Financial Management / Corporate Finance



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Financial Management / Corporate Finance

BFIN 2006

MBA PROGRAM

FALL 2008

Frederik Schlingemann

368A - Mervis Hall

412 - 648 1847 (voice)

412 - 648 1693 (fax)

schlinge@katz.pitt.edu

A. Course Description and Objectives

Welcome to the Intro to Financial Management course. The main objective of this course is to gain understanding of the theory and practice of financial decision making. This course develops the tools and framework necessary to address the question what investment projects should be undertaken to maximize shareholder wealth? To examine this question, we will learn how to value an uncertain stream of cash flows and apply the concept of the time value of money. This includes developing an understanding of the basic investment criteria used by many corporations and the trade-off between risk and return. In addition, we will examine how these tools can be used in our personal finances and investment decisions. The concept of valuation using the discounted cash flow method (DCF) will be the key ingredient of the course.

The course will emphasize the method of valuation addressing each of five key ingredients to making a financial decision. First, we determine the relevant and incremental cash flows associated with the decision. Second, we learn how to value these cash flows using the concept of the time value of money and apply this to the valuation of stocks and bonds and various investment projects. Next, using modern portfolio theory, we arrive at deriving the CAPM, a widely used model to determine the relevant discount rate that reflects the risk associated with the cash flows. Then we will address whether and how financing and capital structure choices affect project and firm value.

After taking this course you should understand the main financial decisions facing the firm, how these decisions are related, and the tools that financial management offers in order to help evaluate these decisions.

B. Teaching Philosophy

My goal is to see you learn. Grades are like a carrot, intended to encourage learning. Grades will vary from A to a failing grade (F), with the majority of students scoring in the B to B+ range. Following the Dean's office guidelines, approximately 30% of the students will receive A or A– grades. I will not hesitate to give you a low - or even failing - grade if your performance indicates to me that you have not learned the material and have not sought for help during the semester. However, my goal is for you to do well and I will generally use a straight scale, so that lots of people can get high grades if the class as a whole is highly motivated and performs well.

I realize that you have a busy schedule and often face difficulty in getting in enough time to study. This makes it all the more important to get involved while you are here. This course covers a lot of material, so if you don't keep up, you may be overwhelmed at exam time.

C. Course Materials

1. Ross, Westerfield and Jaffe (RWJ), Corporate Finance, 8th edition, Irwin McGraw-Hill Publishers.

2. Financial Management Course Pack - Contains lecture notes, cases, and additional relevant course information – available through bookstore

3. A financial calculator - or a calculator that at least can handle exponents - is required.

4. Suggested Readings: Wall Street Journal, Business Week, Fortune, the Economist, and Forbes

5. Occasional handouts in Class

D. Examination and Grading

Exams

There will be two exams – one midterm exam and a (non-cumulative) final exam. The exams are closed-book, but I will provide a formula sheet for each exam, which will not have definitions or instructions how to use the formula. Exam grades will be based on both the approach taken and the correctness of the response. Calculators will be permitted.

There will be no make-up exams and you must take the exam during your registered section. Exams are scheduled well in advance so that you can plan around these dates. Do not ask to be excused from exams for matters of personal convenience. An unexcused absence without supporting documentation (e.g., doctor’s note or police report) will result in a grade of zero.

Problem Sets

There will be 7 homework assignments during the course. Students have to work individually on these assignments and submit typed solutions according to the schedule below before 6pm. Late submissions are under no circumstances accepted. Solutions to the assignments will be made available during the subsequent recitation session. The problem sets are graded and serve to prepare you for the exams. Students should not use homework material from previous years because of differences in material!

Homework Due Date

1 Wednesday, September 10

2 Wednesday, September 24

3 Monday, October 6

4 Thursday, October 16

5 Monday, November 3

6 Thursday, November 20

7 Wednesday, December 3

Recitation Sessions and Additional Material

During the weekly recitation sessions, you will be provided with extra problems, examples, and supplemental explanations of course material covered in the classroom. Students are highly encouraged to attend these sessions and work on the relevant problems with their recitation instructor as much as possible. In order to understand finance and do well on the exams, practicing and working on the examples is a must.

Participation

Course participants are expected to be well-prepared in class and have reviewed the necessary material before each class. This will allow for more interesting and efficient class discussions. Students are required to have read carefully chapters 1 and 2 of the textbook prior to the start of classes.

Case Projects

Course participants are required to work on one case assignment for a grade. The case report on Lex Services PLC should be limited to 5 pages (typed, double-spaced, any 12-point font) and is due before 5:00 p.m. on Friday, December 12, 2008. Late submissions will be under no circumstances accepted. Participants are encouraged to work with other members of their Katz assigned group, or form their own group (up to a maximum of 6 members), and submit one group copy of the analysis. As a rule, grades for the case assignment will be assigned equally to each group member without exceptions to this rule. Each name should appear on the case analysis for a member to receive credit. The questions you need to address in analysis are provided starting on page 5 section G. Absolutely no help or material from any external source, like the web or anyone outside your project group can be consulted for the project.

Two other cases, the Super Project and Marriott Corporation will be discussed in class (see course schedule). Students are expected to have read these cases thoroughly before class in order to make for more interesting discussions. All cases are provided in the last section of the course package.

