2 Categories of Business Finance

							                                           Finance 333
                                      Financial Management
                                         Master Syllabus
                                      Revised October 2007
                                        By Thomas Rourke

Course Description
      Financial Management, along with Theory of Finance 330, provides the conceptual
      foundation for upper-level courses in Finance and is required for all students
      concentrating in Finance. The course provides an in-depth treatment of important topics
      on the theory and practice of financial management. Students leave this course with a set
      of conceptual tools that can be applied to evaluating alternative business decisions. More
      specifically, the course details the links between business decisions and stock prices, and
      it covers the analytical techniques used to evaluate the impact of alternative business
      decisions on the firm‟s stock price. Topics include: financial statement analysis and
      financial forecasting, risk and return, valuation of bonds and stocks, the cost of capital,
      capital budgeting, real options in capital budgeting, corporate valuation and measures of
      financial performance.

       Prerequisites: Business Finance 331

Learning Goals
      After completing the course, students will be able to:
       Provide an overview of the financial management process;
       Describe the primary financial statements and how to estimate firm cash flows;
       Analyze a set of financial statements to assess a firm‟s liquidity, asset management,
         debt management, and profitability;
       Construct a set of pro-forma financial statements;
       Explain the relationship between risk and expected returns;
       Illustrate the valuation of bonds;
       Illustrate the valuation of stocks;
       Compute a firm‟s cost of capital based on the primary sources of firm funding and the
         cost of each;
       Estimate the value of a firm;
       Determine a firm‟s optimal capital structure;
       Explain the capital budgeting process;
       Estimate the cash flows and risks of projects.

Objectives
      Overview of Financial Management
       Discuss potential agency problems of stockholders versus 1) managers and 2)
           creditors and describe four mechanisms used to motivate managers to act in
           stockholders‟ best interests;
       Explain why management‟s primary objective should be to maximize the firm‟s
           (intrinsic) value;



9b4e7b48-aa8d-4fb4-aedc-db515bd2eec6.doc
        Distinguish between intrinsic value and stock price and explain why they might not
         be equal to each other;
       Describe the role of finance in the corporation;
       Describe the following types of financial markets and institutions—primary market,
         secondary market, money market, capital market, investment bank, financial
         intermediary;
       Define market transparency, explain why it is important and list the safeguards to the
         integrity of U.S. financial information.
      Financial Statements and Cash Flows
       Describe and interpret the major financial statements: balance sheet, income
         statement, statement of cash flows, statement of retained earnings;
       Construct a statement of cash flow (indirect method) and statement of retained
         earnings, given simple balance sheet and income statement data;
       Modify and interpret simple financial statements for managerial purposes—FCF,
         ROIC, NOWC, Operating Assets, Operating Capital, EVA, MVA.
      Analysis of Financial Statements
       Define the major categories of financial ratios and explain what each category is
         intended to measure—liquidity, asset utilization, financial leverage, profitability,
         valuation multiples;
       Compute and interpret all of the financial ratios described in the chapter of the
         recommended textbook;
       Construct and interpret common size statements;
       Identify the impact of a change in one financial ratio or variable on other financial
         ratios or variables;
       Compute and interpret the DuPont equation for ROE;
       Explain the limitations of financial ratios.
      Financial Planning and Forecasting Financial Statements
       Develop pro forma financial statements using the percent of sales method;
       Develop pro forma financial statements given specific assumptions on sales growth,
         financial ratios and capacity needs;
       Determine Additional Financing Needed (AFN) and incorporate in pro forma
         statements;
       Use the constant growth AFN Formula to explain the impact of the following on
         external capital requirements: retention ratio, capital intensity and profit margin.
      Risk and Return
       Explain why financial managers need a theory of the relationship between risk and
         return;
       Explain stand-alone (total) risk, market (portfolio) risk, diversifiable (firm-specific)
         risk;
       Compute expected (ex ante) return and standard deviation from a probability
         distribution of returns;
       Compute historical (ex post) average return and standard deviation using a financial
         calculator with sample data;
       Explain the distinction between expected returns and required returns;
       Explain how diversification reduces risk;


9b4e7b48-aa8d-4fb4-aedc-db515bd2eec6.doc 2
       Compute the expected return and beta of a portfolio of common stocks;
       Explain why beta is the relevant measure of risk for individual investments;
       Compute beta from sample data using a financial calculator;
       Explain how the inputs to the Security Market Line are obtained;
       Use the Security Market Line to compute required returns.
      Bonds and Their Valuation
       Define yield to maturity, yield to call, current yield, capital gain yield, premium bond,
         discount bond;
       Use a financial calculator to value a bond and to calculate yield to maturity and yield
         to call
       Describe interest rate risk and reinvestment risk;
       Define default risk and explain how it affects a bond‟s yield to maturity;
       Explain how a bond ratings affect firms‟ borrowing costs.
      Stocks and Their Valuation
       Define intrinsic value, required return and expected return;
       State the components of the return on a common stock;
       Explain the logic of dividend discount models (DDM);
       Describe the type of firm to which the Constant Growth DDM applies;
       Identify the primary characteristic of a firm that determines shareholders‟ preference
         for current versus future dividends;
       Use the Constant Growth DDM to derive expected return;
       Use the Two-Stage Growth DDM to obtain intrinsic value;
       Use the Two-Stage Growth DDM to obtain dividend yield and capital gain yield for a
         single holding period;
       Define stock market equilibrium;
       Describe an efficient market;
       Explain how competition among investors leads to efficient markets;
       Describe the three forms of market efficiency;
       Explain why randomness in stock returns is consistent with market efficiency;
       Explain the implications of market efficiency for technical and fundamental analysis.
      Cost of Capital
       Identify the three primary sources of capital and compute the cost of each;
       Define the target (or, optimal) capital structure;
       Explain how the WACC is used in capital budgeting;
       Identify factors impacting a firm‟s cost of capital, including those that can be
         controlled by management and those that cannot;
       Explain why the cost of new common stock exceeds the cost of retained earnings;
       Make adjustments for flotation costs;
       Explain why it is necessary to adjust hurdle rates for project risk;
       Compute a divisional hurdle rate.
      Corporate Valuation and Value-Based Management
       Apply the corporate valuation model (FCF valuation) to obtain the value of the firm,
         the value of common equity, and the per-share value of the stock;
       Identify the fundamental drivers of shareholder wealth (i.e., market value added).


