Boston College Carroll School of Management Fall 2018 MFIN102103&4 Basic Finance Hassan Tehranian Section /T,Th 10:30 a.m. and 1:30 p.m. Fulton Hall 145 Office: Fulton 550 B http://www2.bc.edu/hassan-tehranian/ e-mail: hassan.tehranian@bc.edu COURSE DESCRIPTION: Basic Finance introduces students to the vocabulary and concepts of finance. This course examines financial decision making and provides specific tools for analyzing and interpreting financial data. The goal of the course is to introduce and develop key finance tools/concepts such as: (1) interpretation of financial statements (2) time value of money (3) risk and return (4) capital budgeting (5) cost of capital (6) working capital management (7) international finance So that they can be used by students in future courses and/or future financial decisions. In addition, the course seeks to show that these key concepts are the basis for many related finance topics. TEXTS: Required: Coursepacket of Class Notes, available at the BC Bookstore and available in my home page. Recommended: Fundamentals of Corporate Finance (8 th or 7th ed.), by R. Brealey, S. Myers, and A. Marcus, McGraw-Hill Inc., 2015, 2012. PREREQUISITE: Financial Accounting (MA021) OFFICE HOURS Tuesdays & Thursdays 3:00-4:30 p.m., and by appointment. The TA will set her/his office hours during the first week of the semester If you have questions about course material, please feel free to visit me or TA during those office hours. If our office hours conflict with other classes or responsibilities, please send an email to us with a list of dates and times that are convenient for you, and we will schedule an appointment. With sufficient notice, our schedule can be flexible. My telephone number is 552-3944 and the Finance Department numbers are 552-3985 and 552-4647. 1
GRADING Two in-class exams - 45%. Homework s (2) - 10%. Project 5% -Topic TBD Final exam (cumulative) - 40%. Note that if your final exam grade is higher than one or both of your in-class exams, then the final exam grade will replace the lower in-class exam grade. In general, students in this course can expect a grading distribution as follows: 25-35% As for excellent work 50-70% Bs for very good or good work 5-15% C or less for adequate or below work The average grade for the class should be around a B or B+. Please note: While this range is a guide, the actual distribution for this course in any given semester and your own grade will depend on how well you and your classmates actually perform in the course. EXAM PROCEDURES There will be two exams during the semester, which will be taken in class. In addition, there will also be a cumulative final exam. IMPORTANT DATES Exam #1 - Thursday, October 11 th (in class). Exam #2 -, Tuesday November 13 th (in class). STUDY PROBLEMS It is imperative that you practice your problem-solving skills. The failure to practice problem-solving skills often leads to failure on exams. I suggest a number of problems in the class. Working through class examples on your own, including those in the course packet are very useful. EXTRA SESSIONS From time to time, there may be extra classes scheduled to review problems or for other purposes. Such classes are optional. THE WALL STREET JOURNAL Throughout the class, current issues covered in The Journal will be discussed. Students are encouraged to read The Journal throughout the semester as it will reinforce the material covered in class and will expose students to many facets of the business world. In addition, part of one class will be used to discuss and review a current issue of The Journal. 2
TIME 1. To best use the limited time in class, a student who misses a class or is late is responsible for getting complete notes (prior to class when possible) from another classmate (Caution: my lectures often contain explanations not spelled out explicitly in my notes): including: - announcements - lecture notes - discussion notes - handouts (which may also be obtained from the instructor outside of class) 2. While I don t take attendance, you ll probably find it helpful to make it to class. I don t teach this course by following the textbooks verbatim. 3. Please shut your cell phones off before coming to class. ACADEMIC SUPPORT SERVICES If you have a disability and will be requesting accommodations for this course, please register with either Kathy Duggan (Kathleen.duggan@bc.edu) Associate Director, Academic Support Services, the Connors Family Learning Center (learning disabilities and ADHD) or Suzy Conway (suzy.conway@bc.edu), Assistant Dean for Students with Disabilities (all other disabilities). Advance notice and appropriate documentation are required for accommodations. QUESTIONS A BASIC FINANCE STUDENT SHOULD BE ABLE TO ANSWER: 1. The Firm and Financial Manager What are the major decisions that a financial manager makes? What objective should the financial manager use contrast to competing objectives? What problems would allow this objective to hurt other stakeholders? 