University of Connecticut

Financial Mathematics II – Applied Mathematics of Corporate Finance

Math 369/289

Fall 2007

Classes: MW: 3:00 – 4:45 Instructor: James G. Bridgeman, FSA

MSB307 MSB408

860-486-8382 bridgeman@math.uconn.edu

Office Hours: W 11:00 – 12:00 websites:

M/Th 10:00 – 11:00 instructor’s math.uconn.edu/~bridgeman

Th/F: 2:00 – 3:00 course: math.uconn.edu/~bridgeman/math369f07/index.html

Or by appointment

Context for the Course

Required for the Professional Master’s degree in Applied Financial Mathematics

Certified for SOA/CAS Validation by Educational Experience (VEE) in Corporate Finance

Contains some material relevant for SOA exams FM and MFE

Specific Course Content

Introduction to the Applied Mathematics of Corporate Finance and Introduction to Derivatives and Option Pricing Models

Required Text

Copeland et al, Financial Theory and Corportate Policy (4^th ed.)

Responsible for substantial additional non-text material presented in class

Supplemental/Advanced Material (not required)

Various resources as referenced in the text

Ho & Lee, The Oxford Guide to Financial Modeling

Chew, The New Corporate Finance/where theory meets practice (3^rd ed.)

McDonald, Derivative Markets (2^nd ed.)

Megginson, Corporate Finance Theory

Shreve, Stochastic Calculus for Finance I: Binomial Asset Pricing Model

Brealey Myers Allen, Principles of Corporate Finance (8^th ed.)

Panjer (ed.), Financial Economics

Gollier, The Economics of Risk and Time

Grading

Term Paper 35%

Cases & Assignments 15%

Mid-term Exam 20%

Final Exam 30%

Both the syllabus and the grading plan are subject to change with appropriate advance notice to the class.

Outline & Intended Pace
Week of	Topic(s)	Material
all semester	each Monday a 50 minute tutorial on derivative securities will proceed at a separate pace	Ch. 7
8-27	introduction
9-3	decisions about value; expected cash flow; DCF valuation	handout Ch. 2A-H Ch. 14A
9-10	financial statement analysis – where and when is the cash?	Ch. 14B
9-17	risk; variance of cash flow	Ch. 5A-D
9-24	capital asset pricing model (CAPM)	Ch. 5E-F, 6A-H
10-1	market risk premium; arbitrage pricing theory (APT); market efficiency	Ch. 6I-M, 10A-D
10-8	market efficiency: cost of information, evidence	Ch. 10E-G, 11A-F
10-15	market efficiency: evidence; corporate tax effect on value	Ch.11G-H,14C
10-22	financing decisions: capital structure, MM theory	Ch. 15A-E
10-29	financing decisions: capital structure, practical considerations	Ch. 15F-L
11-5	financing decisions: dividend policy: cash plus information	Ch. 16A-F
11-12	dividend policy: effect on value; real options – a new approach to value	Ch. 16G-H, 9A-F
11-26	real options - where does value come from?	Ch. 9G-J
12-3	review and/or extra topics	TBD
	Final Exam TBD week of 12-10 to 12-15	All

Term Papers

A paper will be due on November 30. You may choose any of the main topics in the syllabus (i.e. sections in the text or from class notes) and prepare a paper covering the topic in more depth, or presenting extensions of the material in the text or class notes, after consulting outside references. Alternatively, you may choose a topic from sections of the text not covered in the syllabus and explain how it works, including its connections with the material covered in the syllabus.

Assignments

Significant business cases or sets of text exercises will be assigned for collection and grading occasionally during the semester. In addition, every week text exercises will be assigned not for collection and grading but to aid with your mastery of the material. Completion of this work will be assumed on both the mid-term and the final exams. Finally, background readings may be assigned in text sections not referenced in the syllabus. These will not be covered in exams, but should be read to enhance your understanding of the material.