CAMERON UNIVERSITY - DEPARTMENT OF BUSINESS

SPRING 2007: Managerial Finance - FIN 5613

Thursdays 7.05 pm

INSTRUCTOR: V. Sivarama Krishnan; email - sivarama@cameron.edu

OFFICE: School of Business 108; Phone 581 2805;
OFFICE HOURS: Tuesdays, Wednesdays, Thursdays: 10.30 am – 1.00 pm, Fridays: 12.30 pm – 2 pm and
by appointment.

Textbooks and Instruction Materials:

01 Financial Management: Theory and Practice by E. F. Brigham, L. C. and M. C. Ehrhardt; Harcourt
College Publishers, 11th. Edition.
02 Texas Instruments' BA II Plus business calculator.
03 Case 1 – Available on the instructor’s website.
04 Clarkson Lumber - Harvard Business School Case.

Course Description: The focus of the course is on practical applications of finance theory to corporate decision
making. Topics covered include: the financial environment; financial planning; risk-return trade off and asset
pricing models; asset valuation; capital budgeting; working capital management; capital structure and dividend
policy; leasing; and multinational financial management. The topics will be covered through lectures, mini-
cases from the text, problems and cases. Student participation and class discussions will also be essential
ingredients in the course mix.

Course objectives: The course will enable the students to:

1. Gain a good understanding of finance theory and practice as applicable to corporate financial management;

2. Learn analytical tools useful for corporate decision making;

3. Apply the theoretical principles of finance to corporate decision making relating to valuation, investment,
financing, dividends, and working capital management; and

4. Develop skills in the analysis of real life finance problems and evaluate alternate approaches to their
solution.

Course Assignments and Grading: The graded assignments for the course include: class participation and
case discussions (10%), summary case reports (10%), a project assignment (14%), and three exams (66%). The
case assignments and the project are discussed below. Grades for class participation and discussion will be
assigned on the basis of actual participation in class discussions including the case discussions.

Student Preparation: Students are expected to come fully prepared for each class. Besides reading contents of
each chapter, you are also expected work through a number of numerical problems and exercises from the text
and attempt the discussion problems (see below). A number of mini-cases selected from the textbook and the
discussion problems will be discussed in class. These are listed in the class schedule. I will make available on
my web page PowerPoint presentation files for each chapter. The PowerPoint presentations are in the form of
answers to questions included in the mini-cases for the different chapters. Please work through the mini-cases
assigned and then check your answers with the solutions given in the presentations.

The key learning tools included in the course design are the textbook, two cases, many discussion problems,
lectures and class discussions, and the three exams. Each of these is discussed below.

The Textbook: The text is very readable and easy to use. The ideal way to use the book is to read the assigned
chapters well ahead of the class. Work through the examples given in each assigned chapter. The text comes
with CD-ROM, which includes Excel spreadsheets and other tools. This will prepare you for the class
discussions and the discussion problems.

The Cases: I have included two cases dealing with different aspects of corporate finance. The first case
(instructor prepared) is available on the instructor's website. This case involves investment decision-making and
capital budgeting issues and requires essentially straightforward applications of the concepts discussed in
chapters 9, 10, and 11. The Clarkson Lumber case, available from the instructor on the first day of the class
on payment of a nominal charge (about $3) is mostly about short-term financing issues, liquidity and current
asset management (chapter 22). Each case lends itself to detailed financial analysis and it would be a good
experience to do the analysis for the cases.

You are required turn in a two/three page summary report for each of the cases on the day assigned for the case.
The report should review the issues involved, provide a clear analysis and attempt the financial analysis for the
appropriate actions required for solving the problems or issues faced by the company. You should attempt as
much financial analysis as possible. The reports should be neatly typed and properly organized.

