BUSN 6640-FINANCIAL MANAGEMENT



BUSN 6640-FINANCIAL MANAGEMENTUniversity Of Colorado At Denver Online MBA ProgramFall 2015 – August 17th through December 9thDr. John Byrde-mail (office): john.byrd@ucdenver.edu(970) 247-9182 (before 9:30 pm only, Mountain time)Course DescriptionAn introduction to the tools, techniques, and concepts of financial management, including the time value of money, risk analysis, the theory of valuation, capital budgeting, cost of capital, methods of working capital management, the debt-equity choice, dividend policy, mergers and acquisitions and the basics of option valuation. How the class worksThis is a Canvas class. The login screen I use is at: are broken into weekly lessons. Each week there will be a lecture (or maybe two) on the class website. These web-based lectures sometimes have videos, links and/or embedded spreadsheets, so are the best way to access the material. Each topic has a textbook chapter, which can be download from the class website. About half of the weekly units have a mini-case or problem set associated with the material. Every week has a non-scoring practice quiz. Each week you should read through the lectures and text chapters, do the mini-case or problem set, then do the practice quiz to test your comprehension. If you have questions about the material or assignments, each week has an area titled ‘Finance Questions’ where you can post questions, answer or comment on questions posted by other students.There are five graded activities (totaling 400 points) that must be completed during the semester:Two 75-point online quizzesOne 100-point midterm exam (exam emailed to you)One 100-point comprehensive final exam (exam emailed to you)Company Analysis Project (50 points) Important class datesThe key dates for the class are listed here. Please put the dates somewhere you look at often or can access easily. I understand that you all have busy lives, so have noted the assignments with a little bit of flexibility in their due dates. Assume that all other due dates are firm. Last day to drop without $100 course penalty – August 24.Last day to drop with tuition adjustment – September 2. Quiz #1 (75 points) - Available September 5 through 15.Project Part 1- Due September 24 (Very flexible due date).Quiz #2 (75 points) - Available October 3 through 13. Midterm Exam (100 points) - Available October 16 through 26Last day to drop without special petition and Dean’s signature – September 26.Project Parts 2 & 3 - Due December 3.Final Exam (100 points) - Available December 2 through 9.Virtual office hoursI check e-mail and the class website often, i.e., daily. During the week (Monday-Friday) I will try to respond to e-mails or questions posted in ‘Finance Questions’ within 24 hours unless I am out of town. Weekends tend to be filled with family activities. Questions posted or emails received from late Friday through Sunday may not be answered until Monday or early Tuesday. Important e-mail and contact informationWhen you send me an e-mail be sure to put your name in the note and have BUSN 6640 in the subject line. I am teaching three classes this semester and this will help me better understand and respond to your question. If you are asking a question about an exam or quiz problem it speeds my reply if you include the entire problem in your note. That will save me having to log on to the class website and find the question you are asking about. My e-mail address is: john.byrd@ucdenver.edu In case you need it, my home phone is 970-247-9182. We turn in early, please limit calls to the hours of 8:00 a.m. and 9:30 p.m. Text (no book to buy!)Foundations of Corporate Finance, 2nd edition, by Hickman, Hunter and Byrd, 2002, Southwestern College Publishing. The ISBN number is 0-324-01639-5. I have posted chapters in DOC SHARING for free download. If you have the time, downloading and printing (or reading on the computer) is a lot cheaper than buying the textbook. If you want a hardcover text you can find the book online. Almost all MBA finance texts covers the material in this class. If you choose to use a different text it is your responsibility to figure out which chapters in that text correspond to our topics. We have a new book coming out soon, so I may post page proofs from that text if they become available in time.CalculatorA financial calculator can be helpful. Personally, I use a spreadsheet program (Excel) more than a calculator. I like having the data laid out in front of me where I can see what is going on. It is also easy to print or move into a word processing program. Every MBA student should have good spreadsheet skills by the time they complete the program, so I encourage you learn Excel (or some other spreadsheet). If you prefer using a calculator, be sure to find one with financial functions.EXCEL PRIMER: I will send out an Excel Primer so you have a reference for using the basic financial functions. It is a first draft so suggestions for improvement would be appreciated. Other course materials (Completely