introduction to finance syllabus

7/29/2019 Introduction to finance Syllabus

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STEPHENM.ROSSSCHOOLOFBUSINESS

UNIVERSITY OFMICHIGAN

ANN

ARBOR,

MI

48109

‐1234

INTRODUCTIONTOFINANCE

COURSEOBJECTIVESThisistheintroductorycourseinFinancepreparedspecificallyfortheonlineofferingviaCoursera.Itspurposeistoequipyouwithaframeworkandbasictoolsandtechniquesnecessarytomakesounddecisions.Themainfocusofthecourseisonvaluationofbothrealandfinancialassets.Thecourseisdesignedwiththefollowingspecificobjectives: Toteachthefundamentalmethodsandskillsoffinancevitalforunderstanding

valuationofanyasset,personalorcorporate Toprepareyoutomakesoundpersonalandprofessionaldecisions

Toprepareyoutotakemoreadvancedcoursesinfinance Toprovideyouwithabaselevelofsophisticationtoenableyoutobetterunderstand

theroleoffinanceindebatesovercorporateandpublicpolicy.

COURSEDESCRIPTIONThiscourseisprimarilydevotedtotheprinciplesoffinancialvaluation.Wewillfirstdiscusstheconceptoftimevalueofmoneyinextensivedetailwiththeuseofseveralrealworldexamples,andthenapplytheprinciplesofvaluationtovalue(a)realprojectsorideasand(b)financialsecurities(stocksandbonds).Sincedecision‐makingvirtuallyalwaysinvolvesriskanduncertainty,wewillthenintroducetheconceptofrisk,andtherelationbetweenriskandreturn.Thisisfollowedbyadiscussionoftherelationbetweenfinancingandtheweightedaveragecostofcapitalinaworldwithoutfrictions.Wewillthenintegrateourknowledgeofcashflowswithourunderstandingofriskandfinancingtorevisitvaluationanddecision‐making.Althoughtheconceptsofcompetitivecapitalmarketsandmarketefficiencywillnotbecoveredinaseparatesession,theywillbewovenin the fabric of the course



consequently,Iwillmakeaconsciousattempttointroduceeachtopicwithreal‐lifeexamples.Istronglyencourageyoutoattempteveryprobleminthevideobeforewedoit

together.Youwillalsoberequiredtosubmitweeklyassignmentsthatinvolvemultipleproblem‐solvingexercises.Someoftheseproblemsaremorecomplexbydesignthantheexampleswewilldoin“class”(thevideos)becauseclasstimeneedstobedevotedtounderstandingtheissuesandconcepts.Inmyview,doingproblemssoonaftertherelevantmaterialiscoveredinclassisthebestwaytolearn.Wehavecarefullycoordinatedboththecontentandthepaceofthecourse.Sinceitisimportanttoacquirethebasicconceptsandskillsofasubjectmatterbeforeapplyingthemtorelativelycomplexsituations,inthefirsthalfofthecoursewewillconcentratemoreonthetoolsoffinance.Wewillmoveatafairlybriskpaceandintroduceyoutoseveraltools,whichyouwilllearntoapplywithincarefullyconstructed(butrealistic)situationspresentedtoyouin“number‐crunching”orientedassignments.ClassStructure

Afteralotofthought,andlisteningcarefullytothefeedbackofexpertsinonline/virtualteaching,Ihavedecidedtoconductthisclassin“realtime.”Inotherwords,wewillmimictheprocessofaface‐to‐faceclassinthatthecoursewillrunforafixedperiodandallofyouwillbeexposedtothevideosandassignmentsatthesametime.Basedonourexperience

inofferingthecoursethefirst timearound,wehavechosenthelengthof theclassto

be15weeks,withmaterialsofferedintwo‐week chunks,eachfollowedbyoneweek

forassimilationandcompletionof relevant assignments.

