College of Business Administration
FIN 1335—Managerial Finance
Fall 2001 Emery Trahan, Ph.D., CPA, CFA Class Hours: 413 Hayden Hall TU-TH 9:55-11:35 (617) 373-4568 (Office) 170 Dodge Hall (617) 373-8798 (Fax) (617) 373-3248 (Assistant—Kathy) E-mail: email@example.com Home Page: http://www.cba.neu.edu/~etrahan Office Hours: TU/TH 2:00-3:30 and by appointment.
A. Course Prerequisites In order to be in this course you must have completed the Introduction to Finance sequence (FIN 1438 & FIN 1439). If you feel weak on that material you should work extra hard these first few weeks to get up to speed. Do not fall behind! B. Required Course Materials 1. Intermediate Financial Management, 6th edition, by Brigham, Gapenski, and Davies. (Student Home at http://www.harcourtcollege.com/finance/ifm/student/) 2. Cases in Financial Management, for FIN 1335, by Brigham and Klein. 3. FIN 1335 Class Packet, available in the bookstore, by Emery Trahan. 4. Access to Microsoft Excel and the Internet. 5. A financial calculator (Capable of time value of money, NPV, IRR, and regression). If you need to purchase a calculator, I recommend you look at the Texas Instruments BAII Plus or TI-83. 6. Daily reading of The Wall Street Journal. C. Grading 1. Midterm Exam 2. Final Exam 3. Case Write-ups 4. Company Analysis Project 5. Class Participation
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D. Office Hours My office hours are posted above. I am in the office regularly and am available by voicemail and e-mail. Please feel free to contact me to set up a time that fits your schedule.
E. Groups A substantial portion of the work in this class will be done in groups. You should immediately form into groups of four or five. You will work in these groups on case write-ups and a company analysis project. Your group is also a good vehicle to use for reviewing course material and preparing for exams. An effective and efficient group brings together diverse viewpoints and skills. In forming your groups, make sure that you consider the unique talents of each potential member. Group members will receive a group grade and will evaluate each other. "Free riding" will not be permitted. If group members think that someone is not doing his or her fair share of the work, the group should meet as a group and try to work things out. If this fails, the team (individually or as a group) should meet with me. You may also consider the option of “firing” a group member and asking him or her to find another group. I reserve the right to adjust the grade of any individual group member who contributes disproportionately to the effort.
II. Course Objectives 1. In FIN 1438 and FIN 1439 you were exposed to various finance topics but probably did not develop the skills required to make financial decisions. Now, through reading, lecture, working problems, case write-ups, and an analysis project and presentations, you will learn how to analyze complex financial problems and make financial decisions. Both financial theory and its applications in a real world setting will be stressed. 2. In addition to developing financial decision-making skills, the course will offer opportunities to consider many broader issues. Throughout the course, we will discuss the relevance of globalization, the world economy, technological advances, and legal, social, and ethical issues related to the practice of corporate finance and business. 3. The ability to communicate clearly and concisely is essential for financial managers. Through your written and oral presentation projects you will improve these skills. My evaluation of your work will consider the clarity, neatness, grammar, etc. I have information on the Northeastern University writing center, where you can obtain an evaluation of and assistance with your writing projects free of charge. 4. Working in a group environment may seem bothersome in a class setting but in the business world very few actual projects are accomplished outside of a group setting. Working in groups will allow you to develop these skills and take advantage of the strong points of each member of your group. 5. Computer skills are absolutely essential for the financial manager. The up-front cost of developing these skills is quickly offset by the efficiency and superior performance gained from the skills. This course will provide many assignments where you will be required to develop and use computer spreadsheets, word processing, and graphics presentation skills. 6. You will be asked to actively participate in the learning process. Your learning will be reinforced through class participation, case studies, projects, and exams. You will have regular and frequent deliverables that necessitate that you keep up on the
material on a regular basis, rather than cramming for exams. All assigned materials should be read prior to coming to class.
III. Case Projects
1. Your group will be responsible for preparing two case write-ups. All write-ups should be no longer than two typed double spaced pages, with one-inch margins and 12-point fonts, plus relevant exhibits. Please follow these guidelines to avoid disappointment. 2. Your case write-ups should address all relevant aspects of the case. The write-up should have an introduction, analysis, recommendations, and conclusion. Resist the temptation to answer a question with the statement, "See Exhibit 1." Expand the statement into something like, "The debt to equity ratio is two to one, which is above the industry average of one to one, and it has been growing. (See Exhibit 1.)" I will read your reports like your boss will when you graduate, and he or she will not want to hunt through exhibits to find the answer to questions. Exhibits should be used to show details, and to elaborate on points made in the text, however it should be possible for the reader to follow the report without looking at the exhibits. All exhibits should be numbered and should be referred to in the text (number the exhibits in the order that they are referenced in the text). Exhibits should be self-contained, i.e., the reader should be able to understand the exhibit without looking at the text. Descriptive headings are a must. 3. Typically cases do not have one correct answer. You need to develop alternative solutions, analyze them, and recommend the best one. A basic guide is to: a) identify the problem, b) develop alternative solutions, c) evaluate the alternatives, and d) select the best alternative. Be sure to include a brief introduction and summary. 4. Guideline questions to consider are noted in the course schedule. You should address the issues raised by these questions, but do not format your report in a question and answer format. 5. Spreadsheet templates for several of the cases are available on my Web page.
