Finance I (430-43/71/73), Fall
2007
Professor Camelia M. Kuhnen
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Phone: (847) 467-1841 |
Campus Office: |
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Fax: (847) 491-5719 |
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Web: Research page |
Go to: Syllabus
News and announcements:
- The final grades for the course are now available through the CAESAR system.
- As explained in the syllabus, your overall score in the class is computed as (sum of best 6 problem sets)+0.26×(score on midterm×100/150)+0.50×(score on final×100/150 ), where each problem set score is between 0 and 4 points (reduced by 25% for students who got at least two negative peer evaluations). The overall score takes values between 0 and 100. You can interpret a score of 90 as indicating that you have mastered 90% of the material taught in class.
- The mean overall score for the class was 85, the median score was 88, the highest score attained was 98 and the lowest score was 52. The standard deviation was 10. The figure below shows the distribution of the overall scores.
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class score of at least 90 translates into an A grade; a score lower than 90 but higher than 75 translates
into a B grade. A score below
75 and above 55 translates into a C
grade. A score below 55 translates into a D.
- Regrading Policy: Please request regrades
in writing. I will always regrade the entire
exam, not just a specific question or part of an exam. The only exception are addition errors: I will fix these without
regrading the exam.
- The final exam solutions are now available. The mean and standard deviation of the final exam scores were 121 and 21, respectively.
- The midterm exam solutions are now posted. The average midterm score across all sections was 127.8, and the standard deviation of scores was 15.2. The lowest score was 63, and the highest was 148.
- The midterm exam is now posted.
- Here are some articles that you may find interesting, given what you have learned in class so far (they’re just-for-fun readings). These were suggested to me by some of your fellow Finc 430 students this quarter.
- First class sessions:
43: Monday,
September 24 (
71: Monday, September 24 (downtown campus).
73: Thursday, September 27 (downtown campus).
- Groups for section 43 are here.
- Questions received from students regarding Finc 430 homework assignments and exams, as well as my answers to them, can be found here. If you have a question, it may already be answered, so please check the questions & answers page first.
- The
textbook (Brealey, Myers and Allen Principles
of Corporate Finance 8th ed.) is available at the bookstore. I do not
recommend buying the old 7th edition of the book. You will use the 8th
edition in later classes so it is worth getting the new version now. I
also do not recommend getting the International Edition of the book
because it has different exercises.
- If you are in section 43 and have a conflict in a particular week, you are welcome to join us in sections 71 or 73 downtown. The Inter-Campus Shuttle will get you there and back, see http://www.univsvcs.northwestern.edu/shuttles/inter.htm
- If you
are interested in information for finance majors, click here.
For suggested courses corresponding to a variety of careers in finance,
click here.
Times/rooms:
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Class Times |
43: Mondays/Thursdays, 1:30-3:00pm, room 2245 ( 71: Mondays, 6:00-9:00pm, room 309 (downtown) 73: Thursdays, 6:00-9:00pm, room 309 (downtown) |
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Office Hours |
43: Wednesdays, 3:00pm-4:00pm, office 4225 (starting week 2). In weeks 5 and 10 the hours are 4:00pm-5:00pm. 71: Mondays, 4.45 pm-5.45 pm, office M273 (starting in week 2) 73: Thursdays, 4:45pm-5:45pm, office M273 (starting in week 2) |
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Review sessions |
43: Wednesdays,
1:45pm-2:45pm, room G05 ( 71, 73: Every other Saturday, 10:00am-12:00pm, room 109 (downtown) |
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Midterm Review Session, Week 5 |
43: Wednesday, October 24, 1:45pm-3:45pm, room G03 ( 71, 73: Friday, October 26, room 109 (downtown) |
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Midterm (3-hour take-home) |
Posted on this website on the evening of Friday, October 26. Due in week 6: 43:Thursday, November 1 (in class) 71: by Thursday, November 1, 6pm (drop exams in my mailbox in Wieboldt) 73: Thursday, November 1 (in class) |
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Final Review Session, Week 10 |
43: Wednesday, December
5, 8:45am-10:45am, room G36 ( 71, 73: Friday, December 7, 6:00pm-8:00pm, room 109 (downtown) |
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Final (in class) |
43: Wednesday, December 12, 12pm-3pm, room 1246 ( 71: Monday, December 10 (downtown) 73: Thursday, December 13 (downtown) |
Course Description:
This is a first course in corporate finance which is designed to introduce students to the concepts and techniques necessary to analyze and implement optimal investment decisions by firms. The course studies the effect of time and uncertainty on decision making. Topics include basic discounting techniques, stock and bond valuation, capital budgeting under certainty and uncertainty, asset pricing models and efficient markets.