optional): Reading The Wall Street Journal is a good way to see how finance affects companies. You do not have to subscribe, but the rates are very good for student subscribers. You can subscribe to the Wall Street Journal at: cost is $21.99 for 3 months and includes online access.Note: If I find something timely in the WSJ I will send it to you, so there is no need to subscribe yourself. PrerequisitesYou need basic accounting skills, familiarity with basic statistical concepts such as mean, standard deviation, correlation, co-variance and regression, and some comfort with the basic concepts of competitive markets, such as entry, exit, competitive market pricing, profits in imperfectly competitive markets, etc. The CU Denver courses that cover these topics are:1. BUSN 6620--Applied Economics for Managers2. BUSN 6530--Data Analysis for Managers3. BUSN 6550--Analyzing and Interpreting Accounting InformationCourse ObjectivesFinancial management is concerned essentially with acquiring and investing funds to create wealth for shareholders. It develops key concepts of risk, return, and value, and teaches the quantitative techniques necessary to create an analytical and institutional (financial markets) framework for making the firm's investment and financing decisions. Upon completing this course, you should understand:Corporate structure and the concept of agent-principal relationships.How to use discounted cash flow techniques to value securities like bonds and stocks.How to estimate project cash flows and evaluate investment opportunities (NPV analysis).How to estimate a risk measure for a firm’s stock.How to calculate an asset’s risk adjusted required rate of return.How to calculate the average cost of obtaining funds to acquire assets (cost of capital).Financial market efficiency and when and why it is likely to apply.How to evaluate the mix of debt and equity financing for a firm (capital structure). How to assess the financial health of a company by analyzing its financial data.Options and know a few of the roles that options play in corporate finance.Asking & Answering QuestionsEach week the class website includes an area 'Finance Questions' where you can post questions about the material. Other students or I will respond to your questions. One of the best features of the on-line format is the interaction between students and faculty, so please don't hesitate to write me with your questions. I am here to answer questions, clarify concepts, and help you with the various tools introduced in the class.GradingBusiness School policy suggests that the average GPA for this class should be between 3.1 and 3.5. The GPA of the final letter grades in this class usually average about 3.4. Final letter grades are based on the total points each student earns from the 400 points available. I expect that everyone to earn all the points for the company analysis project. Individual questions on the essay exams are graded on a 90, 80, 70 basis, with 'A' quality answers earning from all of the possible points to 90% of the possible points, 'B' level answers receiving points in the 80% range, and so on. Usually the lower bound for final letter grades is 93% for an A, 90% for an A-, 87% for a B+, 82% for a B, and a B- requires at least 78% of the possible points. This scale may shift a little depending on the distribution of total points. Approaching the materialThere are two ways to learn the material: lectures on the website and the textbook. You should try out the various mediums and figure out which one(s) work best for you. I think trying to read all of them is not necessary or efficient (too much redundancy).The website lectures are the most current versions of the material. I try to improve them a bit every term. If you find something that could/should be fixed please write explaining exactly where it is and what the problem is. I think things are clear but they may not be to other people.The textbook is a fairly readable introduction to the material. Depending on how you like to learn it may be very helpful. I am finishing a new version and may post those page proofs as they become available.Problem sets and mini-cases allow you to practice the tools of the class. These are not turned so do not affect your grade. You can choose not to do them if you feel confident with the material. I recommend that most people use these practice opportunities to make sure they have a good understanding of the material.A project with a real company gives one more opportunity to practice techniques form the class, as well as look at real financial information. This is a graded assignment. Everyone receives full credit for it, if they complete it successfully during the semester.About the quizzes and examsQUIZZES: The two 75-point quizzes will be entirely on-line and are comprised of true-false, fill-in the blank, multiple choice and multiple answer questions. Many of the questions on the quizzes will be similar to the non-graded practice quizzes in each of the weekly units. I