Williams College Department of Economics. Economics 384: Corporate Finance

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1 Williams College Department of Economics Economics 384: Corporate Finance William M. Gentry Office: Fernald 3 Phone: wgentry@williams.edu Office hours: Monday 10:00 12:00 Wednesday 2:00 3:30 or by appointment Spring 2004 Tuesday & Thursday, 11:20-12:35 Hopkins B1964 Course Description: This course analyzes the major financial decisions facing firms. The first half of the course provides a framework for evaluating investment decisions also known as the capital budgeting process. The second half of the course focuses on how the cash for the investments should be raised the firm s financing decision. The course builds on the tools of marginal analysis developed in microeconomics. We will also explore the role of taxes and information problems in determining investment and financing decisions. Prerequisites: Economics 251 and 252 and some familiarity with statistics. Course Materials: There is one required book for the course: Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance, 7 th edition, 2003, McGraw-Hill Irwin (denoted B&M on the reading list). In addition, there is a casebook with two Harvard Business School cases along with one other additional reading for the course. A combined package with the textbook and casebook is available at Water Street Books. The textbook is a standard corporate finance textbook and is commonly used in MBA programs. The book is somewhat dense it has considerably more detail than is typically provided in the undergraduate versions of corporate finance textbooks. I may distribute more topical readings as the semester progresses. In addition, you may check the Blackboard site for the course. The site will include helpful links for gathering more information about materials discussed in class. I will also post course announcements on Blackboard. Assignments: I. Quizzes. There will be 7 short online quizzes throughout the semester. These will be administered via Blackboard. My goal is for the quizzes to take roughly minutes provided that you are current on the readings and the

2 material covered in the relevant classes. The quizzes will cover the union (not the intersection) of material from the readings and classes. One purpose of the quizzes is to provide you an incentive to stay current with the reading. Class time will be much more productive if everyone has read the assignments and we can use the class time to go more deeply into material (rather than the class time providing the first pass over the material). One downside of using online quizzes is that they do not allow for partial credit. Despite my best efforts to mitigate this issue by writing clear questions, the partial credit question may arise at some point. In contrast, computerized grading occasionally leads to students getting the right answer via good luck. I hope that these sorts of issues balance out over the course of the semester. Please keep in mind that the quizzes are a relatively small portion of your overall grade. In addition, in calculating your grade, I will drop your lowest quiz score. The quizzes are individual work. You should not discuss the questions with each other until after the deadline for everyone to have taken the quiz. Each quiz will be available for at least 36 hours. The tentative quiz schedule is as follows (these dates are subject to change): Between classes 3 & 4 Between classes 6 & 7 Between classes 9 &10 Between classes 11 & 12 Between classes 15 & 16 Between classes 19 & 20 Between classes 22 & 23 II. III. Problem Sets. There will be 4 problem sets. By virtue of having the quizzes to cover some of the material in the class, we will have relatively few problem sets. The goal of the problem sets is to hone your analytical toolkit from what we are covering in class. In working on the problem sets, I encourage you to discuss the questions with your colleagues. However, the final written work should be done independently. Also, please provide attribution to the people you worked with by adding a note at the top of the problem set. Unless there are extraordinary circumstances, I will not accept late problem sets. Case Write Ups. We will have two case discussion classes during the semester. Case method teaching is inherently discussion driven. To help focus our discussion, you will write 1 page (single-spaced) write ups addressing specific questions about each case.

3 For the most part, your grade on the write ups will be on a yes/no basis. I will not be grading the write ups for whether they are right or wrong though I appreciate clearly made and written arguments. There are two reasons for grading on a yes/no basis. First, some cases do not have a right or wrong answer (though I could grade based on how clearly you make your arguments). Second, a good case discussion usually arises when there is a diversity of opinions in the room so I do not want people converging on a single outcome before the class discussion. While you may discuss the case with your colleagues before the class discussion, your case write ups should be written independently. As with the problem sets, please let me know with whom you have discussed the case by making a note at the top of the page. The case write ups are due by 9 pm the night before the case discussion. You can turn in a paper copy to my office (or my mailbox across the hall) by 5 pm the day before the case. Alternatively, you can send me an with an attachment before 9 pm the night before the case discussion. I need the write ups before class so that I can plan the case discussion. The cases are currently scheduled for Thursday, February 19 (Class 6) and Thursday, April 15 (Class 17). IV. Group project. There will be a three-part group project. The goal of the group project is for you to apply course concepts to a specific firm. The group projects are an important part of the course since, along with the cases, they are exercises in applying course concepts to real world situations. The standard group size will be 3 people; if necessary, I will allow for one or two groups of 4 people. You may form your own groups. I will provide more details on the group project later but the brief outline is as follows. In the first part, you will select a firm and familiarize yourself with its financial statements and compare them to other firms in the industry. In the second part, you will make some capital structure calculations for your firm. In the third part, you will analyze a corporate finance issue facing your firm. The due dates for the group project are: Part I: Thursday, February 26 Part II: Tuesday, April 20 Part III: Thursday, May 13 V. Midterm exam. There will be one in-class, closed book midterm. It is scheduled for Thursday, March 18. VI. Final exam. A 3-hour, closed-book final exam will be scheduled during the exam period.