Thereareseveralreasonsforthisdecision,butIwouldliketoemphasizeacouple.First,mostlearninghappensviainteractionsamonglearners;infact,allourassignmentsintheface‐to‐faceversionofthisclassareteamassignments.Sinceyouaredispersedallovertheworld,itisdifficulttoreplicatetheface‐to‐faceenvironment.Iencourageyouthereforetouseonlineforumstodiscussissuesthat,againaccordingtoexperienceinCourseraclasses,willbefacilitatediftheclassisconductedsynchronouslyforallofyou.BysynchronouslyImeanmakingmaterialsavailableinblocks,ratherthanmakingthewholecourseavailabletoyouatonce.Basedonourexperienceinthefirstofferingofthisclass,thecontentcanbestbebrokenupintotwo‐weekblocks.Thisformatisdictatedbythenatureofthecontentandhastheadvantageofprovidingyoumoreflexibilitytopaceyourself.Second,adequateassimilationtimeiscentraltounderstandinganything.Andthereforeyouneedtimetothinkabout,andpractice,alltheconceptsandapplicationscoveredin“class.”Ifyoufindthematerialforsomesectionseasierthanothers,domoreproblemsthanrequiredinthe assignments and review more materials For example I have provided several



is15weeks.

Iofcoursecannotpreventyoufromreadingchaptersinadvance,butthenIcanonlycontrolwhatIcan.Istronglyencourageyoutopaceyourselfbasedonthevideos.

PREREQUISITES

Thisisatoughissue.Idonotbelieveinprerequisites,exceptforasenseofcuriosityandanattitude.Havingsaidthat,exposuretoeconomics(themotherdisciplineoffinance),accounting(thelanguageofbusiness),and/oralgebraandstatistics(weallneedit)willclearlyhelp.Iwillhowevertryandcovereverythingstartingwithfundamentalsandwillhighlightwhenthereisaneedforyoutodosomefurtherworkinspecificareas.Infact,Ihopetheclasswillmotivateyoutolearnmore.Ibelievethatlearningusuallyhappenswhenyouaremotivatedbyacuriositytounderstandsomething.

COURSEMATERIALS

VIDEOS

Themainresourcesprovidedbymeforthisonlineclassarethevideos,organizedlikeatextbookin10Chapters.Eachchapter/videoisabout120minuteslong,andbrokenupintobitesizepieces.Ihaveworkedwithprofessionalstoeditthevideos,butIencourageyoutopaceyourselfaccordingtoyourstyleandbackground.Mostimportantly,therearenumerousexamples/problemsinallthevideos,andpleasetryandtakeeveryopportunitytoattemptanexercisebeforeyouseemeanalyzeit.Wehavetriedtocreatebreaks

whereverpossibletofacilitatethisprocess,butIdonotwantthevideostobecomelikeTVadvertisements;shortandexciting,butwithnorealcontent.ItisimportantforyoutoknowthatIwillnotprovideanynotestoaccompanythevideosbecauseIwantyoutocreateyourownnotesasyouwatchandlistentothepresentation.Thebestpartaboutthisonlineclassisthatyoucanpause,rewind,andfastforwardthevideosatwill.Youcanplayitatfasterspeedswheneverneeded.Butitisalsoveryeasyforyoutobecomeapassiveparticipant.IwantyoutobeactivelistenersandIencourageyoutomakeyourownnotesasyougoalong.Thiswillhelpyoutounderstandandlearnthematerialreallywell,assumingofcoursethatyoufindmeengaging.Ifyoudothat,youwillnotneedtextbooksorothermaterials,exceptofcoursetoreviewand/orreadadditionalstuff.ADDITIONALRESOURCES



TEXTBOOKS

Inaddition,Iprovidebelowreferencesofseveralalternativetextbooksthatareallveryhighquality.Tohelpyouwithyourreading,wehavealsoprovidedyouchaptersfromtwobooksasexamplesofreferences.Pleasenotethatthevideosdonotfollowanyspecificbookandthebookchaptersareonlyreferences;theydonotperfectlymatchthematerialwecoverandmaysometimescontainmaterialthatwewillnotcover.Mygoalistoexposeyoutothefundamentalsoffinance,noteverydetailineverytextbook.

Thelistoftextbooksisprovidedbelow.PleaseseetheClassScheduleattheendofthissyllabus,andprovidedasaLinkonthemainpage,torefertothespecificchaptersfromtwoofthesebooks.Youarenotrequiredtopurchaseanyofthesebooks,butrecognizethatoneofthemisavailabletoreadforfreeontheweb.Youmustfollowtheguidelinesprovidedbytheauthorforuseoftheonlinematerial.Ifyoudochoosetobuyabook,arelativelyrecenteditionwilldo,andlookforusedand/orpaperbackversions.

