University of Wisconsin - Madison
The School of Business
Professor Kenneth A. Kavajecz Finance 700
4287 Grainger Hall Intro. to Financial Management
Phone: 608-265-3494 Fall 2007
Office Hours: Tuesday and Thursday 12:30-1:30 PM
and by appointment.
Class Time Lectures
FNCE 700 001 Tuesday-Thursday 9:30 -10:45PM Grainger Hall 1195
FNCE 700 002 Tuesday-Thursday 11:00 -12:15PM Grainger Hall 1195
Required Materials Lecture notes, additional readings, projects, problem sets, and old exams, all of
which are available for downloading from my instruction website listed above.
While a regular calculator is all that is required, you may opt for a financial
calculator. Problem sets and exam will require you to show all your work (i.e.
show the formula and its solution), although a financial calculator may be useful
in checking your solutions. In the event that you decide on a financial calculator,
Casio, Hewlett-Packard and Texas Instruments produce acceptable models. Note
that some models use reverse polish notation (RPN).
Texts No textbook is required for this course. However, should you want a textbook I
recommend, and will most closely follow is Berk and DeMarzo, Corporate
Finance, 1st Edition.
Note that there are many other perfectly fine corporate finance texts available
that students can use, e.g. Brealy and Myers, Principles of Corporate Finance, 7th
Edition; Ross, Westerfield and Jaffe, Corporate Finance, 7th Edition.
Materials on Reserve Berk and DeMarzo, Corporate Finance, 1st Edition.
Solutions Manual for Berk and DeMarzo, Corporate Finance, 1st Edition.
Teaching Assistants: Heather Pahl Don Henken
Office: 3115 Grainger Hall 5284 Grainger Hall
Email: email@example.com firstname.lastname@example.org
Phone: 608-262-1553 608-263-3465
Office Hours: TBD TBD
Office Hour Location: TBD TBD
Keep in mind that students’ performances may vary from one year to the next and that I retain
complete discretion in altering the final grade distribution. That said, I anticipate the following
distribution of final grades for this course: A’s 25-30%, AB’s 45%, B’s 20-25% and BC or lower 0-5%.
The course grade will be based on one midterm exam, two group projects and a final exam with
the following weights applied to each:
Midterm exam 7:15-9:15 PM Tuesday, October 23, 2007 30% TBA
Group Project 1 Due Tuesday, November 13, 2007 15% In Class
Group Project 2 Due Wednesday, December 12, 2007 15% 8:00AM
Final exam 10:05-12:05AM Monday, December 17, 2007 40% TBA
The weights placed on the following requirements are not negotiable and will not be changed.
Thus explicit requests to reapportion the weighting scheme or implicit requests due to retesting or
supplementary work will be denied.
In case of scheduling conflicts, an alternate exam will be allowed if the student notifies the
instructor of the problem within the first 2 weeks of class, otherwise the student must take the at the
Both exams are closed book, but a formula sheet will be allowed. You will need a calculator.
For those students unable to take either the midterm or final exam because:
(i) they are ill and have a doctors confirmation; or,
(ii) they have three or more exams scheduled that day,
the makeup exam will occur at the start of the Spring Semester of 2008. There will be no other
rescheduling of exams for any reason.
There are two group projects during the semester and descriptions of both are listed on my
website. Both group projects are to be done with the previously assigned teams of students within your
cohort. The first group project is a finance case study due on November 13, 2007. The second group
project which is due at the end of the semester (December 12, 2007) is an integrated company analysis
where your team will analyze a publicly traded company using the ideas and concepts within each of the
core classes (accounting, data analysis, finance and marketing).
Be advised that late projects will not be accepted. Project write-ups are to be typed double-
spaced with specific page limitations although appendices are allowed. In handing in your project make
sure to provide both a paper and electronic copy. The projects will require some library work as well as
require some facility with a spreadsheet. Any necessary materials can be downloaded off the internet
In order to ensure a fair distribution of the overall project grade each group member will provide
me with their estimate of each group member’s (including their own) overall contribution to the work. In
rating your group members you should consider all aspects of the work, including but not limited to,
creativity, preparation, quality and quantity of work, cooperation. All evaluations are completely
confidential. Evaluations are listed as a percentage (0% to 100%). Evaluations will be averaged across
group members and will determine the fraction of the project grade that you will receive. For example, if
a group receives 80 points for their project and your group members award you 75% in terms of overall
contribution, you will receive 60 points. Peer evaluations are due the same day as the respective project is
due. You may download a peer evaluation form from my website.
