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Lahore University of Management Sciences

ACF 261: Principles of Finance

Instructor: Mohammad Basharullah Year: 2007-2008


Office: Room:- 2253-ACT Quarter: Fall
E-Mail: basharullah_2000@yahoo.com Phone 0300 401 3446
bashar@lums.edu.pk 0321 443 0296
Days: Monday & Wednesday
Office Hours: 2:30-4:30 pm

COURSE PRE-REQUISITES:
A familiarity with basic Financial Accounting, Quantitative Methods and Statistics.

COURSE DESCRIPTION:

This is an introductory course in Finance and the first in a series of required Finance core
courses for the B.Sc. Accounting & Finance degree. This course together with the next
course, Corporate Finance, completes an introduction to Financial Management using the
modern theory of finance. The final required course in the sequence, Intermediate
Finance, introduces advanced topics and explores certain topics in depth.

Firms invest in real assets such as plant and equipment (the Investment decision) and
raise money via personal funds, stocks, bonds or bank loans (the Financing decision).
Broadly speaking, Financial Management is about how these Investment and Financing
decisions should be made. This course explores the first part of Financial Management
and introduces the framework, tools and techniques for making Investment decisions.
Specifically, we will cover Valuation, Capital Budgeting, Modern Portfolio Theory and
Equilibrium Risk-Return Relationship.

GRADING:

Quizzes (3) 15%


Midterm 30%
Final 30%
Class Participation & Attendance 10%
Project 15%

Quizzes:
Quiz 1: session 5
Quiz 2: session 9
Quiz 3: session 16

Project: The project is about applying Stock Valuation and Risk/Return techniques learnt
in the course to companies listed on Karachi Stock Exchange. Details of the project will
be given in session 2.

READING:

The required reading for the course constitutes relevant chapters from the book and
occasional lecture handouts. These Handouts will be posted on the course web site a
day before each lecture.

Book: “Fundamentals of Financial Management” (2004) International 4th edition by


Brealey, Myers, Markus (BMM).
Outline of the Course on
Principles of Finance
Date Session Topics Readings
Month No Body of Knowledge Book & Handouts
/Day

An Introduction To Finance
Sep
1 The firm and the financial manager BMM
3,4
Ch 1&2
An Overview Financial Environments.
(Capital Markets & Corporate Finance.); BMM
5,6 2 An Introduction to Financial Markets, Financial Ch 2
Institutions and Financial Instruments.
Consumption Savings & Investment,
Basic Financial Statements;
10,11 3 Balance Sheet; Income Statements & Cash Flow BMM
Statements; An analysis of Cash flow Statements. Ch 3
Time Value Of Money
1st Quiz Compounding & Discounting; Future and present
12,13
4 value; Level and Uneven Cash Flows; BMM
Ch 4
Time Value Of Money ( Continued) BMM
Perpetuities and Annuities; Various Application of Ch 4
17,18 5
TVM; TVM as Basis Of Valuation of Financial Handout
Instruments.
Time Value Of Money (Continued) ; Various BMM
19,20 6 Application of TVM; TVM as Basis Of Valuation Ch 5
of Financial Instruments.
Valuation -Valuing Bonds BMM
Bond Characteristics; Basic Valuation Model; Ch 5
2nd Quiz
24,25 Bond Prices and Yields; Different Types of yields;;
7
Forward Rates and Theories of Term Structure;
The Yield Curves;
Valuation -Valuing Bonds
Bond Prices and Interest Rates: Price Volatility:
26,27 8
Price Sensitivity; Bond Duration and Convexity BMM
Ch ,6
Valuation - Stocks
Different Type of Stocks; Some Stock BMM
Oct
9 Classifications. An Overview of Valuation of Ch ,6
1,2
Stocks Basic Stock Valuations Models; Dividend
Discount Models and Other Models
Valuation -Valuing Bond & Stocks BMM
Oct
10 Basic Stock Valuations Models; Dividend Ch 6
3,4
Discount Models and Other Models
8 11 Mid Term Examination
A Proposed Outline of the Course on
Principles of Finance
Date Session Topics Readings
Month No Body of Knowledge Book & Handouts
/Day

