GSBA548: Corporate Finance

Syllabus – Spring 2016

Professor:Alexander S. Gorbenko

Office:HOH 711

Office Hours:Wednesday4:00 pm – 6:00 pm, Saturday 5:30 pm – 7:30 pm

Email:

COURSE DESCRIPTION

This course covers the foundations of finance with an emphasis on financial-decision making. We will discuss many of the major financial decisions made by corporations and investors. Essential in most of these decisions is the process of valuation, the discussion of which will be an important emphasis of the course. Topics include criteria for making investment decisions, valuation of financial assets and liabilities, relations between risk and return, market efficiency, capital structure choice, payout policy, the effective use and valuation of derivative securities (such as options and convertible securities), real options, and risk management. The course is rigorous, but practical. Our goal is to understand general principles and then apply them in practically important scenarios.

Finance is a challenging topic – indeed, finance professors believe (rightly) that finance is the most challenging topic taught in business schools. Although challenging, this course will be fun and in particular will consist of fun games – that may help you understand the tricks of finance better than solid textbooks. Welcome to finance!

COURSE LEARNING OBJECTIVES

Through lecture, case analysis, worked samples, and by learning to apply appropriate mathematical and financial formulas and functions, you will be able to:

  1. Understand basic types, goals, and implications of financial management and the role of the financial decision-maker.
  2. Interpret financial statements and how they influence long-term planning and growth.
  3. Understand the meaning of time value of money and how to evaluate the trade-off between dollars today and dollars sometime in the future.
  4. Understand how firms decide to commit capital and its impact on cash flow (discounted cash flow).
  5. Understand the different criteria used to evaluate proposed investments (e.g., net present value (NPV), IRR, payback period).
  6. Understand interest rates and bonds and realize how interest rates impact bonds.
  7. Determine the cost of capital, and understand and apply the concepts of the weighted cost of capital (WACC) and adjusted present value (APV).
  8. Recognize and understand the elements of optimal capital structure, the effects of financial leverage, bankruptcy, and the role of taxes.
  9. Understand how asymmetric information and difference in incentives of various market participants affect valuation of the firm, choice of investment and the means through which it is optimally financed.
  10. Understand derivatives, or options, in the context of corporate finance.

FORMAT AND TEACHING METHODS

There will be a reading assignment for each session as well as a case or other problems to prepare for some sessions. PowerPoint lecture notes will be posted on Blackboard well before the class. You should be prepared for each session by doing the reading and working on the assigned case or problems. Cold calling will be used.

STUDENTS’ RESPONSIBILITIES

This course covers a large amount of material in significant depth (including many Nobel-prize winning ideas, past and future) and because it is only eight weeks in length, it is necessarily quick-paced and tough. You are strongly encouraged to be prepared for each class and to keep up with the material as we go along.This course is structured so that each lecture’s material builds upon the concepts introduced in prior lectures.

This course is fun (I promise) but also difficult and intensive. It is crucial to attend all sessions. Session attendance is mandatory. Punctuality is important.

You are absolutely encouraged to ask questions in class (given limited amount of time, I may not have time to answer all questions in class but do intend to answer all questions after class if there are any outstanding questions).

GROUP ASSIGNMENTS AND WORK

Do all cases and assignments in study groups. The hand-in assignments should be handed in on the dates specified before the start of the class. No late submissions will be accepted.

Submit one report per group of students. State the names of group'smembers clearly on the first page. Each report should be printed and contain at most 10 standard, single-sided pages.

GRADING

Your course grade will be determined by your group assignments (three assignments, 10% each, 30% total), your performance on the exam (50%), your class attendance (10%) and participation (10%). Specifically, failure to attend one class deflates your course grade by 5% out of maximum 100%; failure to attend two or more classes -- by full 10% out of maximum 100%.

TEXTBOOK, COURSE FOLDER, MATERIALS, AND READINGS

The textbook for this course is Corporate Finance, authored by Jonathan Berk and Peter DeMarzo, Third Edition, published by Pearson.

Other required readings are included in the syllabus or will be made available on Blackboard during the course.

If you are interested in some entertaining supplementary reading on financial markets, the following books can be of interest. The first is an informative book about the origins of modern finance:

Capital Ideas: The Improbable Origins of Modern Wall Street, authored by Peter L. Bernstein, 2005 Wiley edition.

