of Equivalent Annual Benefit
2. EVA (Making Sure Managers Maximize NPV)
Sources of positive NPV, Reasons why managers depart from the shareholder-value maximization principle, Economic Value Added (EVA)
3. Risk, Return and the Cost of Capital
Relationship between risk and return, Standard deviation of a portfolio, Efficient frontier, Market portfolio, CAPM. Beta -Practicalities of estimation, Asset betas. Weighted average cost of capital (WACC)
4. The Efficient Markets Hypothesis and Behavioural Finance
Evolution of asset prices in an efficient market, Theoretical foundations and forms of EMH, Behavioural and empirical challenges to EMH, Some explanations for the EHM violations, The...