Baylor University



Baylor University

Finance 4360

Corporate Financial Management

Fall 2009

Dr. Steven P. Rich

Office: Hankamer 340

Office Phone: 710-4547

Home Phone: 848-5862

E-mail: steve_rich@baylor.edu

Home page:

Backup Home page:

Course Objectives:

In Finance 4360, we examine how firms make optimal financial decisions. We explore this issue through discussions of how cash flow, time, risk, information, market imperfections, the absence of arbitrage, and the presence of options determine the value of real and financial assets. You should also gain an understanding of how to use Excel to analyze corporate financial decisions.

Prerequisite: Finance 3310

Office Hours and Review Sessions:

Mon: 1:00 – 2:00; 3:15 – 4:00

Wed: 1:00 – 2:00; 3:15 – 4:00

4:00 – 5:00: Review Session (I’ve requested HCB 407)

Fri: 1:00 – 2:30

Office Hours: Office hours are times I have set aside to answer questions you have about the class. But any time I am in my office and the door is open you are welcome to come in and talk about finance.

Review Sessions: In general, I will hold a review session every Wednesday from 4:00 to 5:00. During review sessions we can discuss any topic or homework problem you find confusing. The benefit of review sessions is that you get to hear questions and comments made by others in my classes this semester.

Note: If for some reason I will not be available for some of my office hours, I will post a note on my door. If possible I will also make an announcement in class prior to the missed office hours.

Books:

Required: Corporate Finance by Berk and DeMarzo

Important: I will assume you have downloaded and made corrections to the textbook (including problems) included in the Errata on my website.

Optional: Study Guide to accompany Corporate Finance by Simonson

Tuesdays/Thursdays:

On Tuesdays and Thursdays, I study finance and will only be available via email unless there is an emergency.

My Home Page:

My Finance 4360 web page contains essential course materials (including partial lecture notes) and may be accessed from my main home page by clicking on “Class Info” and then the “Finance 4360” link.

Grading:

Exams (300 points each) 1200

Final 600

Class Participation 300

Total Possible Points 2100

Your grade will depend on how many of these possible points you earn. Earning 1890 points will result in an A, 1850 points a B+, 1680 points a B, 1640 points a C+, 1470 points a C, and 1260 points a D. Earning fewer than 1260 points will result in you flunking the course. It is possible that you will need fewer points than those listed. I reserve the right to raise any student's course grade.

Grade substitution: I will substitute your highest grade for your lowest grade on an exam. If your final is either your low grade or your high grade (as a percent of possible), treat it like two exams worth ½ of your score.

Examples:

Exam 1 = 150; Exam 2 = 190; Exam 3 = 260; Exam 4 = 250; Final = 400 (½ = 200)

Low = 150 (Exam 1); High = 260 (Exam 3)

Result: Exam 1 becomes a 260

Exam 1 = 270; Exam 2 = 280; Exam 3 = 260; Exam 4 = 250; Final = 400 (½ = 200)

Low = 200 (½ of Final); High = 280 (Exam 2)

Result: Final becomes 480 = 280 + 200 (count Exam 2 + ½ of actual grade on final)

Exam 1 = 150; Exam 2 = 190; Exam 3 = 260; Exam 4 = 250; Final = 580 (½ = 290)

Low = 150 (Exam 1); High = 290 (½ of final)

Result: Exam 1 becomes a 290

Course Policies:

Violations of the honor code (including cheating and not reporting cheating) will result in an F in the course and possible expulsion from the University.

On Friday, I will pass around a seating chart. Please put the name you want me to call you on the seating chart.

The Textbook and What I will Cover in Class

In class I plan to focus on those parts of the required readings that I think you will have the most difficulty figuring out on your own. Most of what I will discuss in class will be new, but some will be a review of Finance 3310. That leaves most of what was covered in Finance 3310 and new material that is straight forward or descriptive for you to review, relearn, and/or learn on your own. Since I won’t be discussing everything in every chapter, I recommend that you look over the required readings before we discuss them in class. Reading ahead will also help you ask better questions during class.