The second is a well-known and enjoyable book that takes a pragmatic look at investing in the stock market:

A Random Walk Down Wall Street, authored by Burton G. Malkiel, 2007 9th W.W. Norton & Company edition.

COURSE ETIQUETTE

Tech equipment (tablets, laptops) may be used in class only as long as they are used for note-taking or to support class participation. Cell phones are not allowed.

No student may record any lecture, class discussion or meeting with me without my prior express written permission. I reserve all rights, including copyright, to my lectures, course syllabi and related materials, including summaries, prior exams and all supplementary course materials available to the students enrolled in my class.

EXAMS

The exam will be given on 27(Wed class) and 30 (Sat class) April 2016.

Please reserve this date in your calendar as there will be no scheduled alternatives.

The exam is open book.Mock exams will be posted on Blackboard at the beginning of the quarter.

Type of assessment / Submission date / Weighting / Group/Individual / Submission Information
Assignment 1 / March 9 (Wed class) / March 5
(Sat class) / 10% / Group / Electronic/Hard copy
Assignment 2 / March 30 (Wed class) / April 2
(Sat class) / 10% / Group / Electronic/Hard copy
Assignment 3 / April20 (Wed class) / April 23
(Sat class) / 10% / Group / Electronic/Hard copy
Final exam (open-book) / April 27 (Wed class) / April 30
(Sat class) / 50% / Individual / Hard copy
Midterm (open-book, offline) / March 26 (both classes) / Extra 1% / Individual / Electronic/Hard copy
Class participation / n/a / 10% / n/a / n/a
Attendance / n/a / 10% if no missed classes
5% if one missed class
0% if two or more missed classes / n/a / n/a

STATEMENT FOR STUDENTS WITH DISABILITIES

Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to me as early in the semester as possible. DSP is located in STU 301 and is open 8:30 a.m.–5:00 p.m., Monday through Friday. The phone number for DSP is (213) 740-0776. For more information visit

STATEMENT ON ACADEMIC CONDUCT

USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, contains the Student Conduct Code in Section 11.00, while the recommended sanctions are located in Appendix A.

Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal.

EMERGENCY PREPAREDNESS / COURSE CONTINUITY

In case of emergency, and travel to campus is difficult, USC executive leadership will announce an electronic way for instructors to teach students in their residence halls or homes using a combination of Blackboard, teleconferencing, and other technologies. Instructors should be prepared to assign students a "Plan B" project that can be completed at a distance. For additional information about maintaining your classes in an emergency please access:

COURSE SYLLABUS

Note 1: Preliminary and subject to change!

Note 2: Chapter readings refer to the textbook by Berk and DeMarzo

FEBRUARY24 (Wed class) / 20 (Sat class): SESSION 1

Prepare:

Case: Callaway Golf

Part 1: Financial Decision Making

Background Reading:

Chapter 2: Introduction to Financial Statement Analysis (2.1-2.4)

Chapter 3: Financial Decision Making and the Law of One Price

Read:

Chapter 4: The Time Value of Money

Chapter 8: Fundamentals of Capital Budgeting (8.1-8.2)

Part 2: Financial Analysis I: Capital Budgeting

Read:

Chapter 8: Fundamentals of Capital Budgeting (8.3,8.5)

MARCH 2 (Wed class) / FEBRUARY 27 (Sat class) :SESSION 2

Prepare:

Case: Should you pay cash for a new car?

Bond Valuation Assignment

Part 1: Financial Analysis II: Return on Investment. How Not to Be Duped

Read:

Chapter 5: Interest Rates

Chapter 7: Investment Decision Rules

Part 2: Interest Rates and Bond Valuation

Read:

Chapter 6: Valuing Bonds

MARCH9 (Wed class) / 5 (Sat class): SESSION 3

Assignment 1 to hand in:

Case: Airbus A3XX

Part 1: Valuing the Firm

Airbus A3XX Case Discussion

Read:

Chapter 9: Valuing Stocks

Part 2: Risk and the Cost of Capital

Read:

Chapter 10: Capital Markets and the Pricing of Risk

Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model (11.1-11.6)

MARCH 23 (Wed class) / 12 (Sat class): SESSION 4

Prepare:

