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University of Texas at Dallas

School of Management

Finance 6301 Professor Yexiao Xu


Financial Management Spring 2005

Course Syllabus
Course Objectives:

Financial management can be broadly defined as how to efficiently manage assets, liabilities, and
equity in order to maximize the wealth of the owners. In general, this applies to individuals as well
as organizations. In order to study the subject in a general but concrete environment, we will focus
the financial management of a corporation, or corporate finance. In other words, you will be
introduced to various issues concerning corporate financial decision-making. In order to help you
understanding these issues from a big picture, we will divide our subjects into three areas, the
investment decision, valuation, and the financing choices of firms. On the investment side, we will
study how a firm should commit its resources to various projects to achieve the maximum value.
This is carried out through two stages. First, we examine the financial aspect of the investment
decisions, or capital budgeting in an ideal world with certainty. After developing necessary theory
to quantify risks, we then apply a similar approach to capital budgeting in an uncertainty
environment. Given a firm’s decision to invest in certain projects, it is equally important to know
how financing decision of using debt vs. equity will affect the firm’s value. Perhaps, a more
fundamental question to ask is whether different means of financing matters. Much of the theory in
this part relies on the valuation issue of different financial claims. Therefore, we will also learn how
to price various types of securities, including stocks, bonds, and options, in an efficient market.
With the globalization, the world markets are increasingly integrated. Therefore, it is very useful to
expose yourself to some of the issues in international finance.

Because of the risky nature of firms’ investment, most financial decisions are made under
uncertainty about firms’ future cash flows. Therefore, statistical knowledge is required, especially
knowledge on probability distributions, mean, variance and covariance. I strongly recommend you
to take STAT 5311 first. Accounting information is also important for managers to make sound
decisions. Knowledge about accounting statement is also required.

Course Requirements:

There will be one lecture (Monday 7:00-9:45PM) per week. You should make every effort to attend
each lecture. In addition, I will hold my office hours on Monday from 5:00PM to 6:30PM, or by
appointment. My office is located in room SM3.812 on the third floor of the new School of
Management building. I can be reached by phone at (972)883-6703 or email at
yexiaoxu@utdallas.edu. If you are interested in my research, my current working papers are
available for downloading at http://www.utdallas.edu/~yexiaoxu. Registered students can also
download my lecture notes and problem sets from my website.

We will have about five problem sets distributed during the semester. No late homework will be
accepted. Solutions to the problem sets will be posted on my website after the due date. There will
be one in-class midterm and a final exam. In order to be fair to everyone, exams must be taken on
the specified dates. For those who can not take the midterm on the date of exam due to business
travel, you should take it before leaving the town. No additional credit or make up final will be
granted. The grading breakdown is as follows:

Problem Sets 30%


Midterm Examination 30%
Final Examination 40%

In addition to fill out the survey sheet at the end of this syllabus, you are required to send me an
email in order to put you on my mailing list for updates and hints to problem sets

Readings:

The required textbook is Ross, Westerfield and Jaffe, Corporate Finance, 6th edition. I also
recommend Random Walk Down Wall Street by Burton G. Malkiel. This is an entertaining book to
understand the basics of financial markets. It is also an excellent guide for your personal financial
planning. Finance is an emerging filed of economics. One will never truly understand it without
constantly expose to the real world. Therefore, it is crucial to read Wall Street Journal or financial
section of major newspapers such as the New York Times, and watch financial programs.

Assignments and Course Outline:

Introduction

Jan.: 10 An introduction to corporate finance


Lecture 1 The functions and objections of financial management
Financial markets
Basic accounting information

RWJ, Chapters 1, 2

Jan. 17: Martin Luther King, Jr. Day

The Investment Decision

Capital budgeting under certainty:

Jan. 24: Net Present Value (NPV) Analysis Note: Problem Set 1 Due in Class
Lecture 2 Financial planning
Financial markets economics and NPV analysis
Compounding and discounting
Perpetuity and annuity calculation
RWJ, Chapter 3, 4
Jan. 31: Why use NPV analysis?
Lecture 3 Some alternatives to NPV analysis and their drawbacks
Strategy and analysis in using NPV
Capital rationing, decision tree, and sensitivity analysis
RWJ, Chapter 6, 8.1-8.2

Feb. 07: Cash flow calculation Note: Problem Set 2 Due in Class
Lecture 4 Incremental cash flow
Replacement theory

RWJ, Chapter 7

Capital budgeting under uncertainty:


Feb. 14: Portfolio Theory
Lecture 5 Introduce to risk and return
Measuring risk and return
Diversification and different types of risks
Efficient portfolio and Capital Market Line
RWJ, Chapter 9, 10.1-10.7

Feb. 21: Asset pricing models Note: Problem Set 3 Due in Class
Lecture 6 The Capital Asset Pricing Model (CAPM)
Systematic v.s. nonsystematic returns
The Arbitrage Pricing Theory (APT)
CAPM v.s. APT
RWJ, Chapters 10.8-10.10, 11

Mar. 28: Midterm exam during the lecture time

Mar. 07: Spring Break

Valuation
Mar. 14: Efficient markets
Lecture 7 Three notions of efficiency
Implications for corporate finance
RWJ, Chapter 13

Mar. 21: Valuation of stocks and bonds Note: Problem Set 4 Due in Class
Lecture 8 Bonds pricing
Models for common stocks valuations

RWJ, Chapter 5, 14
Mar. 28: Introduction to modern finance theory
Lecture 9 Introduction to options
Option pricing theory
Real options

RWJ, Chapters 22.1-22.9, 22.12, 23.1, 23.4, 8.4

The Financing Decision

Apr. 04: The capital structure Note: Problem Set 5 Due in Class
Lecture 10 Introduction to capital structure
Financial leverage and firm value
The role of taxes
The MM theory

RWJ, Chapters 15

Apr.11:Limits to the use of debt


Lecture 11 Cost of financial distress
The MM theory with personal tax
Capital budgeting with leverage
APV, FTE, and WACC approaches

RWJ, Chapter 16, 17

Apr. 18: International finance Note: Problem Set 6 Due in Class


Lecture 12 Terminology
Foreign exchange markets
Purchasing-power parity
International capital budgeting

RWJ, Chapters 31

Apr. 25: Final examination


University of Texas at Dallas
School of Management
Fin 6301 Prof. Yexiao Xu
Section 501 Spring 2005

About Yourself

In order for me to better organize the course, and to adapt the materials to your background,
would you please tell me more about yourself?
Your Name ___________________________
Your Phone Number ____________________
Your Email Address ____________________
(Please send me an email with your full name, so that I can compile a mailing list)
Your Job _______________________________________________________________________

Your Background
Finance Class _____________________________________________________________
Economics Class __________________________________________________________
Accounting Courses ________________________________________________________
Statistics and Math Courses __________________________________________________
Other related Courses _______________________________________________________
Survey:
Do you read sports section of a newspaper?
Never _______ Occasionally _______ Often _________
Do you read financial newspapers, such as the Wall Street Journal, the Financial Times, the
financial section of the New York Times, etc.?
Never _______ Occasionally _______ Often _________
Do you read financial magazines, such as Money Magazine, Business Week, Forbs, etc.?
Never _______ Occasionally _______ Often _________
Do you watch financial programs, such as Nightly Business News, CNBC, Wall Street Week
with Louis Rukeyser, etc.?
Never _______ Occasionally _______ Often _________

Your Comments: