ST. BONAVENTURE UNIVERSITY

      School of Business

Jim Mahar          

Finance 301 – Corporate Finance

               

                                                                            Fall  2014

Finance 301--

  1. administrative
  2. outline
  3. notes
  4. special topics
  5. assignments

Instructor Information

Jim Mahar

Contact Information

Text Book:

Administrative

Screenshot 2014-06-09 15.41.34.png

Syllabus LINK-- http://goo.gl/Pcufnp

Text: Fundamentals of Financial Management by Brigham and Houston (8th edition)

        YOU MUST HAVE CODE...do it today... First assignment is week 1.  SO DO IT!

aplia.com

Class time: Monday 6-8:40

Office hours: T and Th 2:30 to 4:30, M: after class.  W&F will vary.  Also by appointment and online

Lab hours: TBA

Finance Mentors for class:

Course Description and Objectives (My take)

The primary purpose of Students in Money Management is to provide business students an opportunity to experience firsthand the management of a real investment portfolio.  Using money donated by alumni and others, students will be responsible for determining and monitoring overall asset allocation, for selecting individual equity and fixed income investments that conform to the investment policy statement (see attached), and for managing administrative issues.  An advisory board composed of industry professionals and alumni provide oversight and guidance.  Students enrolled for the class are responsible for reporting performance and other portfolio information to the advisory board.  Grounded firmly in the Chartered Financial Analyst (CFA) common body of knowledge, this course will draw on and develop a student’s spreadsheet modeling skills and require students to develop a formal buy or sell recommendation on a stock of their choosing supported by the analyses and models covered in the course.

Applicable Program Objectives

For specific program goals please see Program Objectives:

Finance 410 is an elective course for finance  majors, and supports the program learning goals and objectives as shown below:

Program Learning Goals

Objectives

Course

Goal 1 – Franciscan Values:  Our graduates will understand the relevance of Franciscan values in their professional lives.

1.     Our graduates will relate Franciscan values to contemporary business practices.

2.     Our graduates will apply an ethical framework to decision making.

We will discuss ethics throughout the course. and have a special topic on in in week 1 and 2.

Goal 2 – Critical Thinking:  Our graduates will be critical thinkers.

1.     Our graduates will identify problems, select and apply appropriate problem-solving techniques, and use appropriate decision making skills to make a recommendation.

Finance classes are inherently about decision making as well as recommendations.  In this class we will do this in every buy/sell decision.

Goal 3 – Effective Communication Skills:  Our graduates will be effective communicators.

1.     Our graduates will produce professional quality written business documents.

2.     Our graduates will create and deliver professional quality oral presentations.

Students will be responsible for presentations almost every week. in the context of a “flipped” classroom .  

Goal 4 – Global Perspective:  Our graduates will have a basic global perspective.

1.     Our graduates will demonstrate a basic knowledge of international business issues.

Financial markets are inherently linked and thus international finance is central to the class.  Additionally, some of our holdings are international assets.

Goal 5 – Knowledge of Business Disciplines:  Our graduates will have a fundamental knowledge of business disciplines.

1.     Our graduates will demonstrate an  understanding of basic business disciplines and concepts.   In finance this means that students will understand valuation, capital budgeting, capital structure, time value of money, market efficiency, and derivative basics.

To value a firm, one must understand all aspects of a firm.  

This course should synthesize many of the finance program goals located at http://ms.sbu.edu/SLAP_goals/slap_goals/Finance.doc

                   Upon completion of the course, the student will be expected to:

1.           analyze an industry and a company’s position within that industry

2.           identify a company’s competitive advantage

3.           use the industry analysis, company positioning, and competitive advantage to develop forecasts for purposes of valuation

4.           value a company using several different techniques

a.           dividend discount models

b.           free cash flow forecasting

c.           market multiples

d.           residual income models

5.           create buy and sell recommendations based on company analysis and valuation models

The structure of this course is quite unique.  It is a student-run investment portfolio organized much like an independent money management firm with a management team and different functional areas.  Therefore, the progress of the fund and the implementation of the investment strategy (determinants of your grade) rely heavily on your initiative.  You will be expected to be proactive and operate with limited guidance.  This setting offers opportunity to be innovative and creative in your approach, and to learn from outside sources, such as industry professionals.   Unlike a traditional class, much of your direction will come from the management team instead of the instructor.  Let’s roll!

Prerequisites and Technology Requirements

Quizzes will be online and autograded.  They are available until date stated.  After that you will have a zero for that quiz.  (in other words keep up with the reading and quizzes).

Grading:      

Congratulations!  You have an A at the start of the year.  Stop for a few seconds and imagine it on your final GPA.  An A in finance is a great way to show off to your future employer, family, and yourself.  Congrats again.  Now don’t lose it!

