BUS 558 Financial Management

                                 Combined Module and Syllabus

Waynesburg University
Summer ...
Calculator:

A financial calculator is required for this class. The Texas Instrument BAII Plus Student Edition,
hereafter ...
Week 4:          Mid term
                 Chapter 5 - Bond Theory and Valuation

Week 5:          Chapter 6 - Risk, retur...
Workshop Objectives and Assignments:

Workshop 1: Overview of Financial Management and Time Value of Money

This class emp...
3) Develop the concept of free cash flow as a key variable in assessing the firm’s financial
      performance over time
 ...
Class Activities
     1) Facilitator will bring a case study to class on financial planning and budgeting
     2) Extended...
Objectives

   1)   Differentiate measures of risk for a single security vs. a portfolio
   2)   Understand risk reduction...
Class Activities
   1) Discussion of financial articles
   2) Case Study for Cost of Capital concepts
   3) Review of Capi...
Class Activities
       1) Discussion of the importance of raising funds in the capital markets to lower WACC
       2) Fa...
Supplement: Using the Financial Calculator for Time Value Problems



Directions:       Please review this worksheet using...
Exit BGN mode by keying: [2nd] [QUIT]




Chapter 2:     Time Value of Money

Discounted Cash flow analysis which embodies...
I/Y = 6   (calculator strokes are 6, I/Y)
N=5         m*years; (annually so 1 *5)
PMT = N/A

Input F.V., I/Y and N, CPT P....
PMT = n/a

Answer:         F.V. = $7,930 the additional $930 can be used towards a first class airline ticket.

The text u...
displays, hit 2nd SET then 2nd QUIT.

Answer: $331.01 (higher due to extra period of interest)

