FNCE 3323
Corporate Options
Chapter 19
Chapter 17 (p. 585589)
Real Options
Managers can respond to changing
market conditions and to competitors
actions
Often these responses are referred to as
real options because they deal with real
assets as opposed
FNCE 3323
Introduction to
Derivatives
Chapter 19
Derivatives: A Brief History
One of the first formal markets for
derivatives was the futures market for
wheat
Farmers were concerned about the price
they would receive; Millers were concerned
about the pr
FNCE 3323
Leasing vs. Debt
Chapter 16
Advantages and Disadvantages of Debt
Advantages:
interest payments are tax deductible to a firm
wise use of debt may lower a firms weighted average
cost of capital (WACC)
during inflation, debt is repaid with cheap
Assignment 2 Due Tuesday October 18 at 4:30
Calculate the Weighted Average Cost of Capital in regards to ABC utility.
ABC Utility Ltd. Has the following capital structure:
Debt,
10 Years until maturity, 8% coupon
Preferred Stock, 5%
Common Stock,
10,000 s
COURSE OUTLINE
2016/2017
COURSE NAME: Corporate Finance
COURSE CODE: FNCE3323
COURSE DESCRIPTION
Corporate Finance examines financial and investment decisions from the corporation's perspective. The financial markets, the
tradeoff between risk and return,
FNCE 3323
Options Calls &
Puts
Chapter 19
Options: A historical perspective
The first record we have of options being
used is from Aristotle in his Politics
regarding a successful speculation by the
philosopher Thales
Thales forecasted a good olive crop
FNCE 3323
Ratio Review
Chapters 23
Valuation Ratios
These ratios give insight into the relative
investment performance of each
shareholder
Measured in a per share basis
Help measure risk and return for each
shareholder
Valuation Ratios
Earnings Per S
FNCE 3323
Valuation and
Rates of Return
Chapter 10
Bond Definitions
Par value (face value)
The principal amount of a bond that is repaid at the
end of the term
Assume par value of $1000 unless otherwise told
Coupon rate
The annual coupon divided by t
Calculator:
CF0 = 90,000;
C01 = 132,000; F01 = 1;
C02 = 100,000; F02 = 1;
C03 = 150,000; F03 = 1;
I = 15;
CPT NPV = 1769.54
CPT IRR = 10.11
NPV
NPV is positive so accept the project
IRR
If you compute the IRR on the calculator, you get 10.11%
because it
FNCE 3323
The Security
Market Line and
the CAPM
Chapter 11 Appendix A
Introduction
The Capital Asset Pricing Model (CAPM)
is the basic theory that links risk and return
for all assets
Basic premise is that investors are not
rewarded for taking on unnece
FNCE 3323
Sources of Short
Term Financing
Chapter 8
Why Does Trade Credit Exist?
Sellers can use credit to signal quality of
product by allowing returns within credit
period
Sellers know more about the business
than other lenders so they can lend at
red
FNCE 3323
Working Capital
and the Financing
Decision
Chapter 6
The Nature of Asset Growth
Sales growth often requires permanent
current assets
Often a firms internal funds are not
sufficient in financing the buildup in
inventory and accounts receivable
FNCE 3323
Current Asset
Management
Chapter 7
Cash Management
Financial managers want to keep cash balances to
a minimum
There are 2 reasons for holding cash
1. for everyday transactions (main reason)
2. for precautionary needs (emergencies)
Goals are t
FNCE 3323
Capital Markets
Chapter 14
Structure of Capital Markets
Capital Markets can be classified into:
(1) Primary vs. Secondary Markets

A new security is first issued in a primary markets and there is
cash flow to the issuer.
Any security currently
FNCE 3323
Leverage
Chapter 5
Introduction  Leverage
Leverage results from the use of fixedcost
assets or fixed cost funds to magnify returns to
the firms owners
The amount of leverage in the firms capital
structure the mix of longterm debt and equity
1
LESSON 4
PROBLEMS
PROBLEM (1) EARNINGS VARIABILITY/BUSINESS RISK
Hard working Construction (HWC) builds doors for homes in western Canada. Sales vary
with the general business cycle. The expected sales outcomes are presented as follows.
Probability
Sale
1
INSTRUCTOR COPY
*
LESSON 3
PROBLEMS
PROBLEM (1) EFFECTIVE ANNUAL RATE
A bank will lend you $3,000 for 50 days at a cost of $45 interest. What is the face value of the
loan? What is the effective annual rate?
FACE VALUE OF THE LOAN=$3,000
EAR=(1+Interest
Advanced Finance
Ch.02 Uncertainty (class)
Problem
(200206) An investor is considering purchasing common shares of two companies that manufacture
outdoor leisure items. RAIN Inc. produces lawn furniture, umbrella tarpaulins, and canvas awnings. SHINE
I
1
LESSON 2
1
PROBLEMS
INSTRUCTOR COPY
TOTAL RISK RETURN MODEL
John Smith is thinking of investing in two securities, X and Y. After some
analysis of these two prospects, he prepared the following exhibit. Each of
these two securities has the same initial
Fnce4471
Ch.04 CME (class)
Statistical methods
Ex. 01: Returns review
Consider the following monthly prices of three ETFs:
Year
2010
2011
2012
2013
X
62.00
56.66
59.57
66.50
Y
84.00
92.83
93.77
91.00
Z
21.00
18.81
20.38
23.68
a. Simple returns
i. Calculat
Advanced Finance
Ch.04 Capital structure (class)
Leverage
1. (200706) ABC Corp. increased its sales by 15% in the past year, but its earnings before interest and
taxes (EBIT) increased by only 5%. What is its degree of operating leverage?
a. 0.33
b. 0.
Fn2
Ch.01 Basic capital budgeting II (class)
Problems
Q3 (200306)
RBB Inc. produces lawn tractors, primarily for the residential market. The firm is evaluating an
investment in new production machinery. The new machine would allow RBB to manufacture l
LESSON 5
PROBLEMS
PROBLEM (1) Dividend Policy
You are the Chief Financial Officer (CFO) of Rexall Drug Company (RDC), and are reviewing
RDCs dividend policy. You have prepared a forecast of RDCs earnings after interest and
taxes and its investments needs
1
LESSON 5
PROBLEMS
PROBLEM (1) Dividend Policy
You are the Chief Financial Officer (CFO) of Rexall Drug Company (RDC), and are reviewing
RDCs dividend policy. You have prepared a forecast of RDCs earnings after interest and
taxes and its investments need
Fnce447 1
Ch.05/08 Leverage (class)
Leverage
Ex. 01: Computing rm ROE
Martin, Inc., a U.S. manufacturing company, has an ROA equal to 5%, and equity nancing equal no
$1m. The rms cost of debt is 2%.
a. Calculate the rms ROE if total assets equal to $2m.
b
Fnce4471
Ch.10 Execution (class)
Ex. 01: Spreads
There were three sell orders placed for a stock during a day. The following are the quoted bid and ask
quotes at various points in the day.
Time
11
12
02
of trade
a.m.
p.m.
p.m.
Bid size
400
400
400
Bid pri
1
LESSON 4
PROBLEMS
PROBLEM (1) EARNINGS VARIABILITY/BUSINESS RISK
Hard working Construction (HWC) builds doors for homes in western Canada. Sales vary
with the general business cycle. The expected sales outcomes are presented as follows.
Probability
Sale
Fnce4471
Ch.08 AI (class)
Managers appraisal
Ex. 01: Fund selection
Tim is evaluating 4 funds run by 4 independent managers relative to a benchmark portfolio that has an
expected return of 7.4% and volatility of 14%. He is interested in investing in the f