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Financial Theory (EFN-640)
- Instructor Name: Dr. Ahmad Fraz
- Credit Hours: 3
- PIDE School of Economics
- E-mail: [email protected]
- Office Hours: 08:30 AM -04:30 PM
Prerequisites For this Course:
None
Text Book(s):
- Corporate Finance Theory by William L Megginson
- Financial Theory and Corporate Policy by Thomas E. Copeland
Reference Book(s):
- Investment Analysis and portfolio management by Reilly and Brown,[8th]
- Fundamentals of Corporate Finance By Ross, Westerfield and Jordan,[8th]
Course Description
This course offers a rigorous introduction to the key concepts of modern finance and how they are used to solve business problems in valuation, investment, risk management, and corporate financial decision-making. We will apply these to essential finance theories and their applications, many of which were developed by Nobel Laureates. The course is divided into four main sections: (A) an overview of the financial challenges faced by firms and along with the principles of corporate financial decisions related to capital structure; (B) concepts of modern finance used to address risk and return, including Efficient Capital Market Theory, Arbitrage Pricing Theory (APT), portfolio theory, and the Capital Asset Pricing Model (CAPM); (C) Decisions related to dividend policy, the relationship between information Asymmetry and agency theory, and Corporate restructuring; and (D) Future gaps in finance.
Course Objectives
- In addition, the course has two broad and inter-related aims
- To provide a rigorous foundation in the core concepts and principles of modern finance.
- To apply theoretical finance models, including those developed by Nobel Laureates, to practical corporate finance scenarios.
- To explore the essence of finance theory and illustrate how its various components, such as capital structure, dividend policies, portfolio theory, agency theory and corporate restructuring, are interconnected.
- To introduce students to emerging trends and potential future directions in the field of finance.
Learning Outcomes
On successful completion of the course, students will be able to:
- Understand the main ideas of modern finance theory and recent developments in the field.
- Describe the financial problems faced by firms and how financial theories help in solving them.
- Apply important finance concepts, such as decision-making under uncertainty, Efficient Market Hypothesis, Modern Portfolio Theory, Arbitrage Pricing Theory (APT), and Capital Asset Pricing Model (CAPM), to practical situations.
- Understand and assess different theories of capital structure, dividend policies, and the impact of information asymmetry and agency issues on financial decisions in firms.
- Examine the financial, strategic, and governance aspects of mergers and acquisitions, and evaluate their impact on shareholder value
Lecture Plan
| Session | Topic | Readings
(Book Chapters/pages/Research papers/Handouts/Web links including video links |
Activities
Quizzes/Assignments/Term papers |
Instructor
(If multiple instructors are teaching a course, mention instructor’s name for each module/session |
| Module # 1:
Title: Introduction of Financial Theory and Capital Structure |
||||
| 1 | Introduction, Building Blocks of Financial Theory | Chapter 1: The Role of Financial Theory and Evidence
Book: Corporate Finance Theory by William L Megginson CLO: 01 |
Dr. Ahmad Fraz | |
| 2 | Saving, Investment in Perfect Capital Market and Fisher Separation Theorem | Chapter: 1 Introduction: Capital Markets, Consumption and Investment Decision
Book: Financial Theory and Corporate Policy by Thomas E. Copeland VDO lecture of Prof. Shiller:
VDO lecture: Consumption and Investment without Capital Markets VDO lecture: Fisher’s theory of optimal intertemporal choice and resource allocation CLO: 01 |
Students will prepare a summary of each video and bring it to class | Dr. Ahmad Fraz |
| 3 | Corporate models of Finance around the world |
Chapter: 2 Ownership, Control, and Compensation Book: Corporate Finance Theory by William L Megginson VDO Documentary: The Corporation
https://www.youtube.com/watch?v=6v8e7dUwq_Q CLO: 02 |
Students will prepare a summary of each video and bring it to class | Dr. Ahmad Fraz |
| 4 | Capital Structure Theory |
Chapter 7: Capital Structure Theory Book: Corporate Finance Theory by William L Megginson Base Paper: Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 261-297. CLO: 04 |
Discussion on Term papers | Dr. Ahmad Fraz |
| 5 | Capital Structure Theory |
Chapter: 15 Capital Structure Theory and the Cost of Capital: Theory and Evidence Book: Financial Theory and Corporate Policy by Thomas E. Copeland VDO lecture CIMA F3: Case study: Marriott Corp Cost of Capital Harvard Case CLO: 04 |
Students will prepare a summary of each video and bring it to class | Dr. Ahmad Fraz |
| Module # 2, Title: Portfolio Theory | ||||
| 6 | Portfolio Theory |
Chapter 05: Objects of Choice: Mean-Variance Portfolio Theory Book: Financial Theory and Corporate Policy by Thomas E. Copeland
VDO lecture of Prof. Shiller: CLO: 03 |
Dr. Ahmad Fraz | |
| 7 | Portfolio Theory |
Chapter 3: Risk, Return, and Market Efficiency Book: Corporate Finance Theory by William L Megginson Base Paper: Markowitz, H. (1952). Portfolio selection. The journal of finance, 7(1), 77-91. CLO: 03 |
Discussion on Term papers | Dr. Ahmad Fraz |
| MID TERM EXAM | ||||
| Module # 3, Title: Efficient Capital Market Theory and Asset Pricing Models | ||||
| 08 | Efficient Capital Market Theory |
Chapter 10: Efficient Capital Market: Theory Book: Financial Theory and Corporate Policy by Thomas E. Copeland
VDO lecture of Prof. Shiller A Brief History of the Efficient Market Hypothesis.
