1 Professor: Dr. John Kensinger CBA 168G (office) (home) (fax) Office hours: 4:00-5:30 PM Wednesday; 2:00-3:20PM Thursday Also available in classroom Wednesday after class (please remain in the classroom if you want to see me after class) Class Time: RTFP 135 6:30-9:20PM Wednesday Texts and Readings: 1. Keohn, Scott, Martin, Petty, Financial Management :Principles & Applications, 10th Ed., Prentice-Hall (2005) ISBN Prentice-Hall provides a variety of worthwhile resources via its website (www.prenhall.com) including briefing notes on important financial concepts, news alerts about current events that are related to the course, plus a downloadable finance tutor that can give you additional practice with financial calculations. After accessing the Prentice-Hall homepage, navigate to the Business section, then the Finance section. Have fun! 3. Handouts for lecture notes, problem sets, and readings packets will be given throughout the course. Copies also can be downloaded on the Internet at These handouts are stored as portable document files that are fully cross-platform compatible (any computer can read them, including UNIX workstations or personal computers running under Windows or Macintosh operating systems). Most computers that have a web browser are ready to use these files. If you have trouble opening them, the difficulty would be that the computer does not have Adobe Acrobat Reader software. This software is available at and can be downloaded free of charge. 4. Additionally, I have authored finance tutor software that is distributed worldwide by Apple Computer s Intellimation Library for the Macintosh. It provides immediate feedback, including diagnosis of why mistakes are made. As developer, I can provide copies of the program to you upon request. This program runs only on Macintosh computers operating in Classic environment, which are available for student use at several locations on campus. If you would like a copy, you may download it from the course website.
2 Prerequisites: Prerequisites include completion of ACCT 5020, FINA 5040, ECON 5000, MATH 1190, BCIS 5090, MSCI 5010, and completion of or concurrent enrollment in ACCT 5130.Brief Description of the Course: The course consists of a series of sixteen Topics, eight problem sets, and five cases. The requirements include a two preparatory examinations and a cumulative final examination. Purpose of the Course: The course is concerned with the concepts and techniques employed in competing for capital in the global marketplace, and managing the firm in a manner which preserves its competitiveness as a repository for capital. Since this is a core course designed for all MBA students, it develops financial concepts that form the essential background for managers from all disciplines who make decisions for firms that draw capital from public markets either directly through securities or indirectly through financial intermediaries. The role of the financial markets in accomplishing an optimal allocation of economic resources is a central issue. Students should finish the course with a much improved understanding of the management/investor relationship, reflected in financial transactions such as hostile takeovers, leveraged buyouts, spinoffs, public offerings, and so on. Disability Accommodation: The College of Business Administration complies with the Americans with Disabilities Act in making reasonable accommodation for qualified students with disability. If you have an established disability as defined in the Americans with Disabilities Act and would like to request accommodation, please see me by the third class meeting. My office hours and office number are shown on this syllabus. Calculators: A financial calculator is required. Financial calculators are now the minimum standard among business professionals, and a suitable one can be purchased for a fraction of the cost of a textbook. The objective is that you become comfortable with an easily portable computational device, learning to work quickly and accurately with it. Then you will be a more reliable decision-maker in the often-hectic business environment. For overall value per dollar in the current generation of calculators, I suggest the Hewlett-Packard HP-17. At the lower end of the HP line, the HP-10 offers all necessary capabilities for this course at an affordable price. At the high end of the price range, the HP-19 offers the most advanced capabilities available in the calculator market. In addition, the HP-12C is still a good value, but requires that you adapt to Reverse-Polish Notation. (When ordering HP calculators, be sure you are getting the business version and not the science/engineering version of the same model number). For the student with advanced mathematical or computer training, one of the programmable calculators equipped with the proper software will do the job but won t give you the extra touches that come with the special purpose financial calculators. 2
3 Non-finance majors with budget concerns may be able to get by with the Texas Instruments (TI) BA-II Plus. If you choose this route, you will give up in time much more than you save in dollars. The TI-BA 35 Solar calculator does not have all the features needed for the course. A word of caution is in order: if you buy a used calculator be sure to get a complete instruction manual, otherwise you ll have a paperweight with great potential. If you are considering some other calculator you will need to be sure it can do all the financial calculations involving present and future value of single sums, annuities, series of cash flows, interest rate calculations for single sums or annuities, and internal rate of return for a series of cash flows. Calculators are required for examinations. Palmtop computers are not allowed for examinations. Grading: Homework problem sets will not be graded. The scores on the examinations will be averaged and then