Overall Grading

I will curve the course grades based on relative performance if the class average is below 70% (this is not likely). Otherwise a straight scale will be used with the +/( system.

|Assignment |Percent |

|Homework |20 |

|Midterm Exam |25 |

|Case Analysis |20 |

|Final Exam |35 |

|Total Grade |100 |

|Score |Grade |

|93 – 100 points | | |A | | |

|89 – 92 | | |A( | | |

|85 – 88 | | |B+ | | |

|81 – 84 | | |B | | |

|77 – 80 | | |B( | | |

|71 – 76 | | |C+ | | |

|65 – 70 | | |C | | |

|59 – 64 | | |D | | |

| 0 – 58 | | |F | | |

E. Katz Best Practice Partners & Executive Spotlight Visits

The Katz Best Practice Partner Program is an alliance between the Katz Graduate School of Business and those companies that exemplify Best Practice in the school’s MBA course areas. This program, together with the Executive Spotlight Visits, has added an important segment to the Financial Management class in the form of lectures and presentations by world-class “Executive Faculty”. Participants in the class are required to attend these presentations, which are scheduled outside the regular class time. Information regarding speakers will become available during the semester.

F. Other Course Policies

Academic Integrity

Students in this course will be expected to comply with the University of Pittsburgh’s Policy on Academic Integrity. Any student suspected of violating this obligation for any reason during the semester will be required to participate in the procedural process, initiated at the instructor level, as outlined in the University Guidelines on Academic Integrity. This may include, but is not limited to, the confiscation of the examination of any individual suspected of violating University Policy.

Disabilities

If you have a disability for which you are or may be requesting an accommodation, you are encouraged to contact both your instructor and Disability Resources and Services (DRS), 216 William Pitt Union (412-648-7890/412-383-7355(TTY)), as early as possible in the term. DRS will verify your disability and determine reasonable accommodations for this course.

Lectures

Lectures will stress the most important issues addressed in the text and course material. You are responsible for all material covered in class, assigned readings, suggested problems and study questions, and problem sets. Lectures may - and usually - go beyond the scope of the textbook for certain topics. Therefore, it is important for you to attend class. Remember to bring a calculator to class so that you may work problems and participate in class.

Contact information

It is easy and effective to email me your questions and I will reply as soon as I can, usually within 24 hours. I do not have scheduled office hours, but will gladly schedule appointments with you at any time possible. I intend to hold review sessions before each scheduled exam.

G. Lex Services PLC – Case Questions

Use the information in the case and any assumptions you feel are necessary and make sure your case analysis answers the following question. Make sure to write the case as a self-contained report you could submit to your board of directors (i.e., not just a list with answers).

1. Why is Lex Service PLC concerned about its cost of capital in 1993? What role will an estimate of the cost of capital play within Lex? In general, how can and do companies make use of cost of capital estimates?

2. Using the data provided in the case, estimate the cost of equity for Lex under its future target capital structure for the consolidated company.

a. What risk-free rate did you use to obtain your estimate? Justify your choice.

b. What risk premium did you use? How did you obtain this estimate?

c. Is your estimate of the cost of equity for Lex appropriate as a discount rate for Lex’s total operating cash flows? Why or why not?

3. If Lex had no debt in its capital structure, what would be its cost of capital? How could Lex use this estimate in their valuation?

4. If Lex operated with essentially no leverage in its capital structure and then added a moderate amount of debt, how would this affect its total value? How might we capture this value impact of debt in our valuation analysis?

5. Should Lex use a single corporate-wide discount rate or multiple discount rates (one for each line of business) to evaluate investment projects? Explain your answer and show what the discount rates would be for each of its divisions.

6. What sort of sensitivity analysis would you suggest?

H. Course Schedule for Full-time MBA Program

Date Topic Readings & Assignments

|Monday, August 25 |NPV: First Principles of Finance |Appendix of Chapter 4 |

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|Wednesday, August 27 |Time Value of Money and NPV |Chapter 4 |

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|Wednesday, September 3 |Time Value of Money and NPV |Chapter 4 & HW 1 assigned |

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|Friday, September 5 |Valuing Bonds and Stock |Chapter 5 |

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|Monday, September 8 |Valuing Bonds and Stock |Chapter 5 |

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|Wednesday, September 10 |Valuing Bonds and Stock |Chapter 5 |

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|Monday, September 15 |Valuing Bonds and Stock |Chapter 5 & HW 2 assigned |

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|Wednesday, September 17 |Alternative Investment Criteria |Chapter 6 |

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|Monday, September 22 |Capital Budgeting |Chapter 7 |

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|Wednesday, September 24 |Capital Budgeting |Chapter 7, HW 3 assigned |

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|Monday, September 29 |Capital Budgeting |Super Project Case |

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|Wednesday, October 1 |Risk and Return |Chapter 9 & 10 |

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|Monday, October 6 |Risk and Return |Chapter 9 & 10 |

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|Wednesday, October 8 |Risk and Return |Chapter 10 & HW 4 assigned |

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|Monday, October 13 |Risk and Return |Chapter 10 |

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|Wednesday, October 15 |Risk and Return |Chapters 10 |

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|Monday, October 20 |Review for Midterm Exam |Chapters 1-7, 9-10 |

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|Wednesday, October 22 |Midterm Exam |Chapters 1-7, 9-10 |

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|Monday, October 27 |Market Efficiency |Chapter 13 & HW 5 assigned |

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|Wednesday, October 29 |Market Efficiency |Chapter 12 |

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|Monday, November 3 |Risk and Capital Budgeting |Chapter 12 |

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|Wednesday, November 5 |Capital Structure |Chapter 15 |

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|Monday, November 10 |Capital Structure |Chapter 16 & HW 6 assigned |

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|Wednesday, November 12 |Capital Structure |Chapter 17 |

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|Monday, November 17 |Capital Structure |Chapter 22 |

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|Wednesday, November 19 |Capital Structure |Chapter 22-23 & HW 7 assigned |

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|Monday, December 1 |Capital Structure & Valuation |Marriott Case |

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|Wednesday, December 3 |Review for Final Exam |Chapters 12-13, 15-17, 22-23 |

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|December 8 – 12 |Final Exam |Chapters 12-13, 15-17, 22-23 |

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