The aim of this class is to provide an introduction to the basic principles of financial decision taking and the theory of finance and is a core class in all of the M.Sc. degrees. The class will provide an introduction to the theory of finance and will also consider the application of the theory in practice, it will develop the basic principles of valuation, the nature of risk and uncertainty, the relationship between risk and returns, and the nature of investment and financial decisions. It will provide students with a good understanding of the principles underlying financial theory and reasoning and the ability to apply these principles in a practical context.
The class provides opportunities for students to develop and demonstrate knowledge, understanding and skills in the following areas:
i) Knowledge Based Outcomes:
On completion of the class students should be able to:
- develop the main building blocks of modern financial theory
- discuss the objectives of the company and the relationship to financial decision criteria;
- use compounding and discounting to evaluate financial proposals;
- understand and employ the net present value and internal rate of return of investment proposals;
- explain the merits of the net present value rule as an investment criteria;
- recognise the attractions as well as the limitations of the internal rate of return as an investment criterion;
- determine the cost of borrowing and the evaluation of financing proposals;
- evaluate capital budgeting proposals;
- incorporate the effects of inflation in the analysis of investment and financing proposals;
- identify the determinants of the prices of bonds and shares;
- define and measure risk;
- construct portfolios to manage risk exposure;
- explain capital market theory and the capital asset pricing model;
- explain the role of beta as a measure of risk;
- identify and discuss the implications of the capital asset pricing model for security analysis and corporate financial management;
- analyse financial asset prices and returns in competitive capital markets;
- understand efficient market theory and its implications of efficient market theory for the evaluation of securities and corporate financial management;
- understand the nature of options and the basic principles of option pricing theory.
ii) Skills Outcomes:
On completion of this class students should be able to demonstrate:
- the ability to structuring and take financial decisions ;
- an appreciation of the need to link decision criteria to objectives;
- an understanding of the role of abstract analysis in the development of practical decision taking techniques
- the ability to evaluate empirical evidence in the assessment of theory: and
- the ability to use spreadsheets in financial analysis.
TEACHING AND LEARNING
There are 36 contact hours and the teaching will be on the basis of lectures and tutorials (the teaching will in the form of 12 two hour lectures supplemented by 12 one hour tutorials that will emphasise the practical application of the analysis). The lectures will cover all the major issues specified in the syllabus. Time will be allocated in each session to discuss the more controversial topics and the more demanding aspects of the analysis. An informal approach will be employed in the lectures to encourage continuing participation through questions and observations. The tutorials will focus on the development of quantitative analysis and skills, and course participants will be required to work through a series of problems prior to each tutorial. The tutorials will consider questions dealing with the practical applications of the analysis and discuss the key elements in the theory. Tutorial attendance is compulsory.
D Hillier, S A Ross, R W Westerfield, J F Jaffe and B Jordan. “Corporate Finance: European Edition”.1st Ed., Irwin McGraw-Hill, 2010.
This is a well established text with a new European edition provide by a member of the Strathclyde staff, Professor David Hillier.
R Brealey, S Myers and F Allan. “Principles of Corporate Finance”. 10th Ed., McGraw Hill, 2010.
This is probably the most widely used introductory text in finance at the graduate level. It was a highly innovative text when first published, and has exercised a major influence on the nature and coverage of nearly all subsequent text books. It is well written and focuses on the most interesting and important theoretical issues.
Jonathan Berk and Peter de Marzo. “Corporate Finance”. Addison-Wesley, 2007
This covers the same ground as the more established texts. It is a well structured and interesting text that could well challenge the role of Brealey et al and Ross et al as the leading textbooks in the area.
T E Copeland, J F Weston and K Shastri. “Financial Theory and Corporate Policy”.Addison-Wesley, 4th Ed., 2005.
An advanced text which covers the same range of topics as the other textbooks, but is more theoretical and rigorous. It also provides a good discussion of the relevant empirical tests and evidence, but unfortunately is becoming a little dated.
J M Stern and D H Chew. “The Revolution in Corporate Finance”.Basil Blackwell 4th Ed. 2003.
A collection of essays, that attempt to interpret recent advances in finance for business school educated managers.
M C Jensen and C W Smith. “The Modern Theory of Corporate Finance”.McGraw Hill 2nd Ed. 1990.
This collection of papers provides a convenient access to some of the more important academic articles in finance written before 1990.
D Hillier, M Grinblatt, and S Titman. “Financial Markets and Corporate Strategy”.McGraw Hill European 2nd Ed. 2011.
This is a good US text which has been modified and developed for the European Market.
To be identified in detail in class but will include among other things additional reading and links to the coverage in the media of current financial developments.
|Session||Lecture Title / Subject / Content|
|1||The objectives of the company, agency theory and value maximisation.|
|2||The role of interest in financial decision taking.|
|3||Investment criteria and capital budgeting - theory and practice.|
|4||Valuation of bonds and shares.|
|5||An introduction to risk and uncertainty.|
|6||Portfolio theory and the management of risk.|
|7||Capital market theory.|
|8||Capital asset pricing model and beta and the determination of the cost of capital.|
|9||Forms of financing - debt and equity.|
|10||Efficient market theory and its implications.|
|11||An introduction to options and option valuation.|
|12||Corporate financial policy.|