Graduate School of Business Adminstration 548



Graduate School of Business Administration 548 - Corporation Finance

MAcc Program Fall 2007 Semester - J. K. Dietrich

Office: Accounting Building 301G

Office Hours: 1:00-1:30pm Tuesday-Thursday and by special arrangements

Phone Number: (213)-740-6539 E-mail: kdietrich@marshall.usc.edu

Website:

Course Objectives and Requirements

Corporate Finance is an introductory course in finance required for most masters in accounting students. The course objective is to introduce students to the finance approach to solving business problems and to understand how the finance function fits into the operations of businesses. A collateral goal is to provide students embarking in careers in accounting with a exposure to the role of accounting numbers in finance as well as providing students choosing elective courses in finance with necessary preparation to perform well in those classes. The course aims to prepare students in their first (and future] jobs in the accounting profession to deal with the finance practitioners they will encounter in businesses and financial markets.

The course is integrative and cumulative throughout the term and operates at three levels:

( Textbook reading assignments for basic theory and analytical approaches, augmented with in-class and end-of-chapter problems and exercises providing practice in applying concepts and confirming comprehension;

( A course project completed in groups that applies theory and analysis to a real corporate case building on class examples and discussion;

( Reading assignments and discussions of current business articles and applied finance literature illustrating controversies and issues in corporate finance.

Course requirements consist of timely reading and comprehension of text (and optional use of the study guide), preparation of end-of-chapter problems as the basis of classroom discussion and participation, a mid-term examination, a final examination, and a group project divided into parts due throughout the semester, and a final group project summary. The course is cumulative and integrative throughout the semester. Course grades will be assigned as follows:

Class participation 10%

Midterm examination 25

Final examination 35

Group project parts 10

Final Summary 20

Text and Recommended Readings

Ross, Westerfield, and Jaffe, Corporate Finance (8th edition), McGraw-Hill-Irwin.

Three class handouts: (1) PVFIRM: Introduction and Overview; (2) Present Value Analysis and Formulas; (3) Financial Statement Analysis and Assumptions for Valuation.

Student Problem Manual for Use with Corporate Finance, Irwin, recommended for students desiring extra practice with problems.

Wall Street Journal (required for each class) and Fortune or The Economist

References (on Reserve)

Solutions Manual to Accompany Corporate Finance (with text problem solutions)

Koller et al Valuation (4th edition), Wiley.

Class Materials

Materials provided for each class include: (1) “Class Objectives and Problem Assignments”; (2) overhead transparency copies. Also on occasion there will be: (3) “Class Examples and Problems” as well as SEC disclosures and other readings and materials listed on the below schedule and outline. All of these materials are distributed via Blackboard. Students are responsible for downloading and reviewing these materials before class. For some classes, special materials may be passed out in class and students are responsible for obtaining and reviewing these materials.

All the above materials except the special materials will be distributed via Blackboard.

Academic Policy

The Student Conduct Code set out in Section 11.00 “Academic Integrity Violations” of the 2001-2002 Scampus (p. 82) governs the standard of conduct expected of students in this class. Sections of the code (11.11 to 11.19) cover restrictions on plagiarism, using other students’ work, examination conduct, and so forth, which define the standards applied at USC generally and in GSBA 548 specifically. Students are expected to be familiar and to follow this code of academic conduct.

End-of-Chapter Problems (minimum required for Class Discussion)

|Chapter |Problems |

|4 |2, 3, 11, 12, 13, 14, 23, 26, 27, 28, 32, 33, 34, 38, 43 |

|5 |1, 2, 4, 6, 8, 15, 17, 21, 34 |

|7 |1, 2, 3, 4, 11, 19, 20, 21, 24, 28, 30 |

|8 |1, 4, ,5, 6, 7, 25, 29 |

|9 |1, 2, 4, 7, 9, 10 |

|10 |1, 2, 3, 5, 7, 11, 28, 29, 32 |

|12 |1, 5, 8, 9, 12 |

|13 |(Concept Questions p. 398) 2, 3, 10; (Problem p.. 401) 1 |

|15 |1, 2, 8, 12, 13, 16, 20, 21, 22 |

|16 |4, 6, 8 |

|18 |14, 15, 16 |

|Course Outline and Assignments |

|Class |Dates |Topic |Readings/Assignments |

| | |1. Course Introduction and Overview |

|1 |8/28 |Accounting and Finance: Importance of Course* | |

|2 |8/30 |Course Requirements and Goals; The Finance Function |Chpt. 1, Nike Proxy 2007 |

| | |2. Present Value and Valuation of Firms and Investments |

|3 |9/4 |Corporate Goals and Governance |Chpt. 2, Handout (1): PVFIRM: Intro and |

| | | |Overview |

|4 |9/6 |Market vs. Book Values, Value Creation |Stern-Stewart EVA & |

| | | |Strategy, review Nike 10-K |

|5 |9/11 |Present Value Calculations |Chpt. 4 |

|6 |9/13 |Present Value Simplified Formulas |Handout (2): PV Formulas |

|7 |9/18 |No class: Schedule individual meetings in lieu of class | |

|8 |9/20 |Review: Present Value Calculations and Interpretations | |

|9 |9/25 |Valuation of Fixed Incomes (Bonds) |Chpt. 5 |

|10 |9/27 |Valuation of Fixed Incomes: Continued |Chpts. 14 & 20 |

| | | |Part 1 of Project due |

|11 |10/2-x |Valuation of Preferred and Common Stocks | |

|12 |10/4-x |Valuation of Stocks: Continued | |

|13 |10/9-x |Analysis and Value of Capital (Fixed) Investments |Chpt. 7 |

|14 |10/11-x |Analysis of Fixed Investments: Continued |Handout (3): Financial Statement Analysis and|

