SCHOOL OF BANKING AND FINANCE
FINS5514 CAPITAL BUDGETING AND FINANCIAL DECISIONS
Course Outline, Session 2, 2004
Capital budgeting and financial decisions is primarily concerned with the major financial
decisions faced by the firm. These decisions can be broadly classified as the investment
decision, the financing decision, the dividend decision and the restructuring decision.
This course will examine the main theories and empirical evidence surrounding these
decisions and to use this knowledge to help solve typical `real' finance problems.
Key Learning Outcomes
On completion of the course, you will:
Be able to explain why the separation of the ownership and the control of most major
corporations can cause agency problems and describe how a judicious use of different
financing vehicles (equity, debt, convertibles, dividends, etc.) can reduce these costs;
Be able to apply several capital budgeting techniques using MS Excel, appreciating
the strengths and weaknesses of the different techniques;
Have an understanding of how to incorporate risk and uncertainty into capital
budgeting decisions and how capital budgeting is applied in practice;
Understand the link between capital budgeting decisions and the impact on firm
performance. You will also appreciate the key issues surrounding the performance
Have an understanding of the restructuring choices faced by managers and how these
choices can help resolve agency problems within the firm;
Be able to describe how the arbitrage-based arguments of Modigliani and Miller
establish the irrelevance propositions and to explain why their framework can
contribute to our understanding of financing decisions;
Be able to explain why managers face an adverse selection problem to convince
investors to give the financing that managers need to implement investment decisions
and to describe how costly signalling mechanisms can assist the managers to make
informed corporate finance decisions;
Be able to explain the key issues surrounding the formulation of a company's
Be able to critically evaluate the core empirical evidence related to each of the key
The prerequisites for this course are:
Business Economics (ECON5103),
Statistics for Business (ECON5203) and
Security Valuation and Portfolio Selection (FINS5513, allowed as a co-requisite).
It is the student's responsibility to ensure that the prerequisites have been met prior to the
commencement of the course.
This subject has a WebCT site (http://webct.edtec.unsw.edu.au/webct/public/home.pl ).
Lecture overheads, information on lab sessions, tutorial questions and solutions will be
downloadable from this site. Class announcements will also be posted to this site. To
access the site, you need a valid Unipass number if you are using campus wide PCs. If
you wish to access the site from your home or work PC you will need to connect to the
University Dial-Up System (UDUS). Details about Unipass and UDUS may be obtained
from www.disconnect.unsw.edu.au/old-index.html .
Thursday 14.00 - 17.00 OMB 112
Thursday 18.00 - 21.00 Biomed Theatre E
Lab Classes. Week 7 Only.
Thursday 14.00 17.00 Quad Lab 10, Room 1038
Thursday 18.00 21.00 Quad Lab 10, Room 1038
Dr Sian Owen (Weeks 1, 2, 8-14) Dr Kathryn Wong (Weeks 3-7)
(Lecturer in Charge)
Office: Quad 3057 Office: Quad 3041
Email: Sian.Owen@unsw.edu.au Email: K.Wong@unsw.edu.au
Tel: 9385 4412 Tel: 9385 7886
Consultation Hours: See WebCT for details
A combination of formal lectures, tutorials (problem solving classes) and computer lab
sessions will be used. The computer lab sessions give you an opportunity to experience
practical applications of material covered in the lectures.
Tutorials/problem-solving classes: Students must prepare answers in advance to the
exercises set for each week. A tutorial / problem-solving class will be held during the
last hour of each lecture. Solutions will also be available on the subject web page.
Labs: A computer lab session will be held in week 7. Details will be posted on the
It is expected that you will spend at least ten hours per week studying this course. This
time should be made up of reading, group work, working on exercises and problems,
performing computer tasks and attending classes. In periods where you need to complete
assignments or prepare for examinations the workload may be greater.
Over commitment has been a cause of failure for many students. You should take the
required workload into account when planning how to balance study with employment
and other activities.
The course will be assessed through a combination of class tests a formal written exam
and a project.
