Course Details

Course Information Package

Course Unit CodeAFIN203
Course Unit Details
Number of ECTS credits allocated5
Learning Outcomes of the course unitBy the end of the course, the students should be able to:
  1. Describe the alternative theories of dividend policy and show the dividend irrelevancy argument with numerical examples
  2. Calculate mean, variances and correlations between assets, portfolio expected returns and explain the concept of diversification
  3. Explain and show graphically the feasible set, minimum variance set, and efficient set and explain capital allocation between risk-free and risky assets
  4. Calculate the value of the firm with debt financing using the weighted average cost of capital and the CAPM model
  5. Describe the characteristics of options and derive payoff diagrams of options
  6. Calculate financial options value using Black and Scholes formula and using binomial trees
  7. Apply option theory to value corporate investment decisions under uncertainty
Mode of DeliveryFace-to-face
Recommended optional program componentsNONE
Course Contents

Dividend policy: The dividend process, factors affecting dividend levels and changes, information in dividends and stock repurchases, and the dividend  controversy

Portfolio theory: Means, variances and correlations of assets based on historical returns or scenarios, portfolio expected returns and volatility, the concept of diversification, feasible investment set, minimum variance set and efficient set, investor preferences in mean-variance space, the capital allocation between risk-free rate and risky portfolios

Financing and the cost of capital Miller-Modigliani theory of the capital structure and the tax advantage of debt, the weighted average cost of capital (WACC) approach for firm valuation using CAPM, unlevered and levered betas, capital structure theories

Understanding and valuing options: Definitions of common options contracts and their use, payoff diagrams for common option contracts and combinations of options, put-call parity, call and put option contracts using Black-Scholes and binomial trees, sensitivity analysis to option values, application of option theory to corporate investment decisions (real options)

Recommended and/or required reading:
  • Brealey, R., Myers, S., and A. Marcus, Principles of Corporate Finance, McGraw Hill, 2010
  • Copeland, T., F. Weston , K. Shastri Financial Theory and Corporate Policy, Addison-Wesley, 2004
  • Bodie Z., Kane A. and Alan Marcus Investments, 6th Edition, McGraw-Hill, 2004
Planned learning activities and teaching methodsThe taught part course is delivered to the students by means of lecturers, conducted with the help of computer presentations and the use of the board. Lecture notes and other course material like spreadsheet examples are available to students through the web.
Assessment methods and criteria
Final Exam60%
Language of instructionEnglish
Work placement(s)NO

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