Corporate Finance Theory FRL 367-01 CRN: 50454 P. Sarmas Summer Quarter 2012 Building 24B Room 1417 Tuesday & Thursday: 4:00 5:50 p.m. www.csupomona.edu/~psarmas Catalog Description: Capital Budgeting under uncertainty, capital structure, cost of capital, and specialized financial decision tools. Emphasis on operational techniques through cases, problems, and computer applications. 4 Lecture/Problem-solving. Pre-requisite: FRL 301. Required Background or Experience: Knowledge of basic accounting principles, of financial statement construction, of all topic in Managerial Finance I and II, command of algebra and basic statistical methods, good comprehension of written and spoken English, and knowledge of computer spreadsheet analysis. 1. Prerequisite: FRL 301 and MAT 125 with a minimum grade of C. 2. Prerequisite Justification: FRL 367 is an advanced course that builds on the topic covered in FRL 300 and FRL 301. Good performance in this course requires knowledge of accounting principles, principles of economics, statistical techniques, and managerial finance. 3. General Education Contribution The communication and analytical skills learned in English and mathematics courses greatly enhance students ability to understand the concepts and apply the techniques of corporate finance theories in this course. Good comprehension of written and spoken English, and competency in college level algebra and statistics are essential for good performance in this course.
Corporate Finance Theory FRL 367 Summer 2012 2 Course Objectives: The objectives of this course are to provide students with advanced knowledge of key finance concepts and theoretical principles relating to the cash flow estimation, capital budgeting and risk analysis, the effects of debt and dividend policy on firm value, and the operation of Multinational Corporation. In addition, the course is intended to provide students with the tools to calculate the value of firm before and after acquisition, to assess the risk of investments, to determine the cost of capital for firms and for individual projects. Expected Outcome: In this course, students, as prospective managers, will gain knowledge of financial management theories and acquire skills related to financial decision making in a business firm. This course builds on the knowledge and skills acquired in FRL 300 and FRL 301. Upon successful completion of this course, students should be able to explain theoretical relationship between risk and return; statistical measure of risk and return; diversification; concept of beta; conduct decision-tree, sensitivity, scenario, and breakeven analysis; cost of capital; capital structure; operating and financial leverage; dividend policy; working capital investment and financing; foreign exchange and various parity conditions; basic valuation of acquisition; and other related topics. Required Text: Author: Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jordan Title Corporate Finance, 9 th Edition Publisher: Irwin and McGraw-Hill, 2010 Recommended Text: Brealey, Myers, and Marcus Fundamental of Corporate Finance Brigham and Houston Essentials of Managerial Finance Study Guide Academic Integrity: The University is committed to maintaining academic integrity throughout the University community. Academic dishonesty is a serious offense that can diminish the quality of scholarship, the academic environment, the academic reputation, and the quality of Cal Poly degree. Please read the University catalog to learn about academic dishonesty at Cal Poly and to the responsibility of students, faculty, and administrators relating to this subject.
Corporate Finance Theory FRL 367 Summer 2012 3 Course Requirements: 1. Class attendance and participation is required. 2. Reading the assigned chapter(s) prior to the meeting. 3. Problem assignments listed in Course Schedule Section. 4. Completing the homework assignments on due dates shown is important. Late assignments are NOT graded. 5. Completing the mid-term and final examinations. 6. Please arrive on time and remain in class throughout the session. Late arrival and early departure results in point deduction. 7. Please turn off your phone while in class. Use of phone in the class during lecture by any one student will result in 5 points deduction from all students enrolled in the class. 8. Please note that there are NO late assignment and NO make-up examination. Homework Assignment: The assignments are posted on the McGraw-Hill s CONNECT, which is an online homework management system containing questions tied directly to your textbook. We will be using CONNECT for several assignments in this course. You need to purchase CONNECT access code and register for the course. You can purchase the access code in one of several ways: 1) As part of the package with your text in the bookstore 2) If you buy a used book, you can purchase Homework Manager online at www.mhhe.com/support. 3) Homework Manager Plus includes an e-book component and can be purchased at www.mhhe.com/hm. (This is optional). 4) As an alternative, if you need assistance, please contact McGraw-Hill Technical Support by visiting www.mpss.mhhhe.com/ or call: (800) 331-5094. 5) Once access code is purchased, go to following site to register for the course. http://connect.mcgraw-hill.com/class/p_sarmas_e01_-_summer_2012 6) The problem sets are homework assignments which you must complete in order to earn credit toward the course grade. Make sure to submit your completed homework for grading. 7) Complete assignments by the due date. No Late Assignment.