IV. Company Analysis Project
An important skill for any corporate financial manager or financial analyst is the ability to evaluate a company and form an opinion of its operating and financial performance. You will work as part of a team to evaluate the performance of an actual publicly traded company. The project will involve strategic analysis, fundamental analysis, financial forecasts, market-based performance analysis, and value estimation. The project requirements are as follows: 1. I will select four companies to analyze. For each company, two groups will be designated: 1) securities analysts and 2) management. Groups should write their report and prepare their presentation from the viewpoint of their assigned role and the role of the group they are presenting to. In this context, management will attempt to
convince the securities analysts to recommend their company, while securities analysts will make a buy/sell recommendation presented to management. Get the big picture of the company and assess it strategically by preparing a strategic overview of the company considering the overall economy, the industry, the company, and a competitor. A SWOT analysis reading is included in the Class Packet. Gather data from Value Line, Compact Disclosure, annual reports, and information available on the Internet. You should choose a relevant competitor company to benchmark against. Prepare a comprehensive financial analysis of the company (and its competitor), including a ratio and DuPont analysis, and stock market returns for the past one, three, and five years. You should perform all calculations, as opposed to pulling ratios from published sources. Prepare a pro forma income statement and balance sheet for the company for the next fiscal year. Using the pro forma statements for the next fiscal year, compute free cash flow for the projected year as follows: Operating Income (EBIT) Minus income taxes Plus depreciation and amortization expense Minus increase in net working capital Minus increase in goodwill and other assets Minus capital expenditures (change in net fixed assets plus depreciation expense) Equals estimated free cash flow. The format for your report should look something like the following: Introduction—An overview of the report, including the major recommendations. Strategic Overview—A big-picture strategic analysis of the company, its industry, and the overall economy, including an exhibit summarizing the strategic analysis. Basic Financial Analysis—A big-picture financial analysis including an analysis of recent returns to shareholders, a ratio analysis, and a DuPont analysis. Pro forma financial statements—Project the balance sheet and income statement for the next year. Evaluation of Free Cash Flow—An evaluation of the company’s free cash flow covering the current year, the past two years, and the pro forma year. Valuation—An assessment of the company’s market value. Recommendation—Depending on what role your group represents, make a recommendation to the group you are presenting to. Summary and Conclusion—Summarize the key points and conclude. Your report should be of the same format described above for case write-ups; a maximum of three pages plus exhibits. Reports must be prepared on a computer using a word processing package and must use Microsoft Excel or a comparable spreadsheet package to perform the analysis. Use of Microsoft PowerPoint or a
comparable graphics package for presentations is required. Well thought out tables, graphs, and exhibits are invaluable in presenting material in a clear and concise manner. Your written and oral presentations should be well thought out, well organized, and presented in a professional manner. Computer graphics and print material should be of high quality. 8. Reports are due on Tuesday, November 27, 2001, and presentations are due on Tuesday, November 27, 2001 and Thursday, November 29, 2001. Interim progress reports will be due (details will be announced). Oral presentations should be ten minutes long, and you should be prepared to take questions.
V. Class Participation
Class participation is a significant component of the grade for this course. Your grade will be positively affected by your interest, effort, and quality of class participation and negatively affected by inappropriate behavior in class. You should treat the class as if it is a business meeting that you are attending with your colleagues and supervised by a senior manager. To excel you need to contribute appropriately, properly respect the views of others, and not disrupt the meeting. You also need to participate regularly enough and at a high enough level to impress the senior manager.
