Faculty of Law and Management School of Economics and Finance

Finance
FIN2FIN

Subject Learning Guide

Semester 2, 2011 Bundoora

David Walker Subject Coordinator

Contents
1.0 Subject information at a glance 2.0 Subject description 3.0 Learning and assessment
3.1 3.2 Learning objectives Assessing the learning objectives

3 4 5
5 5 8 8 8 8 9 9 9 10 12

3.3 Assessment components 3.3.1 Tutorial Assessment 3.3.2 Multiple Choice Test 3.3.3 Final Examination 3.4 Assessment requirements and definitions 3.4.1 Passing the subject 3.4.2 Assessment criteria 3.4.3 Academic plagiarism 3.5 Special consideration

4.0 Teaching arrangements

4.1 4.2 Lecture timetable Tutorial timetable

13
13 14

5.0 Learning resources

5.1 5.2 Prescribed and recommended texts Learning Management System (LMS)

15
15 15 16

5.3 Language and Academic Skills Lecturers in the Faculty of Law and Management

6.0 Feedback and quality assurance processes 7.0 Learning effectively in this subject

17 18

Page 2 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University

1.0 Subject information at a glance

Academic and support staff: Tutorial coordinator: Greg Rice Email: ricey98@hotmail.com Subject coordinator: David Walker Room: 431, Donald Whitehead Building Phone: 9479 2674 Email: d.walker@latrobe.edu.au Credit points: 15.0 Prerequisite: ECO1IMI Introductory Microeconomics

Delivery mode and location: Lectures: One 2 hour lecture per week, 5pm-7pm Tuesday ELT 6 OR repeated at 5pm-7pm Thursday Agora Theatre Tutorials: One 1 hour tutorial per week, students are required to access the web based OASIS tutorial allocation system to enrol in ONE weekly tutorial. Assessments: Tutorial Assessment (10% of final grade) One Multiple Choice Test (20% of final grade) One 3-hour Final Examination (70%) Hurdle Requirement: students must achieve a final examination mark of at least 40% to pass FIN2FIN. Essential text: Fundamentals of Corporate Finance, Berk, J., DeMarzo, P., Harford, J., Ford, G. and Finch, N., Pearson Australia, 2011. Special study requirements: Not applicable Students with special needs whose participation in this Subject might be limited by any study requirements are encouraged to consult the Equity and Access Subject (EAU). Further information and contact details for the EAU are available at http://www.latrobe.edu.au/equity/

FIN2FIN / Finance / Bundoora Page 3 of 18 Faculty of Law and Management, La Trobe University

2.0 Subject description

This subject is designed as an introduction to the concepts, theories and practical applications associated with the area of finance. The aim of the subject is both to provide background information and understanding of the concepts and importance of finance to all students, as well as to suitably prepare students for future subjects comprising a major stream or degree program in finance. As such, Finance is the foundation subject in finance at La Trobe University, and develops knowledge of finance concepts and the building-blocks required for successful completion of more advanced finance subjects at undergraduate, honours and masters level. Finance is a prerequisite subject to be successfully completed prior to the undertaking of all subsequent finance subjects. The content of the subject will cover the nature of the financial environment and the types of financial decision-making required from both a business and individual perspective. The subject introduces students to the concept of the time value of money and its importance to the accumulation and valuation of different forms of cash-flow streams. Methods of valuing various types of financial assets such as shares, debt securities, bonds and options will be explored, with a major focus on using this information for financial decision-making. This subject will also introduce students to the concepts of risk and return as they relate to financial assets, and the extension of these ideas to the evaluation of portfolio theory and formal asset pricing models. Other topics relating to financial management and financial market efficiency will also be covered, to provide a broad and well-rounded understanding of the area of finance.