Discussion problems: Seven sets of discussion problems are included and these will be available on the
instructor’s webpage on January 4. These problems relate to concepts covered in the different chapters. We will
try to discuss as many of the problems as possible in class on days assigned for each set. Please attempt to do
these problems first and then check your answers with the solutions, which will be provided on the instructor's
web page. We will use the BA II Plus calculator for most of the computations required for the class. If you
are not familiar with the calculator, please learn and practice calculator applications before the beginning of the
course. A note on the use of the BA II Plus is available on the instructor’s web page.

Lectures and class discussions: While I am responsible for the "lectures," you are responsible for class
discussion. The lectures will be brief and discuss the essential concepts from the different chapters. I will use
the mini-cases as the bases for the lectures. We will spend more time discussing the applications and
discussion problems. Your participation in class discussions through questions and comments will get you
participation grade points. Please note that 10 percent of the course grade is set for class participation. This
will be decided on the basis of your participation in class discussions (including the case discussions).

Exams: Each exam will include a closed book part (for about 35 minutes or so for about 25 percent of the exam
grade) which will have short essay questions on concepts and ideas and an open book part (for about 85 minutes
or so for about 70 percent of the exam grade), which will include mostly numerical problems similar to the
discussion problems.

Project Assignment: This is a research project involving study and financial analysis of a company of your
choice (subject to the instructor’s approval) and estimation of the cost of capital for the company based on
current cost data. The attached handout provides details of the project. Please choose your company by January
18 and inform the instructor of your choice. The project assignment will be discussed in detail on January 18.
The report has to be submitted to the professor by May 3, 2007.

Instructor’s Web site: I use my web page (www.cameron.edu/~sivarama) as a direct channel of

communication to the students. Please use email as the preferred mode of communication with me. The course

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materials are pass word protected. The userid and password will be emailed to you using the ids available on
Camsis.

Course Schedule: Tentative schedule of classes and topics are given below.
Day/Date/Session Topics/Chapters/Assignments

January 11, 18 Introduction, Time Value of Money, and Review

Chapters 1, 2, 3 and 13; Mini case - Chapter 13
Discussion Problem set 1

January 18, 25 Risk, Return and Asset Pricing Models

Chapters 4 & 5, Mini cases - Chapters 4, 5
Discussion of Project Assignment

January 25, February 1 Asset Valuation and Options

Chapters 6, 7 and 8; Mini case - Chapter 8
Discussion Problem set 2

February 8, 15 Cost of Capital and Capital Budgeting

Chapters 9, 10 and 11; Mini cases - Chapters 9, 10, 11
Discussion Problem set 3; Case Discussion - Case 1

February 22 Examination 1

March 1 Real Options; Financial Planning

Chapters 12, 14 - Mini cases - Chapters 12, 14
Discussion Problem Set 4

March 8 Valuation and Governance: Chapter 15;

Mini case - Chapter 15; Discussion Problem set 5

March 8, 15 Capital Structure and Dividends

Chapters 16, 17, 18; Mini cases - Chapters 16, 18

March 29 Examination II

April 5 Leasing; Working Capital Management

Chapters 20, 22; Mini cases - Chapters 20, 22
Discussion Problem Set 6

April 12 Derivatives; Chapter 23; Mini case – Chapter 23

Case Discussion - Case 2

April 19 Mergers; Multinational Financial Management

Chapters 25, 26; Mini cases 25, 26; Discussion Problem Set 7

April 26 Review & Catch up

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May 3 Examination - III

FIN 5613 – SPRING 2007

Project Assignment

The project assignment will enable the student to apply the tools and skills learned in the course to a practical
real life problem. This assignment is a research project involving study and financial analysis of a company of
your choice and estimation of the cost of capital for the company based on current cost data. You are also
required to review and comment on the company’s capital structure, dividend policy, investment decisions and
general performance. You would need as much information as you can get on the company. It is, therefore,
recommended that you get the company’s annual reports (for three to five years) and other information as early
as possible. The report on the project has to be submitted to the professor by May 3, 2007. A brief description
of the project components is given below.