2. Accounting and Finance Why is there a difference between earnings and cash flow? What s the difference between market value and book value? 3. The Time Value of Money Be sure you can value different streams of cash flows Be able to compare interest rates quoted over different time intervals 4. Security Valuation and Inflation Find the market value of a bond given its yield to maturity Find and interpret the yield given a bond s price Why do bond prices and yields vary inversely (tie in with what Greenspan does)? Be able to calculate, use and explain when we use real interest rates Understand the stock pages and indexes in the Wall Street Journal Be able to use the constant growth and multi-stage growth dividend discount models Interpret the P/E ratio 3
5. Capital Budgeting Be able to calculate and interpret the NPV and IRR of a project Calculate and interpret the modified IRR Identify and calculate the relevant cash flows for a project Be able to discuss and support (qualitatively) the decision to postpone a project 6. Risk, Return and the Opportunity Cost of Capital Be able to define an opportunity cost Interpret a stock return s standard deviation and the effect of diversification on portfolio risk Be able to distinguish between stand-alone risk and market risk Interpret the beta of a security Use beta in estimating a required rate of return for investors 7. The Firm s Cost of Capital Define and calculate a firm s capital structure Discuss the tradeoff to a firm in using debt versus equity financing Calculate the firm s WACC and explain why market value weights are used, not book value weights Determine when the WACC is and isn t the best choice in evaluating a project 8. Corporate Financing and the EMH What does it mean when we say a market is efficient? What are the implications of the EMH for a firm s financing decisions? What are the implications of the EMH for investors? 9. Financial Statement Analysis Interpret financial ratios relating to liquidity, leverage, profitability, and asset use efficiency Use the dupont model to decompose ROE and attribute what the firm is doing well or poorly as a result of your analysis Evaluate the limitations of ratio analysis 10. Financial Planning Construct a simple pro-forma set of financial statements and estimate the external funds needed (available) Estimate the effect of a firm s growth on the need for external financing 11. Working Capital Management and Short-Term Planning Explain why firms need to invest in current assets Explain how firms long-term financing policies affect short-term financing policies Explain costs and benefits of holding cash and inventory Define and measure float When should you extend credit to a customer? 12. International Finance Understand the difference between spot and forward exchange rates Discuss exchange rate risk, operational hedges and financial hedges Discuss the relationship between exchange rates, inflation rates and interest rates 4
BASIC FINANCE - COURSE TENATIVE OUTLINE Note: These dates are approximate; I ll make it explicit what you are responsible for in class. Week # Class Dates Reading Assignment 1 Aug 28, 30 Ch. 1: Goals and Governance of the Firm 2 Sept. 4, 6 Ch. 2: Financial Markets and Institutions Ch. 5: Time Value of Money 3 Sept. 11, 13 Ch. 5: Time Value of Money-Continued 4 Sept. 18, 20 Ch. 6: Valuing Bonds Ch. 7: Valuing Stocks 5 Sept. 25,27 Ch. 11: Intro. to Risk, Return, Opp. Cost Ch. 12: Risk and Return 6 Oct. 2,4 Ch. 3: Accounting and Finance Ch. 4: Financial Statement Analysis 7 Oct. 9 Oct. 11 No Class EXAM #1, THURS, Oct. 11 th 8 Oct. 16,18 Ch. 18: Long Term Financial Planning Ch. 20: Working Capital Management 9 Oct. 23, 25 Ch. 20: Credit Management Ch. 19: Cash and Inventory Management (Short Term Financial Planning) 10 Oct.30 & Nov. 1 Ch. 8: NPV & Other Investment Criteria Ch. 8: Investment Criteria (cont d) 11 Nov. 6, 8 Ch. 9: Discounted Cash Flow Analysis to Make Invest. Decisions Ch. 9: Disc. Cash Flow Analysis (cont d) 12 Nov. 13 Nov. 15 EXAM #2, Tuesday, NOV. 13 th Ch. 9: Disc. Cash Flow Analysis (cont d) 13 Nov. 21 Ch. 13: Cost of Capital Nov. 23 THANKSGIVING HOLIDAY 14 Nov. 27, 29 Ch. 16: Debt Policy Ch. 17: Dividend Policy 15 Dec. 4, 6 Ch. 22: International Financial Mgmt. Review Session THE FINAL EXAM IS CUMULATIVE. If changes to the above schedule are necessary, they will be announced in class. 5