Page 4 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University

3.0 Learning and assessment

3.1 Learning objectives
At the successful completion of FIN2FIN, students will be expected to: 1. Explain the role of capital markets in the separation of ownership and management of companies. 2. Apply the concept of the time value of money in the calculation of present and future values and in the valuation of simple investment projects, debt and equity securities. 3. Understand the determination and term structure of interest rates and the valuation of bonds. 4. Understand, compute and explain the different investment decision rules, including the NPV, IRR, Payback Period and Profitability Index, and their strengths and weaknesses. 5. Compute the value of shares using various valuation techniques and explain the key differences, strengths and weaknesses. 6. Explain the trade-off between risk and return in the determination of asset prices, and calculate asset prices and expected returns, taking this trade off into account, through the CAPM. 7. Explain the concept of informational efficiency in capital markets through the use of examples. 8. State and explain the basic ideas and terminology related to options.

3.2 Assessing the learning objectives

Learning objective 1: Explain the role of capital markets in the separation of ownership and management of companies. Student learning outcomes 1. Understand the key principles that underlie consumption and investment decisions. 2. Explain the difficulty in determining the optimal investment decision for a firm with two or more shareholders (in the absence of a capital market). 3. Identify the optimal investment decision for multi-shareholder firms in the presence of a capital market. 4. Explain the NPV and IRR rule for investment decision making. 5. Solve numerical and graphical Fisher separation problems. Assessments Tutorial assessment, midsemester examination, final examination

FIN2FIN / Finance / Bundoora Page 5 of 18 Faculty of Law and Management, La Trobe University

Learning objective 2: Apply the concept of the time value of money in the calculation of present and future values and in the valuation of simple investment projects, debt and equity securities. Student learning outcomes 1. Ability to use present value and future value of single sum, annuity and perpetuity formulas to solve time value of money problems. 2. Understand the different ways that interest rates are quoted and how inflation, expectations and risk combine to determine interest rates. Assessments Tutorial assessment, midsemester examination, final examination

Learning objective 3: Understand the determination and term structure of interest rates and the valuation of bonds. Student learning outcomes 1. Understand bond terminology. 2. Use bond valuation formulas to price different bonds. 3. Understand the term structure of interest rates and the role of default risk for interest rate determination and bond pricing. Assessments Tutorial assessment, midsemester examination, final examination

Learning objective 4: Understand, compute and explain the different investment decision rules, including the NPV, IRR, Payback Period and Profitability Index, and their strengths and weaknesses. Student learning outcomes 1. Use time value of money concepts and formulas in the assessment of basic capital budgeting problems. 2. Use and compare the various investment decision making tools to accept or reject investment projects. Assessments Tutorial assessment, final examination

Learning objective 5: Compute the value of shares using various valuation techniques and explain the key differences, strengths and weaknesses. Student learning outcomes 1. Use the discounted dividend and free cash flow models to value equity securities. 2. Understand the ideas behind valuation by multiples, its strengths and weaknesses. Assessments Tutorial assessment, final examination

Page 6 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University

Learning objective 6: Explain the trade-off between risk and return in the determination of asset prices, and calculate asset prices and expected returns, taking this trade off into account, through the CAPM. Student learning outcomes 1. Explain the concepts of return and risk, as they apply in the discipline of finance. Assessments Tutorial assessment, final 2. Calculate the average return and volatility of returns from a set examination of historical asset prices. 3. Apply the CAPM formula to calculate an unknown variable with all other information given. 4. Interpret and explain the meaning of CAPM betas, systematic and non-systematic risk.

Learning objective 7: Explain the concept of informational efficiency in capital markets through the use of examples. Student learning outcomes 1. Define an efficient capital market. 2. Understand and articulate the key differences between weak, semi-strong and strong form efficiency and the role of different tests of efficiency. 3. Relate examples of excess returns to the different levels of informational efficiency of markets. Assessments Tutorial assessment, final examination

Learning objective 8: State and explain the basic ideas and terminology related to options. Student learning outcomes 1. Ability to explain the key features of options and their fundamental operation. Assessments Tutorial assessment, final 2. State and explain the key factors that determine option pricing. examination

FIN2FIN / Finance / Bundoora Page 7 of 18 Faculty of Law and Management, La Trobe University

3.3 Assessment components

The components to the assessment in this subject, along with the weighting that each will contribute to your final mark, are as follows: Tutorial Assessment 10% Multiple Choice Test 20% Final Examination 70% Note that there is a hurdle requirement on the Final Examination. As well as requiring an overall mark of at least 50%, you must achieve a mark of at least 40% on the Final Examination to pass the subject.

