The course content includes: Risk and return: estimation of risk and return using statistical tools; Markowitz’s efficiency portfolio model and Sharpe’s tangency portfolio (CAPM). Leverage and capital structure decisions: effect of debt-equity ratio on stockholders’ return; operating and financial leverage and their relation to changes in fixed cost funds; Modigliani-Miller (MM) irrelevance theory—-assumptions, validity and proof; MM with taxes; effects of financial distress, agency cost and asymmetric information on MM theory; finding the optimal capital structure. Dividend policy: Target payout policy; investors’ preference between dividend and capital gains, MM dividend irrelevance theory, Bird in the hand theory, tax preference theory; other issues in target payout decision—signaling hypothesis, clientele effects, changing dividend preference and agency cost. Dividend stability. Maintaining stock price stability—- repurchases stock splits and stock dividend. Bankruptcy, reorganization and liquidation: financial distress and its consequences; settlement of short-term formal bankruptcy; reorganization in bankruptcy; prediction and analysis of potential bankruptcy. Business combination and analysis of mergers: forms of business combination, rationale for mergers, ways of mergers, forms of mergers.
FIN301 (Business Finance I)
- It is the student’s responsibility to gather information about the assignments and covered topics during the lectures missed. Regular class attendance is mandatory. Points will be taken off for missing classes. Without 70% of attendance, sitting for final exam is NOT allowed. According to IUB system students must enter the classroom within the first 20 minutes to get the attendance submitted.
- The date and syllabus of quiz, midterm and final exam is already given here, however, announcements will be given ahead of time. There is NO provision for make-up quizzes.
- The reading materials for each class will be given prior to that class so that student may have a cursory look into the materials.
- Class participation is vital for better understanding of sociological issues. Students are invited to raise questions.
- Students should take tutorials with the instructor during the office hours. Prior appointment is required.
- Students must maintain the IUB code of conduct and ethical guidelines offered by the School of Business.
- Students must refrain from any type of cheating and/or plagiarism in a course. Any student acting otherwise will receive an “F” grade in the course. School of Business, IUB, maintains a zero tolerance policy regarding violation of academic integrity.
- Students are not allowed to keep bags, handouts, books, mobile phones, smart watches or any other smart electronic devices with them during any exam. Students are advised to keep everything in the front of the class room before the exam starts. Please note that, just carrying any smart electronic devises (even if the devise is turned off or put it in silent mode) during the exam will be considered as “cheating”. Moreover, during the exam, anything written on hand palms (or anywhere else) and carrying paper materials (whatever is written) will be considered as “cheating”. Any sorts of “cheating” will result in an “F” grade with no exception. During the exam, students are only allowed to carry pen, pencil, eraser, sharpener, ruler, highlighter and calculator in a clear plastic bag.
| Type of Evaluation | Nos. | Weight |
| Class Attendance and Participation | 100% | 5 |
| Quiz (Best two will be counted) | 4 | 15 |
| Project and Presentation | 02 | 30 |
| Midterm Exam | 01 | 20 |
| Final Exam | 01 | 30 |
| Total | 100% |
The following chart will be followed for grading. This has customized form the guideline provided by the school of Business.
| A | A- | B+ | B | B- | C+ | C | C- | D+ | D | F |
| 90-100 | 85-89 | 80-84 | 75-79 | 70-74 | 65-69 | 60-64 | 55-59 | 50-54 | 45-49 | 0-44 |
* Numbers are inclusive
The course will be based mostly on the following books [some other books and journals may be referred time to time]:
- Ross, S A , Westerfield, R W & Jaffrey, J F; 2013, Corporate Finance; 10th Edition; McGraw Hill
Link to virtual learning system: http://103.254.86.4/sb/ (School of Business – Faculty name- Login as a guest- password is 1234).