You will start off the semester with 500 points.  Points are lost for poor performance based on the following list:

Test 1                                                        10%

Test 2                                                        15%

Final                                                        25%

Quizzes                                                15%

Financial planning project                                 10%

class participation                                        10%

Online Participation                                        7.5%        

Stock Pitch (video or in class)                               7.5%

Thus, if you get a 60% on test one, you lose 40% of the possible points on the test.  So  (500*.10 = 50 total points possible, points lost (.4 * 50 = 20).

the Course grading will be based on the following:

Total Points at end of the Semester:

450 and above A

400-449 B

350-399 C

300-350 D

below 300 F

In lieu of a curve (which tends to create poor incentives), there will be extra credit assignments.  

Earn Extra points!!

Extra Credit Opportunities:

  1. 10 points for each Friday Forum attended and accompanied by a one page write up.
  2. 10 points for attending Meet the Financial Executives/Meet the Accountants night (tentative date 9/23)
  3. 10  points for attendance to 2 weeks of SIMM (must sign in with Mike Lawhead)
  4. 4 points per Friday Finance Forum you attend and submit 350 word summary. (max 20 for semester)
  5. 10 points for Finance Club NYC trip
  6. 10 points for participating in SIMM Bootcamp (at least 75% attendance)
  7. 10 points for participating in the SIMM portfolio challenge and remaining active throughout the semester.
  8. 10 points for a short (less than 180 seconds) video on how to use your financial calculator for Time Value of Money Questions.
  9. 10 points for a financial internship report (what you did, how it helped, how it ties in to the class).
  10. 10 points for a Resume submitted prior to September 1.
  11.  10 points for active participation in PositiveRipples
  12.  10 points for a minimum 2 page paper on poverty in the US (submitted by September 22)
  13. 10 points for a minimum 2 page article on the role of Wall Street in US economy (Due Sept 29)
  14. More likely as the semester progresses.

   

I should warn you that I am often accused of being a hard "tester". I reserve the right to "curve" grades at the end of the semester but given the many opportunities for extra credit, I do not plan on using that “right”.

The tests will center predominately on lecture notes. The tests may include multiple choice, true/false, problems, short answers, and/or essays. Currently I plan on having the majority of the questions multiple choice. The tests are cumulative and will generally include approximately a substantial percentage based exclusively from the book and outside readings (blog, website, etc.) packet to make reading and watching beneficial. The final is cumulative and is required even if you have amassed enough points to pass the class.  

I reserve the right to have unannounced quizzes. However, I do not currently have any unannounced quizzes scheduled.

You will need a calculator that can do exponents. While you probably want a financial calculator it is not required.

Outline

  1. What in the World is Finance? and why would I possibly care?

Chapter 1  (Ethics)

  1. Chapter 2: the Financial System
  1. The players
  2. Nexus of Contracts (a look ahead to Finance 401)
  3. Stakeholder theory and the nexus of contracts
  4. Ethics  
  5. Socially Responsible Investing

  1. Accounting is a foundation

                Chapter 3: Financial Statements

                Chapter 4: Ratios and 4A

  1. Time Value of Money (TVM) (Chapter 5 + much more)

  1. Valuation (applied TVM)
  1. Bonds and their Valuation (Chapter 7, 7A, 7B, 7C)
  2. Stocks and their Valuation (Chapter 9)

  1. Risk and return
  1. Interest rates (Chapter 6)
  2. Risk and Return (Chapter 8, 8A)
  3. The cost of capital (Chapter 10, 10A)

  1. Capital Budgeting (what assets do we want)
  1. The basics (Chapter 11) and beyond (Chapter 12E, 12F)
  2. Cash flow estimation and Risk Analysis (Chapter 12)
  3. CAPM (Chapter 12C, 12D)

  1. Capital Structure (How are we going to pay for the assets)
  1. What is it?  Leverage  (Chapter 13, 13A)
  2. The good and the bad. (Tax reduction and increased risk (7C)
  3. Why does it matter? Good times great, bad times horrible.
  4. How about the future?  Forecasting and Planning (Chapter 16, 16A)

  1. Dividends and Share repurchases (Chapter 14): Giving back.

Special topics:

  1. Bringing it home: How personal finance matters
  2. Are investors really rational?  a look at Behavioral Finance
  3. Working Capital Management: how short term finance can influence the value of a firm (Chapter 15, 15A)
  4. Multinational finance (Chapter 17)

Notes

Color Coding:

Brownish: my own video on the subject

Blue RIBBON: Really important

Yellow: Optional

To keep this page shorter, notes for this class will be at http://financeprofessor.com/finance-classes/finance-301/

Week 1:

Any organization can be broken down into the various functional areas:

  1. Productions/Operations
  2. Marketing
  3. Accounting
  4. Information Technology
  5. Finance

http://youtu.be/_qIwpEhY9ro 

Finance is arguably the most interdisciplinary of all the fields.  In other words need to know a little (or more) about all the fields to be really good at finance.  Not sure why?  Imagine buying a company: each of the areas plays a very important role in valuing the firm, and hence we need to know about each of the areas before we can price (or value) the company.