PRESENT VALUE OF AN ANNUIT...
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  1. 1. BUS 558 Financial Management Combined Module and Syllabus Waynesburg University Summer II 2008 Day and Dates of Course: Wednesdays July 2 through August 20. Class Site: Southpointe Facilitator: John Niedenberger, CFA, CFP Office: 412 471-4191 x8903 Cell: 412 897-4010 Office E-Mail: niedenberger@hunterassociatesinc.com Home E-Mail: jniedenberger@verizon.net Office FAX: 412 471-2993 Facilitator Attendance Policy: If an absence is unavoidable, please contact facilitator to discuss a makeup assignment in lieu of missed class participation. Policy For Makeup Work and Late Assignments: Due by last class. Unless a family emergency or medical reason exists, 10% will be deducted from any overdue assignments for each week overdue. Prerequisite BUS 555 Managerial Accounting and Control Course Objective Develop the skills required to perform financial statement analysis, determine stock/bond valuation, evaluate capital expenditure projects and understand sources of financing and dividend policy. In doing so, the student will be provided with a solid understanding of the two main building blocks of finance: Time Value of Money and Risk/Return Trade-Off. The Brigham text will be supplemented with case studies and current financial articles. For all topics, the corporate treasury, financial intermediary and investor perspectives will be analyzed. Course Requirements Text: Brigham and Ehrhardt, Financial Management, 12th edition, Thompson (Note new edition,2008) 1
  2. 2. Calculator: A financial calculator is required for this class. The Texas Instrument BAII Plus Student Edition, hereafter referred to as “Calculator” is the recommended model. Other acceptable models must be able to perform Net Present Value (NPV) and Internal Rate of Return (IRR) functions. The student is responsible for learning how to use his/her calculator before the first workshop. Review the Supplemental Document at the end of this module detailing basic calculator functions and time value of money problems for the Calculator. You will be required to be able to use the Calculator to solve the problems assigned for Chapter 2 before the first workshop. Grading Scale 92 – 100 A 90 - 91 A- 88 – 89 B+ 82 – 87 B 80 – 81 B- 78 – 79 C+ 72 – 77 C 70 – 71 C- Additional Information While there are no formal prerequisites for this course, it is assumed that the student has some basic knowledge of accounting principles, elementary algebra, and descriptive statistics. I will distribute a basic math and statistics handout in the first class for review. Throughout the course certain terminology or concepts are central to understanding finance. As a backup to the text and the coverage during class time, I recommend the website www.investopedia.com as a reference tool. It allows you to search for financial and investment buzzwords, giving you a practitioner interpretation of many academic terms and concepts. Especially noteworthy are the tutorials on topics such as basic financial concepts, fundamental analysis, discounted cash flow analysis, and financial ratio analysis. Workshop Schedule and Topics Week 1: Chapter 1 - Overview of financial management and the financial environment Chapter 2 - Time Value of Money / Calculator Skills Week 2: Chapter 3 - Financial statements and cash flow Chapter 4 - Ratio Analysis Week 3: Chapter 14 - Financial Planning & Forecasting Chapter 22 - Working Capital Management 2
  3. 3. Week 4: Mid term Chapter 5 - Bond Theory and Valuation Week 5: Chapter 6 - Risk, return, and the capital asset pricing model Chapter 8 - Equity Valuation Week 6: Chapter 10 - Cost of Capital Chapter 11 - Capital Budgeting Decision Rules and Process Overview Week 7: Chapter 18 - Distributions to shareholders:dividends and share repurchases Week 8: Company Analysis Presentations Chapter 19 – Overview of initial public offerings and investment banking Major Assignments and Evaluation Case Study I 20% (Due Class 3) Mid-term 25% (Class 4 – in-class) Company Presentation 25% (Due Last Class) Case Study II 20% (Due Class 6) Class Participation 10% & Financial News Discussion Company Analysis Presentation – Each student will choose a publicly held company, analyze its strategic direction and competitive position, evaluate its financial strength and determine whether it is a “buy” at the current price. Summary of written paper will be presented during Workshop #8. Financial News Discussion – Each student will be required for Weeks 2, 5, and 6 to bring in a relevant financial related article to present to class. Article is for discussion purposes only, no written analysis required. Method of Instruction Combination of case studies highlighting the main concepts and lecture/discussion format to outline the fundamental principles and analytical techniques. The emphasis is on applying theory to real-world examples. All assigned problems or cases focus on finding solutions to a particular decision a firm must make to optimize its financial structure. A few brief outside articles (approximately one per workshop) will be distributed to highlight a concept as it applies to an actual company, and to provide a springboard to class discussion. 3