Case: Cost of Capital at Ameritrade

Part 1: What Finance Tells You about Portfolio Choice

Read:

Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model (11.7-11.8)

Part 2: Estimating the Cost of Capital

Cost of Capital at Ameritrade Case Discussion

Read:

Chapter 12: Estimating the Cost of Capital (12.1-12.6)

MARCH 30 (Wed class) / APRIL 2 (Sat class): SESSION 5

Assignment 2 to hand in:

Nike

Part 1: MidtermReview

Midterm and Nike Case Review

Part 2: How Do Firms Fund Investment

Read:

Chapter 14: Capital Structure in a Perfect Market

APRIL 6 (Wed class) / 9 (Sat class): SESSION 6

Part 1: Leverage and Payout Policy I: Debt and Taxes

Read:

Chapter 15: Debt and Taxes

Chapter 18: Capital Budgeting and Valuation with Leverage (18.1-18.3)

Part 2: Leverage and Payout Policy II: Managerial Incentives and Information

Read:

Chapter 16: Financial Distress, Managerial Incentives, and Information

Practice Exam and Problems Review

APRIL 13 (Wed class) / 16 (Sat class): SESSION 7

Prepare:

Case: New Raggedly Bear Company

Part 1: Leverage and Payout Policy III: Financial Distress and Bankruptcy

Read:

Chapter 16: Financial Distress, Managerial Incentives, and Information

Part 2: Financial Ratios and Short-Term Financing

New Raggedly Bear Case Discussion

APRIL 20 (Wed class) / 23 (Sat class): SESSION 8

Assignment 3 to hand in:

Debt Policy at UST

Prepare:

Case: Arundel Partners

Part 1: Options in Real Life

Read:

Chapter 20: Financial Options (20.1-20.5)

Chapter 21: Option Valuation

Chapter 22: Real Options

Part 2: What Is Missing In The Picture?

Read:

Relax!

We will discuss (important) topics and issues we have not covered in the introductory course

CALLAWAY GOLF (Session 1)

Questions:

  1. What are the key costs and benefits of the FX-1 product?
  2. What is the gross margin for the FX-1 product? How does it compare with Callaway Golf overall?
  3. How would FX-1 change Callaway Golf’s earnings each year?
  4. How would the FX-1 change Calaway Golf’s available cash each year?
  5. Does the project justify the upfront investment, and the other resources it will consume?
  6. How would you determine the value of this opportunity?
  7. Should Callaway Gold launch the FX-1 irons?

SHOULD YOU PAY CASH FOR A NEW CAR (LA Times) (Session 2)

Consider the LA Times article: “Should You Pay Cash for a New Car?” Assume, based on the information given in article that the cost of car is $8,239.05, that the loan is given for 48 months at 14.2% APR, and that the savings rate is 8% APR. Note that this loan, as most consumer loans (mortgages, car loans), has equal payments over the life of the loan.

Questions:

1.What is the monthly payment Keppel will need to make on his car loan?

2.What is the “Total Interest Paid” (total payments minus the price) on the loan?

3.How much interest will he earn on his savings?

4.What is Sperling’s Rule? What is the right decision? Why?

BOND VALUATION ASSIGNMENT (Session 2)

CASE 1: Consider the US Treasury note 2-Year Treasury Note with $100 million face value, paying 2% coupon rate (in semi-annual payments). It was issued on September 30, 2008 and matures on Sept 30, 2010. It was sold for $99.775954 (per $100 face value) on September 30, 2008.

Questions:

  1. Draw a diagram showing the cash flows you should expect to receive from this security if you bought it on September 30, 2008
  2. What was the yield to maturity of this note (assuming a semi-annual convention) on that day?
  3. Did this note trade at premium, discount, or at par on that day?
  4. If the price of the note increases to 100.025, what is the yield to maturity of the note?
  5. What is the yield of this note when it is traded at par?

CASE 2: The table below gives the yields to maturity (annualized rate) of zero-coupon Treasury securities:

Year / 1 / 2 / 3 / 4
YTM (%) / 3.306 / 3.975 / 5.156 / 5.737

Questions:

  1. What is the price of the Treasury Note that pays 100 coupon in each year 1 through 4 (i.e., there are 4 payments each of 100) and 1000 face value in year 4?
  2. What is the yield to maturity of this security?
  3. If the market price of this security is $1,137.50, could you make an arbitrage trade? If yes, then specify the details?