But before we get to far into finance and the firm, let’s take a step back and see what the role of finance is:

My intro video:

http://www.youtube.com/watch?v=VWm1LafajZk

http://financeprofessor.com/notes-for-classes/what-is-finance/

Finance is important to Governments, Firms, non profits, households, and individuals.  Finance in its broadest context leads to election losses, governmental collapses, personal stress, suicides, divorces, and wonderful movie plots.  

What is the financial system?

My video introduction to the Financial System:

http://youtu.be/mnFtjsaWSCg

A little more in depth on look at Financial Intermediaries

        http://www.youtube.com/watch?v=nxYBUrKFqOI

So now what is finance? Your turn.  In class (week 1 still) we will break into groups of 4 and you each will have a few minutes to discuss and answer the following questions:

  1. What is finance?
  2. Why does finance matter?  

What is finance?  

Webster’s New World dictionary defines it as          (1.) money resources, income, etc          (2.) the science of managing money. “ Used in this context it is a noun.  It can also be used as a verb in which case it is to supply or get money for a project. Of these I like the definition as the management of money.  Finance is the most encompassing of all business enterprises.  To understand finance you must know about the entire business, indeed the entire economy.”

http://financeprofessor.com/notes-for-classes/what-is-finance/

Wars are found over finance, countries and businesses collapse due to poor finances, people die over financial worries, countless lives changed because of finance, marriages dissolve over financial concerns, and yet all too many people are afraid to study finance and to see how finance can play a key role in making their business or their life much better.

Let’s start at the top:

VERY IMPORTANT!

 The financial system: money flow from those with money to those with ideas.   A well functioning financial system can be a competitive advantage for a country.  All players (investors, financial institutions, corporate financiers, and government officials) must understand their roles.

   

Areas of finance: think of where the various classes line up in the above drawing.  

Corresponding classes

Investments

SIMM

Derivatives

Money and Banking

Financial Institutions

Commercial Bank Mgt.

Corporate Finance

Problems in Finance

Organizations:

There are many forms of organizations.  From Fortune 500 firms to small start-ups and everything in between.  Size, operations, marketing all vary tremendously, but all have same tasks that need to be done.  Money needs to be raised, invested carefully into operations, and then in case of business have the money return to the investors.  

Typical organization has a board of directors that oversees the CEO, who in turn oversees a Chief Operating Officer and a Chief Financial Officer.  

Jobs in finance are numerous and tend to be high paying.  Some examples are well known: stock brokers, investment bankers, stock analysts, but many others are not so well known but often just as important.  

http://www.careers-in-finance.com/

 

Forms of a Business Organization

Nexus of Contracts:  much more in 401, but for now understand that everyone in the nexus has different incentives.  If we draw up contracts in the wrong way we can destroy value and lead to more fighting between stakeholders.

Contracts and firm value

How we organize these contracts can create (or destroy) value.  

Creating value

Intrinsic Value vs Market Price

highly correlated but the two may be different especially when market prices fluctuate (either too high or too low).   We in academic finance used to assume the intrinsic value and market price were the same, but now we acknowledge that market prices can take wide swings away from intrinsic value.  

One way to create value is by more efficient

Nexus of contracts

Want more?  Here are some more advanced notes http://financeprofessor.com/notes-for-classes/nexus-of-contracts/

CEO Pay

        Stats

        History

        Occupy Wall Street

        Capital in the 21st Century:

Ethics!

  1. Think long term
  2. Transparency
  3. Win: Win
  4. be honest

Here is a helpified path that captures much of the what we did at the end of class in week 2.

https://helpified.com/paths/financial-ethics-and-sri-impact-investing-for-finance-301-ethics-less

My Video introduction to ethics:

http://youtu.be/Bk-pzKziOXE

Ethics made simple:

http://www.youtube.com/watch?v=LrJaOOGJLW0

 Some short videos on ethics that you will want to watch.  

1. http://www.youtube.com/watch?v=K23cV1Jvhqw

2. http://www.youtube.com/watch?v=YqBhEpkLfgs  NB!!!

3. http://www.youtube.com/watch?v=Lhwhgf01Ozw The best part is the wrap up.

4. http://www.youtube.com/watch?v=2sSWusph3ig Dilbert! Not the best ever, but good introduction to the idea.