  4. 4. Workshop Objectives and Assignments: Workshop 1: Overview of Financial Management and Time Value of Money This class emphasizes the two cornerstones of finance: risk management and the time value of money, both of which are “mega-concepts” that will be repeated throughout the course. Chapter 2 is a hands-on guide to the many uses of present value and future value in personal and corporate finance. Objectives 1) Establish the goal of financial management as maximizing the value of the firm subject to regulatory and ethical constraints 2) Discuss external and macroeconomic factors affecting firm profitability 3) Demonstrate the power of the time value of money through several present value and future value applications Assignments to be Completed Prior to Workshop 1 1) Read Chapters 1 and 2, Text 2) Homework (not to turn in, but to discuss in class) Chapter 1: p. 34-35, Questions 1-3, 1-4, 1-9 Chapter 2: p. 75, Problems 2-1, 2-2, 2-3, 2-5 Class Activities 1) Introduction and overview of course and course requirements 2) Discussion of management goals and examples of companies provided by facilitator 3) Class problems and handouts on various time value of money applications 4) Review assigned homework problems Workshop 2: Financial Statements and Analysis Financial statement analysis and ratios constructed from the statements form the core of company analysis from the viewpoint of a creditor or investor. Actual companies will be used to apply the analysis in identifying strengths and weaknesses. Objectives 1) Analyze and identify strengths and weaknesses of a company by examining the three external financial statements: balance sheet, income statement, and statement of cash flows 2) Emphasize the importance of cash flow from operations as a check on the quality of reported earnings 4
  5. 5. 3) Develop the concept of free cash flow as a key variable in assessing the firm’s financial performance over time 4) Discuss how financial planning and forecasting aid in evaluating the firm’s strategy 5) Analyze financial ratios and their importance in evaluating a firm’s financial strength and profitability Assignments to be Completed Prior to Workshop 2 1) Read Chapter 3 2) Read Chapter 4 3) Read E-Reserve articles for class discussion: “Cash Flows, Ratio Analysis, and the W.T. Grant Bankruptcy,” and “Using ROE to Analyze Stocks” 4) Homework, Answer questions on W.T. Grant case (distributed in Workshop 1) 5) Homework, Chapter 4, p. 149, Problem 4-13 6) Financial related article due Class Activities 1) Facilitator will bring in financial statements for actual company and lead a discussion on analysis and conclusions 2) Discussion of the W.T. Grant case 3) Review of homework problems and key points in readings 4) Class exercise on evaluating ratios for company in Activity 1) Workshop 3: Financial Planning and Working Capital Management The roadmap to execution of a firm’s strategic plan is the construction and analysis of pro-forma financial statements. Special attention will be given to the relationship between Sales and Assets. Objectives 1) Discuss the purpose and importance of pro-forma financial statements 2) Analyze the relationship between sales and net plant and equipment 3) Calculate the Additional Funds Needed in various in-class applications 4) Discuss affects of Cash Conversion Cycle on Free Cash Flow 5) Construct cash budget Assignments to be Completed Prior to Workshop 3 1) Read Chapter 14 2) Read Chapter 22 3) Do Spreadsheet Problem 14-10, p 513 4) Problems 22-1, 22-2, 22-5, pp. 808-09 5) Case Study 1 Due 5
  6. 6. Class Activities 1) Facilitator will bring a case study to class on financial planning and budgeting 2) Extended discussion on Spreadsheet Problem assigned 3) Extending financial analysis with working capital principles 4) Review Workshops 1 – 4 5) Distribute sample midterm for class discussion Workshop 4: Bond Theory and Valuation This class will focus on the basic characteristics of bonds including features such as Call and Put Options, Equity Conversion and Warrants. Discussion will include risks associated with bonds and simple bond valuation. Objectives 1) Understand the credit rating process and its impact on a firm’s cost of capital. 2) Discuss ways to structure a bond to enhance its credit rating. 3) Introduce the basics of Chapter 7 and 11 bankruptcy codes as an effective “hammer” held by bondholders. 4) Master simple bond valuation and discuss the various factors that influence a bond’s price in the market. Assignments to be Completed Prior to Workshop 4 1) Prepare for Midterm 2) Read Chapter 5 Class Activities 1) Midterm 2) Discussion of bond risk parameters 3) Class exercise on bond valuation problems Workshop 5: Risk, Return, and Equity Valuation This workshop will be used to understand the sophisticated concept of risk in the portfolio context and its mitigating affect on the risk of holding an individual security. Discussion will focus on the use rather than the calculation of standard deviation, coefficient of variation and beta. In addition, equity valuation will be reviewed with an emphasis on the challenges involved in projecting future earnings and dividend increases. This class will discuss several ways of determining the value of a stock, from the most theoretical approach to some practical methods used by analysts on Wall Street. 6
