Since one of the requirements of the class is participation, attendance is required. All absences require an email note explaining the absence. This note is required no later than the day that you return to class from an illness. For personal reasons, the note should be sent in advance of the scheduled absence. It is your responsibility to obtain class notes and handouts, and to make-up all missed assignments.

To develop techniques for corporate decision making under conditions of risk and to investigate the elements of corporate financial policy.

Learning Objectives: Upon completing this course, the student should be able to:

• Enhance analytic problem solving skills.

• Sharpen and refine written and oral communication techniques.
• Develop currency in the language of corporate finance.
• Determine the "best" solution to a problem among several alternatives in an environment of incomplete information.
• Understand the interactions and perspectives of various corporate stakeholders in the corporate finance decision-making process.
• Function under the demands and expectations of the corporate work environment.

This course is the second financial management course and is intended primarily for finance majors. Students are expected to have a basic understanding of financial management and securities markets. The course consists of (1) lectures, (2) discussions of financial management topics, selected readings, and current events, (3) written and oral reports, (4) quizzes, and (5) a final exam. Much of the learning will come from your own individual work and from interactions with other students. Accordingly, the benefits that you receive from this course will be directly related to your individual effects. FIN 328 is a writing intensive course and as such will require a number of written reports that will hopefully improve your writing skills. Any project, individual or group, which does not receive a satisfactory for writing must be rewritten until a satisfactory is received.

The following weights will be utilized in determining your final grade:

The class will be divided into groups of 3-4 students each. Each group will make at least one oral presentation and at least 3 write-ups. Each oral presentation should cover assignment questions, difficulties, and suggestions for improving the assignment. Presenters should be prepared to answer questions from the instructor and their fellow classmates. The use of PowerPoint and/or overheads to explain facts, figures, and calculations is usually a necessity. All group assignments must include a signed Grade Allocation Sheet (discussed later). The grade that you receive for the course will be influenced by the performance of your team. Thus, this course provides the opportunity for group participation and leadership, skills that are valuable throughout life.

Grade Allocation Sheet:

The grade allocation sheet (GAS) is a statement allocating the team grade to the individual team members and must be turned in with all major group assignments. Each member must sign the GAS and agree upon the weights to be used to allocate the grade among the team members. The average group weight must be 100% of the over-all case grade, but your group can assign individual weights from a low of 50% to a high of 150% of the overall grade. This allocation system is the only fair way to distribute the grade in accordance with the work of the individual members. If you work harder than other members of the team, you should expect and demand a higher allocation. A member that contributes less than average to the team effort should expect to receive less than an average grade allocation. The team must decide itself how the grade is to be allocated. The assignments will NOT be accepted without a GAS signed. Since each member must sign the GAS, each individual member must be satisfied that the weight allocation is proper before he or she signs. There will not be any "arbitration process" by the instructor, this must be a team decision accepted with understanding and compromise among the members.

EXAMPLE: Team Grade (90%)

*Note: No team member can receive a score higher than 100% on any assignment.

Most classes will start with a discussion of current events. Students will be graded on participation in both quality and quantity over the semester.

• Throughout the semester several problems/assignments will be required.
• All students are required to keep a portfolio of work including problems, exercises, reports, summaries, and quizzes with corrections. This portfolio will be used in the final grade evaluation.
• All assignments are to be turned in on the date due. Failure to turn an assignment in on time will result in an automatic grade reduction of 10% per day (i.e., 10% turned in late but on the due date; 10% additional for each day after the due date). No credit will be given after the assignment is returned to the rest of the class.

Each team will be responsible for analyzing and writing up solutions to a number of assignments. Complete written solutions for all assignments are due at the beginning of class on the dates assigned and ALL REPORTS MUST BE TYPED. All major reports should follow the format outlined below and be written from the viewpoint of consultants.

• Executive Summary: Each write-up must include an executive summary. The executive summary is a one-page overview of everything covered within your report, including the overall solution (1 page Maximum). It is not an introduction.

• Body of Report: The body of the report should include an introduction and a conclusion. Your report should address all the questions presented within the assignment as well as factors that are disturbing such as limiting assumptions or ethical implications of suggested alternatives. DO NOT write your report in the style of "The answer to question 1 is . . .". Also resist the temptation to use statements like "See Exhibit 3" without explaining the data within the text of the report. Expand the statement to something like the following: "The current ratio is 2.3x, which is below the industry and peer group average, and it has been declining over time. See Exhibit 3 for a detailed analysis of the ratio calculations." Be sure to include page numbers.

• Exhibits: Tables, graphs, and detailed equations should be placed in exhibits to avoid disrupting the flow of the report. Exhibits should be used to illustrate, explain, and elaborate on points made in the report text, but it should be possible for the reader to follow the report without ever referring to the exhibits. Exhibits should also be stand-alone documents, so include relevant titles and highlight the important figures or equations. All exhibits must be tied into the text.

• References: Document the sources of all information used.

• Absences will result in a grade of zero for the missed quiz or exam. Plan your schedule, so that you can take all quizzes and the final exam. Quizzes will be announced at least one class period prior to the date the quiz is being given. The FINAL EXAM will be given as scheduled by the registrar during the final exam period (December 14-22, 1999). You are expected to bring a financial calculator to all evaluations.

• All quizzes must be corrected after they have been graded and returned. The quiz and the corrections are to be included in your course portfolio.

I. Fundamental Concepts

Chapters: 1, 2, 3, 4

Chapters: 5, 6, 7, 8

Chapters: 9, 10, 11, 12

Chapters: 13, 14, 15

Chapters: 16, 17, 18

Chapters: 19, 20, 21, 22, 23, 24

Chapters: 25, 26, 27, 28

Due Date: November 29, 1999

Minimum length: 8 pages Maximum length: 10 pages

As a research paper, I expect you to pick a topic, complete a literature review, and perform a simple test from which casual observations can be made.

Follow "Written Report Format" Double-spaced typewritten. Graphs, charts, and other illustrations do not count towards the page limits.

An outline of your proposed research paper must be submitted by Friday, October 22, 1999. Topical comments and suggestions will be returned.

The bibliographies at the end of each chapter and the Wall Street Journal Street Journal provide a ready source of research material.

Maximum of 5 points added to final course grade

(Extra points earned = Percentage grade on project * 5).

Does a listed stock (i.e., NYSE, ASE, etc.) create shareholder wealth? Who bears the burden of income taxes, corporate taxes, school taxes, etc.? Bankruptcy prediction - Altman Z factor; "Useful" financial ratios; Sustainable Growth Rate (SGR); Interest Rate Risk; Linear programming and capital budgeting; Capital budgeting under inflation; Monte Carlo simulation; Short-term interest rates as predictors of inflation; Stock market and inflation; Stock market and interest rates; Liquidity premium; Market efficiency: bond pricing; and Market Efficiency Tests (one or more of the following: 1. Technical trading rules; 2. PE ratios - high vs. low; 3. Return on equity; 4. Stocks trading at 52-week low; 5. Cyclical patterns; 6. Block trading; 7. Insider trading; 8. Mutual funds; 9. Value Line survey; 10. Filter rules; 11. Price movement based on yesterday's movement; 12. Numerous other market tests); Capital Asset Pricing Model (CAPM); Arbitrage Pricing Theory (APT); Cost of capital; Divisional cost of capital; Bond rating process; Effects of a bond rating change; Bond refunding; Value and cost of call provision of debt issue; Cost of corporate bankruptcy; What happens to the stock prices of companies first going public? Leverage and stock returns; Determinants of corporate borrowing; Dividends as a signaling device; Effects on stocks going ex-dividend; Stock dividends - rationale and results; Stock splits - rationale and results; Stock repurchases - rationale and results; Cash management; New debt instruments; Optimal credit policies; Option Pricing Model (OPM); Option pricing applied to capital structure; Pricing of convertible debt; Conglomerate mergers; Acquisition models; Effects of defensive tactics on stockholders; Announcement of acquisition on the acquirer's stock price; Corporate spin-offs: i.e., Quaker and Dart & Kraft; Lease Analysis; Interest rate parity between countries; Evaluating international capital projects; International cost of capital; International stock returns; Creating shareholder value; Relationship of spot and future prices; Forward prices as predictors of actual prices

Three group projects, living cases, have been assigned this semester to apply the principles of financial analysis to a "real world" professional setting. Each project incorporates material from class and the textbook. Although each project is a separate assignment, the projects will build on each other. The three assignments are:

• Historical Company Analysis: Evaluate the historical, financial performance of a company using ratio analysis and peer group benchmarking. (Friday, October 1, 1999)

• Financial Planning Model: Project the financial performance of a company by developing a "pro forma" income statement, balance sheet, and cash flow statement. (Friday, October 29, 1999)
• Acquisition Evaluation: Determine a value for this company. (Monday, November 22, 1999)

Each group will select one company for the semester (maximum 3 groups per company). All groups will prepare all three projects for their selected company. Each group will make at least one presentation of one of its projects throughout the semester. In this way, all three projects for each company will be presented. For example, if groups 1, 2, and 3 are responsible for the same company, each group prepares written analysis for all three projects. In addition, Group 1 is responsible for presenting the Historical Company Analysis (Project #1) while Group 2 is responsible for presenting the company’s Financial Planning Model (Project #2) and Group 3 presents the third group project, an Acquisition Evaluation.