| Sessions | Topic | Learning Outcomes | Readings |
| Session -1 | Introduction | Understand the term capital structure and the important questions it tries to answer
Understand the pie theory
|
Ross, Chapter 16 and Course Outline
Page 494-496
Handout available on virtual learning system |
| Session -2 | Capital Structure: Basic Concepts | Describe how maximizing the value of the firm leads to shareholder wealth maximization
Understand the role of financial leverage in affecting the value of the firm Explain the concept of homemade leverage |
Ross, Chapter 16
Page 495-499
Handout available on virtual learning system |
| Session -3 | Capital Structure: Basic Concepts | Understand the Modigliani and Miller propositions on selecting the optimal capital structure
Review the MM proposition’s assumptions and identify their lackings Relevant Problem Solving from Text |
Ross, Chapter 16
Page 499-505
Handout available on virtual learning system |
| Session -4 | Capital Structure: Basic Concepts
|
Calculating firm value for different capital structures
Discuss the growth in online investing and the pros and cons of using the Internet as an investment tool. Relevant Problem Solving from Text |
Ross, Chapter 16
Page 505-520
Handout available on virtual learning system |
| Session -5 | Capital Structure: Limits to the Use of Debt
|
Understand the costs of financial distress
Differentiate between bankruptcy cost and bankruptcy risk Identify the different direct and indirect costs of financial distress Relevant Problem Solving from Text
|
Ross, Chapter 17
Page 525-530
Handout available on virtual learning system |
| Session -6 | Capital Structure: Limits to the Use of Debt
|
Discuss the agency costs associated with bankruptcy risk
Understand the role of protective covenants in reducing costs of debt Relevant Problem Solving from Text |
Ross, Chapter 17
Page 530-535
Handout available on virtual learning system |
| Session-7 | Capital Structure: Limits to the Use of Debt | Explain the effect of integration of tax and financial distress costs in the MM propositions
Identify the consolidated pie model of a firm Relevant Problem Solving from Text |
Ross, Chapter 17
Page 535-541
Handout available on virtual learning system |
| Session -8 | Capital Structure: Limits to the Use of Debt
Project Distribution |
Identify the different agency costs of equity
Describe the free cash flow hypothesis Understand the pecking-order theory Discuss the real life implications on the capital structures of firms around the world Relevant Problem Solving from Text |
Ross, Chapter 17
Page 541-558
Handout available on virtual learning system |
| Session -9 | Dividends and Other Payouts | Explain the different types of dividend payouts
Explain the cash dividend payout procedures
Relevant Problem Solving from Text
|
Ross, Chapter 19
Page 580-583
Handout available on virtual learning system |
| Session -10 | Dividends and Other Payouts
Quiz 1 |
Describe the effect of dividend payouts on stock price
Explain the cash dividend payment mechanics Understand the theoretical arguments for dividend relevancy
Relevant Problem Solving from Text
Knowledge on Capital Structure: The Basic Concepts and the Limits to Debt
|
Gitman, Chapter 14
Page 565-572
Handout available on virtual learning system |
| Session -11 | Dividends and Other Payouts
|
Understand the theoretical arguments for dividend irrelevancy
Understand the Modigliani & Miller propositions on dividend relevancy. Explain the types of dividend policies
Relevant Problem Solving from Text
|
Gitman, Chapter 14
Page 572-582
Handout available on virtual learning system |
| Session -12 | Dividends and Other Payouts
|
Explain the concepts of stock repurchase and stock splits
Identify the real world considerations for stock repurchases and cash dividends Understand the real world factors favoring a high-dividend policy Relevant Problem Solving from Text
|
Ross, Chapter 19
Page 587-599
Handout available on virtual learning system |
| Session -13 | Mergers, Acquisitions and Divestitures
Quiz 2 |
Understand the three basic forms of acquisitions
Explain the sources of synergy from mergers and acquisitions Identify the different defensive techniques used against takeover attempts Explain the different ways of divestiture
Relevant Problem Solving from Text
Knowledge on Dividends and other payouts |
Ross, Chapter 29
Page 886-919
Handout available on virtual learning system |
| Session -14 | Midterm Exam | CHAPTERS 16, 17, 19 and 29 | Ross, Chapter 16, 17, 19 and 29 |
