Applied Financial Management: Lecture Notes for Departments of Management, Assignments of Investment Management and Portfolio Theory

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Department of Management

Applied Financial Management

Revision Guideline

Lecture 1 Basic Concept

Discounted cash flow formula Present Value = + + + +……+ Net Present Value=C 0 +

Lecture 1 Basic Concept

Value a bond = PV(annuity of coupon payments)+PV(final payment of principal) = + + + ……+ Dividend Discount Model of Common Stock: = + + ... + = +

Lecture 2 Risk and Return

Measuring Risk: Variance () = the expected value of (– rm)^2 Diversification strategy: Reducing risk by spreading the portfolio across many investments.

Lecture 2 Risk and Return

Efficient Frontier: move up and left Sharpe Ratio = Investors track Sharpe ratios to measure the risk-adjusted performance of investment managers.

Lecture 3 CAPM and Cost of Capital

Expected risk premium on stock = beta * expected risk premium on market ß ()

Lecture 3 CAPM and Cost of Capital

• (^) Arbitrage Pricing Theory: Factors: Macroeconomics influences; Noise: unique to that company

Lecture 4 NPV & Other Investment Criteria

Lecture 5 & 6 Capital Structure

• (^) Trade-off theory Financial Distress Costs
• (^) Pecking Order
• (^) Signaling theory
• (^) Agency theory

Lecture 7 Payout Policy

Dividend Theories:

• (^) Miller and Modigliani (MM) (1961)
• (^) Bird-in- the-hand theory
• (^) Tax preference theory
• (^) The signaling theory
• (^) Agency theory

Lecture 8 Efficient Market

• (^) Weak Form Efficiency --Market prices reflect all historical information
• (^) Semi-Strong Form Efficiency --Market prices reflect all publicly available information
• (^) Strong Form Efficiency --Market prices reflect all information, both public and private

Good Luck!