9b4e7b48-aa8d-4fb4-aedc-db515bd2eec6.doc 3
      Capital Structure
       Define the target (or, optimal) capital structure;
       Explain business risk and financial risk, including the factors that influence each type
         of risk;
       Define operating leverage and explain how it affects business risk;
       Calculate operating breakeven points;
       Use Hamada‟s equation to compute levered and un-levered betas;
       Find the optimal capital structure when cash flows are perpetual;
       Compute the equilibrium stock price in a recapitalization;
       Explain why increasing debt can raise both the cost of debt and the cost of equity;
       State the assumptions made by Modigliani and Miller, and state their initial
         conclusions about capital structure;
       Explain how debt can add value to a firm;
       Describe the costs of bankruptcy and financial distress;
       Explain the Trade-Off Theory of capital structure;
       Describe the limitations of the Trade-Off Theory;
       Define asymmetric information and the concept of signaling;
       Define financial flexibility and explain why, according to signaling theory, firms
         strive to maintain reserve borrowing capacity;
       Describe how asymmetric information can impact the choice between issuing debt
         and equity.
      Capital Budgeting
       Define, compute and state the decision rules associated with the Payback Period,
         Discounted Payback, NPV, Profitability Index, IRR, and MIRR;
       Distinguish between independent and mutually exclusive projects;
       Distinguish between normal and non-normal cash flows;
       State the rationale for NPV;
       Describe the problems associated with IRR;
       Sketch a project‟s NPV Profile;
       Define and calculate the „crossover rate‟ between two mutually exclusive projects;
       Explain NPV and IRR reinvestment rate assumptions;
       Distinguish between economic life and physical life;
       Apply the Replacement Chain approach to mutually exclusive projects with unequal
         lives.
      Cash Flow Estimation and Risk Analysis
       Identify relevant project free cash flows;
       Estimate a project‟s free cash flows;
       Calculate depreciation using MACRS;
       Discuss the effects of inflation on capital budgeting;
       Define stand-alone risk, corporate risk and market risk;
       Explain why stand-alone risk and corporate risk are important;
       Discuss the use of sensitivity analysis and scenario analysis for analyzing project risk;
       Use decision trees in capital budgeting analysis.




9b4e7b48-aa8d-4fb4-aedc-db515bd2eec6.doc 4
Topic Outline
      I.      Overview of Financial Management                                           10%
      II.     Financial Statement Analysis and Forecasting                               15%
      III.    Risk and Return and the Theory of Valuation                                20%
      IV.     Cost of Capital and Corporate Valuation                                    20%
      V.      Capital Structure                                                          20%
      VI.     Cash Flow Estimation and Risk Analysis                                     15%

Recommended Teaching Procedure
     Lecture and Discussion. Given the nature of the material, a substantial reliance on lecture
     is in order to provide a clear explanation of financial concepts. In addition, a wealth of
     examples and real-world applications may be readily found in business publications such
     as the Wall Street Journal. The instructor should regularly utilize these examples as a
     basis for class discussion in order to augment students‟ interest in and understanding of
     financial concepts.

       Financial Cases and Projects. Cases, projects and research papers provide opportunities
       for students to demonstrate their ability to understand and apply of financial concepts.

Evaluation
      The following evaluation system may be employed with weights adjusted to satisfy the
      instructor‟s desires and/or areas of emphasis:
              In-class exams                                                         60%
              Cases, Projects and/or Research Papers                                 40%

Textbook and References
      Recommended Text
      Financial Management: Theory and Practice, 12 edition, Brigham, Eugene F. and
      Michael C. Ehrhardt, 2008, Thomson South-Western

       Supplemental References
       Financial Management
       Journal of Applied Corporate Finance
       Financial Analysts Journal

       Web Sites
       http://www.finweb.com/                       financial economics server with many
                                                    pointers to other relevant web sites
       http://www.wsj.com/                          Wall Street Journal
       http://www.barrons.com/                      Barron‟s
       http://www.nyse.com/                         New York Stock Exchange
       http://www.nasdaq.com/                       NASDAQ
       http://www.sec.gov/                          Securities and Exchange Commission
                                                    Association
       http://www.cfainstitute.org/                 Investment Management and Research




9b4e7b48-aa8d-4fb4-aedc-db515bd2eec6.doc 5
Learning Outcomes Assessment
      Learning outcomes will be assessed in a variety of ways, both at formal assessment periods,
      throughout the course and afterward. A variety of tools may be used including:
       Examinations and quizzes, formally scheduled at key intervals.
       Surprise quizzes at important milestones during the course.
       Preparation and presentation of homework problems.
       Case studies that integrate multiple learning objectives into one comprehensive solution.
       Projects that incorporate course material with outside research and analytical activity.
       Critical discussions about current activities in finance that challenge the student to apply
          classroom learning to the situation.
       Incorporation of “clicker” technology to measure comprehension and modify lectures and
          reviews based upon the collection of real-time feedback.




9b4e7b48-aa8d-4fb4-aedc-db515bd2eec6.doc 6