3.3.1

Tutorial Assessment

There are two components to tutorial assessment: i) attendance (5/10) and ii) the marks for a short Assessment Task (5/10). A mark of 0.5 is awarded for each tutorial attended and a maximum of 5 marks over the eleven tutorials. Second, throughout the semester three Assessments Tasks comprising of multiple choice, short answer, and calculation questions will be given at the beginning of three randomly chosen tutorials. Each Assessment Task will be marked at out of 10. Your two best results for the Assessment Tasks during the semester are summed to give a mark out of 20, which is then divided by 4, to make up the remaining 5 marks of Tutorial Assessment. These Assessment Tasks will cover the material from previous tutorials. The marked Assessment Tasks will be returned to students the following week.

3.3.2

Multiple Choice Test

There will be a Multiple Choice Test in Week 6, 30 August between 5pm to 6pm, which will cover Lectures 1 4 inclusive. The test will comprise 15 multiple choice questions; approximately 50% theory questions and 50% calculation questions. The total time for the test is 50 minutes with no separate reading time.

3.3.3

Final Examination

There will be a 3 hour Final Examination held at a time and venue to be determined by the University. No other examination times will be available. Please note that dictionaries are not permitted in tests or examinations without the prior written permission of the School of Economics and Finance. Programmable or nonprogrammable calculators may be used in tests and examinations. Electronic dictionaries may not be used.

Page 8 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University

3.4 Assessment requirements and definitions

3.4.1 Passing the subject
An overall grade of at least 50%, and A mark of at least 40% on the final examination. (Hurdle requirement).

To pass this subject you need to achieve:

Students who achieve an overall grade of at least 50%, but who achieve a mark of less than 40% on the Final Examination, will be given a Supplementary Examination to give them another opportunity to meet the hurdle requirement.

3.4.2

Assessment criteria
Criteria No answer; OR several answers; OR an indecipherable answer; OR an answer other than the most accurate answer. The most accurate answer.

Multiple-choice Question:
Marks 0% 100%

Analytical, logical, interpretative, factual or descriptive question:

Marks out of 5 0 Marks out of 10 0 Criteria No answer; OR an indecipherable answer; OR an answer which is irrelevant to the question; OR an answer which is factually, logically or otherwise incorrect. A decipherable answer which is relevant to the question AND which has SOME theoretical, logical or factual basis BUT for which any exposition of the theoretical, logical or factual basis is lacking from the answer, AND which is significantly incomplete, inaccurate or unfounded. A decipherable answer which is relevant to the question AND which is demonstrably well founded in theory, logic or fact AND which is substantially complete and accurate. A decipherable answer which is relevant to the question AND which is demonstrably well founded in theory, logic or fact AND which is complete and accurate AND which contains some exposition of the main points. A decipherable answer which is relevant to the question AND which is demonstrably well founded in theory, logic or fact AND which is complete and accurate AND which contains some theoretical and/or empirical insight and analysis of the main points.

1-2

1-4

2.5

3-4

6-8

9-10

FIN2FIN / Finance / Bundoora Page 9 of 18 Faculty of Law and Management, La Trobe University

Calculation problem:
Marks out of 5 0 Marks out of 10 0 Criteria No answer; OR an indecipherable answer; OR an answer based on a formula, procedure or calculation which is irrelevant to the question; OR an answer based on an incorrect formula, procedure or calculation. A decipherable answer based on a correct formula, procedure or calculation which is relevant to the question AND which is correctly applied, BUT which contains a significant error (calculated to 4 decimal places) OR is incorrectly applied, AND/OR fails to provide complete workings for the solution. A decipherable answer based on a formula, procedure or calculation which is relevant to the question AND which is correctly applied, and for which complete workings for the solution are provided, BUT which contains a minor error (calculated to 4 decimal places), which provides an inaccurate but plausible answer. A decipherable answer based on a correct formula, procedure or calculation which is relevant to the question AND which is correctly applied, AND which contains no errors (calculated to 4 decimal places), BUT which is incorrectly expressed OR for which complete and correct workings are not provided. A decipherable answer based on a correct formula, procedure or calculation which is relevant to the question AND which is correctly applied, AND which contains no errors (calculated to 4 decimal places), AND which is correctly expressed AND for which complete and correct workings are provided AND for which an insight into, or understanding of, the procedure or context is provided.