1. FINANCIAL ANALYSIS

Do a summary ratio analysis and evaluate the overall performance of the firms over the last three years as
possible. Look at both the stock market performance of the firm’s stock and the book returns earned by
the firm. Some important ratios/numbers to be looked at include:

i) Profit margin, Return on Equity and Return on Assets

ii) Asset Turnover Ratios, Price Earnings Ratio, Market to Book Ratio
iii) Detailed Du Pont analysis with industry comparison and trend analysis
iv) Analysis of statement of Cash Flows and quality of earnings
v) EVA using the company cost of capital (see 4 below) and MVA.
vi) Stock Performance over Last Five Years

Please do not do a “data-dump” from Yahoo or other web resources. Provide a summary table of key ratios
and analyze, interpret and comment on company’s performance using key ratios and other measures.

2. INVESTMENTS

Review, analyze, and compare capital investments the company has been making in the last three/five
years. Include acquisition, sale of assets or divisions, spin off, etc.

3. DIVIDEND POLICY

Describe, analyze, and compare the firms’ dividend policies. See if you could relate them to the
theoretical views expressed in the text and in class. Include stock dividends, stock splits, and stock
repurchases in this section.

4. CAPITAL STRUCTURE AND COST OF CAPITAL

Finding capital structure requires only simple analysis of the balance sheets of the firms. You should
estimate the capital structures based on both the book and market values of liabilities. A note on
estimation of capital structure and cost of capital is attached.

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DATA SOURCES: Company Annual reports and 10K reports, Moody’s, Standard and Poor, Dunn and
Bradstreet, and Valueline, Publications, Yahoo, CBS Marketwatch, Reuters and other web sites.

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 COMPUTATION OF CAPITAL STRUCTURE AND COST OF CAPITAL

Consider only the cost bearing components; that is, exclude interest-free debt such as accounts payable and
trade credit, deferred taxes, etc. If the company uses a lot of non-interest bearing components in its capital
structure, it may be worth looking into.

Most firms will have short-term debt (SD), long-term debt (LD), and equity (E). Some firms might have
preferred stock (PS) also. Convertible debt and leases could be classified as long-term debt, although cost of
these could be different from that of LD and much harder to estimate. The total value of the firm, V (excluding
the interest free liabilities) would then be:

V = SD + LD + PS + E

Calculate V using both book and market values. You may assume that the market value of debt equals the book
value.

COST OF EQUITY: (rs): Estimate rs using the CAPM [rs = rRF + B (rm -rrf)], the DCF [rs = D1/P + g] or the risk
premium approach. The risk premium approach is a rule of thumb, which estimates the cost of equity as the
cost of debt (the firm’s debt; not treasury debt or AAA rated debt) plus a risk premium. Historically, the
premium has been 4 to 5%. Once you have the estimates by the three methods you can compare the three and
take an average. If any of the estimates does not appear to be in line with the other estimates, use your judgment
and exclude the outlying estimate.

COST OF LONG TERM DEBT: (rld): If the firm’s bonds are quoted in the market, you can estimate yield from
the quotes. Alternately use the bond rating for the firm and get current yield on comparable corporate debt.
Bond ratings are published in Moody’s or S & P bond guides.

COST OF SHORT TERM: (rsd) - Generally based on prime rate of lending by commercial banks. Many firms
borrow directly from the market through commercial paper and the commercial paper rate is less than the prime
rate.

COST OF PREFERRED: (rps) This is harder to estimate without quotes for the preferred stock. If you know the
dividend, price, and the maturity, you can estimate the cost as you would estimate the cost (yield to maturity) of
a bond. [Note: Many companies do not use any preferred stock. If preferred stock is less than 5% of the assets,
you may ignore it.]

WEIGHTED AVERAGE COST OF CAPITAL (WACC):

WACC ={rsd (SD/V) +rld (LD/V)}(1-T) + rps (PS/V) + rs (E/V)

where T = the marginal tax rate for the firm.

Please remember to do reality checks on all numbers you get. Note that the formula is just a modified version of
the one in chapter 9 of the textbook.

Due Date: The report is due on May 3, 2007.