RSM 332 Lecture 1

Tina Tan

May 15, 2017

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About Me

3rd year PhD student in Finance at Rotman

Had a few years working experience in trading before my PhD study

Email: xiaole.tan14@rotman.utoronto.ca

Phone: (416) 978 4180

Office Hours: Wed. 3-5p.m., RT1050C, or by email appointment

TAs:
Jiadi Cao, jiadi.cao@mail.utoronto.ca
Yufan Hu, yufan.hu@mail.utoronto.ca
Chanik Jo, chanik.jo15@rotman.utoronto.ca

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About the Course

Textbook: Introduction to Corporate Finance, Booth and Cleary, 3rd or 4th

Edition, Wiley

Optional: Financial Theory and Corporate Policy, Copeland, Weston, and

Shastri, 4th Edition, Addison-Wesley.

Personal recommendation: Economics of Employment, Abba Lerner, 1st

Edition, McGraw-Hill.

Two homework assignments: 10%, due on 2nd Jun Fri and 23rd Jun Thur

Mid-term: 35% (7th Jun, Wed, 5pm - 7pm, EX100)

Final exam: 55%, time and location TBD

For both middle and final exam, you can bring a one-page, 10 point or
larger font crib sheet.

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About the Course

We meet every Monday and Wednesday 11:10 am to 1pm (except 22nd May,
Monday, Victoria day and 7th June, Wednesday, mid-term)

No tutorial but there is a useful website: 332ta.raykan.com

Practice the tutorial problem set and past exams available on the website
(check the solution AFTERWARDS, not BEFORE or MEANTIME)

I will cover some sample questions in each course

Prerequisites:
linear algebra and calculus
probability and statistics
excel (Solver)

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Thanks for your attention! Any questions?

Now let’s start the lecture.

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Lecture Agenda

What is Finance?

Forms of business organizations

Methodology and course plan

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What is Finance?

In my own opinion, there is no standard right answer to this

question. It will take you a while to figure out your own
understanding.

My understanding: Finance is a branch of Economics.

Economics is about pricing and distributing limited resources used for
producing goods for people to consume. Q: example of unlimited resources?

The limited resources need to be temporarily transferred between different

individuals to generate more wealth.

Finance then solves this distribution problem: under what terms these
resources are allocated between lenders/investors and borrowers/entreprenuer

Two main areas of Finance: asset pricing (investments) and

corporate finance

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What is Finance? - Corporate Finance

Corporate Finance is about how insiders of a

corporation do the following:
Working capital management

Capital Budgeting
Estimate cost of capital

Estimate Net Present Value (NPV) of a new project

Capital Structure
Issue how much debt and equity?

Initial Public Offerings (IPOs)

Dividend policy

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What is Finance? - Corporate Finance

The typical balance sheet of a corporation

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What is Finance? - Asset Pricing

Asset Pricing is about how outsiders of a

corporation do the following:
Pricing the debt and equity part of a corporation
Estimate cash flow of bond and stocks

Estimate discount rate for different types of cash flows

Pricing derivatives: options, futures and forward, swaps,

convertible bonds, CDS, etc.

Form portfolio of corporations to diversify away idiosyncratic risk

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Financial Intermediaries and Financial Markets

Two categories of intermediaries: Commercial and Investment Bank

Commercial bank: take deposits and make loans; usually service
individuals and small business
Investment bank: an agent between large corporation and
investors; facilitate sale of bonds, stocks and derivatives between
corporations and investors or between different investors
Two categories of financial markets: Primary and Secondary
Primary Market: where investment banks facilitate corporation to
sell bonds, stocks and derivative products to investors in order to
raise capital for the corporation
Secondary Market: where investment banks broke an investor to
sell her ownership of a corporation to another investor
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Three Different Forms of Business Organization

1 Sole Proprietorship
2 Partnership
3 Corporation
It is slightly more expensive to incorporate a business, and you
have to pay corporate taxes, but it has limited liability, unlimited
life, and good access to the capital market.
There is pros and cons in each forms of business organization.
The main factors to consider: tax, legal cost and liability.

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Focus of Different Finance Courses

RSM332 - Capital Market Theory: it has a focus on the Asset

Pricing area of finance. Knowledge of this course can be used if
you work for the Sales and Trading of a investment bank or hedge
fund and mutual fund. Also, it only covers simple financial assets
such as bonds and stocks.
RSM333 - Introduction to Corporate Finance: it has a focus
on the Corporate Finance area of finance. Knowledge of this
course can be used if you work for the IPO and M&A of a
investment bank or Venture Capital and PE fund.
RSM330 - Investment: it has a focus on the financial market
and intermediaries. Knowledge of this course is informative and
practical as it overviews many functions of finance industry.

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RSM 332 Course Plan

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Methodology

Normative: how should people behave?

Theoretical approach
Simplifying assumptions
Explanations, predictions, and suggestions

Positive: how people actually behave?

Empirical approach
Data, regression, statistical analysis
Test theories, point to new directions

Normative and positive sides are complementary.

This course focuses the Normative part.

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Thanks for your attention! Any questions?

Next lecture we will talk about the use of financial

market in a simple economy.

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