1-2

1-4

2.5

3-4

6-8

9-10

Note: Rounding discrepancies and errors carried forward, except for significant errors, are not defined as errors. A significant error is an error of an order of magnitude, which should have been detected as an unlikely answer. If the error carried forward is a significant error then the question will be marked as if the error did not exist, with one mark deducted for not picking up the error.

3.4.3

Academic plagiarism

Because the assessment tasks in this subject are conducted under examination conditions, the only way in which plagiarism is likely to occur is copying the answers from another student. This is treated very seriously and may constitute grounds for academic misconduct, without warning. The complete University guidelines on plagiarism, including possible penalties, are listed below.

Page 10 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University

PLAGIARISM
The following warning is issued by the University (Undergraduate Course Handbook: 2007, P. 16). One form of academic cheating is plagiarism: the reproduction of someone elses words, ideas or findings and presenting them as ones own without proper acknowledgment. There are many forms of plagiarism, including the following: direct copying of sentences, paragraphs or other extracts from someone elses published work (including on the Internet and in software) without acknowledging the source paraphrasing someone elses words without acknowledging the source using facts and information derived from a source without acknowledging it using ideas directly derived from an identifiable author without acknowledging the source producing assignments which should be the students own, independent work in collaboration with and/or using the work of other people (e.g. a student or tutor). Plagiarism and copying the work of other students are forms of cheating and will be treated accordingly. A person found assisting another person to plagiarise may be punished as severely. To ensure that you are not guilty of plagiarism you must, in all your written assignments, declare all sources from which you have obtained materials or ideas. The penalties for plagiarism are severe and are governed by University legislation. A student found to have plagiarised will be allocated no marks for the particular piece of work involved, or may be allocated a fail grade in that subject, or may be excluded from the University. STUDENTS ARE ADVISED TO FAMILIARISE THEMSELVES WITH THE RULES CONCERNING ACADEMIC MISCONDUCT Further explanations for academic misconduct and for plagiarism are available at: http://www.latrobe.edu.au/policies/

FIN2FIN / Finance / Bundoora Page 11 of 18 Faculty of Law and Management, La Trobe University

3.5 Special consideration

If you feel you have some special circumstances that may affect your performance in this subject, you are encouraged to consult the tutorial co-ordinator (Greg Rice: ricey98@hotmail.com) or the lecturer in charge (David Walker: d.walker@latrobe.edu.au) in the first instance. Queries with respect to mid-semester examination results must be made within 14 days of the results being posted. These results will be posted on LMS soon after the exam is conducted. Queries with respect to tutorial assessment task results must be made within 14 days of the results being posted. These results will be posted on LMS after the final week of semester. In general, extensions or special consideration will only be granted on presentation of a valid medical certificate. Special consideration is governed by University and School of Economics and Finance policies and procedures. You should consult with the schools student services office in the first instance for advice on applying for special consideration. You will also find useful information on such issues as special consideration and additional support for current students at the following Faculty of law and Management website: http://www.latrobe.edu.au/lawman/currentstudents/faculty/administration/index.html In particular, you can download the Faculty of Law and Management Student Study Guide which contains wide ranging advice and information for undergraduate students at: http://www.latrobe.edu.au/__data/assets/pdf_file/0004/29839/2009-lasu-student-studyguide.pdf While there are additional forms of assistance for students with English as a second language in the Language and Academic Skills Unit (LASU), a more general study skills support service is available to all School of Business students. For more information on these and other services visit the following Faculty website: http://www.latrobe.edu.au/lawman/about/teaching-and-learning/lasu