Practice Problems and Problem Sets
The Berk and DeMarzo (BD) book contains some practice problems. Solutions to all of BD’s
problems are on reserve in the UW-Madison Business Library located in Grainger 2200. Please note that
the practice problems from BD are at times elementary and should not be used to measure the difficulty of
the midterm and final exams. Supplementary materials for the BD text may also be found at
In addition to the BD’s practice problems, my website contains problems sets, old midterms and
an old final exam. These questions are representative of what you are likely to encounter on this
semester’s midterm and final exam. The teaching assistants and I will be available in office hours to go
over any of the practice problems, problems sets, or old exams. Note that problem sets will not be
collected, rather they are provided as an aid for students to help them practice applying the material
covered in class.
There will be four review sessions held throughout the semester. Each session entails a short
structured overview of the material since the last review session as well as time for student questions and
problem solving. These review sessions are scheduled as follows:
Review I: Tuesday, September 25, 2007, 6:30-8:30 PM, TBA
Review II: Tuesday, October 16, 2007, 6:30-8:30 PM, TBA
Review III: Tuesday, November 20, 2007, 6:30-8:30 PM, TBA
Review IV: Friday, December 14, 2007, 1:00-3:00 PM, TBA
Exams and group projects will be accepted for regrade only if they are accompanied by a signed
Regrade Request Form (downloadable from my website) and are submitted within the timetable outlined
below. Note if an exam/group project is submitted for regrade, the entire exam/group project will be
regarded by me.
Deadlines for regrade requests:
Group Projects: 2 weeks from the day the project was returned.
Midterm Exams: 2 weeks from the day the exam was returned.
Final Exams: 2 weeks after the beginning of the following semester.
As a good learning environment depends critically on your involvement, I expect that you will
make an effort to attend class on time. Should you not be able to attend class I expect that you will notify
me, in advance if at all possible, why you are not able to make class.
Academic Integrity is an important part of all of the classes you take at the University of
Wisconsin – Madison School of Business and this one is no exception. While I know that you have
signed a personal statement verifying that you understand the honor code and promise to abide by it,
additional measures will be implemented in all MBA classes to keep academic integrity in the forefront.
First, both the specific honor code is listed below for your review. Second, for each piece of work that
will be evaluated for a grade you will be required to attach the following statement:
“On my honor, I have neither given nor received unauthorized aid in completing this academic work.”
Please note that any suspected violation of the Honor Code will be reviewed by, and subject to, the
decision and recommended punishment of the Honor Board.
School of Business
MBA Academic Integrity Policy
I understand that it is the policy of the University of Wisconsin-Madison to not discriminate on
any grounds, and especially not on the basis of gender, race, color, religion, national or ethnic
origin, disability, or sexual orientation. I support this policy and will not tolerate any deviations
from it in the classroom. If I feel that some form of discrimination has been directed toward me
or another during class time, it is my right to contact the Honor Board (or Dean) immediately.
I understand that plagiarism is a major offense at this University and that it is my duty to
understand what plagiarism is and actively seek out advice when I have a question about my
work. Plagiarism is defined by this University as:
“Plagiarism means presenting the words or ideas of others without giving credit.
I should know the principles of plagiarism and the correct rules for citing
sources. In general, if my [work] implies that I am the originator of words or
ideas, they must in fact be my own.
[Specifically], if I use someone else’s exact words, they should be enclosed in
quotation marks with the exact source listed. I may put someone else’s idea in
my own words as long as I indicate whose idea it was.
If I am unsure about the proper ways to give credit to sources, I may ask my
instructor or consult the Writing Center at 6171 Helen C. White Hall (phone:
608/263-1992, e-mail: email@example.com) for a copy of their handout "Quoting,
Paraphrasing and Acknowledging Sources."” Excerpt taken from
I understand that all exams whether in-class or take-home are strictly individual efforts. I will not
communicate with any student regarding any aspect of the exam such as, content, coverage, etc.,
until all students have taken the exam. Moreover, I will be certain that anyone with whom I
discuss the examination has previously handed in their examination.
• Individual Homework
I understand that homework that is not handed in for a grade may be discussed with the professor
and other students; indeed, I am encouraged to do so. However, individual homework
assignments that are to be handed in for a grade may not be discussed with students or others
outside the class, such as other faculty members, alumni, etc., unless specified by the instructor.
Note that similar or identical homework may have been assigned in previous semesters; I may
NOT access solutions from any source for those previous semesters. Difficulties with, or
questions regarding, graded and ungraded work may always be directed to the instructor of the
• Group Work
Basic Rules: I understand that group work must be done solely within the group and when
required I must hand in a single set of answers for my group. I must contribute equitably in the
assignment’s/case preparation if I am to take full credit for it. This does not mean that my ideas
must be included. It means that I should make a significant contribution to the overall process. If
that did not happen for some individual, I can include in my report an estimate of that person’s
contribution relative to others in my group.