  7. 7. Objectives 1) Differentiate measures of risk for a single security vs. a portfolio 2) Understand risk reduction through diversification 3) Apply beta to understanding the risk of a single security held in a portfolio 4) Apply the required rate of return on a security using the CAPM 5) Determine the value of a stock with a dividend discount model 6) Understand and apply various Market Multiples to valuing stocks Assignments to be Completed Prior to Workshop 5 1) Read Chapter 6. The key graphs to understand are Figure 6-7, p. 217; Figure 6-8, p. 221; and Figure 6-10, p. 228. 2) Homework: pp. 235-36, Problems 6-1, 6-2, 6-6, 6-9 3) Read Chapter 8 4) Homework: Problems 8-1, 8-2, 8-3, 8-4, p.p. 307-08 5) Financial related article due Class Activities 1) Facilitator will apply beta concepts to an actual company 2) Review of homework problems 3) Class exercise on valuation of a stock using beta theory 4) Facilitator will bring to class a case study illustrating concepts of portfolio risk and return 5) Facilitator will provide actual company valuation using dividend discount model Workshop 6: Cost of Capital and Capital Budgeting One of the key concepts of corporate finance is that a company needs to earn a return on investors’ money in excess of the actual opportunity cost of that money in order to add to shareholder value. This is the concept of economic value added, as described in the text. Capital budgeting is a decision process to choose the projects that should best enhance shareholder wealth, i.e., the ranking of projects with the highest expected return relative to the cost of debt and equity financing. Objectives 1) Understand the concept of Economic Value Added 2) Calculate the cost of capital for a firm incorporating floatation costs 3) Apply time value analysis to the capital budgeting problem Assignments to be Completed Prior to Workshop 6 1) Read Chapter 10 2) Homework: Problems 10-2, 10-3, 10-5, 10-7 3) Read Chapter 11 4) Financial related article due 7
  8. 8. Class Activities 1) Discussion of financial articles 2) Case Study for Cost of Capital concepts 3) Review of Capital Budgeting Techniques Workshop 7: Dividend Theory and Policy This workshop will continue with the capital budgeting process emphasizing the various decision making techniques. In addition, Dividend Policy will be reviewed with a focus on distinguishing between cash dividends and share repurchases as alternatives in maximizing shareholder wealth. Objectives 1) Review capital budgeting decision techniques including NPV, IRR, MIRR, Profitability Index and Payback 2) Discussion of factors that affect Dividend Policy 3) Review of three types of Dividend Policy Assignments to be Completed Prior to Workshop 7 1) Read Chapter 18 2) Homework: Problems 18-1, 18-3, 18-4, pp. 668-69 Class Activities 1) Mini-case on dividend policy for class discussion 2) Class problems on dividend policy calculations Workshop 8: IPOs and Investment Banking; Company Presentations This workshop will be segmented into two parts, the first will consist of a brief discussion on the topic of Initial Public Offerings and the role of Investment Banking. The second part will be dedicated to Company Analysis Presentations. Objectives 1) Examine the process and pros/cons of “going public” 2) Understand the role of investment bankers and the importance of the secondary market 3) Provide feedback on Company Analysis Presentations through group question/answer session Assignments to be Completed Prior to Workshop 8 1) Read Chapter 19 2) Company Presentation Due 3) Case 2 Due 8
  9. 9. Class Activities 1) Discussion of the importance of raising funds in the capital markets to lower WACC 2) Facilitator will provide real-life examples of IPOs and funding decisions 3) Oral presentations of individual companies 9
  10. 10. Supplement: Using the Financial Calculator for Time Value Problems Directions: Please review this worksheet using a financial calculator (preferably the Texas Instruments BAII Plus) before the first class. -------------------------------------------------------------------------------------------------------- Key Calculator Steps (for Texas Instruments BAII Plus): To Clear Work: [2nd] [CE/C] Clears current work. [2nd] [CLR TVM] Clears the time value registers which should be cleared each time before you start a problem. Does not clear Payment per Year (P/Y). To set and reset Payments per Year: [2nd] [P/Y] Displays current setting of “payments per year”. By default the number of compoundings per year will equal the number of payments per year. With calculator in P/Y mode, the number of payments (compoundings) per year can be changed to any number by keying [X] [ENTER] Exit P/Y mode by keying: [2nd] [QUIT] To input N when Payments per Year are NOT annual: Once P/Y is set . . . input number of years, hit [2nd] [N], then hit [N] again to enter into the calculator, then [2nd] [Quit]. Here is an example: 30 year monthly mortgage . . . Step #1: Change P/Y to 12 (monthly) Step #2: Input 30, [2nd] [N] (should see 360 on calculator screen) Step #3: Hit [N] again to set. Step #4: [2nd] [quit] To change decimal places shown: [2nd] [FORMAT] Displays current setting of “places displayed after decimal point”. With calculator in FORMAT mode, the number of decimal places displayed can be changed to any number X by keying: [X] [ENTER]. I suggest at least 5 decimal places. Exit FORMAT mode by keying: [2nd] [QUIT] To toggle between “End” and “Beginning” for Ordinary Annuity and Annuity Due: [2nd] [BGN] Displays current setting of “timing of annuity payments”. Two options are BGN (beginning of period) and END (end of period). With calculator in BGN mode, “toggle” to option not currently displayed by keying: [2nd] [SET] 10
