University of Notre Dame Mendoza College of Business MSM Corporate Finance: Preliminary Syllabus Clements Spring 2015

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1 Course & Contact Information: Meets Monday and Wednesday, 2:00 3:20PM Instructor: Walt Clements Office: 224 Mendoza Office Hours: regular times TBD, others by appt or stop by Phone: (574) Cell: (630) Course Materials and Resources: Corporate Finance 3 rd edition by Berk and DeMarzo (text from Finance Principles Course) Readings provided, class discussions and notes, current news, and in- class work. Active use of the Sakai Course Website. Case work, Problem Sets and Homework problems to help embed course concepts and prepare you for exams. Course Overview: The University of Notre Dame s Mendoza College of Business is highly regarded, as are its Finance degrees and course offerings. MSB Corporate Finance is an important part of the curriculum for Master of Science in Business candidates at Mendoza, building on the Finance, Accounting and Strategy courses taken earlier. The goal of this course is to build upon the knowledge gained in the earlier courses by continuing to develop students Financial Evaluation and Problem- Solving skills, both individually and in teams. These are the skills required to make good business decisions: operational, between investment alternatives, and Mergers & Acquisitions activity. We will explore developing real optionality and risk management when creating projects, resource allocation, firm, equity and debt valuations, and company capital structure alternatives. The skills learned in this course are important enablers for students to become successful Finance Professionals and Business Leaders. The course is made up of 3 distinct modules that are highly integrated across a firm s Finance scope: Module 1: Financial Statement analysis, building financial forecasts, valuing a firm and its equity Module 2: Capital budgeting making decisions based on value and risks Module 3: Capital structure, cost of capital, payout policy, and raising capital 1

2 Course Learning Objectives: For Corporate Finance, the learning objectives are to develop students Finance skills to prepare them to become successful Finance Professionals and Business Leaders. Students will further develop their interpersonal, teamwork, and communication skills through group project work required for the course, working in groups on homework assignments, and participating in an interactive class setting. After successfully completing this course, students will be able to: Interpret a firm s financial statements, be able to develop its financial forecast, value a firm, its equity and its debt. Evaluate project investments to decide whether to proceed or not by analyzing both financial and qualitative information, and develop real options for projects to consider risks and opportunities. Understand how investment and financing decisions impact firm value. Differentiate between financing and capital structure alternatives. Identify and assess corporate risks, understand risk mitigation techniques. Communicate ideas and project work in a challenging and respectful environment, individual and team, written and inter- active class settings. Commit to the role of corporate governance and ethics in the success of the firm, both financial and in fulfilling its obligations to its various stakeholders. Consider local and global implications for all subject areas of this course. Build capabilities and confidence to solve problems and embrace opportunities by achieving the course learning objectives. Student Deliverables and Grade Determination: Exam points Exam Exam points Group Case Project 1 40 Group Case Project 2 40 Group Mini- Cases 20 Problem Sets 50 Preparation for Class & Engagement 50 Total 500 points Final grades are assigned on a curve, and will reflect your performance relative to the class. Guidelines are a grade point average of between for MSB courses. I can let you know your approximate grade during the semester at that point. Exams are closed book, and will include multiple- choice questions, an occasional essay, and problems for you to solve. You will need a financial or statistical 2

3 calculator (phone calculators are not allowed). You will be given certain formulas and be required to know others, which will be clear prior to the exam. There are two Group Case Projects and 4 group Mini- Cases. For Group Case Project 1, you will use Excel to build pro forma financial forecasts for an assigned company, derive its free cash flow, and determine the value of the company and its equity. In a short written summary, you will share your answers, observations, and how you are able to link your work to the financial markets and investor s views. For Group Case Project 2, you will analyze a corporate investment project, and determine the best decision for the firm. The deliverable will be a written report and quantitative support using Excel. I will regularly assign Problem Sets for you to complete, which are good practice to ensure understanding of key concepts and to prepare for exams. I will collect and grade 10 of these, and include your highest 8 scores toward your grade for this area. These are individual submissions, although I do encourage you to work together as this enhances the learning experience. At the start of the course, I will provide a schedule of Problem Sets and Mini- Cases and due dates. ½ of the Preparation for Class grade will be based on attendance (present, on- time), and the other ½ on active Engagement during class (participate, computers closed, attentive) and with your groups based on peer evaluations. More than 3 absences will result in a lower grade. Attendance is required when Group Case Work is discussed. Class Code of Conduct Entering Notre Dame you studied the Academic Code of Honor, and signed a pledge to abide by the Code. Refer to for the full Code and a Student Guide. The most fundamental sentence is the beginning of Section IV- B, which states: The pledge to uphold the Academic Code of Honor includes an understanding that a student s submitted work, graded or ungraded examinations, draft copies, papers, homework assignments, extra credit work, etc. must be his or her own. Violations will be subject to sanction. Please be sure you understand these policies and seek help with any questions or concerns. 3

