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Math Managerial Finance II—AFM372. AKA: Corporate Finance Instructor: Alan Huang Office Hours: HH386E, TR 3:00-4:30 or by appointment Email: [email protected] Normally emails are answered within 48 hours (72 hours if received in weekends)

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Math managerial finance ii afm372
Math Managerial Finance II—AFM372

  • AKA: Corporate Finance

  • Instructor: Alan Huang

  • Office Hours: HH386E, TR 3:00-4:30 or by appointment

  • Email: [email protected]

    • Normally emails are answered within 48 hours (72 hours if received in weekends)

    • Emails received shortly before midterm and final will only be answered in additional office hours

    • Use your TAs, course discussion forum, and office hours wisely. Physical presence has priority over phone/emails/electronic posts.

  • Required Text:

    • Corporate Finance (4th Canadian edition, 2008) by Ross, Westerfield, Jaffe and Roberts

    • Course Notes

  • Problem Sets

Course web page
Course Web page (Also accessible through UWACE)

  • Syllabus

  • Announcements

  • Lecture notes

  • Chapter solutions

  • Problem sets

  • Quizzes & Exams

  • Case

  • Discussion Forum: UWACE, discussion forum tab

  • Important dates
    Important Dates

    • September 30: Quiz 1

    • October 24: Midterm Exam

    • November 13: Quiz 2

    • November 20: Case Due

    What is Corporate Finance

    The Classical Objective Function


    Hire & fire managers


    -Annual Meeting

    Maximize stockholder wealth

    No social costs

    Lend $



    -Operation decisions


    Protect bondholder interests

    Costs can be traced to firm

    Reveal information honestly and on time

    Markets are efficient & assess effect on value


    What can go wrong?


    Have little control over managers

    Managers put their interests above stockholders

    Significant social costs

    Lend $



    -Poor Operation decisions


    Bondholders can get ripped off

    Some costs can not be traced to firm

    Delay bad news or provide misleading information

    Markets make mistakes and can over- or under-react


    Advanced topics: Counter actions


    • More activist investors

    • Hostile takeovers

    Managers of poorly run firms are put on notice

    Corporate good citizen constraints

    Protect themselves




    • Covenants

    • New type

    • More laws

    • Investor/Customer backlash

    Firms are punished for misleading information

    Investors and analysts become more skeptical


    Important concepts from afm272
    Important concepts from AFM272

    • Time value of money

      • Perpetuities, annuities

    • Risk adjustments

      • CAPM:

        E(Rj) = Rf + βj [E(Rm) – Rf]

    • Capital budgeting

      • NPV rule

    Basic principles
    Basic Principles

    Objective: Maximize the Value of the Firm

    • Invest in projects that yield a return greater than the minimum acceptable hurdle rate (i.e. that have positive NPV)

      • The hurdle rate should reflect the (systematic) risk of the project and the financing mix used

    • Choose a financing mix that minimizes the hurdle rate

    • If there are not enough investments that earn the hurdle rate, return the cash to the owners of the firm

      • The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics

    Another important principle no arbitrage
    Another important principle: No-arbitrage

    • a.k.a. the “law of one price”

    • arbitrage involves the simultaneous purchase and sale of assets in such a way as to generate risk free profit at zero cost (a free lunch)

    • in well-functioning capital markets, arbitrage opportunities will be extremely rare and will not last for long

    • another way of thinking about this idea is that any two assets with identical future cash flows must sell for the same price today (or else there would be an arbitrage opportunity)

    • though simple, this is a surprisingly powerful idea that is widely used in financial theory and practice

    What will be covered in afm372
    What will be covered in AFM372

    • Interactions with stock and bond markets: How to raise money?

      • Chapters 14, 15, 20, 21

    • Deciding the right financing mix

      • Chapters 16—18

    • Dividend policy

      • Chapter 19

    • Financial Derivatives & Risk management

      • Chapters 23—26

    • Special topics

      • Leasing (ch. 20), M&A (ch. 31)