Class tests: A class test will be held during the normal lecture times in week 6 and
week 14. The tests will be of multiple-choice format in which students have to answer
35-questions in 1 hour. The first (second) test will cover lecture material (Brealey and
Myers only) from weeks 1 to 5 (8 to 11). The tests carry a weight of 10% each (total
A formal end of semester written exam will be held during the University's exam
period. Details will be posted on the web later in the semester. The final exam has a
weight of 50%.
Project: The project will be in the form of a mini-case study. You will be required to
provide a solution to a capital budgeting problem using Microsoft Excel and to write-
up the results in the form of a business report. You will carry out this task in groups.
Details will be posted on the web. The project has a weight of 30%.
The weighted average mark across all assessments will be used to determine pass or
Summary of Assessment Procedures
Exam / Test Week Held Material Venue and Duration Weight
1st Class Test 6 Weeks 1 to 5 During 1 hour 10%
Project Submit Week 8 30%
2 Class Test 14 Weeks 8 to During 1-hour 10%
Final Exam 16/17 Weeks 9 to TBA 3-hours 50%
Textbooks / Reference Material
Required purchase available from UNSW bookshop:
Brealey, R.A. and S.C. Myers, `Principles of Corporate Finance', 7th Edition, McGraw-
Hill, 2000 (S658.15/349). Book web site:
Students may also want to consult the following texts, which are available from the
Bierman, H., and S. Smidt, `The Capital Budgeting Decision: Economic Analysis of
Investment Projects, Eighth Edition, Macmillan (S332.6/15)
Chew, D. H. (Ed.) (1998), The New Corporate Finance: Where Theory Meets Practice,
Second Edition, McGraw-Hill (S658.15/472).
Damodaran, A, `Corporate Finance, Theory and Practice', Wiley, 1997.
Copeland, T and F. Weston, `Financial Theory and Corporate Policy, Third Edition.
Copeland, T., Koller, T. and J. Murrin, `Valuation: Measuring and Managing the Value
of Companies, Third Edition, Wiley, 2000 (S658.15/460).
Levy, H and M. Sarnat, `Capital Investment and Financial Decisions', Fifth Edition,
Ross, S. A., R. W. Westerfield and J. F. Jaffe (1998), Corporate Finance, Fifth Edition,
Damodaran, Levy and Sarnat and Ross, Westerfield and Jaffe all cover the same material
as Brealey and Myers, albeit in a different style. Bierman and Smidt provide quite an
extensive coverage of capital budgeting with a good discussion of capital budgeting
applications and the difficult aspect of dealing with the uncertainty problem. Copeland,
Koller and Murrin is primarily aimed at financial managers and provides an excellent
coverage of the more practical aspects of investment decision making and how such
decisions impact on firm value. Copeland and Weston, although a little dated, provides a
much more rigorous analysis of most of the subject matter.
The academic papers listed below are available in full-text format (pdf files) from the
library. Simply go to the library home page and click on the hyper link to
`MyCourse@UNSW', which appears under `Catalogues'. As a postgraduate course, you
are expected to read broadly on each subject area. The list of references provided under
each subject heading should be regarded as the minimum reading necessary to achieve a
pass in this course.
Web site resources:
Brealey and Myers web site:
Corporate Finance online: Covering 27 different topics, you can complete challenging
exercises and discussion questions that draw on recent articles, company reports,
government data and other Web-based resources.
Finance around the world: Provides an interactive map that allows you to access finance
and business news and analysis from your favourite regions of interest around the world.
Introduction to the Course
An introduction to agency theory and models, shareholder wealth maximization,
objectives of the firm, value creation.
Required Reading: BM Chapter 1
Agency Theory: History and Recent Empirical Evidence
Ang, J., Cole, R. and J. Wuh Lin, `Agency Costs and Ownership Structure' Journal of
Finance, Vol. 55, 2000.
Claessens, S., Djankov, S. and L. Lang, `The Separation of Ownership and Control in
East Asian Corporations', Journal of Financial Economics 58, 2000.
Denis, D, `Twenty-Five Years of Corporate Governance Research...and Counting',
Review of Financial Economics 10, 2001
The Investment Decision I (The Certainty Case):
Defining cash flows, the time value of money, financial mathematics for capital
budgeting, basic applications (valuing bonds and equity), the link between stock prices,
earnings and cash flows
Required Reading: BM Chapters 2, 3, 4
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