Prerequisites:
The prerequisite for this course is knowledge of probability and statistics through linear regression. This requirement may be satisfied with either (i) prior or concurrent registration in Decision Sciences 434, (ii) sufficient previous course work in statistics. Familiarity with basic financial accounting (Accounting 430) and microeconomics (Managerial Economics 430) is recommended.
Textbook:
The textbook for the course is:
Richard A. Brealey, Stewart C.
Myers, and Franklin Allen, Irwin/McGraw-Hill, Principles of Corporate
Finance, 8th Edition (ISBN 0073130826, though different batches
could have different ISBNs).
You will also use this text for Finance II (441).
There is also a course packet.
Optional Texts:
There is also a set of three optional texts:
1. Study Guide for Use with Brealey/Myers/Allen, Principles of Corporate Finance, 8th
Edition, ISBN 0072957263
2. Craig W.
Holden, Excel Modeling in Corporate Finance, 2nd Edition,
Pearson/Prentice Hall. ISBN 013132165-X. Book and CD-ROM.
3. Craig W. Holden, Excel Modeling in Investments, 2nd Edition, Pearson/Prentice Hall. ISBN 0131611372. Book and CD-ROM.
You probably do not want to buy these. They will be on reserve at the library. Copies of the Solutions Manual for Principles of Corporate Finance have also been put on reserve there. The Solutions Manual has answers to the end-of-chapter questions. Answers to assigned review problems are included in the course packet so you will not need the Solutions Manual unless you would like to do extra problems.
Course Requirements and Evaluation:
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Assignment |
Weight |
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Best 6 of 8 problem sets |
24% (4% each) |
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Midterm |
26% |
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Final |
50% |
The course grade will be determined by a 24%/26%/50% weighting on your best six problem sets/your midterm/your final.
There will be eight problem sets. Three of these are cases. Each of your best six problem sets will count toward 4% of your course grade (in other words the two lowest problem set grades will be dropped). Problem set grades are between 0 and 4. Problem sets are due by the beginning of class on the due date. Late problem sets will not be accepted. You may submit problem sets via FAX if you are unable to attend class. My FAX number is 847-491-5719. You should work on the problem sets in groups of four people. Groups will be formed during the first class. At the end of the quarter I will ask you to evaluate your peers based on their contribution to the group’s output. These evaluations will determine whether each group member gets the group’s score on problem sets, or a lower score.
The midterm will be a take-home exam, which should take about 3 hours to solve. I will post it on Friday, October 26 (in PDF format readable by Adobe Acrobat Reader). The midterm must be handed in at the beginning of class on Thursday, November 1 (section 43), Monday, October 29 (section 71), and Thursday, November 1 (section 73). No late midterms will be accepted.
The final will be an in-class exam and will be given during finals week. The exact dates are Monday, December 12 for section 43, Monday, December 10 for section 71, and Thursday, December 13 for section 73.
The exams are open book. You may use calculators and laptops for the exams, but no assistance (from group members or anyone else) is allowed.
Office Hours, Review Sessions, Review sessions:
My
You can also ask questions after class, e-mail me at c-kuhnen@kellogg.northwestern.edu, or call me at (847) 467-1841.
The two main review sessions are in week 5 and 10, prior to the midterm and the final. These each last 2 hours.
Regular review sessions will be held weekly for section 43
on Wednesdays, 1:45pm-2:45pm (
Honor Code, Class Room Etiquette:
The first sentence of the Kellogg Honor Code reads: "All students enrolled in a course offered by the Kellogg School of Management agree to abide by the Kellogg Honor Code." If you are unsure of what this means, please read the honor code. If you are in doubt about whether something is acceptable under the honor code, you should not hesitate to ask me.
You will be allowed to work in groups for problem sets. The
solutions you hand in should be independent work of your group. Before the
problem sets are handed in you should discuss the problems only with members of
your group. You should not discuss the problems with other students in this or
any other 430 class or with former Finance 430 students. You should not receive any assistance on the midterm or the final from
anyone. You should not work on the midterm for more than the allowed time.
Violators will fail the class and may be expelled.
You are also expected to follow the Kellogg code
of classroom etiquette. Please be
respectful of your fellow students and do not use your laptop for anything
other than note taking/Excel calculations during class.