Class Participation

Class participation points will be based on you asking and answering questions about the readings, the lectures, and the homework problems. Quality is more important than quantity, but both are important. I realize that some of you would prefer to quietly get your education. However, to be successful in the business world, you will need to be able to clearly and confidently express your opinions. Use this class to hone your skills. Class participation points will also be determined by attendance and being on time. There is a small bonus for perfect attendance, so missing once will drop your class participation point a little. After this first absence, additional absences have a nonlinear impact on your grade. This means that the first few will have little or no impact on your grade, but after a few absences, each additional absence will have an increasingly negative impact on your participation grade. It is possible for participation points to become negative with enough absences. If you come in late, it is your responsibility to make sure to come by at the end of class to let me know you were there. After you leave the classroom, I will not change an "absence" to a "late".

Homework

Homework days: On homework days you will have a chance to put your solutions on the board (or screen if you have worked a problem using Excel) and ask questions about your solutions. You will also have a chance to answer questions asked by others or by me. On each homework day, we will discuss problems from all chapters we have finished talking about since the previous homework day. For example, assume that we discuss problems from chapters 3 and 4 on the first homework day and that by the second homework day we have finished discussing chapters 5 and 6. Then on the second homework day, we will discuss the problems from chapters 5 and 6.

Spreadsheets: According to my former students, most finance graduates will spend most of their day working in Excel. As a result, I recommend that you solve all homework problems using Excel in addition to solving them using pencil, paper, and calculator. In fact, some of the problems in the textbook are difficult if not impossible to solve without using Excel. In my opinion, spreadsheet should include 3 areas: an area into which data is entered, an area that displays solutions, and sometimes an area in which calculations are performed. The data entry and solutions areas should be highly visible while the calculation areas don’t need to be visible. You goal is to build flexible spreadsheets where it is easy to change any of the variables and see the new result.

General Recommendations: Working homework problems is one of the best (if not the best) way to learn the material for this course. In addition to the recommended problems from the textbook, I also suggest that you write out answers to the “Concept Checks” for each section and definitions for the “Key Terms”. I also recommend that you work as many problems as possible from my old exams. When working homework problems, I recommend that you avoid looking back at the book or the notes until you get stuck or think you have the correct answer. After you have worked through all of the required problems for a chapter, I recommend that you get together with a study group to discuss the homework. As you defend your answers and/or ask others about their answers, you will learn a lot more about finance than you would on your own. For the topics you find especially difficult, you might use MyFinanceLab at: . At MyFinanceLab, click on the “Study Plan” for additional problems (with hints) that are virtually identical to the problems in the book. WARNING: MyFinanceLab is a great tool if you are stuck, but using it to get hints (or even worse to show solutions) will give you a false sense of confidence. The hardest part of finance is figuring out what to do...and MyFinance lab does the heavy lifting for you.

Exams

Coverage: The exams will cover any material discussed on all homework days since the last exam. The final will be comprehensive meaning you will be responsible for all material covered in the course.

Technology during exams: During exams, you may not at any time bring out (from your backpack or pockets) a computer of any kind (including handhelds), a phone, or a calculator that contains text related to this class. I reserve the right to flunk anyone who breaks this rule for any reason. I will project the current time on the screen at the front of the room so that you will know what time it is even if you use your phone as a clock.

Statute of limitations: A two-week statute of limitations applies to appeals on grading. The two-week period when I post grades for regular exams and begins on the first day of next semester for the final.

Course Outline:

Review pages: Review pages cover material you should have learned in Finance 3310. Even though I will not explicitly cover the information in these pages in class, you are responsible for all of the material in these pages. “Responsible for” means you may need the concepts to work problems on the homework and exams. I highly recommend that you read the review material in all chapters before we start discussing that chapter.

1. Introduction to Corporate Finance

Recommended reading: Chapters 1 and 2

Note: We won’t cover Chapters 1 or 2 in class, there is no required homework, and the material won’t be explicitly on exams. However, later chapters will build on these chapters to at least some extent.

Required reading: Chapter 3

Textbook Problems:

Chapter 3:

Recommended: 2, 5, 6, 9, 13, 14, 18, 21

Also good: 7, 17, 20

Note: textbook problems not listed as recommended or also good for each chapter fall into one of two categories: 1) I used to assign it and decided that it was a poor problem, 2) I haven’t looked at it yet. If you find check figures for a particular problem that is not listed, that problem falls in the first category.

