Report is not long, 2000 words max
Report is consistent and effectively sells its recommendations
Presentation is professionally done
Contextual, Willingness to participate and attentive to discussion
Innovative, There is willingness to test new ideas and comments are not confrontational.
Insightful, Comments are appropriate and indicates insightful analysis of case data
Relevant, Comments are relevant to current discussion and linked to comments of others
Supported, Comments clarify important aspects of earlier ideas and lead to clearer statement of relevant concepts and issues
Bring exam admission slip
Use 50 leaves bound notebook
Coverage (all focus questions not covered in the discussions)
Recommendations, Criteria for selecting alternative recommendations are given, Criteria are appropriate, Plan of action is logical linked to the analysis, Plan of action is specific, complete and practical, Recommendations are likely to achieve intended results
Quality analysis, Major issues are addressed, Relevant tools are used properly, Assumptions for analysis are stated clearly, Causes of the problems are identified in the analysis
Exhibits, Analyses in the exhibits are done correctly, Exhibits support and clarify key points, Not more than 7 exhibits
Time Value of Money
Focus questions, Is discount rate the same as discount factor? Opportunity cost of capital?, How is risk factored into the time value of money?, Why do capital markets ensure that all shareholders unanimously agree that NPV is a sensible criterion for evaluating projects?, Value maximization assumes a well-functioning capital markets. What does "well-functioning" mean? In what ways does maximizing value conflict with shareholders' interests?, Why is a reputation for honesty and fair business practice important to the financial value of the corporation?
Evaluating Projects, Capital Budgeting Process, Project “ATIOCF”, Incremental Cash Flow, Focus questions, What are capital investments? What do the capital budgeting decision process involves?, Explain the process of generating project proposals within the firm., Determine initial, interim, and terminal period after-tax incremental operating cash flows associated with a capital investment project., Understand why cash, not income, flows are the most relevant., Explain why, when, and how sunk costs and opportunity costs should, or should not, be considered.
Firm Valuation, Dividend discount model, Cash flows, profitability, & growth, Free cash flows, Profitability, financial ratios, & terminal value, Focus questions, What is the general DCF formula for the value of a stock?, What is a two-stage DCF model? When would you want to use one?, What is the Dividend Discount Model?, Is free cash flow the same thing as earnings?, Is the earnings-price ratio a good measure of the cost of equity? Why or why not?, What is meant by PVGO? Why do the shares of companies with valuable PVGO trade at low earnings-price ratios?
Introduction to Risk & Return, Measuring risk, The tradeoff between risk and return, Focus questions, If stock prices rise faster than dividends, one possible explanation is that the cost of capital has fallen. Explain why., Would an average of past returns over or under estimate the cost of capital?, Explain the difference between the arithmetic average and the compound annual return. Which one is higher?
Portfolio Theory, Portfolio risk & diversification, Optimal portfolios, Systematic vs. diversifiable risk, Focus Questions, What are the formulas for the variance and standard deviation of returns?, What are the two types of risk? Which one can be reduced by diversification?, What is the general formula for calculating the risk of a portfolio?, What is beta and what is its average value?, Explain why diversification makes sense for an investor, but not generally for the firm itself
CAPM, Using the CAPM, Estimating beta and the cost of capital, Focus questions:, If stock returns are normally distributed, the distribution can be completely defined by two numbers. What are they?, What is meant by "the set of efficient portfolios?", What is the Sharpe ratio? Why should investors attempt to maximize it?, Write down the capital asset pricing model, State the formula for the arbitrage pricing theory. What are the three steps involved in estimating expected returns using this formula?, State the Fama-French three-factor model
Brealey et al Chapter 14Keown et al Chapter 14
Debt, taxes, and the after-tax WACC, Tax effects of financings, Corporate taxes: Interest paid are treated as expense while dividends paid are not, Personal taxes: Interest paid are deductible from income, dividends received are taxable, Overall: debts have tax advantage, Effect of taxes on WACC, Advantages of Debt, Tax advantage, Signaling, Corporate control, Lower issue costs
Financial distress, Costs against debts, Direct costs, Managers' time & effort, Legal costs, Indirect costs, Foregone positive NPV projects, Loss of competitive position, Lost customers, Lost suppliers, Asset fire sales and liquidation, Loss of interest tax shields, Value - Distress, Optimal Firm Value with Distress
Focus questions, What is meant by a "random walk?", What are the forms of the efficient-market hypothesis? Give example and evidence of each, What is "prospect theory?" How does it differ from the assumptions used to develop the capital asset pricing model?, What are the six lessons of market efficiency? Give example of each
Brealey etal Chapter 15
Overview of Corporate Financing
Financing patterns and the stock market's reaction
Focus questions, What is the main source of funds for most companies?, What is meant by the company's financial deficit?, What is meant by residual cash flow rights and residual control rights?, How do financial intermediaries contribute to the functioning of the economy? Give two examples, How are venture capital funds organized?, How is venture capital financing structures so as to ensure that the new business is a success?, How do rights issues work?