will send out some longer problems just before the quiz. A few of the fill-in-the-blank questions will be based on these pre-quiz worksheets. The quizzes are available for about 7 days. You may take the quizzes anytime during that period, but once you start a quiz you must complete the quiz in that attempt. I set the quiz time at 2.5 hours. If something happens (computer crash, child wakes up, etc.) I can add time to your quiz. Send me an email or call. This is NOT meant to be a race or speed event, so ask for extra time if you need it. Online quiz dates are very difficult to extend. I do not give anyone access to their scored quiz until everyone has completed the quiz. Extending the deadline means your colleagues cannot review their work, or that I have to create a new quiz for you. So please note the quiz dates and plan on completing the quizzes during the scheduled periods.Quiz score improvement: The quizzes are over basic material that everyone needs to know to pass the class. I give students scoring below 80% a chance to do extra work to raise their score to 80%. This is my way of assuring that everyone has a reasonable understanding of the foundation material by the time the first exam occurs. There are no opportunities to improve exam scores or to do extra credit to improve your grade, so you need to perform well on the four graded activities (2 quizzes and 2 exams). I expect everyone to earn full credit on the company analysis project, so grades are determined by quizzes and exams. A caution about online quizzes multiple answers questions:I use a few multiple-answer questions in the online quizzes. These are multiple-choice questions with one or more correct answers. Sometimes when you look at your quiz results the software indicates all the answers you got correct, not all the correct answers. This difference may seem trivial, but it has confused someone every term. Here is an example of how this confusion arises. Suppose the question is as follows: **** Multiple Answer Question******** Select All Correct Answers ****The City of Denver is: A. In Colorado.B. In the United Sates.C. In Nepal.D. Has a population of over 25 million. E. The capital of the State of Colorado. If you select all of the correct answers (A, B and E) when you review your quiz you would see that all of your responses had been marked "Correct". This means that you answered all the questions correctly, not that answers C and D are correct. A few people who may have relied too heavily on the practice quizzes to study interpreted the "Correct" designation to mean that all the answers were correct (A, B, C, D and E). When they saw a similar question on another quiz they marked all the answers, got two wrong (C and D) and felt like they had been misled.EXAMS: There are two exams. The midterm and the final exam are both worth 100 points. These exams allow me to ask you more open-ended questions or more complicated quantitative problems for which partial credit can be assigned. The exams cover standard material from the class and ask you to synthesize and apply concepts from the class to slightly different situations. I will send the essay exams to you via e-mail by the stated start date (earlier if I get them ready sooner), and you will have about 7 days to complete them. The midterm covers all material through Week 9 (CAPM and beta). The class website will have a discussion area where you can share ideas about how to do mid-term questions, but you cannot post specific answers. I will delete any posting that gives answers. This makes the mid-term a little more of a collaborative activity, and I think it enhances people’s understanding of the material. The final exam is comprehensive and completely individual. There will be no discussion or sharing of approaches. Neither exam offers any make-up or score improvement opportunity.Hints for succeeding in this classDo not fall behindThis class is fairly demanding with new material being introduced every week. If you fall behind early in the term you may not have the tools to successfully deal with latter material. The best (and maybe only) solution is to not get in that situation. Ignoring the class for a week or two could make completing it difficult, so keep up.Ask questions earlyOn-line classes are designed for easy interaction between students and the teacher. If you have given some section of the class a good honest effort but are still having trouble with the material, write me or post questions in the Finance Questions for the appropriate week. Do not spend a week trying to figure out something, and then suddenly discover you have missed that week's material.Overall Course PlanThe course shell is divided into weekly units. You may visit the course site and study the units anytime you want. The only restriction is that the quizzes and exams are available only for a pre-specified time, so act as milestones throughout the semester.Weekly Course StructureEach unit (or week) of the class has: An introductory section that lists the