VI. Course Policies
1. Assigned chapters should be read prior to the class where they will be discussed. The Mini Case at the end of each chapter covers most of the material in the chapter and provides a good review. Key mini cases are assigned on the syllabus and solutions are provided in the class packet. After the class session you may want to re-read the chapter, focusing on the material covered in class. Assigned cases should be read and worked on prior to the class where they will be discussed. Very few, if any, of you will be able to learn to make financial decisions unless you spend time struggling to work out numerous financial problems. It is essential that you continuously work out the answers to these problems without looking at the solutions. 2. All examinations are closed book and closed notes. To receive credit you must show all work leading up to a final answer. Unless otherwise stated, all work is to be completed on an individual basis by the student. Cheating harms the University, the faculty, and the students; it decreases the value of your degree to prospective employers. The majority of you will not cheat, and should be protected from anyone who would. Anyone caught cheating, or attempting to cheat, will be dealt with severely, and may be asked to leave the University. Please note that cheating includes discussing the content of assignments and exams with students in other sections of this course, prior to the session when these students will cover the assignment or exam. It also includes relying on case solutions from students in prior sections of this class or Instructor solutions. 3. All assignments are due at the beginning of class on the dates that they are due. Late assignments and will not be accepted. If a serious, documented illness forces you to miss a scheduled exam, you must contact me prior to the exam if
you want to be given an opportunity to earn credit for the exam. If you are unable to get to class to turn in an assignment, you may mail or fax it to me (no e-mails please). The assignment should reach me prior to the time that it is due, and you should leave me a voice mail message alerting me to the transmittal. You should retain a copy of all returned graded work as a receipt of your grade. You should pick up all work within one week of when it is returned to the class. Failure to do so means that you do not have a receipt showing that the work was turned in. 4. If for any reason a class is canceled, all materials due or exams scheduled for that class will automatically be shifted to the next regularly scheduled class. Failure to complete an assignment will result in a score of zero. 5. The workload in this course is fairly high, but manageable if you keep organized and do not fall behind. Corporate finance is a fairly complex subject and hence it requires a significant effort and struggle to master. This helps to explain why finance and accounting majors tend to earn among the highest salaries for people with college degrees. I think that you will find the material interesting and challenging, and will do well in the course if you put in a reasonable effort. You should plan on spending approximately 6 to 8 hours per week outside of scheduled class time preparing for this class. I have listed my office hours and phone number (with voice mail) above. I am also often available most times by appointment. Think of me as someone who wants very much for you to learn as much as possible about corporate finance; I am your ally in the learning process. Please do not hesitate to stop by my office to discuss corporate finance or any other issues of concern. 6. Grades in the course are determined using the criteria in Section I. C. of the syllabus. Much of the grading in this course involves some subjective evaluation of your work by the professor. I can only assure you that I make every attempt to be consistent and fair to all students. Please feel comfortable approaching me to discuss any questions you have regarding your specific grades. If you have any concerns about your grades, you should discuss them with me prior to the completion of the course. I will be happy to discuss your final course grade with you. However, please be advised that, in order to be fair to everyone, I do not make any changes to final course grades unless there has been a mistake made in calculating your grade.
VII. Tentative Schedule—Deviations from this syllabus may occur. Students are
responsible for all announcements made in all classes. 1. (Thursday, September 20, 2001)—Introduction to Corporate Finance 1. Read Chapter 1, “An Overview of Financial Theory.” 2. Visit the Online Writing Lab website (http://www.dac.neu.edu/owl). 3. Complete a Student Information Card.
2. (Tuesday, September 25, 2001)—Financial Analysis and Forecasting 1. Read Chapter 3, "Financial Statement Analysis,” and Chapter 9, “Long-Term Financial Planning.” 2. Review the mini cases for Chapter 3 questions a, b, and c, and Chapter 9 questions b, g, h, i, and j. 3. Bring your completed Student Information Card, with photograph attached, to class. 4. Analyze the Mark X Company (A) case. Consider questions 1, 2, 3, 4, 5, 6, 7, 8, and 11.
3. (Thursday, September 27, 2001)—Valuation 1. Read Chapter 2, “Basic Financial Tools: A Review.” 2. Analyze the Swan Davis Stock and Bond Valuation case. Consider questions 1, 2, 4a, 4b, 4c, 5, and 10 (Note: The stock price expected at the end of 2001 is $30.20.).
4. (Tuesday, October 2, 2001)—Risk and Return 1. Read Chapter 25, “Risk and Return I,” and skim Chapter 26, “Risk and Return II.” 2. Review the mini case for Chapter 25 questions b, c, d, f, g, and h. 3. Analyze the North Central Utilities case. Consider questions 1d-f, 2, 3a-b, 4a-c, 5, 6, 7a-c, and 8a-f. Note: In Table 1, starting with Compu, shift Var of Returns, Coef of Var (CV), and Beta Coefficient numbers one column to the right.
5. (Thursday, October 4, 2001)—Cost of Capital 1. Read Chapter 5, “Determining the Cost of Capital” pages 145-170 and 190-191. 2. Review the mini case for Chapter 5 questions a, b, c, d, h, and i.
6. (Tuesday, October 9, 2001)—Capital Budgeting Decision Methods 1. Read Chapter 6, “Capital Budgeting Decision Criteria.” 2. Analyze the mini case for Chapter 6 questions a, b, c, d, e, f, g, h, and i. 3. Prepare the Chicago Valve Company case. Consider questions 1, 2, 3, 4a-d, 5, 6, 7, 9, 10, and 11a-d.