  11. 11. Exit BGN mode by keying: [2nd] [QUIT] Chapter 2: Time Value of Money Discounted Cash flow analysis which embodies the time value of money concept is the most important concept in Finance (and most widely used). This chapter is the basis for subsequent chapters and for more advanced finance courses. The text does a good job explaining how to calculate solutions to simple Present Value (P.V.) and Future Value (F.V.) problems using three methods, 1.) manually via formulas 2.) using spreadsheet programs and 3.) using a financial calculator. In class, we will use a calculator to efficiently work through problems. Many of the calculations learned in class will be useful in personal finance transactions such as finding a yield on a bond or other investment option, shopping for a car, buying a home, saving for retirement, college fund etc. An Investment = Outflow of Cash (typically represented by a negative sign) A Return = Inflow of Cash (“ “ positive sign) The Time Value of Money Concept states . . . one dollar today is worth more than $1.00 received in the future (due to inflation). 5 inputs: some problems use all 5, others just 4. PV = Present Value FV = Future Value I/Y = Interest Rate Per Year N = number of periods (frequency per year (m) * # of years) PMT = Payment Scenario A You want to save for a vacation to Europe five years from now and you estimate that you will need at least $7,000 for the trip. You are a little nervous about investing in the stock market, so you choose a 5 year certificate of Deposit (“CD”) from your bank yielding 6.0%. What amount must you invest in your CD today so that you have $7,000 in 5 years? First, always check P/Y = Payments per Year in this example it should be “1” for annual Then hit 2nd CLR TVM (the FV button) and 2nd CLR Work. PV. = ? FV = 7,000 (calculator strokes are 7000, FV) 11
  12. 12. I/Y = 6 (calculator strokes are 6, I/Y) N=5 m*years; (annually so 1 *5) PMT = N/A Input F.V., I/Y and N, CPT P.V. Answer: $5,230.81 (don’t worry about the negative sign) A timeline would look like this: To 6% T5 X------------------------------ 7,000 The process of finding the P.V. is called “discounting” In this example the Interest Rate at which you discounted was 6%. Lets change the scenario slightly: You still want to go to Europe in 5 years knowing that it will cost $7,000 to do so. You have $4,500 today - at what rate of interest (annual return) must you earn each year from now until 2006 to grow $4,500 to $7,000? Calculator Inputs: P.V. = -$4,500 F.V. = $7,000 I/Y. = ? N= 5 PMT = n/a (not used) Input $4,500 as a negative, $7,000 F.V., N= 5 and Compute I/Y Answer: 9.24.% Need to find an investment that yields 9.24% per year. Same scenario, you found the perfect investment, it yields 12% per year, if you invest $4,500, how long will it take to earn $7,000? P.V. = -$4,500 F.V. = $7,000 I/Y = 12 N= ? PMT = n/a Answer: 3.9 years (so almost 4 years) Same scenario, but now that you have such a great investment lined up, you wonder if maybe you could travel first class to Europe - find the value of your investment in five years . . . P.V. = -$4,500 F.V. = ? I/Y = 12 N=5 12
  13. 13. PMT = n/a Answer: F.V. = $7,930 the additional $930 can be used towards a first class airline ticket. The text uses “r” to denote interest rate, I typically use “i”, you can use either one. You do not need to know these formulas. Formulas: P.V. = FV* 1 Chart: FV * (PVIFi,n) ------ (1+i)n F.V. = PV * (1+i)n PV * (FVIFi,n) FUTURE VALUE OF AN ANNUITY Series of fixed payments made at fixed intervals for a specified # of periods. Typically, the payments occur at the end of the period; this is called an ordinary annuity. If the payments occur at the beginning of the period, the annuity is referred to as an “annuity due”. Example of an Ordinary Annuity: 0------1---------2-------3 100 100 100 The first payment will earn interest during the last two years. The second payment during the last year; and the third payment will earn no interest. Assume the following: P.V. = 0 F.V. = ? N= 3 I/Y = 5% PMT = 100 Compute F.V. = $315.25 (ignore the negative sign) Example of an Annuity Due: 0--------1--------2-------3 100 100 100 Each payment is compounded to earn an additional period of interest. On calculator use same inputs, however must change timing of payment to BGN. Hit 2nd BGN, if END 13
  14. 14. displays, hit 2nd SET then 2nd QUIT. Answer: $331.01 (higher due to extra period of interest) PRESENT VALUE OF AN ANNUITY: You just won the lottery!!! You have a choice of $50,000 per year for the next 40 years or a lump sum payment of $625,000 now. You are confident that you can invest the cash and earn 8% on average per year. Which should you choose? 0------------1-----------2------------3------------4------------5----------------40 50,000 50,000 50,000 50,000 50,000 50,000 Inputs: PV. = ? Your decision would be to take the $625,000 and F.V. = 0 invest it yourself at 8% per year. Let us see what discount I/Y = 8% rate they were using: PV. - 625,000 N = 40 FV = 0 PMT = 50,000 PMT = 50,000 N = 40 Compute P.V. = $596,231 VS. $625,000 now I = 7.567% 14

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