Miscellaneous:
You should bring your name plate to class and have it
displayed throughout the quarter.
Familiarity with Excel (or an equivalent spreadsheet program) is recommended. There are handouts titled Use of Financial Functions in Excel and Use of Statistical Functions in Excel in the course packet. They are also linked below, along with spreadsheets. You should work the problems in the handouts.
Course Web Page:
Various types of information will be available on the course
web page, such as downloadable copies of the problem sets and lecture notes and
other course-related files. I will use the News and Announcement section of the
web page as well as email to make general announcements or comments.
The URL for the course web page is: http://www.kellogg.northwestern.edu/faculty/kuhnen/ftp/fin430/teachingf07.html.
Notice that the web page is not part of
Blackboard or CMS.
Course Outline:
Below is an approximate schedule for the class. I will distribute lecture notes at the beginning of each lecture. I will also make the lecture notes available on the class web page. Lecture notes, problem sets, etc. will generally be posted on the web page a few days before they are handed out in class.
Indicated below are the readings for each class. "B,M&A" refers to the textbook by Brealey, Myers and Allen. All additional reading materials are in the course packet. "TN" denotes a teaching note which is in the course packet. You should read the corresponding material in the textbook prior to the lecture. The material in the teaching notes is optional, but may be helpful if you need clarification regarding the content taught in class. The review questions can be found at the end of each chapter of the B,M&A text in the section "Practice Questions" unless noted otherwise. You should work out the review questions listed below. They will not be collected or graded. Solutions to the review problems are included in the course packet.
Week by week course outline and links:
Week
1: Net Present Value (NPV).
Goals in managing the firm. The interaction between firm decisions and capital markets. Asset valuation with known cash flows.
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B,M&A chapter 1, 2, 3. (Optional:
TN “Present and Future Value Concepts and Applications”) “Use of Financial Functions in Excel” |
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Review Problems |
B,M&A chapter 2: 1, 3, and 4. |
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Handouts |
Problem Set 1 (WSJ Interactive version of Airbus article) (Art Institute PDF) |
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Excel Files |
Files referred to in the
reading “Use of Financial Functions...”: Use_of_Excel.xls,
Excel
quirks.xls. Excel file with some of the
examples
from class |
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Additional Material |
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Dates |
43: Monday, September 24
and Thursday, September 27 71: Monday, September 24 73: Thursday, September 27 |
Compound interest rates. After tax discount rates. IRR. Inflation.
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B,M&A chapter 3. (Optional:TN
“Compounding ...” , TN “Inflation”. “As Exchange Rates Swing,
Carmakers Try to Duck’’, “Picasso Painting Sells For $104M”. |
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Review Problems |
B,M&A chapter 3: 1, 3, 7, 8, 9-11, 16, 17, 23. |
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Handouts |
Problem Set 1: Solutions
(will be handed out in class, not posted on-line) |
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Excel Files |
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Additional Material |
Refinancing
mortgages if you expect to move Material
to be covered in the review session for section 43: 1)
Midterm summer 2004 (Q2a and 2b) 2)
Spring 2003 Midterm Question 1a 3)
Fall 2004 Quiz 1 Question 1 Material
to be covered in the review session for sections 71 and 73: 1)
The retirement savings problem (pages 26-28) 2)
Midterm summer 2004 (Q2a and 2b) 3)
Fall 2004 Quiz 1 Question 1 4)
Spring 2003 Midterm Question 1a 5)
Summer 2004 Midterm Question 1b (i and ii) 6)
Spring 2003 Midterm, Question 2 Time
permitting, during the review sessions there will also be a brief Excel
review using problems from TN “Use of
financial functions in excel” (problems 1,4,5,6,9 and 10) |
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Dates |
43: Monday, October 1 and
Thursday, October 4 (Problem Set 1 due Thursday) 71: Monday, October 1 (Problem
Set 1 due) 73: Thursday, October 4 (Problem
Set 1 due) 43: Review session, Wednesday, October 3,
1:45pm-2:45pm, room G05 ( 71, 73: Review session, Saturday, October
6, 10:00am-12:00pm, room 109 (downtown) |
Week 3: Capital Budgeting.
Capital budgeting with known cash flows. Alternatives to NPV. Determining cash flows.
