15.401 Managerial Finance - Andrew Lo PDF

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SLOAN SCHOOL OF MANAGEMENTMASSACHUSETTS INSTITUTE OF TECHNOLOGYAndrew W. Lo15.401 Managerial FinanceFall 2018This course covers the fundamentals of modern financial analysis that are essential to anymanager, entrepreneur, investor, or other business professional. This course is organizedaround three themes: (i) valuing a company, (ii) raising capital, and (iii) managing risk. Topicsinclude personal and corporate investment decisions, startup financing, risk analysis, and anintroduction to security analysis and asset management. This course is a prerequisite for allother finance electives offered by the MIT Sloan Finance Group.Class ScheduleThe class meets twice per week: MW 2:30pm to 4:00pm, E62–276.RecitationsThe TA, Zied Ben Chaouch [email protected], will hold recitations where class material will bereviewed and additional applications and exercises presented. Recitation sessions willtake place on Tuesdays 4:00pm to 5:00pm, room E51–151.Course Website: https://mit.instructure.com/courses/753Office HoursProf. Lo and Zied Ben Chaouch will hold regular office hours, and the times and locations willbe announced on the course website.TutoringExtra help is available through the Core Tutoring nistrative AssistantCrystal Myler, E62-611, (617) 715–4840, [email protected] Requirements and GradingCourse requirements include regular attendance and participation in class, short questions,four problem sets, four case write-ups, and the midterm and final exams. The followingweighting scheme will be used to determine each student’s course grade: 2018 by Andrew W. LoAll Rights Reserved

5%25%25%45%Class ParticipationShort Questions, Problem Sets, and Case Study Write-UpsMidterm ExamFinal ExamThe closed-book in-class midterm exam will be on October 29th, and the closed-bookfinal exam will be given on the MIT-scheduled final exam date (week of December 17 to21, precise date not yet assigned)—please reserve these dates and schedule yourinterviews and travel plans accordingly.Course Materials Class Notes and Recitation Notes. Notes will be available on the course website. Theycontain material not found in Brealey, Myers, and Allen, and provide alternateperspectives on the major themes of the course.Problem Sets and Case Assignments. Problem sets and case assignments will beavailable on the course websiteOnline courses (e.g., Excel, PowerPoint, Financial and Valuation Modeling, InterviewPrep, etc.) are available through www.wallstreetprep.com.Additional Readings (not required)Recommended Textbook: R. Brealey, S. Myers, and F. Allen (BMA), Principles of CorporateFinance, 12th edition, Irwin/McGraw Hill, 2017.Z. Bodie, A. Kane, and A. Marcus (BKM), Investments, 11th edition, Irwin/McGraw Hill, 2017. BKM focus exclusively on capital markets. They provide a more rigorous and thoroughanalysis of investments than Brealey, Myers, and Allen.B. Malkiel, A Random Walk Down Wall Street, 2015. This best-selling introduction to investing is now in its 11th edition and is as popular asever because of its entertaining style and sage advice. This is a great way to ease intofinancial markets, particularly for those who are not financially inclined.P. Bernstein, Capital Ideas, Free Press, 2005. Bernstein was one of the most well-respected and influential practitioners in thefinancial industry, and the founding editor of the Journal of Portfolio Management. This isa lively and beautifully written account of the most important ideas in academic finance,many of which were developed at MIT in the 1960’s and 1970’s.15.401E 2018 by Andrew W. LoAll Rights ReservedPage 2 of 7

Staying Up to DateYou are encouraged to follow financial and macroeconomic news in the Financial Times, WallStreet Journal, or The Economist.ExamsThe midterm and final exams will test your understanding of the key class concepts. They donot test your ability to memorize or to use your calculator; instead, they probe your deeperunderstanding of the material. As a result, they may be more challenging than the exams youare used to. To prepare for these exams, you should review the slides together with your ownclass notes, the required readings, the problem sets, the sample exams, and preferably thesuggested readings. The final exam is cumulative.You will be allowed one double-sided page of notes at the midterm exam and two doublesided pages of notes at the final exam. The sheets must be no larger than 8.5” 11”. There areno restrictions on the contents, other than they have to be readable with the naked eye (nomicrofiche allowed!).If you must miss an exam, you will be required to make it up after the semester is over. Nolaptops, Palm pilots, iPhones, Blackberries etc. are allowed during the exam.Students can request their graded final exams after the end of the semester.Short Questions, Problem Sets, and CasesShort questions or problem sets will be posted before each class and administered online.There will be four problem sets and four cases over the course of the semester. Shortquestions, problem sets and cases are due at the beginning of class—late assignments willnot be accepted. You also need to acknowledge any help you received in your work. The examquestions will have the same format as the problem sets.Sloan ValuesYou are responsible for upholding Sloan’s code of conduct, which mandates zero tolerancefor cheating and plagiarism. For more details on Sloan’s academic policies, please read thedocument Classroom Values in Practice which is available on the course website.15.401E 2018 by Andrew W. LoAll Rights ReservedPage 3 of 7