4 Schedule of Classes Module 1: Financial Statement Analysis, Valuing the Firm and its Equity Class #1: 01/12/15 #2: 01/14/15 #3: 01/19/15 #4: 01/21/15 #5: 01/26/15 #6: 01/28/15 #7: 02/02/15 #8: 02/04/15 #9: 02/09/15 #10: 02/11/15 Content Introductions and Expectations Subject Overview & Intro Review: Financial Statements & Accounting and Cash Flow Financial Statement Analysis Ratio Analysis DuPont Identity Fin. Statement Analysis (cont.) Ratio Analysis (continued) Est. Sales Growth, Real vs. Nominal Benchmarking Sales Trends vs. history and Industry Projecting Fin. Statements Building Pro Forma Income Statement and Balance Sheet Relation between Financial Statements Financial Policy of the firm External Financing Needed Equity Valuation using DCF Review: Free Cash Flow NPV of FCF s and Sequential Valuation Equity Valuation using DCF NPV of future FCF s and Sequential Valuation (continued) Firm & Equity Valuation Methods Valuation based on Comparables Equity Valuation Methods (cont.) Dividend Discount Model Discuss Case Project 1, Exam 1 Review Exam 1 Preparation Required Berk/DeMarzo Chapter 1.2 Berk/DeMarzo Chapter Complete Problem Set 1 Berk/DeMarzo Chapter Prepare for mini- case discussion Read document on Case Project 1 in Projects & Cases folder Readings folder Berk/DeMarzo Chapter Read Paper on External Financing Needed and Sustainable Growth rates in Sakai Readings folder Complete Problem Set 2 Berk/DeMarzo Chapter 8.2 and 19.3 Berk/DeMarzo Chapter 9.3 Complete Problem Set 3 Berk/DeMarzo Chapter 9.3 (continued) Complete Group Mini- Case* Berk/DeMarzo Chapter Complete Mini- Case Berk/DeMarzo Chapter review Prepare for Exam 1 4

5 Module 2: Capital Budgeting, Making Decisions based on Value, Risk Analysis Class #11: 02/16/15 #12: 02/18/15 #13: 02/23/15 #14: 02/25/15 #15: 03/02/15 #16: 03/04/15 03/09 & 03/11 #17: 03/16/15 #18: 03/18/15 #19: 03/23/15 #20: 03/25/15 Content Capital Budgeting I: Review Financial Tools & Single Projects Relevant Cash Flow (Review) Single Project Decisions (Review) Capital Budgeting II: Comparing Projects Choosing among alternatives Capital Budgeting III: Project Risk Analysis Sensitivity & Scenario Analysis Break- Even Analysis Capital Budgeting IV: Complex Problems, Part 1 Comparing Projects of Unequal Lives Complex Problems, Part 2 Evaluating Bid Decisions Complex Problems, Part 3 Capital Budgeting & Real Options No Classes, Mid- Term Break Capital Budgeting V (Complex Problems Part 2 continued) Real Options (cont.) Capital Budgeting VI Other evaluation Criteria (Review) Capital Budgeting Summary Discuss Case Project 2, Exam 2 Review Exam 2 Preparation Required Review Berk/DeMarzo Chapters 3-7, 8.1 & 8.2 from Finance Concepts class, Berk/DeMarzo Chapter Berk/DeMarzo Chapter 8.5 Outside Reading Provided Outside Reading Provided Berk/DeMarzo Chapter 22 Berk/DeMarzo Chapter 22 (cont.) Prepare for Exam 2 5

6 Module 3: Valuing Debt, Cost of Capital, Capital Structure, Payout Policy, and Issuing Securities Class #21: 03/30/15 #22: 04/01/15 #23: 04/06/15 #24: 04/08/15 #25: 04/13/15 #26: 04/15/15 #27: 04/20/15 #28: 04/22/15 #29: 04/27/15 #30: 04/29/15 #31: TBD Content LT Financing, Bond Valuation Long- Term Financing types & trends Different types of Debt & Risk Valuing Bonds (Review) Long- Term Financing Callable Bonds Debt Risk management & governance Cost of Capital (Review) Cost of Equity, Debt, Preferred Stock WACC, Divisional WACC & Pure Play Capital Structure I: Intro Modigliani & Miller Perfect Markets Business/Financial Risk Un- levering Beta and Return Capital Structure II: Imperfect Market WACC with Debt & Taxes Value of Un- levered and Levered Firm Un- levering/re- levering Beta, Return Imperfect Market (cont.) Cost of Financial Distress Agency Issues, Ethics & Governance Payout Policy Dividends & Stock Repurchases Taxes, Clienteles, & Signaling Raising Equity Capital Public & Private Markets Valuing Stock Rights Raising Equity Capital: Stock Offerings Exam 3 Review Exam 3, TBD Preparation Required Berk/DeMarzo Chapter 24 Berk/DeMarzo Chapter 24 (cont.) Berk/DeMarzo Chapter 12 Berk/DeMarzo Chapter 14 Berk/DeMarzo Chapter 15 Berk/DeMarzo Chapter 18.3 Berk/DeMarzo Chapter 16 Berk/DeMarzo Chapter 17 Berk/DeMarzo Chapter 23 Berk/DeMarzo Chapter 23 Prepare for Exam 3 6