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 Finance Theory II  posted by  duggu   on 12/27/2007  Add Courseware to favorites Add To Favorites  
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Jenter, Dirk, and Katharina Lewellen, 15.402 Finance Theory II, Spring 2003. (Massachusetts Institute of Technology: MIT OpenCourseWare),  (Accessed 11 Jul, 2010). License: Creative Commons BY-NC-SA

Calipers around several coins.

Using a financial "tool" to measure money. (Photograph courtesy of Daniel Bersak.)

Course Highlights

Finance Theory II showcases lecture notes from both sections of the course, allowing users to access both Prof. Jenter and Prof. Lewellen's explanations of the material. A full set of assignment questions are also available for the case studies used in the class.

Course Description

The objective of this course is to learn the financial tools needed to make good business decisions. The course presents the basic insights of corporate finance theory, but emphasizes the application of theory to real business decisions. Each session involves class discussion, some centered on lectures and others around business cases.

*Some translations represent previous versions of courses.


Course Objective

The objective of the course is for you to learn the financial tools needed to make good business decisions. The emphasis will be on linking corporate finance to other aspects of corporate strategy. There are three main modules of the course.

  1. Financing Needs and Capital Structure: The course starts with analyzing the factors that determine a company’s need for external financing, be it debt or equity. We then move on to a consideration of the optimal mix of debt and equity financing.

  2. Project and Company Valuation: In the second module, we develop the tools needed for valuing investment projects, including the determination of the relevant cash flows and the appropriate discount rate. We will then use these basic tools to value companies, and to select investment projects.

  3. Selected Topics: The final module deals with selected aspects of modern corporate finance, most likely including Risk Management and Corporate Governance. The actual topics will be determined by the time available, and by the interests of students.

Teaching Methods

We will present the basic insights of corporate finance theory, but emphasize the application of theory to real business decisions. Each session will involve class discussion. In some instances, discussion will be centered on lectures; in others it will be centered on a business case. Your participation is critical to the success of the course. You are expected to read all cases, come to class, and participate in class discussion.

The Team

  • Prof. Dirk Jenter, Section A
  • Prof. Katharina Lewellen, Section B


Finance Theory I (15.401). It will also help if you know some basic economics and accounting.


There are two sections. Both meet twice per week.

  • Section A
  • Section B

Readings / Books

  • Brealey, R., and S. C. Myers. Principles of Corporate Finance. 7th ed. Irvin McGraw-Hill.
  • Higgins, R. C.  Analysis for Financial Management. 7th ed. Irvin McGraw-Hill.
  • Course packet: Contains the case studies, and some supplementary readings for the course.
  • Additional reading material will be distributed in class and posted on the class server.

Requirements / Grading



Case Write-ups

  • Students should form teams of 3 to 5, and hand-in a single write-up per team.
  • Write-ups are due on the first day that the case is discussed in the beginning of the class (make copies to refer to during the class).
  • Each team is required to hand in all write-ups, except two write-ups of its choice.
  • If more write-ups are handed in, only the best ones will be considered.
Midterm Exam (in class, between lectures 11 and 12) 30%
Final Exam (during “Final week”) 30%
Class Participation 10%

Further Details

This course is designed to be time-consuming and challenging. The course is a combination of lectures and cases. Unless you have the time to thoroughly prepare the cases, we strongly recommend that you not take the course. Each case will come with guideline questions. Students are required to submit a two-page memorandum on the cases. Students are required to work in teams of no more than five. Teams with less than three people are strongly discouraged. Only one memorandum need be handed in for a given group. You have the option of not handing in two cases during the semester. There are four required cases: Wilson Lumber, MCI Communications, Dixon, and Ameritrade. Note that Wilson Lumber 1 and 2 count as one case.

The memorandums should be typed and double-spaced. They should be written as if your were presenting it to your business colleagues. The two-page limit is for text only. You may attach as many numerical calculations as you wish. Memorandums will not be accepted after the class has met.

Class attendance and participation in case discussions is critical to the learning process. While the Brealey and Myers textbook is required, this book will often only provide a background for us. We will cover a lot of material that is not actually in the book.

The teaching assistant will be helping with administrative matters. The teaching assistants' main responsibility will be grading case write-ups, answering questions during office hours, and holding one or two review sessions.

Course Policies are Designed to Ensure Fairness

My goals are to meet the course objectives and to ensure that the course is graded fairly. By remaining enrolled in the course, you agree to abide by the policies detailed below. If you anticipate that you cannot abide by these policies (e.g., because you know that you have a conflict with an exam because of vacation travel or travel in connection with an interview), please either re-arrange your schedule or arrange to take this course another time.

Exams cannot be rescheduled or made up. Treat these dates as you would an important meeting in the business world -- that means that unless you are actually hacking-up a lung, you had better be there. In the unlikely event that you are faced with unforeseeable and unavoidable circumstances that will cause you to miss the exam you must talk to me immediately.

Financial calculators will be allowed during the exams. However, quantitative answers that do not show work do not earn points. The exams are cumulative in the sense that the material covered on the final exam builds upon the material from the mid-term.


The TAs and I will work hard to ensure that the same partial credit is allocated to the same partially correct answer on each exam. Occasionally, we will make mistakes in our grading, and we are eager to correct mistakes subject to the following limits. If you believe that there was a mistake in the grading of your exam, within one week following the return of the exam, submit the original exam and a separate written explanation of the points of contention to me. If the re-grade request is made after one week or without an accompanying written explanation, no re-grade will be given. There are no exceptions to the preceding rule. All re-grade decisions are final. We reserve the right to correct all mistakes made during grading an exam submitted for a re-grade.

Special Arrangements and Exam Conflicts

If you have a documented disability and anticipate the need for accommodations in this course, please make arrangements as soon as possible.

Documented evidence that you were seriously ill or had a serious emergency at the scheduled time of an exam are the only valid excuses for missing an exam. In order to be excused from an exam, you must contact me prior to the exam and be ready to provide me with documentation after the exam.


Part I: Financing


The aim of this part of the course is to develop a framework to think about how firms finance their activities. We will go back and forth between developing theories and confronting them to specific practical cases.

1 Lecture: Introduction
2 Case: Wilson Lumber 1
3 Case: Wilson Lumber 2
4 Lecture: Capital Structure 1
5 Lecture: Capital Structure 2
6 Case: Debt Policy at UST Inc.
7 Case: Massey Ferguson, 1980
8 Lecture: Capital Structure: Informational and Dynamic Considerations
9 Case: MCI Communications Corp., 1983
10 Review of Financing and Capital Structure
11 Case: Intel Corporation, 1992
  Midterm Exam   Tell A Friend