I. Course Delaware State University College of Business Department of Accounting, Economics and Finance Spring 2013 Course Outline Course Number: FIN 445 90 CRN 18013 Course Title: Security Analysis and Portfolio Management Class Time: MW 6:00 to 7:15 pm Class Venue: BOA Room 107 II. Instructor: Dr. Nandita Das ndas@desu.edu Office: 212B, Bank of America Building Phone: 302-857-6940 III. Office Hours: Day Time Monday 3:00 PM to 4:15 PM Tuesday 3:00 PM to 4:15 PM Wednesday 2:00 PM to 3:00 PM Thursday 11:00 AM to 12:30 PM* Or By Appointment *Online Office Hours IV. Course Materials: Required Reading Material: Textbook: Essentials of Investments, 8th Edition, by Bodie, Kane, and Marcus, McGraw-Hill/Irwin, 20010; ISBN: 9780077398033 Wall Street Journal Subscription Wall Street Prep Registration (through Raquel Lang, AEF Office, BOA 211) Financial Calculator: Students MUST have a financial calculator. The most commonly used one is Texas Instruments TI BAII PLUS. The calculator must be able to do the following calculations PV (present value), FV (future value), NPV (net present value), and IRR (internal rate of return). The primary goal of using the calculator is to familiarize students with the various functions. Calculators are permitted during exams. Computer Skills: Students MUST be proficient in using basic word processing and spreadsheet software. Most of the assignments require the use of Microsoft EXCEL. 1
V. Prerequisites VI. The following courses must have been completed previously with a grade of C or better FIN 418. Students who have not met these prerequisites must drop this course. Course Objectives. You should use these as benchmarks to see if you have learned the required material before exams. Before the midterm exam, students should be able to: Interpret regression outputs; Manage portfolios [Morningstar]; Explain the general terms of a bond contract; Describe call, convertibility, and sinking fund provisions, and analyze how these provisions affect a bond s price and yield to maturity; Perform a company-level analysis and estimate the required inputs for valuation models; Compare and contrast the more common valuation models used in practice; Implement the Dividend Discount Valuation Model and make investment recommendations; Describe and implement the Free Cash Flow Valuation Model for a firm and its stock; Explain the fundamental principles of the Price Multiple/Relative Valuation Model Before the comprehensive final exam, students should ALSO be able to: Describe the general environment in which security valuation takes place; Analyze and interpret market level security information; Discuss the key components of an industry analysis and how the components relate to expected industry profitability and risk; Use ratio decomposition analysis to show how profitability depends on efficient use of assets, profit margin, and leverage; Use historical and industry information to forecast major financial statements; Understand options markets and how options are valued; Understand futures markets and risk management; Decompose equity and portfolio returns into asset allocation and security selection Competency Objective Introduction to Security Valuation Explain the top-down approach, and its underlying logic, to the security valuation process; Discuss the rationales for the use of price to earnings (P/E), price to book value (P/BV), price to sales (P/S), and price to cash flow (P/CF) in equity valuation and discuss the possible drawbacks to the use of each price multiple; Stock-Market Analysis Estimate and interpret the earnings multiplier of a stock market series, explain changes in it, and calculate the expected rate of return for a stock market series; Explain how the top-down approach can be used to analyze the valuation of world stock markets. 2
Industry Analysis Discuss the key components that should be included in an industry analysis model; Illustrate the life cycle of a typical industry; Analyze the effects of business cycles on industry classification (i.e., growth, defensive, cyclical); Analyze the impact of external factors (e.g., technology, government, foreign influences, demography, and social changes) on industries; Discounted Dividend Valuation Discuss the advantages and disadvantages of dividends, free cash flow, and residual income as measures of cash flow in discounted cash flow valuation, and identify the investment situation for which each measure is suitable; Calculate the present value of growth opportunities (PVGO), given current earnings per share, the required rate of return, and the value of the stock; Free Cash Flow Valuation Define and interpret free cash flow to the firm (FCFF) and free cash flow to equity (FCFE); Describe the FCFF and FCFE approaches to valuation, and contrast the appropriate discount rates for each model and explain the strengths and limitations of the FCFE model; Discuss the appropriate adjustments to net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), or cash flow from operations (CFO) to calculate FCFF and FCFE; Calculate FCFF and FCFE given a company s financial statements prepared according to U.S. GAAP or International Accounting Standards; Market-Based Valuation: Price Multiples Calculate the P/E-to-growth ratio (PEG), and explain its use in relative valuation; Calculate and explain the use of price multiples in determining terminal value in a multi-stage discounted cash flow (DCF) model; VII. Classroom Décor No cell phones are allowed in the class. No chewing gum in the class. Please arrive on time for all classes to avoid distraction to other students. Please be seated for the entire duration of the class unless there is an emergency. VIII. Attendance, Attitude, and Participation (AAP) Policy Class attendance is mandatory. Missing more than three classes will adversely affect your grade for the course; it will be lowered by one level. Attitude refers to maintaining the classroom décor and completing the assigned work for the course. Students will be asked questions related to the material that has been/is being covered in the class. You are expected to participate in the class. 3
IX. Students with Special Needs If you are a student that needs special accommodations to facilitate learning, please inform me of this promptly so that we can work together from the beginning of the semester. X. Method of Instruction The method of instruction involves the use of web technology, lectures, class discussions, case studies, and experiential exercises. Students are expected to read materials prior to their introduction in class. Students will be required to complete exercises assigned from the text and other sources, including the Internet and the university library. Students are expected to complete such assignments in a timely manner and to be prepared to lead and/or participate in class discussion related to these exercises. This course will build on what you have learned in the first course on Investments. Part I: Reading materials This class will be using a combination of readings from your textbook (which you have purchased), from other textbooks (which I will post on Blackboard), from Morningstar (which you have access), and from Wall Street Prep (which you will have purchased BEFORE Week 2). You should also have a WSJ subscription before the second class. Starting on Wednesday of Week 2, there will be weekly in-class clicker questions pertaining to the most relevant topics from the previous seven days. Part II: Wall Street Prep modules using Excel to analyze companies You are required to complete the following modules in the Wall Street Prep Student Passport Financial Statement Modeling Introduction to Valuation Discounted Cash Flow Modeling Many parts of this module will be a repeat as you will also probably be assigned work from this in your Advanced Financial Management class. Thus for this class, it will be your responsibility to have completed the modules by the specified time and ask relevant questions in class. We will review your questions in class, but may otherwise not review the material at all. You will be required to complete the tests following each module in one class session. Part III: Using Bloomberg and Morningstar to trade in the market Each group will select an investment strategy (large-cap, small-cap, growth or value) and select five stocks from different industries and monitor those stocks on a weekly basis. I expect you to use Bloomberg to track the information on these stocks. Your portfolio will consist of these five stocks (equally-weighted). Initially, you will be long on all these stocks. At a later date, you may decide to short it or use derivatives to hedge your risk. 4
You will provide a one-page write-up on your stocks each week beginning the second week of class (due on Blackboard by midnight each Wednesday). You will be using Bloomberg and Morningstar to come up with a final report that will be due on Saturday, April 27 th by midnight. No extensions will be given, so please plan your schedule well in advance. You will present your results in class on Monday, April 29 th. We will go over Morningstar Portfolio Management Tab in the class to help you construct, monitor and evaluate your portfolio. XI. Method of Evaluation Grades will be based on points earned in the following categories: Item Points Classroom Participation (Clickers) 150 Excel Problems* 200 Wall Street Prep Assessments (In class) 150 Midterm Exam (multiple choice) 150 Portfolio Presentation* 150 Final Examination (multiple choice) 200 * Group Assignments XII. XIII. Classroom participation includes quizzes on WSJ. Exam Dates Midterm Exam Final (comprehensive) February 20 th Decided by the Registrar Note: There is no make-up exam. If you miss the exam, the weight will be added to your final examination. Grades will be assigned according to the following scale: 90 100% A 60 69% D 80 89% B Below 60% F 70 79% C You may NOT turn in homework assignments late and there will be NO make-up tests. Attendance and Academic Honesty Academic honesty is expected inside and outside of this class. Academic misconduct will not be tolerated. Please refer to the DSU student handbook for a detailed description of academic misconduct. Any misconduct may result in the maximum penalty set by Delaware State University. 5