Corporate Finance Theory FRL 367 Summer 2012 4 Examination: 1. Please note that you will need to present your student ID at the time of examination. 2. You will be asked to sign the attendance sheet during the exam. 3. Turn-off your cell phones. 4. You will not be permitted to leave the classroom after examinations are distributed. 5. You will have to bring your own scantron and calculator (simple financial calculator). 6. Palm-held computer or programmable calculators are not permitted. 7. You will be provided with a formula sheet. 8. Each examination is composed of true-false, multiple-choice and short-problem questions. 9. You will have to show all your calculations in the problem section for full credit. 10. Your writing should be legible in the essay section for full credit. 11. Check your final examination schedule. If you have more than two final examinations on the same day, make prior arrangements or drop this course. 12. ABSOLUTELY NO MAKE-UP! Course Assistance: Office Information Office Hours Location: Building 66, #219 Tuesday: 2:15 p.m. 3:45 p.m. Telephone: (909) 869 2405 Fax: (909) 869 2124 Thursday 2:15 p.m. 3:45 p.m. E-Mail: psarmas@csupomona.edu Others: By appointment Course Grade: Grades are determined in the following format: Homework....20 percent Mid-term Examination.. 35 percent Final Examination...45 percent The course grade is based on the following scale: Score Grade Score Grade Score Grade Score Grade Score Grade 93 A 86 B+ 76 C+ 66 D+ 0 F 90 A- 83 B 73 C 63 D 80 B- 70 C- 60 D-
Corporate Finance Theory FRL 367 Summer 2012 5 CLASS SCHEDULE: Tuesday: June 19, 2012 Class List Check Course Introduction Chapter 4: Discounted Cash Flow Valuation Valuation: The One Period Case The Multi-period Case Compounding Periods Simplifications What is a Firm Worth? See Connect for Chapter 4 Assignment due date Thursday: June 21, 2012 Chapter 5: Net Present Value and Other Investment Rules Why Use Net Present Value/ The Payback and Discount Payback Period Methods The Average Accounting Return Method The Internal Rate of Return Problems with the IRR Approach The Profitability Index The Practice of Capital Budgeting See Connect for Chapter 5 Assignment due date Tuesday: June 26, 2012 Chapter 6: Making Capital Investment Decision Incremental Cash Flow The Baldwin Company: An Example Inflation and Capital Budgeting Thursday: June 28, 2012 Chapter 6: Making Capital Investment Decision Alternative Definitions of Operating Cash Flow Investments of Unequal Lives: The Equivalent Annual Cost Method See Connect for Chapter 6 Assignment due date Tuesday: July 3, 2012 Chapter 7: Risk Analysis, Real Options, and Capital Budgeting Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis Monte Carlo Simulation Real Options See Connect for Chapter 7 Assignment due date
Corporate Finance Theory FRL 367 Summer 2012 6 Thursday: July 5, 2012 Chapter 8: How to Value Bonds and Stocks Definition and Example of a Bond How to Value a Bond Bond Concepts The Present Value of Common Stocks Estimates of Parameters in Dividend Growth Model Growth Opportunities The Dividend Growth Model and the NPVGO Model Price-Earnings Ratio Stock Market Reporting See Connect for Chapter 8 Assignment due date Tuesday: July 10, 2012 Chapter 9: Stock Valuation The Present Value of Common Stock Estimates of Parameters in Dividend Discount Model Growth Opportunities Price-Earning Ratio The Stock Markets See Connect for Chapter 9 Assignment due date Thursday: July 12, 2012 Chapter 10: Risk and Return: Lessons from Market History Returns Holding Period Returns Return Statistics Average Stock Returns and Risk-Free Returns More on Average Return See Connect for Chapter 10 Assignment due date Tuesday: July 17, 2012 Chapter 11: Return and Risk: The Capital Asset Pricing Model (CAPM) Individual Securities Expected Return, Variance, and Covariance The Return and Risk for Portfolios The Efficient Set for Two Assets Thursday: July 19, 2012 Mid-term Examination (Chapters 4 thru 9 and 10)