(1) Corporate

Finance,

2nd

Edition,

by

Ivo

Welch.Thisbook canbe purchased from Amazonor youcanread it for freeat

http://book.ivo‐welch.info/ed2/ Althoughreadingthetext andthesechaptersisfreeonthiswebsite,the

materialiscopyrighted,not permittedtobedistributedfurther,andnot

permittedtobepostedelsewhere.

Ihavereferencedchaptersofthisbookassuggestedreadingsinthedetailedclass

schedule.ThisbookisreferencedasIV.

(2) CorporateFinance,9thEdition,byRoss,Westerfield&Jaffee.Ihavealsoreferencedchaptersofthisbookassuggestedreadingsinthedetailedclassschedule.ThebookisreferencedasRWJ.

Acoupleofotherexcellenttextbooksare:

(3) CorporateFinance,2ndEdition,byBerk&DeMarzo.

(4) PrinciplesofCorporateFinance,10thEdition,byBrealey,Myers&Allen.

There are several other books on finance and I encourage you to browse a few before



newsregularly.Cruisethewebasoftenaspossiblenotonlytouncoverthewealthofinformationatyourdisposal,buttoalsolearnhowthingswork.Agoodwebsitetobegin

yoursearchishttp://finance.yahoo.com.Iwillusethiswebsiteatseveralpointsduringthe“class.”ReadtheEconomistasoftenasyoucan;ithassomethoughtfulpieces.However,recognizethatyouneedtodevelopthehabitofreadingmaterialcritically;justbecausesomethingispublishedinareputableoutletdoesnotmeanthattheauthorknowswhathe/sheistalkingabout.Iguaranteeyouthatthereisnooneouttherewhoreallyunderstandswhatourcurrentfinancialcrisis,oreventhecrisisinthe1930s,isallabout.

NUMBER‐CRUNCHING ANDSPREADSHEETS

Thepurposeoftheclassistointroduceyoutoconceptsandapplications,withoutworryingtoomuchabouttheexactcalculations.Havingsaidthat,knowinghowtocalculateandexecuteananalysishasalotofpracticalvalue.Iwantyoutoknowthatmostcalculationscanbedoneevenusingtheformulaeandaregularcalculator.Ifyouknowwhatyouaredoing,youcancalculatethestuff.Ithereforeencourageyoutofocusonthesettingupofproblems,ratherthanthecalculations.Whenyougettothecalculations,wewillfindthat

technologyjusthelpsyoudosomuchfaster.But,youwillalsorealizethatspreadsheetsandcalculatorssimplycalculatestuffafteryoutellthemwhattodo;theyareameansandnottheend!Ifyousetupaproblemincorrectly,youwillgetanincorrectanswer.Iwillthereforede‐emphasizetheroleofcalculationsinthevideosanduseaspreadsheetonlytoillustratethelogicandstepsinvolvedinmakingday‐to‐dayfinancialcalculations.Iwillusethefunctionsbuiltintospreadsheets,butagainyoucanactuallycreateyourownformulaeaswell.

Iamassumingthatifyouaretakingthisclassyouhaveaccesstoacomputerandtheinternetand,therefore,tospreadsheets.IwilluseExcelatvariouspointsinthevideosandprovideanoteonSpreadsheets.Youareresponsibleforlearninghowtousespreadsheets.Theassignmentsareagreatwaytodosoasvirtuallyallquestionswillrequireyoutodocalculationsusingeitheraspreadsheetoranalternativemethod.Ifyoudonothaveaccesstoaspreadsheetyoucandotheentireclassusingafinancialcalculator.Whileanyfinancialcalculatorwillsuffice,anHP10BIIisagoodcompromisebetweenfunctionalityandcost.Recognizehoweverthatyouareresponsibleforlearningthenecessaryskillssinceeachcalculatorisdifferentinsomerespect(afterall,theyneedtobeabletodifferentiate!)Fortunately,thefinancialfunctionsarelabeledsimilarlytospreadsheets,andthenoteonSpreadsheetswillgiveyousomehints.Theremaybeabitoflearninginvolved,butitisnotdifficult.



conventionisrelatedtothefactthatalldecisionscanbeplacedonatimeline.Allflows(cashoutorcashin)occuratpointsintime,whileinterestratesapplytoperiodsoftime.