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B,M&A chapter 5, 6. (Optional: TN “Alternatives
to NPV”, TN “Capital Budgeting”) “Internal Rate of Return: A
Cautionary Tale” |
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Review Problems |
B,M&A chapter 5: 1, 4, and 5. B,M&A chapter 6: 10, 11 and 16. |
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Handouts |
Problem Set 2: Solutions |
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Excel Files |
Data for problem set 3 (Ocean Carriers.xls) |
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Additional Material |
Material
to be covered in the review session for section 43: 1) Summer 2004 Midterm
Question 1b (i and ii) (week 2 material) 2) Spring 2003 Midterm,
Question 2 (week 2 material) 3) Spring 2005, Final,
Question 4 |
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Dates |
43: Monday,
October 8 and Thursday, October 11 (Problem Set 2 due Thursday) 71: Monday,
October 8 (Problem Set 2 due) 73: Thursday,
October 11 (Problem Set 2 due) 43: Review
session, Wednesday, October 10, 1:45pm-2:45pm, room G05 ( |
Week 4: Stock Valuation.
The Gordon growth model. Economic value added.
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B,M&A chapter 4.
(Optional: TN “Stock Valuation ...”) “If Profits Grow, How Can
the Market Sink?”, “All P/Es Are Not Created Equal” |
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Review Problems |
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Handouts |
Problem Set 3: Solutions |
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Excel Files |
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Additional Material |
eBay acquisition of Skype: An example of bad growth?? Article on
the Google IPO: A good example of what you could use the two-stage Gordon
growth model for. Material to be covered in
the review session for section 43: 1.Fall 2004, Quiz 2,
Question 4 (week 3 material) 2. Summer 2004, Midterm,
Question 4 Material to be covered in
the review session for sections 71 and 73: 1. Winter 2006, Final,
Question 3 2. Spring 2005, Final,
Question 4 3. Winter 2005, Midterm,
Question 3 4. Summer 2004, Midterm,
Question 4 |
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Dates |
43: Monday, October 15 and Thursday, October 18 (Problem
Set 3 due Thursday) 71: Monday, October 15 (Problem
Set 3 due) 73: Thursday, October 18 (Problem
Set 3 due) 43: Review session, Wednesday, October 17, 1:45pm-2:45pm, room
G05 ( 71, 73: Review session,
Saturday, October 20, room 109 (downtown) |
Week 5: Bond Valuation.
Term structure of interest rates. Forward rates and forward loans. Duration.
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B,M&A chapter 23.1-23.4. (Optional: TN
“Bond Valuation....”) “A Guide to Investing in “A World Turned Inside Out: Why Investors are
Re-evaluating the Predictive Power of Bonds” |
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Review Problems |
B,M&A chapter 23: 1-7,10,13. |
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Handouts |
Problem Set 4: Solutions |
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Excel Files |
Examples from class |
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Additional Material |
Link to Yield
curve graphics |
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Dates |
43: Monday, October 22 and
Thursday, October 25 (Problem Set 4 due Thursday) 71: Monday, October 22 (Problem
Set 4 due) 73: Thursday, October 25 (Problem
Set 4 due) Midterm review session: 43: Wednesday, October 24, 1:45pm-2:45pm, room
G03( 71, 73: Friday, October 26,
6:00pm-8:00pm, room 109 (downtown) List
of problems we will go over in the review session (I will bring copies) The midterm will be posted here
in pdf format on Friday evening, October 26. |
Week 6: Risk and Return.
Introduction.
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B,M&A chapter 7. (Optional: TN “Risk and Return 1”) “Great Expectations”, “Shortchanged” |
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Review Problems |
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Handouts |
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Excel Files |
Examples
from class |
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Additional Material |
Material to be covered in
the Review session for section 43: 1. Midterm, Winter 2005, Question
2 2. Midterm, Summer 2004,
Question 3 Material to be covered in the Review session
for sections 71, 73: 1. Midterm, Winter 2005,
Question 2 2. Midterm, Summer 2004,
Question 1c 3. Midterm, Summer 2004,
Question 3 4. Regression analysis and statistics
review, using this handout
put together by Prof. Hertzberg. |
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Dates |
43: Monday, October 29 and
Thursday, November 1 (Midterm exam due Thursday) 71: Monday, October 29 (Midterm exam due no later than Thursday, November 1,
6:00pm – please leave it in my mailbox in Wieboldt) 73: Thursday, November 1 (Midterm
exam due) 43: Review session, Wednesday, October 31,
1:45pm-2:45pm, room G05 ( 71, 73: Review session, Saturday, November 3, room 109 (downtown) |
What is risk? Portfolio frontier.
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B,M&A chapter 7.
