Baylor University



Baylor University

Finance 5360

Seminar in Corporation Finance

Summer 2007

Dr. Steven P. Rich

Office: Hankamer 340

Office Phone: 710-4547

Home Phone: 848-5862

E-mail: steve_rich@baylor.edu

Backup E-mail: steve-rich@hot.

Home page:

Backup home page:

Contacting me:

Office Hours

Daily: 2:30 – 3:30

Policy on office hours: Office hours are those times that I will be in my office to talk to you about finance or whatever else interests you. If for some reason I cannot keep some of my office hours, I will try to announce this in class before the missed office hours, post a note on my door, and send out an e-mail to the class.

E-mail/Voice-mail

One of the best ways to get in touch with me is via e-mail since I check e-mail frequently. You are welcome to leave voice-mail at my office, but I frequently fail to check my voice-mail for weeks at a time.

Prerequisite:

Finance 3310 (or equivalent)

My Home Page:

My Finance 5360 web page contains essential course materials and may be accessed from my main home page by following the “Class Info” link then clicking on the “Finance 5360” link. If you have a TI-83 or TI-84 calculator, you may want to use the financial programs, solver equations, and CelSheet files I have written for the TI-83 (and TI-84) calculators. You can download the files by following the “Files for the TI-83” link under “Other Material” on my Finance 5360 web page. Instructions on how to download and use these files are on Blackboard.

Books:

Recommended: Corporate Finance (8th Edition) by Ross, Westerfield, Jaffe

Optional: The Quest for Value by G. Bennett Stewart, III

The New Finance: The Case Against Efficient Markets by Robert A. Haugen

Course Objectives:

Finance 5360 examines the creation of value through long-term corporate decisions. In the first part of the course, you will review and/or gain an understanding of the fundamental principles of finance including: economic profit and cash flow, the time value of money, risk and return, options, agency, and efficient markets. In the second part of the course, you will learn to apply these fundamentals as you gain an understanding of the two main long-term corporate financial decisions: capital budgeting and capital structure.

Grading:

Midterm Exam 450

Final Exam (Comprehensive) 450

Homework 150

Class Participation 150

Total Possible Points 1200

Your grade for the course will depend on how many of these points you earn. If you earn 1105 points, you will receive an A, 1080 will be an A-, 1055 will be a B+, 985 will be a B, 960 will be a B-, 935 will be a C+, 865 will be a C, 840 will be a C-, 720 will be a D, and less than 720 will be an F. It is possible that you will need fewer points than those listed. I reserve the right to raise any student's course grade.

Course Policies:

On Monday, I will be passing around a seating chart. Please put the name you want me to call you on the seating chart.

Material from Finance 3310 (or equivalent)

Even though I do not plan to spend class time reviewing concepts from your introductory finance class, you will be responsible for much of the material covered in that course. Since you may feel rusty on some of the basic concepts of finance, I have prepared a number of review sheets that I hope will refresh your memory. I highly recommend that you look over the review sheet for each section before we begin to cover that section. If after looking over a review sheet you still feel shaky about the material, you may want to look at the reading assignment from the book to fill in any gaps. For all sections (even those without review sheets), I recommend that you read the recommended chapters once before you come to class. While reading, you should concentrate on two things. First, it is essential that you concentrate on terms. You will in all likelihood be completely lost if you are not familiar with the terms used in the chapter. Second, you should pay attention to those parts of the chapters that you did not understand. Be sure to ask questions about this material during class. This will be important since what I think you will find difficult may not be what you actually find difficult.

Calculators

A financial calculator greatly simplifies working problems in finance. I personally recommend one of the TI-83 (or TI-84) calculators. However, there are many good financial calculators available today.

Despite my recommendation of the TI-83/84 calculator, the only technology you can bring to an exam is a pencil or pen. The good/bad thing about current technology is that calculators, PDAs, cell phones, etc. can now store pictures and text. I can load my entire set of lecture notes onto both my calculator and my PDA. Since those who own PDAs or text-capable calculators would have an advantage during exams over those who do not, I can maintain a level playing field for everyone during exams by carefully checking every file on every electronic device anyone brings to an exam, by requiring everyone to buy the same calculator, PDA, cell phone, or laptop, or by preventing everyone from bring any form of technology to exams. Since the first approach proved unwieldy and the second approach is unreasonable, I have decided to make exam days technology free (except for a pen or pencil).

Exams

The two exams this summer will be the midterm and the comprehensive final exam. Both exams will have ten “short-answer questions/problems” plus four “problems/essays”. Each of the short-answer questions will either be a short problem, part of a longer problem, or will require a short answer. The problems/essays are longer problems requiring integration of concepts covered on the exam. The final exam is comprehensive meaning you will be responsible for all material covered (lectures and review sheets) in the course. However, the short-answer questions on the final will come only from material covered since the midterm. Since you will not have a calculator during exams, all the points on the exam will be earned by setting up problems and plugging in as many numbers as possible. Calculations are not worth any points. On both exams, the short-answer questions are worth 15 points each and the essays are worth 75 points each.

A one-week statute of limitations applies to appeals on grading. The one-week period begins after the graded material is returned. The one-week period for the final begins on the first day of the fall semester.

Homework

Old Exams and Keys: Exams and keys from previous semesters may be accessed by following links on the main 5360 web page and are organized by semester. For each semester, the first link allows you to open (or save) a list of all of the topics we will cover this semester and a list of all the problems that go with each of these topics. Questions from finals (and sometimes from other exams) often require knowledge of multiple topics. As a result, the problems listed in each section include all problems that can be worked for the first time after finishing that section of material.