SCHEDULE OF LECTURES, TOPICS AND EXAMS Course Outline Housekeeping Overview of Investments Example Problems Topic Week 1: January 13 th and 16 th Regression Basics Linear Regression Testing Significance of Slope and Y-Intercept Residual Analysis for Linearity ANOVA Week 2: January 21 st and 23 rd Morningstar Portfolio Management Module Create a Model Portfolio Import a Model Portfolio - holdings and return Edit Model Portfolio Portfolio Aggregation Report *Access through Morningstar Application: Home > Training > Live Sessions Videos Morningstar Portfolio Management Module (continued) Wall Street Prep (WSP)* Crash Course in Excel Crash Course in Accounting and FSA Ref. to Text Notes from Previous Semester Handout Morningstar Direct User Guide J100* *If this section is not completed during class, you are responsible for reviewing this material by the next class. Reminder: Your first portfolio report is due on Blackboard by midnight. There will be no further reminders. Week 3: January 28 th and 31 st Bond Prices and Yields Characteristics Pricing and Yields Yield Curve Crash Course in Reading FS (WSP) Week 4: February 4 th and 6 th Managing Bond Portfolios Interest Rate Risk Passive Bond Management Active Bond Management Managing Bond Portfolios (continued) Ch 10 Ch 11 6
Week 5: February 11 th and 14 th Introduction to Valuation Enterprise Valuation versus Market Valuation WSP Self- Intrinsic Valuation versus Relative Valuation Study Unlevered and Levered Free Cash Flows Manual III Overview of Market-based and Intrinsic Valuation Equity Valuation (Repeated from Investments Class) Dividend and Earnings Valuation Models Price-Earnings Ratio Ch 13 Forecasting Earnings Per Share Free Cash Flow Method Week 6: February 18 th and 20 th Review and Catch-up time Ch 10-11,13 Midterm Examination: Investments, Ch 10-11, 13, Regression Week 7: February 25 th and 27 th Bloomberg Terminal EQS Screen RV Screen CIXB Screen PRTU Screen Estimating a Firm s Cost of Capital* Introduction Value, Cash Flows, and Discount Rates Estimating WACC * This section ties into Week 8. If you are confused about the material, please be certain to speak with me or your tutor BEFORE Week 8. EXTRA CREDIT February 26 th : BEEP Conference (BOA Auditorium) *Keep your attendance card and bring to class on February 27 th for credit In-class Assessments: Crash Course Tests (WSP) Excel Accounting & FSA Reading Financial Statements Week 8: March 4 th and 6 th DCF Modeling Overview DCF in Theory and in Practice Unlevered versus Levered DCF Modeling the DCF Modeling Unlevered FCF Titman & Martin Ch 4 (Handout) WSP 7
DCF Modeling Modeling the DCF (continued) Terminal Value Using Perpetual Growth Model Terminal Value Using Exit Multiple Approach Calculating Net Debt Modeling WACC SPRING BREAK: March 11 th 15 th Week 9: March 18 th and 21 st Macroeconomic and Industry Analysis Global and Domestic Economy Interest Rate and Federal Government Policy Business Cycles Industry Analysis Financial Statement Analysis Major Financial Statements Measuring Firm Performance In-class Assessments: Valuation and DCF Modeling (WSP) Week 10: March 25 th and March 27 th Forecasting Financial Performance [All of Week 10] Financial Statement Modeling* Modeling Techniques in Excel Setting Up and Projecting I/S, B/S, and SCF Ratio Analysis *This is review from your Advanced Financial Management class. Although the section appears to be long, I do not expect an aboveaverage workload. Week 11: April 1 st and 3 rd Options Markets [Review from Investments class]* Basic Option Strategies Option-like Securities Exotic Options *We will not be celebrating April Fools Day. Option Valuation Basics Binomial Option Pricing Black-Scholes Model WSP Ch 12 Ch 14; Titman & Martin Ch 6 (Handout) Titman & Martin Ch 6 (Handout) WSP Self- Study Manual I: Ch 4-6, 8, 11* Ch 15 Ch 16 8
Week 12: April 8 th and 10 th Futures Market & Risk Management [All of Week 12] Basics Trading Mechanism Strategies Spot-Future Parity Financial Futures Swaps Week 13: April 15 th and April 17 th Portfolio Performance Evaluation [All of Week 13] Risk-adjusted Returns Style Analysis Morningstar s Risk-Adjusted Rating Portfolio Attribution Market Timing Week 14: April 22 nd and April 24 th Equity and Portfolio Attribution Analysis Using Morningstar [All of Week 14] Create an Equity Attribution Report View Equity Attribution Results Using Batch Scheduling to Run Reports *Access through Morningstar Application: Home > Training > Live Sessions Videos Ch 17 Ch 18 Morningstar Direct User Guide F100, H100* Reminder: Your final portfolio report is due on April 27 th (Saturday) by midnight. No extensions will be given. Week 15: April 29 th and May 1 st Portfolio Presentations Final Exam Review 9