ASSIGNMENT TO BE HANDED IN ON MARCH XX AT THE BEGINNING OF CLASS

AIRBUS A3XX (Session 3)

Case Questions

  1. Why is Airbus interested in building the A3XX? What are its objectives?
  2. How many aircraft does Airbus need to sell in order to break even on the investment? Is this number greater or smaller than your estimate of total demand for very large aircraft (VLA) over the next 20 years?
  3. Hint: Consider all capital providers as a single entity and calculate the break-even return to them collectively. To calculate the break-even number of planes, calculate the present value of the required investment and compare it to the present value of a growing perpetuity of cash flow from planes sales beginning in 2008.
  4. What is the NPV? What is your decision based on the NPV analysis?
  5. What are the most important assumptions you made to obtain NPV? Which assumptions are less reasonable?
  6. As Boeing, how would you respond to this situation? How does your answer depend on what you think Airbus is likely to do?

You are the Airbus CEO. Should Airbus commit to building the A3XX? How many orders should Airbus have before committing to develop the plane?
COST OF CAPITAL AT AMERITRADE (Session 4)

Note that we may not have time to discuss all the questions below in class.

Questions:

  1. What are Ameritrade’s primary sources of revenue?
  2. How risky are these cash flows? How are they related to the stock market?
  3. How can the CAPM be used to estimate the cost of capital for a real investment decision?
  4. What is the estimate of the risk-free rate that should be employed in calculating the cost of capital for Ameritrade?
  5. What is the estimate of the market risk premium that should be employed in calculating the cost of capital for Ameritrade?
  6. What do we use for beta?
  7. What comparable firms do you recommend as the appropriate benchmarks for evaluating the risk of Ameritrade’s planned advertising and technology investments?
  8. How to estimate the asset betas of comparables?
  9. What is the cost of capital?

ASSIGNMENT TO BE HANDED IN ON APRIL XX AT THE BEGINNING OF CLASS

NIKE (Session 5)

Make sure you carefully explain your solution.

Questions:

  1. Do you agree with Joanna Cohen's WACC calculation? Why or Why not? Provide as many reasons as possible.
  2. If you do not agree with Joanna's analysis, calculate your own WACC for Nike. Justify all your assumptions.
  3. What should Kimi Ford recommend regarding an investment in Nike?

NEW RAGGEDLY BEAR (Session 7)

Questions:

  1. What does an analysis of the company's financial ratios tell you?
  2. If sales are $38.4 million in 2008, what will be company's funds needs?
  3. Will the additional bank loan solve the company's problems? Is it appropriate? What is appropriate?
  4. You are:
  5. You are Ms Natasha Perelman: What would you do?
  6. You are Mr Jonathan Lamb: What would you do?

ASSIGNMENT TO BE HANDED IN ON APRIL XX AT THE BEGINNING OF CLASS

DEBT POLICY AT UST (Session 8)

Your job is to analyze the effect of leverage on UST, and to propose a recapitalization plan (or not). Throughout, ignore the effect of personal taxes as well as make other assumptions that you consider reasonable. Please list and justify all the assumptions that you make.

Note that this is a “soft” case: there is no one correct solution and your group should do your best to provide insightful and reasonable analysis of the situation. Grading will take into account your analysis and justification of your decisions and assumptions.

Questions:

  1. How well is UST doing?
  2. What are the main sources of risk for UST cash flows?
  3. Is the current capital structure of UST a good one? If yes, what are its main benefits? If not, why not? What might explain why UST has such a capital structure?
  4. From the standpoint of credit analysts and potential bondholders, what are factors of importance when analyzing UST? What credit rating would you assign for a moderate addition of debt? (Note: Total interest expense on existing debt is $7.3 million.)
  5. Analyze the effects of $0.5 billion and $1.0 billion in new debt and concurrent share repurchase (and subtraction of equity). What happens to Earnings per share (EPS) in case of addition to debt? Why?
  6. Summarize the likely costs and benefits of leveraging UST. Articulate and defend an “optimal” capital structure for UST. Should UST undertake a major recapitalization of the company?

ARUNDEL PARTNERS (Session 8)