2. The Time Value of Money

Required reading: Chapters 4 and 5

Review pages: Everything in chapter 4 except the section on growing annuities on p. 104-106.

Textbook Problems:

Chapter 4:

Recommended: 5, 9, 13, 21, 25, 29, 33, 38, 39

Also good: 3, 7, 11, 15, 19, 23, 27, 31, 35

Chapter 5:

Recommended: 1, 5, 9, 13, 19, 21, 26, 29, 33, 17 (from Chapter 4)

Also good: 3, 7, 11, 15, 23, 27, 31

3. Capital Budgeting

Required reading: Chapters 6 and 7

Review pages: Everything in chapter 6 except the section on “Economic Profit or EVA” on p. 156-160.

Textbook Problems:

Chapter 6:

Recommended: 1, 5, 9, 12, 13, 14, 17, 19

Also good: 3, 7, 11, 15

Chapter 7:

Recommended: 1, 3, 5, 9, 13, 15a-c

Note: Add “part c” to problem 1: Rework part b substituting 75% for 50%.

Also good: 7, 11, 15d-f

Recommended reading: Chapters 8 and 9

Note: We won’t cover Chapters 8 or 9 in class, there is no required homework, and the material won’t be explicitly on exams. However, these chapters provide an excellent application of time value of money and provide a fairly in-depth coverage of stock and bond valuation. This material should be covered in Finance 4365 (Investments).

4. Risk and Return

Required reading: Chapters 10, 11, and 12

Textbook Problems:

Chapter 10:

Recommended: 1, 2, 3, 4, 5, 6, 7

Chapter 11:

Recommended: 1, 5, 9, 13, 17

Also good: 3, 7, 15, 19

Chapter 12:

Recommended: 5, 6, 8, 9, 13 (work problem 13 using equation 12.5)

Note: to get data for problem 13, go to and click on the following links: 1) “Student Resources”; 2) “Spreadsheets”; 3) “Chapter 12 Nike Data”

Also good: 2, 3, 4, 11, 15, 19

5. Capital Structure

Recommended reading: Chapters 23 and 24

Note: We won’t cover Chapters 23 or 24 in class, there is no required homework, and the material won’t be explicitly on exams. However, these chapters provide excellent background information on how firms raise capital by issuing equity or debt.

Required reading: Chapters 14, 15 and 16

Textbook Problems:

Chapter 14:

Recommended: 2, 3, 4, 5, 8, 11

Also good: 9, 15

Chapter 15:

Recommended: 1, 5, 6, 8, 13, 17, 21

Also good: 3, 7, 15, 19

Chapter 16:

Recommended: 1, 3, 5, 9, 13, 17, 21

Also good: 7, 11, 15, 19

6. Options

Required reading: Chapter 20, 21, and 22

Sections to skip: Chapter 20: 20.5; Chapter 21: 21.3; Chapter 22: 22.6 and 22.7

Textbook Problems:

Chapter 20:

Recommended: 1, 4, 5, 6, 7, 8, 10, 20, 25, 26

Also good: 11, 13, 15, 17, 19

Chapter 21:

Recommended: 3, 4, 5, 7, 17, 19

Also good: 1, 2, 9, 11

Chapter 22:

Recommended: 5, 9, 13

Also good: 3, 7, 11, 15

7. Dividends

Required reading: Chapter 17

Textbook Problems:

Chapter 17:

Recommended: 1, 5, 9, 13, 17, 21

Also good: 3, 7, 11, 15, 19

Important Dates:

Homework Dates:

Sept 2

14

28

Oct 7

26

Nov 4

18

Dec 2

Exams:

Sept 18 Exam 1

Oct 9 Exam 2

Nov 6 Exam 3

Dec 4 Exam 4

10 Final for 10:10 class from 2:00 – 4:00

11 Final for 11:15 class from 9:00 – 11:00

Note: According to Baylor policy, everyone must take their final at the scheduled time unless they have 3 (or more) exams on the same day. If you have 3 (or more) finals on the same day, talk to me about taking your final with my other 4360 class.

Days on which there will be no class and/or no office hours:

Sept 7 Labor Day

Oct 16 Fall Break

21 Classes will meet as scheduled, but I will not have office hours or a review session

23 I will be attending the Financial Management Association Meetings (recruiting trip)

Nov 25 – 27 Thanksgiving Holiday

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