Page 12 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University

4.0 Teaching arrangements

4.1 Lecture timetable
Students are expected to read prior to each lecture, and are expected to attend each lecture. They should bring to each lecture a printout of the lecture slides, and make additional notes during the lecture as necessary to facilitate private study. Listed below is the detailed Lecture Timetable and reading guide. Week beginning 25/07 Lecture No. 1 Learning objectives 1

Topic Introduction to Finance Consumption and Investment Decisions Valuing Cash Flows and Interest Rates Bonds

Reading guide Berk et al. (2011) Chapter 1; Peirson et al. (2009) Chapter 1; Frino et al. (2009) Chapter 1 Bishop et al. (2004) Chapter 2 (on electronic reserve); Peirson et al. (2009) Chapter 2 Berk et al. (2011) Chapters 3, 4 &5; Peirson et al. (2009) Chapter 3; Frino et al. (2009) Chapter 2 Berk et al. (2011) Chapter 6 Peirson et al. (2009) pp 85-95;

1/08 8/08 15/08 22/08 29/08 5/09

3&4

Mid semester exam No lecture or tutorials 6 Investment Decision Rules Valuing Shares Berk et al. (2011) Chapter 7; Peirson et al. (2009) Chapter 5; Frino et al. (2009) Chapter 4 Berk et al. (2011) Chapter 9; Peirson et al. (2009) pp 79-85; Berk et al. (2011) Chapters 10&11; Peirson et al. (2009) Chapter 7; Frino et al. (2009) Chapters 6&7 Peirson et al. (2009) Chapter 16; (on electronic reserve) Frino et al. (2009) Chapter 10; Berk et al. (2011) Chapter 20; Peirson et al. (2009) Chapter 18 5

12/09 19/09 3/10

8&9

Risk and Return

10/10 17/10 24/10

10 11 12

Capital Market Efficiency Futures and Options Revision

7 8

FIN2FIN / Finance / Bundoora Page 13 of 18 Faculty of Law and Management, La Trobe University

4.2

Tutorial timetable

Students are expected to have prepared written solutions to all tutorial questions before coming to the tutorial. The tutor will discuss the solutions to some or all of these questions. Students are expected to contribute to the class discussion. Listed below is the detailed Tutorial Timetable. In the last column you can cross off the weeks in which an assessment task was given. Week Tutorial No. Beginning 25/07 1/08 08/08 15/08 22/08 29/08 5/09 12/09 19/09 3/10 10/10 17/10 24/10 5 6 7 8 9 10 11 1 2 3 4

Topic covered in Tutorial No Tutorial Introduction to Finance Consumption and Investment Decisions Valuing Cash Flows and Interest Rates Valuing Cash Flows and Interest Rates

Was there an Assessment Task?

Yes/No Yes/No Yes/No Yes/No

No Tutorial - Mid-semester exam Bonds Investment Decision Rules Valuing Shares Risk and Return Risk and Return Capital Market Efficiency Futures and Options Yes/No Yes/No Yes/No Yes/No Yes/No Yes/No Yes/No

Page 14 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University

5.0 Learning resources

5.1 Prescribed and recommended texts
The prescribed textbook, which all students require access to for this subject, is: Fundamental of Corporate Finance, Berk, J., DeMarzo, P., Harford, J., Ford, G. and Finch, N., Pearson Australia, 2011 It is advised that you consider purchasing the prescribed text as the subject will follow the prescribed text closely. The book offers a MyFinanceLab which you should find helpful in learning Finance and passing this subject. The text book also has a website that you are encouraged to visit and it will come packaged with a card that will allow you to register for MyFinanceLab. As noted in the lecture outline, lectures 2 and 10 will draw on chapters from other text books. These chapters will be available from the library reserve section. The chapters are digitised and you will be able to download them at no cost. Supplementary textbooks useful for preliminary reading or for additional reference during semester for particular topics are as follows: Business Finance, Tenth Edition Peirson, G., Brown, B., Easton, S., Howard, P., and Pinder, S., McGraw Hill Education Australia, 2009. Introduction to Corporate Finance, Fourth Edition Frino, A., Hill, A. and Chen, Z., Pearson Education, Australia, 2009. Corporate Finance, Fifth Edition Bishop, S., Faff, R., Oliver, B. and Twite, G., Pearson Education Australia, 2004.

