This course examines the economic principles that determine the allocation of resources through time in market economies. It uses supply and demand relationships to value capital assets (or projects more generally). There is a detailed treatment of the effects of risk and taxes on capital asset prices, and the Modigliani-Miller financial policy irrelevance theorems are derived and examined in detail.

By taking this course students will:

• be exposed to the classical finance model that underpins modern finance;
• understand how securities are priced and affected by the institutional arrangements in securities markets,
• including taxes and other government regulations, and the role played by time, uncertainty, information and inflation;
• know the role played by arbitrage in finance markets and its impact on security prices;
• understand how security prices are determined in the Capital Asset Pricing Model, and the role played by the assumptions in the model;
• know the assumptions behind the the Modigliani and Miller (M-M) financial policy irrelevance theorems as basis for understanding the factors that determine the debt-equity and dividend policy choices of firms.

Two examinable tutorials will be held during the semester, they are both fully redeemable.  The first one, which can contribute 10 per cent to the final grade, will be held just prior to the mid-semester break, while the second one, which can contribute 15 per cent, will be completed just after the mid-semester break.  The dates will be set two weeks in advance and will be announced in lectures and posted on WebCT.  A three (3) hour exam is held at the end of semester.

Two lectures per week with tutorials

ECON2101/2111 Microeconomics 2 (P or H).

Hirschleifer, J., Price Theory and Applications (2nd Edition), 1980 - Chapter 16.
A combination of material is drawn from books, journals and lecture handouts.

Please refer to Course Website