(Optional: TN “Risk and Return 1”) “Use of Statistical
Functions in Excel” “Diversification: A Bigger Free Lunch” |
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Review Problems |
B,M&A chapter 7: Quiz
4, 8, Practice 8, 10, Challenge 1. |
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Handouts |
Notes
Week 7 (click here for annotated
version) Problem Set 5: Solutions, Midterm
Solutions, |
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Excel Files |
Excel
file to go with the above Excel reading. Excel file illustrating how to find the mean-variance frontier of more than two risky assets (plus the riskless asset). Data for problem set 6 (Beta Management.xls) |
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Additional Material |
Material to be covered in
the Review session for section 43: 1. Final, Winter 2004,
Question 3 2. Final, Winter 2004,
Question 1 (b) |
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Dates |
43: Monday, November 5 and Thursday,
November 8 (Problem Set 5 due Thursday) 71: Monday, November 5 (Problem
Set 5 due) 73: Thursday, November 8 (Problem
Set 5 due) 43: Review session, Wednesday, November 7,
1:45pm-2:45pm, room G05 ( |
Week 8: The Capital Asset Pricing Model (CAPM).
What is the price of risk? The Capital Asset Pricing Model. Some alternatives to the CAPM.
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B,M&A chapter 8.
(Optional: TN “Risk and Return 2.”) “The Capital Asset Pricing
Model: Theory and Evidence”, “How High a Hurdle?” |
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Review Problems |
B,M&A chapter 8: 8. |
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Handouts |
Notes
Week 8 (click here
for annotated version) Problem Set 6: Solutions, Problem Set 7 |
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Excel Files |
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Additional Material |
Slides
describing how the Northwestern endowment invests – from a presentation
in Fin430 by William McLean, CIO of Northwestern. Material to be covered in
the Review session for section 43, first hour: 1. Final, Winter 2006,
Question 4 2. Final, Fall 2004,
Question 3 3. Final, Fall 2004,
Question 4 Review of bonds (week
5 material) , second hour – we’ll cover as many as possible of the following
problems: 1. Midterm, Winter 2006,
Question 3 2. Midterm, Winter 2006,
Question 4 3. Midterm, Winter 2005,
Question 6 4. Midterm, Spring 2003,
Question 4 Material to be covered in
the Review session for sections 71, 73: 1. Final, Winter 2003,
Question 3 2. Final, Winter 2006,
Question 4 3. Final, Fall 2004,
Question 3 4. Final, Fall 2004,
Question 4 5. Final, Fall 2004,
Question 1a |
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Dates |
43: Monday, November 12 and
Thursday, November 15 (Problem Set 6 due Thursday) 71: Monday, November 12 (Problem
Set 6 due) 73: Thursday, November 15 (Problem
Set 6 due) 43: Review session,
Wednesday, November 14, 1:45pm-3:45pm, room G03
( 71, 73: Review session, Saturday,
November 17, 10:00am-12:00pm (downtown) |
Week 9: Capital Budgeting Under Uncertainty.
Estimating project beta's. Leverage. Uncertainty over time.
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B,M&A chapter 17.1-17.2. (Optional: TN “Capital Budgeting with the CAPM and APT.”) |
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Review Problems |
B,M&A chapter 9: 10. |
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Handouts |
Notes
Week 9 (click here for annotated
version) Problem Set 7: Solutions. Problem Set 8. |
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Excel Files |
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Additional Material |
Material to be covered in
the Review session for section 43: 1) Final, Spring 2003,
Question 1a 2) Final, Winter 2006,
Question 1b 3) Final, Winter 2006,
Question 5 |
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Dates |
43: Monday, November 26 and
Thursday, November 29 (Problem Set 7 due Thursday) 71: Monday, November 26 (Problem
Set 7 due) 73: Thursday, November 29 (Problem
Set 7 due) 43: Review session,
Wednesday, November 28, 1:45pm-2:45pm, room G05 ( |
Information and capital markets.
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B,M&A chapter 13.
(Optional: TN “Market Efficiency”.) “Are Markets Efficient?”
(two-part article), “By the Numbers: Hedge Funds and Half-Truths” |
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Review Problems |
B,M&A chapter 13: 3, 5. |
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Handouts |
Notes
Week 10 (click here for annotated
version) Problem Set 8: Solutions. |
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Excel Files |
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Additional Material |
Barberis and Thaler, A
Survey of Behavioral Finance |
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Dates |
43: Monday, December 3 and Thursday,
December 6 (Problem Set 8 due Thursday) |