converted to a letter grade as follows: Grading Chart A: 90%-100% D: 60%-70% B: 80%-90% F: below 60% C: 70%-80% The standard formula for calculating the course average will use weights of 30% for each of the first and second exams, and 40% for the final examination. An optional grading formula may be selected on the final examination, that would allow reduction of the weight for either one or both of the preparatory exams to 10%, with corresponding increased weight on the final. The grading option is available upon request, with no other conditions, except that choice of the optional grading formula cannot be changed after the fact. The purpose of the first and second examinations is to provide you with sufficient feedback so you can avoid falling behind. The grading options are available to reduce the impact of inadvertent low scores, while preserving the benefit of timely feedback. Makeup exams may be accomplished by prior arrangement or because of documented illness or documented, unanticipated personal emergency. Routine makeup exams must be completed prior to the next class meeting (to schedule the makeup, contact Kim, Michelle, or the receptionist in the FIREL department office, ). In case of prolonged incapacitation that is documented, other arrangements will be tailored to fit the particular situation. A student who does not make up a missed examination or does not contact the instructor may be dropped for non-attendance. 3
4 Cell Phones: Cell phones must be turned off and put away during examinations. Absolutely no text messaging or wireless is allowed during examinations. Those leaving the examination room for any reason may not use cell phones and other wireless devices or discuss the exam with anyone while the examination is still under way. Study management: Read all the appendices associated with assigned chapters. Familiarize yourself with assigned readings prior to the lectures. A good strategy would be to skim for a general grasp of the issues before the lecture, and then do your focused study afterwards. It is essential not to get behind, since the new topics build on past material. Problem sets are designed to provide exercise in preparation for the examinations. They will not be graded in and of themselves. They are keyed directly to the examples given in class (you will have copies of these on the written handouts) and provide additional practice. Give the problem sets your best shot before we discuss them in class, even though they will not be collected or graded. Treat them as practice exams. By all means, don t look at the solutions until you have given the problems your best shot. When you want more practice to build your confidence, Prentice-Hall (the publishers of your text) offer very nice finance tutor software (on the CD-ROM included with the text) that you can use at your convenience. Additionally, I have authored finance tutor software that is distributed worldwide by Apple Computer s Intellimation Library for the Macintosh. As developer, I can provide copies of the program to you upon request. Learning Objectives for Core Courses in Finance (Source: Accreditation Guidelines for Colleges of Business) 1. Introduction to Financial Management Objectives: Understand the following topics What is the appropriate goal of the firm? What is financial management? What are the various forms of businesses, and the corporate tax structure? Also cover the major foundations of Finance such as Time Value of Money Efficient Capital Markets Agency Problems Diversification Cash Flow and Taxes and their implications for financial managers 4
5 2. Financial Markets and Interests Rates Objectives: Understand the following topics Types of financing used by firm Why financial markets exist Key components of financial market system Role of investment bankers Inflation and interest rates and their relationship; theories of interest rates 3. Mathematics of Finance Present and future value of lump sums, perpetuities, annuities, annuities due Loan amortization Annualized percentage rate (APR) Effective interest rate 4. Risk and Rates of Return : Risk of an individual asset and that of a portfolio How is risk-return tradeoff affected by diversification principles? Market risk, diversifiable risk Relation between risk and return; beta and its implications for investors 5. Bond Valuation Different kinds of bonds in the market How to read and understand market quotations from Wall Street Journal Basic process used to value bonds, find their yield to maturity, yield to call Important relationships that exist in bond valuation and implications for investors 6. Stock Valuation : Basic characteristics of stocks How to evaluate preferred and common stock How to calculate expected and required rate of return for stocks Assumptions behind models and their limitations How to read and interpret stock market quotations. 5
6 7. Cash Flow Estimations and Capital Budgeting Techniques Why it is so hard for firms to find profitable investment opportunities Role of taxes and depreciation in determining initial outlay, operating cash flows and terminal cash flow needed in evaluating long term capital investments The process of evaluating capital budgeting projects = Net Present Value = Internal Rate of Return = Profitability Index = Pay Back Period Conflicts between NPV and IRR and how to resolve these conflicts How to tie the capital budgeting decision to the overall goal of shareholder wealth maximization 8. Cost of Capital What is the cost of capital and how does it play a role in various decisions made by financial managers? What factors determine the cost of capital? How to compute cost of debt, preferred and common stock capital and put them together to develop the overall cost of capital for the firm What assumptions are made in such computations? Role of tax laws in computing cost of capital 9. Analysis of Leverage and Its Impact What is the difference between business and financial risk? How to do break-even analysis = Determine break even point = Understand the assumptions and implications Differences between operating, financial and combined leverage = How to compute these = Implications for decision making. 10. Planning the Firm's Financing Mix What is the meaning of capital structure? How does a firm identify its optimum capital structure? What are some of the key theoretical developments in the field of capital structure and how do they relate to the real world? Tools for capital structure management Implications of tax laws, agency costs and bankruptcy costs in determining capital structure for firms 6