| | | |Assumptions for Valuation |

|15 |10/16 |MIDTERM EXAMINATION | |

|16 |10/18 |Analysis of Corporate Performance and Cash Flows |Chpt. 3 |

|17 |10/23 |Capital Budgeting and Investment Strategy |Chpt. 8 |

|18 |10/25 |Investment Strategy: Continued |Part 2 of Project due |

| | |3. Risk and the Cost of Capital | |

|19 |10/30 |Measurement of Risk and Risk-Adjusted Returns |Chpt. 9 |

|20 |11/1 |Risk Measurement: Continued |Chpt. 11 |

|21 |11/6 |Risk and Investment Selection |Chpt. 12 |

|22 |11/8 |Risk and Investment Valuation | |

| | |4. Capital Structure and Dividends | |

|23 |11/13 |Efficient Capital Markets |Chpt. 13 |

|24 |11/15 |Capital Structure: Modigliani-Miller Assumptions |Chpt. 15 |

|25 |11/20 |Capital Structure: Relaxing M-M Assumptions |Chpt 16 |

| | | |Part 3 of Project due |

|- |11/22 |THANKSGIVING – No Class | |

|26 |11/27 |Dividend Policy |Chpt. 18 |

| | |5. Derivatives and Risk Pricing and Management | |

|27 |11/29 |Derivatives Definitions and Applications |Chpt. 22 |

| | | |Part 4 of Project due |

|28 |12/4 |Option Pricing | |

|29 |12/6 |Options in Finance and Accounting |Project Summary due |

| |12/13 |FINAL EXAMINATION 2:00-4:00PM | |

*Session conducted by Shirley Maxey x Accounting firm recruiting events scheduled

Group Project

Each group will consist of not more than five students. At the end of the semester, each group will hand in an analysis and update of my 2002 valuation of the Nike Corporation Any problems within groups should be taken up with the instructor as soon as they become evident. Peer group evaluations will be collected from each group member at the end of the semester as part of the grade assignments. The Final Summary of the group project is due at the time the last day of class (December 6).

Group Project - Part 1 - Due September 27, 2007

Part 1 of the semester-long project consists of obtaining Nike Corporation financial reports and materials (proxy statement, annual report and 10-K) and: (1) estimating the total market value of long-term debt and equity of the firm using Sheet 1 of the Excel spreadsheet PVFIRM05.xls (distributed through Blackboard); (2) comparing market to book values currently and in 2002; (3) comparing the firm’s capital structure currently and in the 2002 analysis; (4) provide a brief description and analysis of changes in Nike over the last five years and assess the company’s performance in terms of the goals of the financial manager. These results will be neatly summarized on tables and charts (based on the “Capital Structure” sheet from PVFIRM05) formatted on 8.5x11” paper with one-inch margins (this can be a draft for the Final Summary).

Group Project - Part 2 - Due October 25, 2007

Part 2 of the group project consists of: (1) a comparison and analysis of Nike’s 2002 to 2007 actual performance with the projections in my 2002 analysis; (2) an analysis of the Nike’s historical performance (using computer data from Wharton) as a basis for your assumptions to calculate preliminary estimates of the next five years’ cash flows from operations; (3) putting assumptions for future Nike operations in Sheet 2 of PVFIRM05 and for the last two terminal values calculations based on Nike’s projected P-E and market-to-book ratios; and (4) an assessment of necessary investments in working capital and fixed assets, using outputs reported on Sheet 2 of PVFIRM05. Again, assumptions and results will be neatly summarized on tables and charts formatted on 8.5x11” paper with one-inch margins and will be a preliminary draft for corresponding tables for the Final Summary.

Group Project - Part 3 - Due November 20, 2007

Part 3 of the group project consists of: (1) an analysis of the firm’s cost of debt and equity capital ,where the cost of equity will be based on several estimates as discussed in class, using Sheet 3 of PVFIRM05; (2) analysis of the appropriate after-tax, weighted average cost of capital (WACC) for the firm; (3) assumptions for first two terminal values in Sheet 2 based on multipliers for free cash flow using assumptions concerning the future growth of the firm’s free cash flows and net operating profit less an allowance for taxes (NOPLAT); and (4) a critical analysis of changes in the previous two sets of assumptions (cost of capital and terminal value assumptions) relative to the assumptions in my 2002 analysis. All results will be neatly summarized as above to explain and justify results..

Group Project - Part 4 – Due November 27, 2007

Parts 4 of the project consists of reviewing the computations of the present value of the cash flows of the firm using the weighted average cost of capital (WACC) and free cash flow and flow-to-equity methods in Sheet 4 of PVFIRM05, as discussed in class, and assess these calculations using several different sets of assumptions concerning operating environment scenarios. Results and analysis will be neatly summarized as above.

Group Project - Final Summary - Due December 6, 2007

The Final Summary of the group project will be a finished analysis of the evaluation of Nike considered as a possible acquisition or as an buy-side analyst recommendation based on Parts 1 to 4 containing: (1) an executive summary (not more than 1.5 pages double-spaced typewritten with standard type fonts and margins) stating the conclusions and major supporting evidence/arguments for the conclusions; (2) supporting analysis producing results obtained from using PVFIRM05; and (3) sufficient detail and tables to allow a trained reader to reproduce major results produced by the group’s analysis. The document must be clearly readable. The executive summary and attachments must all be on 8.5x11” sheets stapled at the upper-left hand corner. Further specifications on the Final Summary will be available to the class later in the semester.

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