Unlessotherwisespecified,allflowsoccurattheendofaperiod.Therefore,ifsomeonesaysthatMariareceived$10inyear1,itmeanstheendofyear1.(Ofcourse,mostdecisionsinvolveanoutflow/investmenttoday;thebeginningofthefirstperiod.Butitwillbeobvioustoyouwhenthathappens.)Donotworryaboutthis;youwillquicklygetusedtotheconventiononcewestarttheclassandwedoproblemstogetherand,fortunately,everytextbookusesthesameconvention.

ASSIGNMENTS

Youwillbeevaluatedregularlyoverthe15‐weekperiodusingnineassignmentsandafinalexam.PleaseusetheCourserawebsitetoaccessand submitassignments.Thesubmissiondeadlinesareindicatedoneachassignment.Latepaperswillnotbeaccepted!Theassignmentsforthiscoursearequiteintense.Wewillhavenineassignments,eachcraftedtohelpreinforcethelearningofconceptsandproblemscoveredinclass.Bydesign,

afewproblemsaremoredifficultthanthosepresentedinclass.Ibelieveyouwillbetterunderstandtheconceptsbythinkingthroughtheissuesinvolvedinsolvingtheproblemandyouwilllearnexcelintheprocess.

EXAMINATION

Apartfromtheassignments,therewillbeonefinalexaminthe15thweek.Althoughtheexamwillinvolve“number‐crunching,”themaingoalistotestyourunderstandingofthe

concepts.NATUREOF ASSIGNMENTS ANDFINALEXAM

Sinceallgradingwillbeconductedusingtechnology,allquestionswilltakeaTrue/False,fillintheblank,ormultiple‐choiceform.Thequestionswillalmostalwaysbewordproblems,liketheonescoveredinclass,buttherewillbeonespecificanswertoeachquestion.Wehavesetupthegradingprocesssothatyougetfeedback,regardlessof

whetheryougettheanswerrightorwrong,thatissupposedtomakeyouthinkintherightwayabouttheissues.Wehopetoenrichthegradingprocessinfutureofferingstoenableamoreinformativeevaluationprocess.IMPORTANTGUIDELINES:



symbolinyouranswers,justthenumber.Forexample,donotenter“$”beforethenumber;or“%”afterit,eventhoughthequestionswillhavetheseexpressions;

(b)Donotusecommas;(c)Forsimplicity,wewillusedollarsasthecurrency.Roundoffallanswersinvolvingdollarstotheclosestroundnumber.Donotworryaboutdecimals;thegradingsystemhasbeensetuptoacceptroundingtobothroundnumbers.Similarly,youdonotneedtoworryaboutdecimalsinamultiplechoicesanswercontainingdollars;

(d)Financeinvolvesinterestrates.Wewillexpressallinterestratesinpercentages.Donotusemorethantwodecimalsinyouranswers.Pleaselookoutforanyadditionalinstructionsintheassignments/final.Example1:Supposeyouransweris$3221.32.Theansweryouentershouldbe3221.Thereisno$signorcommainit.(Togiveyouthebenefitofdoubt,thecomputerwill

accept3222asacorrectansweraswell.)Example2:Supposetheanswertoaninterestratequestionis6.253%.Youshouldenter6.25.Thereisno%signorthirddecimalinit.(Togiveyouthebenefitofdoubt,thecomputerwillaccept6.26asacorrectansweraswell.)

COURSEEVALUATIONPROCESS

Duetothenatureoftheclass,andthehighenrollments,allassignmentsandthefinalexamwillbegradedusingtechnology.Nopersonwillbeinvolvedintheevaluationprocess.ThetechnologyprovidedbyCourseraisideallysuitedforgradingandassessingperformance.