Investment Criteria; Net Present Value. BMM


10,11 12 NPV; Other Investment Criteria; Mutually Ch 7
Exclusive Projects; Capital Rationing
Discounted Cash Flow Analysis BMM
DCF; Sunk Costs and Opportunity Costs; Ch 8
15,16 13 Discount Nominal Cash Flow by Nominal Cost of
Capital; Separate Investment and Financing
Decision; Calculating Cash Flows.
Project Analysis BMM
How Firms organize the Investment Process; Ch 9
17,18 14 Sensitivity Analysis and Scenario Analysis;
Accounting Breakeven Analysis; Operating
Leverage and Financial Leverage; Real Options
An Introduction to Risk and Return BMM
Risk and Return Basics; Opportunity Cost of Ch 10
3rd Quiz
22,23 Capital; A Review of Rate of Return; Measuring
15
Risk; Risk and Diversification; Different Varieties
of Risks.; Expected Risk & Return
An Introduction To Portfolio Theory BMM
24,25 16 Risk and Return , Portfolio of Risky and Risk less Ch 10
Assets; Efficient Frontiers; Capital Market Line;
An Introduction to Assets Pricing BMM
Measuring Market Risks; The CAPM Model; Beta Ch 11
29,30 17
and Security Market Line; Use of CAPM for
Estimating and Calculating Risk
Cost of Capital BMM
Oct th
4 Quiz Weighted Average Cost Of Capital; Measuring Ch 12
31
Capital Structure; Calculating Required Rate of
Nov
18 Return; Calculating and Interpreting the
1
Weighted Average Cost of Capital
Cost of Capital Calculating Required Rate of BMM
5,6 19 Return; Calculating and Interpreting the Ch 12
Weighted Average Cost of Capital
7,8 20 Review of All Topics
Final Examination
O be announced

Lahore University of Management Sciences

ACF 261: Principles of Finance


Instructor: Mohammad Basharullah Year: 2006-2007
Office: Room 253-ACT Quarter: Fall
E-Mail: basharullah_2000@yahoo.com and basher@lums.edu.pk
Tel 0300 401 3446 & Lums extension 2253
Office Hours: 1430-1630 ( Monday thru Thursday),
By Appointment on Friday

COURSE PRE-REQUISITES:

A familiarity with basic Financial Accounting, Quantitative Methods and Statistics.

COURSE DESCRIPTION:

This is an introductory course in Finance and the first in a series of required Finance core
courses for the B.Sc. Accounting & Finance degree. This course together with the next
course, Corporate Finance, completes an introduction to Financial Management using the
modern theory of finance. The final required course in the sequence, Intermediate
Finance, introduces advanced topics and explores certain topics in depth.

Firms invest in real assets such as plant and equipment (the Investment decision) and
raise money via personal funds, stocks, bonds or bank loans (the Financing decision).
Broadly speaking, Financial Management is about how these Investment and Financing
decisions should be made. This course explores the first part of Financial Management
and introduces the framework, tools and techniques for making Investment decisions.
Specifically, we will cover Valuation, Capital Budgeting, Modern Portfolio Theory and
Equilibrium Risk-Return Relationship.

GRADING:
Quizzes (4) 20 %
Midterm 30 %
Final 30 %
Project 20 %
Quizzes:

Two unannounced and three announced quizzes shall be given, only 4 best shall be
counted, Announced quizzes shall be held on following sessions
Quiz 1: session 4
Quiz 2: session 7
Quiz 3: session 16

Project: The project is about applying capital budgeting techniques learnt in the course to
a proposed project,. Details of the project will be given in session 5.

READING:

The required reading for the course constitutes relevant chapters from the book and
occasional lecture handouts. These Handouts will be posted on the course web site a
day before each lecture.