Want more?  Here is the Financial Ethics helpified set I use in some upper level classes:

https://helpified.com/paths/financial-ethics

Optional:

An “in-class” video on some sources of financial data:

http://www.youtube.com/watch?v=8cs-_d3si2I

Beginning of class for week 3

Chapter 2:

Types of financial assets

        Stocks

        Real Estate

        Preferred shares

Bonds

        Notes

        Commodities

        Derivatives

types of Markets

        Primary

        Secondary

        Stock

        Bond

        Futures

        option

        Forwards

        

Types of financial Institutions

        Investment Bankers

        Commercial Bankers

        Brokerage house

        Stock Markets

More on Stock Markets

        International

        Indexes

VERY early intro to market efficiency

We will cover this in the second part of Week 3

Chapter 3: Financial Statements, CashFlow, and Taxes

CASH FLOW is king!

Chapter 4: Analysis of Financial Statements

Accounting is a way of seeing the companies

RATIOS (page 119)

What are ratios?

A shorthand way of processing and comparing data.

 For example

  1. Miles Per Hour (MPH)
  2. Miles per Gallon (MPG)
  3. Earned Run Average (per 9 innings) (ERA)
  4. Price per dollar of Earnings (PE Ratio)

  http://financeprofessor.com/notes-for-classes/ratios/

EVA: Economic Value Added

NOPAT - Cost of capital = EVA

higher the better

Special Topics:

I. SPECIAL TOPIC #1:  Personal Finance

My video introduction:

http://youtu.be/o_a5c-SnefI

People worry about money incessantly, but often don’t plan change their behaviors in positive ways.  This special topic is designed to get you thinking about your own financial position and to set you on a path to financial happiness.

Warren Buffett on personal finance http://www.youtube.com/watch?v=uw0SRM11wR8

Cool Personal Finance Websites:

http://www.kiplinger.com/

How much does each major make?

http://www.studentsreview.com/salary_by_major.php3

Student Loan links:

http://www.cbsnews.com/news/buried-in-student-loans-heres-how-to-pay-them-off/

Voluntary: calculate your own student debt at present and what you expect the total to be by the end of your college education.  What can you do to lessen this burden? Look into the rules of when you will pay it back, what are the interest rates?  

Retirement Savings:

http://online.wsj.com/news/articles/SB10001424127887324474004578442682818178530

http://www.youtube.com/watch?v=9sgw5foq7d4

Social Security (khan Academy)

http://www.youtube.com/watch?v=gLHUCUv1e5Y

estimate of social security

http://www.ssa.gov/retire2/estimator.htm

Frequent questions:

leasing vs buying a car:

http://lifehacker.com/5858640/should-i-buy-or-lease-a-car

Rent or buy a house:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Cost of living

by city:

http://money.cnn.com/calculator/pf/cost-of-living/

http://swz.salary.com/costoflivingwizard/layoutscripts/coll_start.aspx

Insurance:

Theory of insurance?

Definitions you should know:

There are many types of insurance http://en.wikipedia.org/wiki/Category:Types_of_insurance

http://www.youtube.com/watch?v=-mBdAO34I6A

Last Will and Testament: Taxes and Death

Cat food as a retirement planning tool?

http://financeprofessorblog.blogspot.com/2013/07/ritholtz-you-can-eat-cat-food-tacos-in.html

ASSIGNMENT  (https://docs.google.com/document/d/1qAoCycCDy-o0KB0lZjANhUH7rFzoV7d2EKIs9sg4PCI/pub)

outside reading?

Sure: here are a few to get you thinking:

II. Special Topic #2: Behavioral Finance  

        Combining psychology and finance

->Psychology: study of human mind

        From Google:

https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=definition+of+psychologyScreenshot 2014-06-22 15.57.40.png

So this is the fun stuff: looking at how people make decisions.

->Rational Defintion from google:

Screenshot 2014-06-22 15.47.30.png

So in behavioral finance we look at how deviations from rationality influence financial decision and the consequences of these decisions.   We also look at how the brain works in the growing field of neuroeconomics.  

Dan Ariely Video

THOUGHT EXERCISE:

Think of times when people you know have not acted rationally. Try to understand why they did what they did?

We all make decisions based on many things.   We weigh the costs and the benefits, we think about which will make us better off, and then all too often we just make the decision because it “feels” right, or because our friends are doing it, or to impress someone, live up to our own expectations, etc.

Many times, these seemingly irrational decisions can blamed on any of the biases that we all fall prey to.  

http://rpseawright.wordpress.com/2012/07/16/investors-10-most-common-behavioral-biases/

Wikipedia has a very long list of biases--go ahead--I dare you to tell me you have never fallen prey to any of these:

http://en.wikipedia.org/wiki/List_of_cognitive_biases

Example: overconfidence bias (many variations--time “It will only take a couple of minutes”, intelligence “I am smarter than that”, returns “I can beat the market”, etc.

Special Topic #3

Working capital Management: it’s more exciting than watching paint dry!

Spec