CLO: 03 |
Students will prepare a summary of each video and bring it to class |
Dr. Ahmad Fraz |
| 09 | Efficient Capital Market Theory | Research Papers:
Malkiel, B. G., & Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work*. The journal of Finance, 25(2), 383-417. Fama, E. F. (1991). Efficient capital markets: II. The journal of finance, 46(5), 1575-1617. VDO lecture of Prof. Fama: Are markets efficient? CLO: 03 |
Dr. Ahmad Fraz | |
| 10 | Asset Pricing Models | Chapter 8: Introduction to Asset Pricing Models
Book: Investment Analysis and portfolio management, Reilly and Brown, 8th Chapter 6: Market Equilibrium: CAMP & APT Book: Financial Theory and Corporate Policy by Thomas E. Copeland CLO: 03 |
Discussion on Term papers | Dr. Ahmad Fraz |
| Module # 4, Title: Dividend Policy and Agency theory | ||||
| 11 | Dividend Policy | Chapter 8: Dividend Policy
Book: Corporate Finance Theory by William L Megginson Chapter 16: Dividend Policy Theory and Empirical Evidence Book: Financial Theory and Corporate Policy by Thomas E. Copeland Base paper: Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. the Journal of Business, 34(4), 411-433. CLO: 04 |
Dr. Ahmad Fraz | |
| 12 | Agency Theory | Chapter 12: Information Asymmetry and Agency Theory
Book: Financial Theory and Corporate Policy by Thomas E. Copeland Base paper: Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360. CLO: 04 |
Discussion on Term papers | Dr. Ahmad Fraz |
| 13 | M&A theories | Chapter 18: Acquisitions, Divestiture, Restructuring and Corporate Governance
Book: Financial Theory and Corporate Policy by Thomas E. Copeland
CLO: 05 |
Students will prepare a summary of each video and bring it to class |
Dr. Ahmad Fraz |
| 14 | Venture Capital | Handouts
CLO: 05 |
|
Dr. Ahmad Fraz |
| 15 | Future Gaps in Finance | Chapter 20: Future Gaps in Finance
Book: Financial Theory and Corporate Policy by Thomas E. Copeland CLO: 01 |
Dr. Ahmad Fraz | |
| 16 | Final Presentations on term paper | |||
| Final Exam | ||||
Related Article Reading:
| 1 | Akerlof, G. A. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 488-500. |
| 2 | Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360. |
| 3 | Fisher, I. (1930). The theory of interest (pp. 161-165). New York: Macmillan. |
| 4 | Brealey, R., Leland, H. E., & Pyle, D. H. (1977). Informational asymmetries, financial structure, and financial intermediation. The Journal of finance, 32(2), 371-387. |
| 5 | Grossman, S. J., & Stiglitz, J. E. (1980). On the impossibility of informationally efficient markets. The American economic review, 393-408. |
| 6 | Chen, N.-F., Roll, R., & Ross, S. A. (1986). Economic Forces and Stock the Stock Market: Testing the APT and Alternative Asset Pricing Theories. Journal of Business, 383-403. |
| 7 | Malkiel, B. G., & Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work*. The journal of Finance, 25(2), 383-417. |
| 8 | Fama, E. F. (1991). Efficient capital markets: II. The journal of finance, 46(5), 1575-1617. |
| 9 | Lo, A. W., & MacKinlay, A. C. (1988). Stock market prices do not follow random walks: Evidence from a simple specification test. Review of financial studies, 1(1), 41-66. |
| 10 | Markowitz, H. (1952). Portfolio selection. The journal of finance, 7(1), 77-91. |
| 11 | Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. the Journal of Business, 34(4), 411-433. |
| 12 | Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 261-297. |
| 13 | Roll, R. (1977). A critique of the asset pricing theory’s tests Part I: On past and potential testability of the theory. Journal of financial economics, 4(2), 129-176. |
| 14 | Roll, R., & Ross, S. A. (1980). An empirical investigation of the arbitrage pricing theory. The Journal of Finance, 35(5), 1073-1103. |
| 15 | Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of finance, 19(3), 425-442. |
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