Brealey et al Chapter 18
Leverage, risk & WACC
Focus questions:, What is MM's proposition 1?, What is financial risk? How does it depend on the firm's capital structure?, What is the traditional position on the effects of debt financing on the weighted average cost of capital?, Financial innovation continues. Firms and financial institutions keep designing and issuing new types of debt, equity, or hybrid securities. Does financial innovation support or refute MM's propositions?
Focus questions:, Understand the dividend retention versus distribution dilemma faced by the firm., Explain the Modigliani and Miller (M&M) argument that dividends are irrelevant., Explain the counterarguments to M&M – that dividends do matter., Identify and discuss the factors affecting a firm’s dividend and retention of earnings policy., Define, compare, and justify cash dividends, stock dividends, stock splits, and reverse stock splits., Define “stock repurchase” and explain why (and how) a firm might repurchase stock., Summarize the standard cash dividend payment procedures and critical dates., Define and discuss dividend reinvestment plans (DRIPs).
Managerial decisions have financial dimensions which includes one or a combination of the following areas of finance: assets or activity valuation, risk and return trade-offs, policy formulation for fund sourcing, investments and dividends. The course focuses on corporations and the capital markets thus the students must have adequate foundation on these concepts.
Acquiring funds (Debt &/or Equity), Issue new stocks or not, Issue bonds or not
Using funds (Investment decisions), Pay dividends or not, Replace an asset or not, Where to invest its money
Time value of money, The opportunity to earn a return on invested funds means that a dollar today is worth more than a dollar in the future
Compensation for risk, Investors expect compensation for bearing risk
Don't put all your eggs in one basket, Investors can achieve a more favorable trade-off between risk and return by diversifying their portfolios
Markets are smart, Competition for information tends to make markets efficient
Receipt & disbursement of funds
Profitability vs. Risk
Influences, Operational side, Capital vs. Labor, Product A vs. Product B, Financial mix, Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet), Stocks vs. Bonds vs. Retained earnings, Business form, Single proprietorship, Partnership, Corporation
Establish Right Valuation approach
Management & stockholder wealth
Maximize shareholders wealth, Maximize stock price, not profits or EPS, Why not profits or EPS?, Earnings per share are backward-looking, dependent on accounting principles, Do not fully consider cash flow timing, Ignores risk
Social responsibility, Attracts capital, Consequentially mandatory, Cost increasing activities, Initially voluntary, Offers benefits to society, Provides employment
Separated from field of economics
Preservation of capital
Maintenance of liquidity
Rehabilitation of financially troubled firms
Financial capital vs. Real capital
Cash & Inventory management
Capital structure theory
Maximization of returns for a given level of risk
Capital structure theory
New financial products focused on hedging
Effects of inflation on financial forecasting
Required rate for capital budgeting
Cost of Capital
Enabled e-commerce solutions, For "old economy" existing companies, B2C: buying with credit cards, B2B: ordering, inventory, supply bidding } all online
Spurt new business models & companies, Amazon.com, Ebay, Apple.com, Facebook
Public, Government reserves, Interest rates, Regulations
Corporate, Banks, Insurance companies, Credit unions, Mutual funds
Maximization of shareholder value
Ethical behavior as value
According to maturity, <12 months, Money market, >12 months, Long-term securities, Stocks, Bonds
According to primacy, Primary, Raising funds through sale of corporate securities through new issue, Secondary, Performance of corporate securities in the markets is an indicator of corporate performance
Most financing are sourced from internal rather than external sources Most external financing is debt Primary vs. secondary market transactions or offerings Financial intermediaries declining as a source of capital for large firms Securities markets growing in importance
Externally, IPO, Primary market transactions, Secondary market transactions
Selecting the best projects for the firm to invest
Step 1. Identifying potential investments
Step 2. Analyzing those investments to identify which will create shareholder value
Step 3. Implementing and monitoring the investments selected in step 2
Managing daily cash inflows and outflows
Forecasting cash balances
Building a long-term financial plan
Choosing the right mix of debt & equity
Hires and promotes qualified, honest people, and structures employees’ financial incentives to motivate them to maximize firm value
In practice the incentives of stockholders, managers, and other stakeholders often conflict.
Dimensions of corporate governance, Board of Directors, Securities & Exchange Commission, Sarbanes-Oxley Act of 2002
Identifying, measuring, and managing all types of risk exposures
Some risks are insurable, and some risks can be reduced through diversification.
Financial instruments like forwards, futures, options, and swaps may also be used to hedge market risks such as interest-rate, price, and currency fluctuations.