Course ScheduleThis is an approximate schedule for the course; some material may take longer or shorterto cover than the time 789Assignment Due9/11Net Present Value 1Recitation: Net Present ValueLecture Question9/12Net Present Value 29/18Capital Budgeting 1Lecture QuestionRecitation: Excel for FinanceProblem Set 19/19Capital Budgeting 29/25Case 1: Tottenham HotspurLecture QuestionRecitation: Capital Budgeting9/26Bonds 19/179/2410/110/2Bonds 2Recitation: BondsLecture Question10/3StocksProblem Set 210/9Columbus Day – No Recitation10/8Columbus Day – No Class1010/1010/11Capital Structure1110/1510/16Case 2: UST1210/17Financing a Startup10/24SIP Week – No Class1315.401ECase 1 Due; Lecture Question10/2210/2910/30Recitation: Stocks & Capital Structure (Lecture room TBD)Recitation: Midterm ReviewCase 2SIP Week – No ClassIn-Class Midterm ExamRecitation: Midterm Solution 2018 by Andrew W. LoAll Rights ReservedPage 4 of 7

LectureDateTopicAssignment Due1410/31Case 3: StravaCase 3151617181920212211/511/6Diversification 111/7Diversification 211/13Veteran’s Day – No ClassRecitation: Diversification11/14Risks and Returns 111/20Risks and Returns 2Recitation: Risks and Returns11/21No Class11/1211/1911/26Lecture QuestionProblem Set 3Lecture Question11/27Case 4: AmeritradeRecitation: Risks & ReturnsCase 411/28Options 1Lecture Question12/312/4Options 2Recitation: OptionsLecture Question12/5Options 3Problem Set 412/11Recitation: Options2312/102412/1215.401ERecitation: Diversification12/xxAdaptive Markets HypothesisThe Future of Finance and theFinance of the FutureFinal Exam (please check datewith Registrar) 2018 by Andrew W. LoAll Rights ReservedPage 5 of 7

Course OutlineElectronic copies of the relevant chapters of BLM will be provided during the semester.INTRODUCTION9/5Introduction to Finance and Course Overview Big picture: finance from the user’s perspective Fundamental principles of financePART A. VALUING COMPANY9/10, 9/12Present Value Online lectures on present value/future value, Applications to mortgages, refinancing, basic Real vs nominal cash flows9/17, 9/199/24Capital Budgeting NPV rule, cash flow calculations, discount rates Alternatives to NPV: payback period, IRR10/1010/1510/1710/2910/3115.401EBMA 2BMA 5–6Case 1: Tottenham HotspurPART B. RAISING CAPITAL9/26, 10/1Bonds Fixed-income markets Term structure of interest rates Properties of bond prices and market conventions10/3BMA 1Stocks Equity markets Discounted Cash Flow (DCF) modelBMA 3, 23, 24BMA 4Capital Structure Capital structure Weighted average cost of capital,BMA 17–18Financing a StartupBMA 15Case 2: USTMid-Term Examination (in-class, closed-book)Case 3: Strava 2018 by Andrew W. LoAll Rights ReservedPage 6 of 7

PART C. MANAGING RISK11/5, 11/7Diversification Systematic and idiosyncratic risks Portfolio optimization11/14, 11/1911/26Risks and Returns Applications of the CAPM Empirical evidence and extensions of the CAPMCase 4: Ameritrade11/28, 12/3, Introduction to Derivatives: Options12/5 Basic properties of options (payoff diagrams andBlack and Scholes formula, binomial option pricing) Counterparty risk Real Options12/10CONCLUSION12/1212/xx15.401EThe Efficient Markets Hypothesis and Human Behavior Informational efficiency and market rationality Behavioral anomalies The Adaptive Markets HypothesisBMA 7BMA 8–9BMA 20–21BMA 13Parting Words The future of finance and the finance of the future Ethics and the financial industry Open questions for next coursesFINAL EXAM (closed-book); please check with Registrar for date 2018 by Andrew W. LoAll Rights ReservedPage 7 of 7

15.401 Managerial Finance . This course covers the fundamentals of modern financial analysis that are essential to any manager, entrepreneur, investor, or other business professional. This course is organized around three themes: (i) valuing a company, (ii) raising capital, and (iii) managing risk. Topics