Will Goetzmann
223 56 Hill House Avenue
Office Hours T-TH 4-5
telephone 432-5950
Secretary: Mary Ann Nelson

MPPM 540b
Valuation and Investment
Fall, 1997


This module assumes no prior education in finance. It develops fundamental models of valuation and investment from first priciples and applies them to problems of coprporate and individual decision-making. Topics covers include the net present value investment criterion, valuation of annuities, perpetuities, bonds and stocks, the basics of the secutities markets and capital budgeting decisions. The sceond half of the course introduces portfolio theory and the tradeoff between risk and return. It presents two asset pricing models, the Capital Asset Pricing Model and the Arbitrage Pricing Theory, and applies them to the calculation of the firm's cost of capital. Students are introduced to the fundamental concepts of finance: the time-value of money, portfolio theory and the determinants of expected security returns

Examinations and grading policy

There will be a closed book midterm at the end of the module, on Friday, October 17 from 9:00 AM - 12:00 Noon. Your performance on this exam counts for 90 per cent of your grade. The remainder of the grade (10 per cent) is based on two spreadsheet assignments whose due dates are indicated in the syllabus. Problem sets will be assigned for weekly T.A. review. While these do not count toward your numerical score, experience shows that participation in the homework assignments is strongly positively correlated with the final grade.

TA Sessions

There will be weekly review sessions to discuss homework problems:
Times and Locations
Section 1 6 p.m. - 7:30 p.m. Room A-51 Monday
Teaching Asistants:
Section 2 6 p.m. - 7:30 p.m. Room A-53 Wednesday
Teaching Assistants:
Section 3 6 p.m. - 7:30 p.m. Room A-53 Wednesday

Your homework has to be handed in to the TA's that are assigned to your section, not the TA's of the review session you choose to attend, at 4:00 PM. (Please put the homework in their mailboxes)

The required textbook for the course is:

S.A. Ross, R.W. Westerfield, and J.F. Jaffe (1995), Corporate Finance, 4rd edition, Irwin, Homewood, IL 60430

Valuation and Investment
Course Outline and Reading List (MODULE 2)

September 3 Class 1 Introduction to Financial Management: Introduction, overview and course philosophy.
Reading: Ross/Westerfield/Jaffe Chapter 1 & 2
September 8 Class 2 Financial Markets: The role of the financial markets, the separation of consumption and investment, the separation of investment and financing, present value and future value.
Reading: Ross/Westerfield/Jaffe Chapter 3
September 10 Class 3 Net Present Value and Introduction to Stocks and Bonds: The rationale for net present value, the power of compounding, perpetuities and annuities.
Reading: Ross/Westerfield/Jaffe Chapter 4
September 15 Class 4 Valuing Bonds and Stocks: The relation between bond prices and interest rates, yield to maturity, the valuation of stocks, dividends vs. capital gains.
Reading: Ross/Westerfield/Jaffe Chapter 5
September 17 Class 5 Aternative Investment Rules: NPV vs. payback vs. IRR. The practice of capital budgeting
Reading: Ross/Westerfield/Jaffe Chapter 6
September 22 Class 6 Capital Budgeting and Project Valuation: Cash flows, inflation, positive NPV.
Reading: Ross/Westerfield/Jaffe Chapter 7,8. Assignment 1 Due
September 24 Class 7 Capital Markets: Investment Performance Over History
Reading: Ross/Westerfield/Jaffe Chapter 9
September 29 Class 8 Basics of Return and Risk: The Geography of the Efficient Frontier
Reading: Ross/Westerfield/Jaffe sections 10.1 to 10.7
October 1 Class 9 Preferences and Investor Choice
October 6 Class 10 CAPM: The Portfolio Approach to Risk
Reading: RWJ chapter 10
Homework due: RWJ chapter 9 & 10 problems 9.2,9.5,9.8, 9.18,9.19 10.9,10.20
October 8 Class 11 Understanding the Security Market Line
Reading: RWJ sections 10.8 to 10.10
October 13 Class 12 The Arbitrage Pricing Theory
Reading: RWJ chapter 11
Homework due: RWJ chapter 11, 11.2,11.4, 11.8
October 15 Class 13 Where Do Betas Come From? Leverage and the Discount Rate
Reading: RWJ chapter 12
October 20 Class 14 Efficient Markets. Reading:RWJ Chapter 13. Assignment Due: Acquira Co.