7 Aug 30: Course introduction Class Schedule: Wall Street Journal video: Includes interviews with several well-known entrepreneurs. Watch closely for information on the following subjects: Acquisitions Initial Public Offering Investment Banking Private Financing Risk Allocation Role of Underwriters Strategic Alliances Strategic Management Valuation Venture Capital Topic 1: Introduction to the game and its environment, with an overview of the touchstones of finance what we know don t know about the world s oldest continuously-played game Chapters 1&2 Case 1: Tomago Aluminium Sept 6: Topic 2: Topic 3: Sept 13: Topic 4: 1st problem set: The Net Present Value Rule and Fisher s Separation Theorem why we say managers should maximize share value Handout: Andrew H. Chen James A Conover and John W. Kensinger, Proven Ways to Increase Share Value, Journal of Applied Finance Vol.12 No.1 (Spring/Summer 2002) pp Capital market efficiency and its importance for managers Reading packet on capital market efficiency (handout) Simon M. Keane, Can a Successful Company Expect to Increase Its Share Price? A Clarification of a Common Misconception, Journal of Applied Corporate Finance (Fall 1990), pp (handout) Present Value and Future Value of a Single Payment Calculator manual Present Value and Future Value of a Single Payment 7
8 Sept 20: Topic 5: 2nd problem set: Sept 27: Topic 6: 3rd problem set: The Time Value of Money: Series of Payments Chapter 5 Calculator manual Present Value and Future Value of a Series of Payments Discounted cash flow approaches to security valuation Chapter 7 & 8 Security valuation using the discounted cash flow approach Oct 4: Topic 7: The standard capital investment tool kit Chapters 9, 10, 11 Readings packet on capital budgeting (handout) 4th problem set: Basic capital budgeting tools Case 2: Lockheed Tri-Star and Capital Budgeting, (handout) Oct 11: First Examination, entire session (covers Topics 1-7 and problem sets 1-4) Oct 18: Topic 8: 5th problem set: Oct 25: Topic 9: Lease or buy? Chapter 24 Net advantage of leasing Cost of Capital: Modern portfolio theory, the value additivity principle, and Tobin s separation theorem Chapter 6 Nov 1: Topic 10: Cost of Capital: The value of securities within portfolios Chapter 6 6th problem set: Risk, reward, and project analysis Nov 8: Topic 11: Strategic considerations in capital budgeting making investment decisions when options are involved Chapters 13 & 21 Case 3: Beech Aircraft Corporation: The Starship Project (hand-out) Topic 12: 7th problem set: The basics of options and futures and applications in financial management Arbitrage 8
9 Nov 15: Case 4: Mission to MARS: A Case of Sequential Decisions, (handout) Topic 13: Topic 14: 8th problem set: Nov 22: Topic 15: Issuing securities and analyzing the cost of capital Chapters 12 Financial structure, financial strategy, and the 3rd separation theorem Chapters 14, 3, 4 Handouts: Stewart C. Myers, The Capital Structure Puzzle William J. Barclay & Clifford W. Smith, Jr., The Capital Structure Puzzle: A New Look at the Evidence, Reprinted in Stern and Chew (eds.), The New Corporate Finance Where Theory Meets Practice, 3 rd Edition (New York: McGraw-Hill, 2001) pp Financing short-term and long-term Corporate restructuring, where are we going? (Restructuring includes mergers, acquisitions, takeovers, proxy fights, leveraged buyouts, sell-offs, and spin-offs) Chapter 23 Case 5: Gulf Oil Corporation Takeover (handout). At the time it was the biggest deal ever done, and demolished the idea that some companies are too big to be taken over. There was a major backlash in its wake, leading several states to legislate for the protection of corporations. Handouts: Readings package on corporate restructuring and investor activism Excerpt from Peter F. Drucker, Management: Tasks, Responsibilities, Practices, Building Unity Out of Diversity Excerpt from John W. Kensinger and John D. Martin, Exploring the Controversy Over Corporate Restructuring, (Morristown, NJ: Financial Executives Research Foundation, 1990). Robert F. Bruner, Does M&A Pay: A Survey of Evidence for the Decision-Maker, Journal of Applied Finance Vol.12 No.1 (Spring/Summer 2002) pp Michael C. Jensen, The Eclipse of the Public Corporation, Harvard Business Review (September/October 1989) pp Kensinger & Martin Financing Network Organizations, Journal of Applied Corporate Finance Vol.4 No.1 (Spring 1991) pp
10 Kensinger & Martin, The Quiet Restructuring, Journal of Applied Corporate Finance Vol.1 No.1 (Spring 1988) pp Reprinted in Stern and Chew (eds.), The New Corporate Finance Where Theory Meets Practice (New York: McGraw- Hill, 1992) pp Nov 29: Second Examination, entire session (covers Topics 1-15 and problem sets 1-8) Dec 6: Topic 16: More unresolved questions: the new issue phenomenon, the value of liquidity, and dividend policy Chapters 15, 17 Handouts: Richard A. Brealey, Does Dividend Policy Matter. Reprinted in Stern and Chew (eds.), The Revolution in Corporate Finance 3 rd edition (Malden, Mass.: Blackwell Publishers, 1998) pp Fischer Black The Dividend Puzzle, Journal of Portfolio Management 2, (1976) pp Dec 13: CUMULATIVE FINAL EXAMINATION 10
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