Required homework from old exams: You are responsible for the exam questions from the previous two semesters. For this semester, that means you are responsible for exams from Summer 2006 and Summer 2005. While you are only required to set up problems on exams, you are required to both set up and solve to a final number all problems assigned as homework.

Earning homework points: On homework days, you are responsible for all problems related to topics completed since the last homework day. On these days, homework points can be earned in two ways: 1) by asking questions about the solutions to the required homework (explaining what you are confused about will earn you more points than simply asking to see a solution to a problem), and 2) by answering questions asked by others about the solutions to the required homework. You will not turn in any solutions to homework problems during the semester. Rather you will use your written notes about solutions to ask and/or answer questions asked about the problems. This will often involve writing or drawing on the board.

Volunteers and draftees: I will sometimes randomly call on people to answer the questions asked by others and at other times I will allow people to volunteer to answer those questions. In all likelihood everyone will not be called on to answer homework questions. Therefore, you should volunteer early and often to explain homework problems to make sure that your homework grade doesn’t hurt your course grade. Note that if few questions are asked about homework problems, I will randomly call on people to explain their solutions. In this case, I will focus on typical errors on past exams.

Organization on homework days: Staying organized on homework days will be crucial to your ability to ask and answer questions. But remaining organized will be difficult because we will almost always cover more than one topic on a homework day and since questions can come from multiple exams and multiple semesters. I recommend that you attach your answers to the relevant exam then organize your exams (and notes) by semester and then by exam. This will allow you to find relevant problems and solutions quickly.

Suggestions on homework: Working old problems is one of the best (if not the best) way to learn the material for this course. I highly, highly recommend that you attempt to work problems without looking at the keys until after you think you have the correct answer. Only then should you compare your answers to those on the keys. You will NOT have a key during an exam and recognizing a correct answer is not the same as being able to produce it yourself. I also highly recommend (based on comments made by students from previous semesters) that you work more than just the required homework problems. You should continue working problems from older exams for each section of material until you can consistently get the correct answer without looking at your notes, looking at the solutions, or talking to your friends. You won't be able to do any of these things during an exam. Finally, make sure you understand any differences between your answers and the keys.

Working together: I encourage you to work together on homework problems. Talking through the solutions to old exam questions and working together to build the spreadsheets will help you when it is your turn to explain your solutions to everyone. I also believe you will gain a better understanding of the material which will help you do better on exams.

Class Participation

Class participation points will be based on participation in class discussion and asking relevant questions about lecture material. 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 friendly environment to hone your skills.

I will take attendance at the beginning of each class for my own information. 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".

Course Outline:

I. Fundamentals of Finance => Basic Concepts and Tools

A. Overview of Course and Corporate Finance

Reading assignment: Chapter 1

B. Ratio Analysis

Review sheet to download from web: Review of Financial Statements and Ratio Analysis

Reading assignment: Chapter 3 (Sections 1-4)

Note: There is no lecture over this material. It should be a review of your introduction to finance class.

C. Economic Profit => Economic Value Added (EVA)

Handouts: Partial lecture notes on Economic Value Added , Merck’s 10-k, EVA Analysis of Merck

D. Time Value of Money

Review sheet to download from web: Review of Time Value of Money Fundamentals

Reading assignment: Chapters 4 and 5

Partial lecture notes to download from web: Time Value of Money: Beyond the Basics

E. Risk and Return

1. Capital Asset Pricing Model

Review sheet to download from web: Review of Risk and Return Fundamentals

Reading assignment: Chapters 9 and 10

Partial lecture notes to download from web: Risk and Return: Beyond the Basics

2. Term Structure of Interest Rates

Reading assignment: Appendix 5A (I am unable to find this on web)

Partial lecture notes to download from web: Term Structure of Interest Rates

F. Options

Reading assignment: Chapter 22

Handouts: pages from the Wall Street Journal

Partial lecture notes to download from web: Options

G. Agency

Partial lecture notes to download from web: Agency

H. Efficient Markets

Reading assignment: Chapter 13

Partial lecture notes to download from web: Efficient Markets

II. Asset Management

A. Net Present Value and Alternative Capital Budgeting Rules

Review sheet to download from web: Review of Capital Budgeting Rules

Reading assignment: Chapter 6

Note: There is no lecture over this material. It should be a review of your introduction to finance class.

B. Incremental Cash Flow

Review sheet to download from web: Review of Incremental Cash Flow Analysis

Reading assignment: Chapter 7 (Sections 1, 2, and 3)

Note: There is no lecture over this material. It should be a review of your introduction to finance class.

C. Advanced Topics in Capital Budgeting

Reading assignment: Chapters 8 and 12

Partial lecture notes to download from web: Advanced Topics in Capital Budgeting

III. Liability Management

A. Review of Securities

Review sheet to download from web: Review of Basic Securities

Reading assignment: Chapters 14 and 20

Note: There is no lecture over this material. It should be a review of your introduction to finance class.

B. Issuing Securities

Review sheet to download from web: Review of Issuing Common Stock

Reading assignment: Chapter 19

Note: There is no lecture over this material. It should be a review of your introduction to finance class.

C. Optimal Capital Structure

Reading assignment: Chapters 15 and 16

Partial lecture notes to download from web: Capital Structure

D. Dividend Policy

Reading assignment: Chapter 18

Partial lecture notes to download from web: Dividends

Important Dates:

July 11 Homework discussed

17 Homework discussed

23 Homework discussed

25 Midterm

30 Homework discussed

August 6 Homework discussed

8 Final

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