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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)