COURSEGRADING ANDCERTIFICATE

Yourperformancewillbeevaluatedusingapass/failgrade.Thephilosophybehindourgradingistomakesureyougainadequatecompetencytobegrantedacertificate.To

qualifyforacertificate,youwillneedtofulfillthefollowingrequirements:

Ascoreofatleast70%onfiveofthenineassignments;

Aminimumof60%onthefinalexam.Y ill b ll d t tt t t h i t ll th fi l b t b th



TEACHING ASSISTANCE

ElizabethCostonhasverygraciouslyagreedtohelpmewiththisclass.Consistentwithourphilosophythatyouwilllearnfromeachother,ourhopeisthatyouwillresolvemost/allissuesonyourownbyreviewingthevideos,doingproblems,readingchapters,anddiscussingamongyourselves.ButElizabethwillmonitortheForumsandpostcommentsifthereisanerror,especiallyinanassignmentorintheevaluationoftheassignment.

IMPORTANTISSUESTOCONSIDER

Assignments

Theassignmentsaremeanttobechallenging,thoughwehavetriedhardtoincreasethedifficultylevelgraduallywithineachassignment.Moreimportantly,theassignmentsreflectmybeliefaboutlearning.Noonecanreallymakeyoulearn;youhavetobewillingtoworkhardandstruggle.Theteacher’sroleistoexposeustothefundamentalbuildingblocks,

andweneedtolearnbyapplyingthemtochallengingproblems.ThereasonIlovefinanceisitsapplicabilitytoalltypesofrealworldsituations.Solutionsto Assignments

Inthefirstoffering,somepeoplewantedanswerstotheassignments.Thisisaseeminglyreasonablerequestbutverydifficulttoaccommodate.Creatingquestionsforthevideosandtheassignmentshasbeenthemostchallengingpartofthisnewendeavor.Ittookfour

peopleseveralweekstocreatethese,testthem,andthenmodifythemtofitthegradingstructureimposedbytechnology.Webelieveourassignmentsarewellthoughtoutandreflectagoodbalanceofconceptualandappliedstuff.Duetocopyrightissues,wecannotsimplygiveyouquestionsfromexistingbooks,andIwouldnotwanttodothatanyway.Itwillthereforebeverydifficultforustoofferthisclassmultipletimesifwehavetokeeppreparingnewsetsofquestionswithmultipleversionstoallowyoutoattempteachonemorethanonce.Handingoutanswerswillforceustodothat.Wehaveinsteadchosentoprovidealotofhintsaboutthemainissueineachquestionandyoucanalwaysrevisitthe

videos,gobacktothequestions,workinteams,etc.,tolearnthecontent.Overtime,wehopetoworkwithCourseratocreatericherwaysofgradingandprovidingfeedbackdependingonthetypeoferrorsthatyoumaymake.

HonorCode



Whileweultimatelycannotmonitoreverything,CourseraandmyteamwillmonitorourForumsforanyactivitythatviolatessuchcodesofconductandbasiccivilitytoeachother.

Contact withTAandInstructor

Giventhelargenumberofstudents,neitherElizabethnorIshouldbecontactedwithanyquestions.Whileweloveallofyou,respondingtoquestionswillbevirtuallyimpossible.ButElizabethwillmonitortheforumsandkeepmeinformedonaregularbasis.



10

CLASSSCHEDULE:TOPICSandREADINGS

Week Topic Video

BookChapters Assignments and Notes

WEEK 1Introduction

Time Value of Money: PV & FV for Single Cash Flows1 IV(1, 2),

RWJ(4) Back round Note: S readsheets.

WEEK 2 Time Value of Money: PV & FV for Multiple Cash flows 2 IV(2,3),

RWJ(4) Background Note: Formulae.

WEEK 3 ASSIGNMENTS 1 & 2 due by end of Week.

WEEK 4 Decision Criteria 3 IV(4),RWJ(5)

WEEK 5 Decision Criteria &

Cash Flow Estimation4 IV(4,13),

RWJ(5,6)

Background Note: Sample Cash Flow Template.


WEEK 7 Bonds5 IV(3,5),

RWJ(8)

WEEK 8 Stocks 6 IV(3),RWJ(9)


WEEK 10 Risk 7 IV(6,7,8),RWJ(10)

Background Note: Review of Statistics.

WEEK 11 Risk & Return 8 IV(9),RWJ(11)


WEEK 13 Valuation: Putting it All Together! 9 IV(16),RWJ(16)

Background Note: The Capstone Problem.

WEEK 14 REVIEW

WEEK 15 Assignment 9 & FINAL due by end of Week.

introduction to finance syllabus

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