| Session -15 | Risk and Return | Understand how to calculate dollar and percentage returns on investments
Understand the different components of return on investments Learn the calculation of Holding period returns
Relevant Problem Solving from Text
|
Ross, Chapter 10
Page 306-310
Handout available on virtual learning system |
| Session -16 | Risk and Return | Describe the various measures of return statistics calculations i.e. average return and geometric mean
Relevant Problem Solving from Text |
Ross, Chapter 10
Page 311-316
Handout available on virtual learning system |
| Session -17 | Risk and Return
|
Understand the concept of Risk statistics
Describe the normal distribution and implications in calculating risk Explain the concept of risk free returns and treasury securities
Relevant Problem Solving from Text
|
Ross, Chapter 10
Page 316-330
Handout available on virtual learning system |
| Session -18 | Return and Risk: The Capital Asset Pricing Model (CAPM) | Understand the different numerical characteristics of individual securities
Learn to calculate individual security risk and return and their correlations and covariance Explain the different parameters of correlation coefficients Learn how to use the Markowitz mechanism in calculating portfolio risk and return Understand the diversification benefits of a portfolio from the perspective of systematic and unsystematic risk
Relevant Problem Solving from Text
|
Ross, Chapter 11
Page 331-344
Handout available on virtual learning system |
| Session -19 | Return and Risk: The Capital Asset Pricing Model (CAPM)
Quiz 3 |
Explain the efficient set of a portfolio with two risky assets
Drawing the efficient set of a portfolio with many assets Constructing the optimal portfolio of a risk free and many risky securities by drawing the CML
Knowledge on Risk and Return
|
Ross, Chapter 11
Page 344-353
Handout available on virtual learning system |
| Session -20 | Return and Risk: The Capital Asset Pricing Model (CAPM) | Understand the concept of Beta of individual securities and portfolios
Understand the Capital Asset Pricing Model (CAPM) with the construction of SML Using the CAPM to determine the pricing of individual securities
Relevant Problem Solving from Text |
Ross, Chapter 11
Page 353-368
Handout available on virtual learning system |
| Session -21 | Multifactor Models of Risk and Return
Project Distribution |
Explain the concept of Arbitrage pricing Theory (APT) and benefits of using multifactor models over CAPM
Security valuations using APT models Learn about different stock market anomalies Explain the usage of different real life multifactor models
Relevant Problem Solving from Text |
Reilly, Chapter 9
Page 241-248
Handout available on virtual learning system |
| Session -22 | Efficient Capital Markets and Behavioral Challenges
Quiz 4 |
Understand the concepts and foundations behind efficient capital markets
Identify the different types of market efficiency
Knowledge on Return and Risk and the usage of Capital Asset Pricing Model (CAPM) |
Ross, Chapter 14
Page 435-450
Handout available on virtual learning system |
| Session -23 | Efficient Capital Markets and Behavioral Challenges | Identify the different behavioral biases faced by market participants
Understand the market anomalies caused by behavioral biases |
Ross, Chapter 14
Page 450-458
Handout available on virtual learning system |
| Session -24 | Project Presentation | Capital Structure and dividend policy analysis of a particular industry and individual companies using 5 years of historical data | |
| Session-25 | Project Presentation | Capital Structure and dividend policy analysis of a particular industry and individual companies using 5 years of historical data | |
| Session -26 | Final Exam | CHAPTERS 10, 11, 14 and 9 (Reilly) | Ross, Chapter 10, 11 and 14
Reilly Chapter 9 |
Students who are willing to audit the course are welcome during the first two classes and are advised to contact the instructor after that.
Plagiarism- that is the presentation of another person’s thoughts or words as though they were the students’ own – must be strictly avoided. Cheating and plagiarism on exam and assignment are unacceptable.
Please see the green book for further information about academic regulation and policies, including withdrawal and grading, apples and penalties for pilgrims and academic misconduct.
Students with disabilities are required to inform the School of Business/ Department of Economics of any specific requirement for classes or examination as soon as possible.