On Consulting with Others: I may not discuss the group work with anyone outside my group,
with the exception of my professor or TA. That necessarily means that I will have no discussions
with other groups, with those in other cohorts, or with anyone who may have previously studied
the case. The only exception may be if my professor allows cross-group discussion as part of an
assignment. Even in this case, however, I am obligated to be sure my work is not too similar to
another group’s work in its completed version.
Using Sources: The set of materials to be used in completing the group work will be clearly
defined by the professor; under no circumstances am I to use sources outside the allowed set.
This may include company or knowledgeable sources interviews or library/online searches. All
sources, whether written, oral, or online, must be cited properly.
Note on the Internet: I understand that unless explicitly instructed, the use of any internet
materials to complete an exam, homework or group work, not explicitly assigned to the class are
• Cases and Case Discussions:
I understand that case write-ups are to be done individually, or within your assigned group, as
your professor/instructor designates. In addition, case discussions conducted in class are to be
done within my section or cohort unaided by alumni, 2nd year students or students in other
sections/cohorts who have already reviewed the case. Discussing the analyses, arguments, logic,
etc. that go into the case compromises the equitable distribution of class participation and more
importantly, undermines the learning process. Thus, since the path taken to arrive at an answer is
as important as the answer itself, it is critical that case discussions are a product of my own
• If you are unsure about a rule or policy:
Finally and very importantly, I recognize that the principle ingredient in the successful operations
of the honor code is good faith among all parties. From time to time, situations will arise in
which the application of the honor code is unclear. In such cases, it is important that I contact my
Professor/instructor immediately for clarification.
The goal of this course is to provide you with an introduction to core ideas in finance as well as
provide a solid foundation for further study. The course is broken down into a series of modules. A
module is best described as a collection of ideas that are best presented as a unit. An outline of the course
Module 1 Introduction to Finance [1 Lecture]
Finance within the Business Core
The Financing Function and the Financial Manager
Players and Perspectives
Goals and Objectives of the Course
Module 2 The Time Value of Money [2.5 Lectures]
Compounding and Future Value
Discounting and Present Value
Nominal versus Real Interest Rates
Module 3 The Net Present Value (NPV) Rule [2 Lectures]
Alternatives to the NPV Investment Rule
Average Return on Book
Internal Rate of Return
Module 4 Applications of NPV: Valuation of Safe Cash Flows [3.5 Lectures]
Valuing Treasury Securities
Term Structure of Interest Rates
Pricing Treasury Securities
Capital Budgeting under Certainty
Using the NPV Rule for Capital Budgeting
How to Treat Inflation
Capital Budgeting under Resource Constraints
Module 5 Risk, Returns and Capital Asset Pricing Model [4 Lectures]
Statistics and Stock Portfolios
The Effect of Diversification
The Capital Asset Pricing Model
Effect of Borrowing and Lending
Empirical Tests of the CAPM
Module 6 Arbitrage Pricing [1 Lecture]
The Law of One Price and the Law of No Arbitrage
An Arbitrage Pricing Application: Foreign currencies
The Arbitrage Pricing Theory (APT)
Module 7 Application of the NPV Rule under Uncertainty:
Valuation of Risky Cash Flows [3 Lectures]
The Valuations of Stocks
Capital Budgeting under Uncertainty
Weighted Average Cost of Capital
Module 8 Market Efficiency [1.5 Lectures]
Efficient Capital Markets: Theory and Evidence
The Three Forms of Market Efficiency
Efficiency and Current Information
Module 9 Capital Structure [2.5 Lectures]
The Sources of Long-term Financing
How Corporations Issue Securities
Leverage in Perfect Capital Markets
Where to Look for Violations of MM’s Propositions
The Pecking Order Theory of Capital Structure
Module 10 Payout Policies [2 Lectures]
How Dividends are Paid
Litner Dividend Model
Dividends in Perfect Capital Markets
Dividends and Market Perfections
Dividends as Signals
The Effect of Taxes
The Effect of Agency Costs
Module 11 Interaction of Investment and Financing Decisions [1 Lecture]
The Adjusted Present Value Rule
Module 12 Hedging and Derivative Securities [3 Lectures]
Review of Arbitrage Pricing
Pricing: Binomial Model and Black-Scholes Model
Corporate Securities and Firm Valuation