7. (Thursday, October 11, 2001)—Capital Budgeting Cash Flow Estimation 1. Read Chapter 7, “Cash Flow Estimation.” 2. Analyze the mini case for Chapter 7 questions a, b, c, d, f, h, and i. 3. Prepare the Potato Best Products case. Consider questions 1, 2, 3, 4, 5, 6, 7, 8, 9, 10ab, 11a-c, 12, 13, 14, 15. Questions for this case are in the class packet. Friday, October 12, 2001, last day to drop course without a W grade.
8. (Tuesday, October 16, 2001)—Capital Budgeting Risk Analysis 1. 2. 3. 4. Read Chapter 8, “Risk Analysis and Real Options” pages 277-286. Review the mini case for Chapter 8 questions a, b, c, d, e, f, and k. Prepare the Robert Montoya, Inc. A case. Consider questions 4, 5, and 7, 8, and 9a-b. Prepare the Robert Montoya, Inc. B case. Consider questions 2a-d, 3, 4, and 9a-c.
9. (Thursday, October 18, 2001)—Company Analysis Projects 1. Review guidelines and plan for Company Analysis Project. 2. Review the SWOT analysis reading in the class packet.
10. (Tuesday, October 23, 2001)—Valuing the Firm 1. Read Chapter 4, “Valuing the Firm: The Cash Flow Model.” 2. Review the mini case for Chapter 4 questions a, b, c, h, i, j, and k. 3. Read “America’s Best & Worst Wealth Creators,” by Geoffrey Colvin, Fortune, December 18, 2000, pages 207-216, available in the class packet.
11. (Thursday, October 25, 2001)—Midterm Exam 1. Study.
12. (Tuesday, October 30, 2001)—Capital Structure 1. Skim Chapter 10, “Capital Structure Decisions: Part I,” and Chapter 11, “Capital Structure Decisions: Part II.” 2. Prepare the mini case for Chapter 10 questions h, i, and j.
13. (Thursday, November 1, 2001)—Capital Structure and Dividend Policy 1. Prepare the Aspeon Sparkling Water, Inc. case. Consider questions 3a-b, 4a-c, 5a-c, 6a-d, 9, and 10a-d. Note: The questions for this case are in the class packet. 2. Read Chapter 12 “Dividend Policy.” 3. Prepare the mini case for Chapter 12 questions a, b, c, f, and g. 4. Company Analysis Project: Strategic Overview due.
14. (Tuesday, November 6, 2001)—Dividend Policy and Bond Refunding 1. Prepare the Floral Fragrance, Inc. case. Consider questions 1, 2, 3, 4, 5, 6, 7, 10, 12, and 13. 2. Read Chapter 13, “Investment Banking and Financial Restructuring” pages 523-529.
15. (Thursday, November 8, 2001)—Bond Refunding and Lease Financing 1. Prepare the Bay Area Telephone Company case. Consider questions 1, 2, 3, 4, 7, and 8. 2. Read Chapter 14, “Lease Financing.” 3. Prepare the mini case for Chapter 14, questions a, b, c, d, e, and f. 4. Company Analysis Project: Ratio Analysis Due.
16. (Tuesday, November 13, 2001)—Lease Financing and Mergers and Acquisitions 1. Prepare the Friendly Food Stores, Inc. case. Consider questions 1, 2, 3, 4, 8, 9, and 10. Note: In Table 1, Part B, the equipment cost should be in Year 0, not Year 1. 2. Read Chapter 21, “Mergers, LBOs, Divestitures, and Holding Companies,” and Chapter 8, “Risk Analyses and Real Options,” pages 287-290. 3. Prepare the mini case for Chapter 21 questions a, c, d, e, f, and h.
17. (Thursday, November15, 2001)—Mergers and Acquisitions 1. Prepare the Computer Concepts/Computech Case. Consider Questions 1, 2, 3, 4, 5, 7, 8, 9, and 12. Use a cost of equity of 15.41%. Bring transparencies or computer graphics to present. 2. Company Analysis Project: Pro forma statements due. Friday, November 16, 2001, Last day to drop course with a W grade.
18. (Tuesday, November 20, 2001)—Working Capital Management 1. Read Chapters 16, “Current Asset Management,” 17, “Short-Term Financing,” and 18, “Other Topics in Working Capital Management.”
19. (Thursday, November 22, 2001)—Thanksgiving Holiday, University Closed
20. (Tuesday, November 27, 2001)—Presentation of Company Analysis Projects 1. All company analysis project reports due.
21. (Thursday, November 29, 2001)—Presentation of Company Analysis Projects.
22. (Tuesday, December 4, 2001)—Review and Wrap-up.
23. (Monday, December 10, 2001, 10:30)—Final Exam per University Schedule Comprehensive final exam.