activities and readings for the week, gives a brief overview of the topic, the learning objectives for the unit, and any upcoming due dates.A web-based lecture (or two) on the materialFinance Questions (for you to ask question on that week’s material)Practice quiz (online; can be repeated; has no impact on your grade)In Doc Sharing you will find:Text reading assignments for the weekPractice problems, mini- cases and extra readings for the week, if there are any.Tentative Class ScheduleWeekDateTopicActivityText chapters117-Aug-15Intro; Accounting review; Pro Forma analysisDiscussion ‘Introductions’ Pro forma case1, 2, 3224-Aug-15Basics of Present ValueRefinance & Retirement Cases4331-Aug-15Bond & Stock ValuationQuiz #1 Available September 5 through 15.547-Sep-15Capital BudgetingCapital Budgeting Case7 (pp. 210-232)514-Sep-15Capital BudgetingProject Part 1 due September 24 (Flexible)9 (only pp 295-301)621-Sep-15Real OptionsReal Options Case7 (pp. 232-240 )728-Sep-15Options & ConvertiblesOption exercises; Quiz #2 Available October 3 through 13.?85-Oct-15Risk and Return2-Asset Portfolio.xls6912-Oct-15CAPM & BetaBeta estimation case61019-Oct-15Exam #1 100 pointsMidterm Exam - Due October 29?1126-Oct-15Capital Structure?8 & 11122-Nov-15Dividends & WACCMandalay WACC case12139-Nov-15Working Capital ManagementCash Budget Case?1416-Nov-15Financial AnalysisBond Rating Mini-case131523-Nov-15Thanksgiving Break??1630-Nov-15Mergers and AcquisitionsProject Parts 2 and 3 due December 314177-Dec-15Final Exam 100 pointsFinal Exam - Due December 10?Company Analysis ProjectThe objective of this assignment is to familiarize you with sources of financial data, practice applying some of the quantitative tools of the course, and enrich our somewhat stylized approach to finance with some of the complexity of real-world corporate finance. The assignment has three parts. All three parts will be based on a single company that you choose. Part 1 asks you to investigate the governance and compensation features of the company. This allows you to see the structure of a proxy statement, how CEO pay is reported and what type of people sit on corporate boards. Part 2 asks you to estimate the equity beta for your company. The equity beta is the most commonly used risk measure in finance. This aspect of the project gives you some practice in finding stock price data, computing returns, and doing some statistical analysis. The final part asks you to compute the weighted average cost of capital (WACC) for your company. The WACC is often used as a discount rate in investment analysis. The computation will expose you to the capital structure of a company, which is rarely as neat as our textbook examples.To begin the project you need to find an appropriate company.1: Select a public, non-financial corporation. It should be a company that has been publicly traded for at least two years, so you can get financial statement information and stock prices. Many companies have links to their financials on their websites. A great source of financial data is the SEC's EDGAR database at:. Obtain the company's latest annual report or SEC Form 10K and proxy statement (DEF 14A). The data for most companies is available in PDF format on the internet either on the company’s website (usually under Investor Relations) or at the SEC EDGAR website. Important: The company must have some long-term debt listed on the balance sheet of its financial statements. It is a 10-point deduction if your company has no long-term debt.3. See if historical stock prices are available for at least a year and preferably two years. There are several websites that have such data. A particularly good one is Yahoo, look for Historical Quotes under Research Tools, at: Stock DataEnter the ticker symbol for your company then click on Historical Quotes on the left part of the page. A screen will appear that asks for some information. Select Daily for the type of return and enter some dates (maybe start two years from today). When the data appears click on Last to see if there is data for your entire two-year period. You can also scroll to the bottom of the data and click on Download to spreadsheet. Using this command I have been able to download all of the data right into Excel.Assignment Part 1: Governance information (Due September 24) 15 pointsSend me an e-mail with the information listed below for your company. Almost all of the data can be found on the proxy statement. Please don’t send the assignment as an attachment. They are slower for me to access and grade. Just write an e-mail and send it to me at: john.byrd@ucdenver.eduYour nameCompany name Ticker symbolWhere traded (e.g., NYSE, NASDAQ, etc.)Names of CEO and ChairmanThe total CEO compensation (show the total, salary, bonus, value of stock options and other components individually)CEO and Chair total stock ownershipStock options granted to the CEO and Chair in the most recent yearTotal number of directors on the boardNumber of directors in each of the following categories:Inside