Course Outline-Finance Theory

BAHRIA UNIVERSITY, ISLAMABAD
FACULTY OF MANAGEMENT SCIENCES (FMS)

COURSEOUTLINE- FINANCE THEORY
SEMESTER, SPRING- 2020
 Course Coordinator: Dr. Muzammal Ilyas Sindhu

 Cell No: 0300-5021496
 Email: [email protected]
 What the course is about:

The rapid changes in the field of finance have profound implications for
management education. As usual, the best students (and the best managers)
possess rare intuition, initiative, common sense, strong reading and writing skills,
and the ability to work well with others. But those with the greatest competitive
advantage also have strong technical training in analytical and quantitative
skills of management.
The course of “Finance Theory” emphasizes these skills, provides framework of
conceptual knowledge, enabling the students to understand what the literature on financial
theories are trying to do and how it all fits together. The six seminal and internally consistent
theories upon which modern finance is founded are: (1) utility theory, (2) state-preference
theory, (3) mean-variance theory and the capital asset pricing model, (4) arbitrage pricing theory,
(5) option pricing theory, and (6) the Modigliani-Miller theorems.
The goal of the course is to become familiar with the theory and empirical evidence
related to the field of Finance. This will help them keep up to date with developments in finance
theory, particularly as they affect the financial executive's own thinking processes in making
financial decisions and seek to prepare the students for reading the significant literature of the
past, present, and future.
What is expected of you?
You are expected to read the assigned material and to complete the accompanying problems. The
reading and problems, in conjunction with the lectures are designed to help you learn the
material. This course moves quickly through a fairly large body of materials so you will fall
behind if you do not keep up with the assigned readings and problems.
 Text Books:
 Financial Theory and Corporate Policy by Thomas e. Copeland and J. Fred Weston
.
 Corporate Finance Theory by Megginson, William I
 Intermediate Financial Theory by Danthine and Donaldson
 Foundations for Financial Economics by Huang and Lichtenberger
 Additional Reading:
o Business Recorder
o Pakistan & Gulf Economist
o The Dawn
o Business World
 Projects:
The projects are intended to give some hands-on familiarity with companies financial data and to
provide some experience and insight into applying quantitative techniques useful in behavioral
financial management. The projects will require computations that can be performed on a PC
using Excel (including the SPSS, AMOS and the E-VIEWS). The projects consist of three
homework assignments, two cases, and a research report (with a brief presentation). Students
may work on each project individually or in groups of up to three people (five for the stock
report). If you choose to complete them in a group, please submit one copy for the entire group,
noting the names of all group members. Each group member will receive the same grade.
 Teaching & Learning Programme:
 Week 01
1. The Role of Financial Theory and Evidence

2. Building Block of Financial Theory
3. Finacial Markets type, role and importance
 Week 02
1.Financial Theories Taxonomy (General Description, Practical Example and other
attributes)
 Portfolio Theory
 Capital Structure Theory
 Dividend Policy Theory
 Agency Cost Theory
 Cash Flow Theory
 Theory of Discounted Cash Flows
 Week 03
 Efficient Market Theory
 Capital Asset Pricing Model
 Arbitrage Pricing Theory
 REMM Theory of Human Behavior
 Consumption and Investment with and without
Capital Markets
 Week 04
 Project Valuation
 Discount Rate and time value of money
 Theory of Discounted Cash flows
 State preference Theory
 Valuation of Financial Instruments
 Week 05
 Portfolio Theory
 Risk Return Fundamentals
 Portfolio Risk and Return
 Optimal Portfolio Choice: The Efficient Summary Set with Two Risky
Assets
 The Efficient Set with One Risky and One Risk-Free Asset
 Optimal Portfolio Decisions
 Week 06
 Fisher’s Separation Theorem
 Capital Budgeting Techniques
 Comparison of Net Present Value with Internal Rate of Return
 Case Study
 Week 07
 Derivation and properties of CAMP
 Use of the CAPM for Valuation
 Empirical Tests of the CAPM
 The Arbitrage Pricing Theory and Practice
 Week 08
 Revision
MID TERM
 Week 09
 Efficient Capital Markets: Theory
 A Formal Definition of the Value of Information
 The Relationship between the Value of Information and Efficient Capital Markets
 Rational Expectations and Market Efficiency
 Week 10
 Capital Structure and Cash flow Planning
 The Weighted Average Cost of Capital
 Traditional Theory of Gearing
 Week 11
 Modigliani Miller (MM) theory without Taxation
 Modigliani Miller (MM) theory adjusted for Taxation
 The Adjusted Present Value Method
 Week 12
 Dividends and Retentions
 Dividend Growth and Market Value
 Residual Theory of Dividend Policy
 Traditional View
 Irrelevancy Theory
 Practical Aspect of Dividend Policy
 Agency Cost and Signaling Model
 Week 13
 The Theory of Merger and Acquisition
 Implication and Empirical Evidence
 M&A Valuation
 Market Reaction to M&A
 Week 14
 Theory of Financial Intermediation
 Market Structure and Design
Week 15
 Information Based Model

 Price formation and Design
 Week 16
Presentations.
 I hope that you pass this course with good grade but to be very honest, this depends upon
more on your effort rather than my hopes. Pele Said:
“Success is no accident. It is hard work, perseverance, learning,

studying, sacrifice and most of all, love of what you are doing.”

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BAHRIA UNIVERSITY, ISLAMABAD

FACULTY OF MANAGEMENT SCIENCES (FMS)

 Course Coordinator: Dr. Muzammal Ilyas Sindhu

 What the course is about:

What is expected of you?

 Teaching & Learning Programme:

1. The Role of Financial Theory and Evidence

 Market Structure and Design

 Information Based Model

“Success is no accident. It is hard work, perseverance, learning,

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