EXCEL, LOTUS 123, or other spreadsheet software will prove most helpful in completing these assignments. It is recommended that you use these tools. There are tutorials readily available on campus. Furthermore, it is recommended that at least one member of your group should be proficient with EXCEL or LOTUS 123.

Groups should consist of three or four members. It will be your responsibility to form a group by the end of the second class. By the end of the second class, I will need a list of the group members as well as your preference for company and presentation.

Some examples of excellent projects are on reserve in the library.

In addition to the Grade Allocation Sheet (GAS) turned in with each project, each group member will rate every other group member by assigning each group member's effort 0, 1, 2, 3, 4, or 5 points at the end of the semester. It is your responsibility to contribute to the group! Share the workload evenly. If a group member is performing deficiently (i.e., worthy of only 0, 1, or 2 points), please let that deficient group member know of the problem. If the problem does not rectify itself, please let me know. I will support all group decisions, but I do not want any group member to be caught off-guard.

Each group will be responsible for one presentation during the semester. The presentations should be professionally prepared and presented using either PowerPoint or appropriate overheads. Each presentation should include background on the company, a full discussion about the analysis, and appropriate observations, conclusions, and recommendations. Overhead or PowerPoint presentations should use a large font size. Handouts can also be distributed.

There will be 15 minutes allowed for each presentation, excluding question and answer time. Each group will be able to decide to accept questions during their presentation or after their presentation.

If your group will need any other equipment than an overhead, please let me know at least one week before your presentation.

When you are a member of the audience, I expect your active participation in the discussion. If you are a member of a group that is also reviewing that same company, I expect some insightful questions or comments.

The following sections provide additional information related to each project.

Due Date: Friday (October 1, 1999)

Minimum length: 6 pages; Maximum length: 8 pages

Follow "Written Report Format" Double-spaced typewritten. Graphs, charts, and other illustrations do not count towards the page limits.

1. Purpose: To prepare a professional analysis that applies financial performance metrics (ratio analysis) to the company and topic of your choice. By its nature, this project includes peer group benchmarking.
2. Pick a subject to analyze such as profitability, leverage or financial structure, fiscal health, efficiency, etc. Do not just "shot gun" some ratio analysis.
3. Use visuals, charts, and graphs to illustrate your data. Discuss your information without repeating the calculation methodology and/or data, unless it's pertinent to your analysis.
4. Compare a company against itself over time, with an industry average and/or against its major competitors. You will need to establish the industry group.
5. Tell a story with your analysis. Have a purpose; assume a particular viewpoint such as a potential equity investor, debt investor, or even a bank.
6. A fertile area for analysis may be product line or geographical (international) data. Which product/region is the most profitable, which product/region is growing the fastest, which product/region is receiving the heaviest "new" investment, etc.?
7. Chapters 3 and 4 will provide some assistance. Classroom handouts will provide additional assistance.
8. You should identify your company’s competitors quickly and obtain their annual reports as soon as possible but certainly by the seventh class. You may also want to contact your company and request additional information and/or prior annual reports.
9. In addition, on-line company sites offer a wealth of information such as previous annual reports, quarterly reports, SEC filings, press releases, etc. You may want to visit these sites and consider this data.
10. The library has other ready sources of corporate information available. These publications include Moody's, Value Line, Standard and Poor's, etc. In addition, COMPUSTAT PC is available in the Rauch Business Center Computer Lab.

Due Date: Friday (October 29, 1999)

Minimum length: 6 pages; Maximum length: 8 pages

Overview and Discussion - Double-spaced typewritten; Assumptions - Double-spaced typewritten; Models - Neatly handwritten model or computer printout; Graphs, charts, and other illustrations do not count towards the page limits.

1. Purpose: To prepare a professional 5-year pro forma financial model for your company based upon your set of assumptions for the company.
2. Prepare the three basic financial statements, income statement, balance sheet and cash flow statement using the general format below:

Income Statement Balance Sheet Cash Flow

Sales Cash & Mkt. Sec. Net Income

Cost of Goods Sold Accts. Rec. Depreciation

S, G & A Expense Inventory Change in Def Tax

Operating Income Other Current Operating Cash Flow

Interest Expense Total Cur Assets Chng in Accts. Rec.

Pre-Tax Income Net PP&E Chng in Inventory

Taxes Other Assets Chng in Other Current

Net Income Total Assets Chng in Other Assets

Chng in Accts. Pay

Short-Term Debt Chng in Accrued Liab.

Accts. Pay. Chng in Other Current

Accrued Liab. Chng in Other Liab.