directors (current or former employees of the firm or family members of employees or former employees)Affiliated outside directors (not a current or former employee of the firm, but has some business relationship. See "Related Transaction" section of the Proxy Statement)Independent outside directors (no link to the firm other than their board seat)The ratio of inside and affiliated directors to independent outside directors.Existence of any large stakeholders in company (more than 5% of stock)Number of shares of stock outstandingNote on identifying independent directors:Here is the question you have to ask and answer when categorizing directors as independent: Does the director have incentives to protect the interests of shareholders or to capitulate or blindly agree with the CEO?Suppose an attorney is a director of a company and works for a law firm that's on retainer to the company. If the attorney were to confront the CEO, the CEO could end the contractual arrangement with the law firm. This puts the attorney/director in a compromised position because he/she may be unwilling to stand up for shareholders at crucial moments. Similar relationships could exist with bankers, investment bankers, suppliers or customers.We usually don't worry about investors not having independence because their incentives should be closely aligned with those of other shareholders.We worry more when a director has either a relationship with the CEO–old school friends, etc.– or a business relationship with the company that could be terminated if the director spoke up to represent shareholders in conflict with the desires of the CEO.The idea is to figure out whether the board has the spine to stand up to the CEO or not.Assignment Part 2 : Estimate the equity beta (Due December 3) 15 pointsIntroduction: The Capital Asset Pricing Model (CAPM) is a standard model used to estimate an asset's risk. It can be applied to any asset for which there is a time-series of price data. The beta estimate is the covariance of the returns of the asset to the returns on some broad market index, standardized by the variance of the returns to the index. It sounds more complicated than it is. The following steps will help you compute a beta for the stock of your company.1. Collect price data for your company's stock and for an index. You will need about 250 daily prices for this project. That is about one year's worth of trading. The instructions for getting the historic prices are given at the beginning of these instructions. You will need the ticker symbol for your stock and the index you plan on using. On Yahoo the ticker for the S&P500 is ^GSPC and the ticker symbol for the NADAQ Composite is ^IXIC. A list of the ticker symbols for all the major US indices is at:. Change closing prices into returns.We covered this in Week 2. A return is the price change and income from an asset divided by the price paid. For this assignment we need daily returns so the formula will be something like:Where Prices are the closing prices on the respective days. Only once a quarter, and only for some stocks, will there be a dividend. For example, if Apple Computer (aapl) closed at $20.00 on Monday and $20.25 on Tuesday and paid no dividend that day, its return would be $0.25/$20.00 = 0.0125 = 1.25%You need to convert you price series and your index series into returns. You must be very careful to match the dates of the index and the stock. If you are off by just one day the estimation procedure will not work.3. Compute the beta.The beta is the slope coefficient from a regression of the index returns (x-variable) on the stock's returns (y-variable). You can compute this slope coefficient several ways. EXCEL has a LINEST command that will give you the beta estimate. The command can be inserted in a cell using the INSERT pull-down menu then selecting FUNCTION. LINEST is under the statistical functions. The company stock returns are the y-variable and the index returns are the x-variable. If you reverse the ordering your beta estimate will be pretty far off. If your company return data is in column A from cell 1 to 250 and your index return data is in column B from cell 1 to 250, then the LINEST command should look like this=LINEST(A1:A250,B1:B250)You can also use Regression Analysis in Excel's Data Analysis Add-in (under the TOOLS MENU). You must transform closing prices into returns to compute beta.4. Find a published estimate of your company's beta. There are several internet sources that have beta estimates. Yahoo finance is a good source (). Enter your company’s ticker symbol then go to Key Statistics. The Beta is under Trading Information on the right-hand side of the page. Other sources are:. Send me your beta estimate.Please send just a brief e-mail note (please do not send this as an attachment) to me at: john.byrd@ucdenver.edu In your e-mail include: Your nameCompany name and ticker symbolYour beta estimate At least one published beta estimateIf your beta is very different from the published beta include a