Book: “Fundamentals of Financial Management” (2004) International 4th edition by


Brealey, Myers, Markus (BMM).

COURSE SCHEDULE:

Course outline and the schedule is on the following page


Outline of the Course
Principles of Finance (Section 1)
Date Session Topics Readings
Month No Body of Knowledge Book &
/Day Handouts
Sep An Introduction To Finance BMM
1
3 The firm and the financial manager Ch 1&2
An Overview Financial Environments.
(Capital Markets & Corporate Finance.); BMM
Sep
2 An Introduction to Financial Markets, Financial Ch 2
5
Institutions and Financial Instruments. Consumption
Savings & Investment,
Basic Financial Statements;
10 3 Balance Sheet; Income Statements & Cash Flow BMM
Statements; An analysis of Cash flow Statements. Ch 3
1st Time Value Of Money
12 Quiz Compounding & Discounting; Future and present BMM
4 value; Level and Uneven Cash Flows; Ch 4
Time Value Of Money ( Continued) BMM
Perpetuities and Annuities; Various Application of Ch 4
17 5
TVM; TVM as Basis Of Valuation of Financial Handout
Instruments.
Time Value Of Money (Continued) ; Various BMM
19 6 Application of TVM; TVM as Basis Of Valuation of Ch 5
Financial Instruments.
Valuation -Valuing Bonds BMM
2nd Bond Characteristics; Basic Valuation Model; Bond Ch 5
24 Quiz Prices and Yields; Different Types of yields;;
7 Forward Rates and Theories of Term Structure; The
Yield Curves;
Valuation -Valuing Bonds BMM
26 8 Bond Prices and Interest Rates: Price Volatility: Ch ,6
Price Sensitivity; Bond Duration and Convexity
Valuation - Stocks
Different Type of Stocks; Some Stock Classifications. BMM
1 9 An Overview of Valuation of Stocks Basic Stock Ch ,6
Valuations Models; Dividend Discount Models and
Other Models
Valuation -Valuing Bond & Stocks BMM
3 10 Basic Stock Valuations Models; Dividend Discount Ch 6
Models and Other Models
8 11 Mid Term Examination
Outline of the Course on
Principles of Finance
Date Session Topics Readings
Month No Body of Knowledge Book &
/Day Handouts
Investment Criteria; Net Present Value. BMM
10 12 NPV; Other Investment Criteria; Mutually Ch 7
Exclusive Projects; Capital Rationing
Discounted Cash Flow Analysis BMM
DCF; Sunk Costs and Opportunity Costs; Discount Ch 8
15 13 Nominal Cash Flow by Nominal Cost of Capital;
Separate Investment and Financing Decision;
Calculating Cash Flows.
Project Analysis BMM
How Firms organize the Investment Process; Ch 9
17 14 Sensitivity Analysis and Scenario Analysis;
Accounting Breakeven Analysis; Operating
Leverage and Financial Leverage; Real Options
An Introduction to Risk and Return BMM
Risk and Return Basics; Opportunity Cost of Ch 10
22 15 Capital; A Review of Rate of Return; Measuring
Risk; Risk and Diversification; Different Varieties
of Risks.; Expected Risk & Return
An Introduction To Portfolio Theory BMM
3rd Quiz Risk and Return , Portfolio of Risky and Risk less Ch 10
24
16 Assets; Efficient Frontiers; Capital Market Line;
An Introduction to Assets Pricing BMM
Measuring Market Risks; The CAPM Model; Beta Ch 11
29 17
and Security Market Line; Use of CAPM for
Estimating and Calculating Risk
Cost of Capital BMM
Weighted Average Cost Of Capital; Measuring Ch 12
31 Capital Structure; Calculating Required Rate of
18
Return; Calculating and Interpreting the Weighted
Average Cost of Capital
Presentation of the project
5 19
Presentation of the project
7 20
Final Examination