5.2 Learning Management System (LMS)

The LMS is used in many universities across the world. Many subjects taught at La Trobe University provide students with access to LMS providing them with access to learning materials and activities, such as the Subject Learning Guide, lecture materials, tutorial and assessment task solutions. To access your LMS account for this subject use your web browser (e.g. MS Internet Explorer) to access http://webct.latrobe.edu.au and enter your Username and Password to gain access. LMS Student Help, at http://www.latrobe.edu.au/studentlmsinfo/ , is a good place to start.

FIN2FIN / Finance / Bundoora Page 15 of 18 Faculty of Law and Management, La Trobe University

5.3 Language and Academic Skills Lecturers in the Faculty of Law and Management
Language and Academic Skills (LAS) Lecturers work with undergraduate and postgraduate students to improve their academic skills, including critical reading and note-taking, applying critical evaluation skills, refining a topic and structuring written responses (for different written assessment types), presentation and teamwork skills as well as numeracy/maths If you are interested in any of these services, please meet with your tutor or lecturer who can refer you to the appropriate LAS Lecturer, or email an inquiry to the LAS Lecturer in your school (see below). School of Law: Suzanne Fegan (s.fegan@latrobe.edu.au) School of Accounting: Jeannie Daniels (j.daniels@latrobe.edu.au) School of Economics and Finance: Linda Wannan-Edgar (l.wannan-edgar@latrobe.edu.au) School of Management: Craig Taylor (craig.taylor@latrobe.edu.au)

Page 16 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University

6.0 Feedback and quality assurance processes

The Student Subject Feedback Survey is part of the quality assurance process that occurs across the university. In this survey you are invited to tell us about your learning experiences in the subject you studied. We want you to tell us how you experienced the subject. Your views will be taken seriously and will assist lecturers to enhance subjects for the next group of students. When the surveys reach you, please make time to tell us your views. You will find these quality assurance surveys conducted in the last weeks of the semester. Please treat the quality assurance exercise seriously as your honest opinion is valued and genuine feedback is sought. In the past these surveys have assisted the lecturer in improving the subject offerings to future classes. For example, replacement of inappropriate text books, updating of the curriculum and improvements in assessment techniques. Ultimately, the objective is to provide an interesting and professional subject for all students.

FIN2FIN / Finance / Bundoora Page 17 of 18 Faculty of Law and Management, La Trobe University

7.0 Learning effectively in this subject

To perform well in this subject it is recommended that you: Regularly attend lectures and tutorials. Come to tutorials prepared by attempting the tutorial questions. It is essential in this subject to practice solving problems. Maintain a regular study pattern and keep up with the prescribed reading. Seek help if you are having difficulties with the subject material, which in the first instance would involve consulting with your tutor.

The lectures slides are posted on LMS the Friday before the lecture. These provide a useful summary of the topics; however they are not a substitute for reading the text and taking further notes during the lecture. By listening carefully and taking notes in the lectures, students become acquainted with the general principles of the subject. It is also recommended that students bring a calculator and writing materials to the lectures in order to do calculations and solve problems that will be presented during the lecture. It is crucial in this subject to attempt the tutorial questions before coming to the tutorials. The tutorial questions for each week are posted on LMS in the week before the tutorial. It is only by doing the questions and calculations that you will understand the principles and discipline of Finance. In addition you will not only be preparing for tutorials but also the Assessment Tasks, Multiple Choice Test and Final Examination. Further, tutorials provide the opportunity to obtain feedback on your understanding of the subject material. There are several means of receiving feedback on how you are going in this subject: Participating in tutorials and raising any concerns or difficulties that you are having in regard to the subject material. Reviewing the tutorial questions and Assessment Task solutions. The Multiple Choice Test results. Your tutor will also provide feedback on your progress.

Page 18 of 18 FIN2FIN / Finance / Bundoora Faculty of Law and Management, La Trobe University