paragraph discussing why this difference exists. Please DO NOT send the data. You may send Parts 2 and 3 in a single email if you like.Assignment Part 3: Estimate your company’s WACC (Due December 3) 20 pointsThe weighted average cost of capital (WACC) is a standard approach to estimating a discount rate for NPV analysis. Although the WACC is appropriate only in a limited number of situations, it remains a good starting point for discount rate estimation.In this portion of the assignment you will estimate the WACC for your company.In past classes some students have found WACC estimates for their company on the internet. A Google search might find one. The New Zealand office of PriceWaterhouseCoopers has an interesting website with WACC estimates for many New Zealand companies. You might want to look at these estimates and see how they compare to yours. The URL is: WACC requires from 4 to 6 inputs depending on whether the company has preferred stock outstanding. Your company should have been chosen so it has some long-term debt.Market value of long-term debtCost of long-term debtMarket value of equityCost of equityMost companies do not have any preferred stock. If yours does include:Market value of preferred stock Cost of preferred stock1. Market value of long-term debt - This may not be possible to compute. If your company's debt is publicly traded find the current price and multiply by the number of bonds. If it is not publicly-traded use book value (current principal outstanding from the balance sheet (or balance sheet footnotes).2. Cost of long-term debt – This is the trickiest part of the assignment. The best place to find this information is in the footnotes to the balance sheet. The footnotes will often have detailed information on the coupon rates of many of a company’s debt issues and may have information on the year-end market price of the debt. Here described from best to worst are several approaches for estimating the cost (or required rate of return) of debt.A. If the market price of debt is available (not often) use it to estimate the current yield-to-maturity of the debt. See our notes from Week 2 of the class on how to do this. The yield-to-maturity is the best estimate of the cost of debt.B. If the market price of debt is not available look for the coupon rate. Compute an average coupon rate (or weighted average if the size of debt issues vary) using all of the coupon rates available. This becomes your estimate for the cost of debt.C. If coupon rates are not available you can estimate the coupon rate by dividing the interest expense by the book value of the debt. Use the average of the book value of debt from the end of the previous year (the start of the current year) and the end of the current year. This will help correct for new debt being issued or old debt being repaid.The cost of debt needs to be adjusted for taxes by multiplying the cost by (1 - Tax Rate). Most firms report their effective tax rate in their annual report, often in a footnote to the financial statements.3. Market value of equity - Current market price times number of shares outstanding.4. Cost of equity - Use the CAPM and the beta you estimated in Part 2 of the project to estimate the cost of equity. Let us all use 5% as the risk-free rate and 7.2% as the market risk premium. Also, since a few beta estimates were either very small or large, let us agree that the final cost of equity must be higher than the cost of preferred stock, which should be higher than the cost of debt. A cost of equity that has a 5% to 12% premium over the cost of debt is probably reasonable. 5. Market value of preferred stock - Current market price times number of shares outstanding. Most companies DO NOT have preferred stock. Ignore this step and Step 6 if you cannot find any preferred stock listed on the balance sheet.6. Cost of preferred stock – Annual Preferred Stock dividend divided by the current market price of the preferred stock7. Compute the Weighted Average Cost of CapitalUse the WACC formula remembering to adjust the cost of debt for its preferential tax treatment. You can use the company's average tax rate (tax expense divided by taxable income) or 0% if the company has losses. The tax rate is usually reported in footnotes to the financial statement.Where: Total Capital is the sum of values for Debt + Preferred + EquityCostDebt is the After-tax cost of debt = Cost x (1 - Tax Rate)Neither Preferred nor Common Stock receive any tax treatment (i.e. After tax cost = before tax cost)8. Submit your WACC estimatePlease send me the following information in an email (not as an attachment):Your nameCompany name and ticker symbolMarket (or book) values of debt, preferred stock and common stock.The tax rate used to compute the after-tax cost of debt.The cost of each type of security, e.g., the rates used in the WACC computation.Your WACC estimateA brief discussion of what problems or weaknesses you see in your estimate. ................
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