4 Evaluation: In determining grades, I will use the following weights: Participation 5% Quizzes (7 total) 10% Problem sets (4 total) 10% Case write ups (2 total) 5% Group projects (3 parts) 15% Midterm exam 20% Final exam 35% I will drop your lowest quiz score. I will evaluate participation mainly in terms of whether you are actively engaged with the material and make comments or responses during class that further the discussion. Obviously, attending class is a necessary (though not sufficient) condition for successful participation. Exam grading policies: I grade exams name blind, which I believe increases the impartiality of grading. It also eliminates the fear that I sometimes hear from students that asking dumb questions will hurt their grade because it affects my opinion of their written work. If you believe that I have made a mistake in grading your exam, then I will regrade the exam using the following process. To initiate an exam regrade, you write a memo outlining the issues of debate. I will consider the issues in your memo and regrade your entire exam. Academic honesty: The Honor Code applies to all work submitted and exams taken in this class. You are encouraged to collaborate on the problem sets, however as noted above, the work you turn in should be written up independently and with attribution to those with whom you discussed the assignment. You may also collaborate in studying or preparing for the quizzes and exams, but the written exams should be your work alone. On the quizzes, since people will take them at different times, you should not discuss the quiz with anyone after taking the quiz (until the quiz deadline has passed). On the group projects, the project should reflect the efforts of all members of the group. If you have any questions regarding academic integrity issues, please contact me.

5 Class Schedule (Dates subject to revision) Date / Class Topic / Reading Assignment Dates Th. Feb. 5 #1 Overview and introduction B&M, Ch. 1 Tu. Feb. 10 #2 Calculating present values B&M, Ch. 2 & 3 Th. Feb. 12 #3 Basics of financial accounting Brealey, Marcus & Myers, Ch. 3: Accounting and Finance in casebook B&M, Ch. 29.1, 29.2 & 29.3 Tu. Feb. 17 #4 Valuation of common stocks B&M, Ch. 4 Th. Feb. 19 Interco Case Study Case write up #5 Case Tu. Feb. 24 #6 Investment decision rules B&M, Ch. 5 Th. Feb. 26 #7 Investment decision rules B&M, Ch. 6 Group Project Part 1 Tu. Mar. 2 Introduction to risk and uncertainty Problem Set #1 #8 B&M, Ch. 7 Th. Mar. 4 #9 Risk and return B&M, Ch. 8 Tu. Mar. 9 #10 Capital budgeting with risk B&M, Ch. 9 Th. Mar. 11 Real options and capital budgeting Problem Set #2 #11 B&M, Ch. 10 Tu. Mar. 16 Sources of positive net present value #12 Th. Mar 18 #13 SPRING BREAK B&M, Ch. 11 & 12 Midterm Exam Exam Tu. Apr. 6 #14 Th. Apr. 8 #15 Tu. Apr. 13 #16 Th. Apr. 15 #17 Tu. Apr. 20 #18 Th. Apr. 22 #19 Overview of corporate financing B&M, Ch. 13 & 14 Issuing securities B&M, Ch. 15 Venture capital Movie: Startup.com Netscape case Case Dividends and share repurchases B&M, Ch. 16 (except 16.6 & 16.7) Debt-equity choice B&M, Ch. 17, 18.3 & 18.4 Case write up Group Project Part 2

6 Tu. Apr. 27 #20 Th. Apr. 29 #21 Tu. May 4 #22 Th. May 6 #23 Tu. May 11 #24 Th. May 13 #25 Taxation and corporate finance B&M, Ch. 16.6, 16.7, 18.1 & 18.2 Introduction to options B&M, Ch. 20 Valuing options B&M, Ch. 21 Aligning incentives, compensation & options Grinblatt & Titman, Financial Markets and Corporate Strategy, 2 nd Edition, Ch. 18, McGraw-Hill-Irwin, Ross, Westerfield & Jaffe, Corporate Finance 6 th Edition, Chapter 21.1, McGraw- Hill-Irwin, Mergers & acquisitions Chapter 33 Concluding Thoughts and Review Chapter 35 Problem Set #3 Problem Set #4 Group Project Part 3