San Jose State University
Thayer Watkins
Economics Department

Fall 2006
Office: DMH 214
Hours: M 2:00-3:00, W&R 4:00-6:00,
Tel. No. (408) 924-5420

ECONOMICS 137A
Fundamentals of Corporate Finance

Textbooks:

Description of Course: The primary objective is to study the principles of rational decision-making within corporations. By far the most important of the decisions made by the corporate executives concerns the acquisition and allocation of capital. The course covers both the ways corporations respond to conditions in the financial markets and the ways financial markets react to corporate decisions. The topics covered are:

  1. Criteria for Investment Decisions
  2. Measures of Risk and Return
  3. Portfolio Theory
  4. Capital Asset Pricing Model
  5. Random Walk Models and the Efficient Market Hypothesis
  6. Dividend Policy and Stock Price
  7. Capital Structure
  8. International Financial Decisions
  9. Valuation of Stock Options
  10. Option Theory and Decision Making.

This course is a mixed media online, inclass course. There are lectures that are available on line. The instructions for accessing the lectures and the quizzes are at:

http://www2.sjsu.edu/faculty/watkins/webct137a.htm

The quizzes are to be taken online.

Grading: Grades will be based upon twelve quizzes, two midterm examinations, a final examination, and miscellaneous homework assignments. The examinations are multiple choice.

The final examination will be comprehensive and roughly twice as long as a midterm examination.

The total weight of the twelve quizzes is equal to one midterm examination. The total weight of the homework is somewhat less than one midterm examination. The approximate weighting will be 20 percent for each midterm examination, 20 percent for all the quizzes, 25 percent for the final examination and 15 percent for the homework. Homework is due at the next class meeting of each week.

Abbreviations for Reading Assignments:

Tentative Schedule
WeekReading Homework
1"How Decisions Should Be Made", , "A Bold Investment Project",
The R100/R101 Experiment , Gulag Economics, Misallocation of Capital, Soviet Power, Centrally Administered Economies (CAE), Tanganyikan Groundnuts Scheme, Enron 		Ex 1
2 Hayek, , Alchian: Evolution and the Market, East Asian Financial Crisis of 1997-98, Savings & Loan Assoc., Cost of Capital, Profit and Society, CI:Intro; PB:Icahn; MoD:Intro; :Ch2, Concorde Exs 2-3
3Asset Pricing, CI:Ch. 1; PB: Perelman; MoD:Chs. 1&2; : Ch3 Exs 4-8
4 CI:Chs. 2&3; MoD:Chs. 3&4; :Ch 4 Portfolio Analysis Cost of Capital Exs 9-13
5 CI:Ch. 4; MoD:Chs. 5&6; Portfolio Analysis, Leverage, Cost of Capital The Managerial Revolution Exs 14-18
6 Investment Criteria, CI:Ch. 5; MoD:Chs. 7&8; :Ch 6   Exs 19-21
First Midterm
7 CI:Ch. 6; MoD:Chs. 9&10; New Financial Capitalism   Exs 22-24
8 CI:Ch. 7; MoD:Chs. 11&12, EMH   Exs 25-29
9 CI:Chs. 8&9; MoD:Chs. 13&14, CAPM, Beta Theory  Ex 30-33,
Personal Risk
10 CI:Ch. 10; MoD:Epilogue; LtS:Ch. 1; Leverage and Value Contingent Claims Analysis, Ponzi Schemes, ESOPs 
11 CI:Ch. 11; LtS:Chs. 2&3, LBO's Prospect Theory Hypothetical LBO 
12 CI:Ch. 12; LtS:Chs. 4&5;d
Mathematical Chaos and Financial Markets, Raymond Hurst's Rescaled Range Analysis, Long Term Capital Management, Penn Square National Bank 		 
Second Midterm
13 CI:Ch. 13; LtS:Chs. 6,7&8;
Milken, Capital Sources, Prospect Theory, 		 
14 CI:Ch. 14; LtS:Chs. 9&10; Black-Scholes :Ch 14 Ex 39-40
15 CI:Ch. 15; LtS:Rest of book; Equity Funding , Derivatives, Auditing Scandals, Corporate Finance , Real Options Ex 41-45
Final Examination

Financial calculators

Other References:

1