Corporate Finance Theory FRL 367 Summer 2012 7 Tuesday: July 24, 2012 Chapter 11: Return and Risk: The Capital Asset Pricing Model (CAPM) The Efficient Set for Many Securities Diversification: An Example Riskless Borrowing and Lending Market Equilibrium Relationship between Risk and Expected Return (CAPM) See Connect for Chapter 11 Assignment due date Thursday: July 26, 2012 Chapter 13: Risk, Cost of Capital, and Capital Budgeting The Cost of Equity Capital Estimation of Beta Determinants of Bets Extension of Basic Model Estimating Eastman Chemical s Cost of Capital Reducing the Cost of Capital See Connect for Chapter 13 Assignment due date Tuesday: July 31, 2012 Chapter 16: Capital Structure: Basic Concepts The Capital Structure Question and the Pie Theory Maximizing Firm Value versus Maximizing Stockholder Interests Financial Leverage and Firm Value: An Example Modigliani and Miller: Proposition II (No Taxes) Taxes See Connect for Chapter 16 Assignment due date Thursday: August 2, 2012 Chapter 17: Capital Structure: Limits to the Use of Debt Costs of Financial Distress Description of Financial Distress Cost Can Cost of Debt Be Reduced Integration of Tax Effects and Financial Distress Costs Signaling Shrinking, Perquisites, and Bad Investments The pecking-order Theory Growth and Debt-Equity Ratio Personal Taxes How Firms Establish Capital Structure See Connect for Chapter 17 Assignment due date
Corporate Finance Theory FRL 367 Summer 2012 8 Tuesday: August 7, 2012 Chapter 18: Valuation and Capital Budgeting for the Levered Firm Adjusted Present Value Approach Flow to Equity Approach Weighted Average Cost of Capital Method A Comparison of APV/FTE and WACC Approaches Capital Budgeting When the Discount Rate Must Be Estimated APV Example Beta and Leverage See Connect for Chapter 18 Assignment due date Thursday: August 9, 2012 Chapter 19: Dividends and Other Payouts Standard Method of Cash Dividend Payment Repurchase of Stock Personal Taxes and Dividends Real World Factors favoring a High Dividend Policy Clientele Effect: A Resolution of Real World Factors? What we know and Don t Know about Dividend Policy Stock Split and Stock Dividends See Connect for Chapter 19 Assignment due date Tuesday: August 14, 2012 Chapter 29: Merger and Acquisition The Basic Forms of Acquisitions Synergy and Sources of Synergy Two Bad Reasons for Merger Cost of Stockholders from Reduction in Risk The NPV of a Merger Friendly versus Hostile Takeovers Defensive Tactics Do Mergers Add Value? See Connect for Chapter 29 Assignment due date Thursday: August 16, 2012 Chapter 22: Options and Corporate Finance Call and Put Options Selling Options Option Quotes Combination of Options
Corporate Finance Theory FRL 367 Summer 2012 9 Tuesday: August 21, 2012 Chapter 22: Options and Corporate Finance Valuing Options An Option Pricing Formula Stocks and Bonds as Options Options and Corporate Decisions See Connect for Chapter 22 Assignment due date Thursday: August 23, 2012 Chapter 24: Warrants and Convertible Warrants The Difference between Warrants and Call Options Warrant Pricing and Black Scholes Model Convertible Bonds The Value of Convertible Bonds Reasons for Issuing Warrants and Convertibles Why are Warrants and Convertibles Issued/ See Connect for Chapter 24 Assignment due date Final Examination Cumulative Examination Thursday August 30, 2012 3:50 p.m. 5:50 p.m.