Other Current Cash Flow from Oper

Total Cur. Liab. Capital Expenditures

Long-Term Debt Dividends

Deferred Taxes Debt Financing-Short

Other Liabilities Debt Financing-Long

Equity Equity Financing

Total Liab. & Eq. Change in Cash

3. You may need to add to or delete some of these line items based upon the specific accounting of the company.
4. You will need to report two-years of "actuals" and five-years of projections.
5. It is important that your projection years reflect the integrated nature of the three financial statements. In addition to the general construction of the financial statement relationships, specific relationships should include:

• Change in cash from the balance sheet with the change in cash on the cash flow statement,
• Changes in the other balance sheet accounts with the changes represented on the cash flow statement,
• Change in Retained Earnings with Net Income and Dividends,
• Change in Net, Plant, Property, and Equipment with Depreciation and Capital Expenditures,
• Depreciation with the level of Capital Expenditures,
• Interest Expense/Income with Cash, Marketable Securities, Short-Term Debt, Long-Term Debt, and
• Issuing debt while generating surplus cash and building large cash balances.

1. It is your responsibility to develop the required "base scenario" assumptions. They must be reasonable and may reflect recent historical relationships or company aspirations, for such things as growth, margins, balance sheet relationships, etc.
2. You may need to make simplifying mechanical adjustments so that, for example, a change in inventory (reported on the cash flow statement) represents the year-to-year change in inventory as presented on the balance sheet. For a variety of reasons, the historical "actual" data may not flow so smoothly.
3. Chapters 3, 4, and 9 will provide some assistance. A classroom handout will provide additional assistance.
4. Once the base case is tested and proven, an alternative scenario (either more optimistic or pessimistic) should be completed. This can be accomplished by modifying your most sensitive two or three assumptions and recalculating the model.
5. This exercise can be completed very efficiently using EXCEL, LOTUS 123, or other spreadsheet software. Please take advantage of these types of tools.

Due Date: Monday (November 22, 1999)

Minimum length: 6 pages; Maximum length: 8 pages

Follow "Written Report Format". Overview and Discussion - Double-spaced typewritten; Assumptions - Double-spaced typewritten; Models - Computer printout; Graphs, charts, and other illustrations do not count towards the page limits.

1. Purpose: To prepare a professional acquisition evaluation of your company. Your assignment is to determine a reasonable value (i.e., Present Value) to pay for this corporation.
2. Acquisition valuation is a larger capital budgeting exercise and should be approached with this in mind.
3. You will need to build a five-year model that develops the target's operating income, cash flows, residual value, appropriate discount rate, and present value. A general format will include:

Income Statement Cash Flow

Sales After Tax Oper. Income

Cost of Goods Sold Depreciation

Gross Income Change in Def. Tax

Selling & Marketing Operating Cash Flow

General Admin. Chng in Non-Cash, Non-Debt

Operating Income Working Capital

Taxes Capital Expenditures

After Tax Oper. Income Residual Value

Cash Flow

Net Present Value

4. You may need to add to or delete some of these line items based upon the specific accounting of your selected company. In particular, you may want to detail the "Change in Non-Cash, Non-Debt Working Capital" into its components "Change in Accounts Receivable", "Change in Inventory", etc.
5. It is your responsibility to develop the required "base scenario" assumptions. They must be reasonable and may reflect recent historical relationships or company aspirations, for such things as growth, margins, balance sheet relationships, etc.
6. Chapters 3 through 9 provide some assistance. Classroom handouts will provide additional assistance.
7. Once the base case is tested and proven, an alternative scenario (either more optimistic or pessimistic) should be completed. This can be accomplished by modifying your most sensitive two or three assumptions and recalculating the model.
8. This exercise can be completed very efficiently using EXCEL, LOTUS 123, or other spreadsheet software. Please take advantage of these types of tools.
9. You will need to determine an appropriate discount rate (Cost of Capital) to use in calculating the present value of the company. Present your methodology and rationale. You should consider the sensitivity of your value to this discount rate.
10. You will need to report five-years of projections and at the end of the fifth year calculate a residual value.
11. A residual value may "make or break" the deal. Explore the valuation sensitivity to alternative residual value methodologies.
12. After determining a "fair market value" for the candidate’s operations, compare the market value of equity to the calculated "fair market value" of the equity. The "fair market value" of the equity is calculated as the "fair market value" of the company’s operations less the current level of debt and add back today’s excess cash. This "fair market value" of the equity should then be divided by the number of common shares outstanding. The resulting "fair market value" per share should be compared to the current stock price per share.

PV of Company’s Operations

Less: Outstanding Debt (Long-Term Debt)

Plus: Excess Cash

FMV of Company’s Equity

FMV of Company’s Equity / Shares Outstanding =

FMV per Share

Is the company ripe for takeover?