Marshall School of Business – Fall 2015Corporate Finance

Professor: Dr. BemisTelephone: (310) 288-7827Email: abarquez@marshall.usc.edu

Office hours: Tuesdays 6:00 pm – 7:30 pm or WEDSNESDAYS BY APPOINTMENT at Bridge 307 J

*E-mail is a dependable and efficient way to communicate with me

Course Description

Corporate Finance is the bedrock of any successful organization. The objective of this course is to develop decision-making ability based on Corporate Finance theory. It will explain the procedures, practices and policies by which managers contribute to the financial viability performance of an organization. This course will form the foundation for all subsequent courses such as fixed income securities, investments and corporate valuations. Upon completion of this course, students should have a deep realization of the usefulness of Corporate Finance.

The course reviews the theory and evidence related to the investment and financing policies of the firm and attempts to develop decision-making ability in these areas. The course will cover the theory and practice of business budgeting, choice of capital structure, optimization problems, and the wider economic and social implications of financial management decisions.

Areas that will be covered in depth and more rigorously are Time Value of Money, discounted cash flow techniques and valuation using alternative valuation techniques such as price multiples. Emphasis is on developing the required information for valuation from financial statements using financial ratios, the Dupont Identity and other information sources. Investment decision making under uncertainty, cost of capital, capital structure, pricing of selected financial instruments and corporate liabilities will be included.

By the end of the semester, you should be familiar with financial vocabulary, understand aspects of financial theory, develop skills in financial computation, and appreciate the underlying financial mindset as well as incentives involved when solving problems of finance. You will learn how to determine risk, how to make financial decisions, and how to value an investment as a potential financial opportunity.

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Marshall School of Business – Fall 2015Corporate Finance

Course Learning ObjectivesThrough lecture, group project, worked samples, and by learning to apply appropriate mathematical and financial formulas and functions, you will be able to:

▪ Understand basic types, goals, and implications of financial management and the role of the financial decision-maker.

▪ Interpret financial statements and how they influence long-term planning and growth.▪ Understand the meaning of time value of money and how to evaluate the trade-off between

dollars today and dollars sometime in the future.▪ Understand how firms decide to commit capital and its impact on cash flow (discounted cash

flow).▪ Understand interest rates and bonds and realize how interest rates impact bonds.▪ Understand the different criteria used to evaluate proposed investments (e.g., net present value

(NPV), profitability index, payback period).▪ Determine the cost of capital, and understand and apply the concepts of the weighted cost of

capital (WACC).▪ Recognize and understand the elements of optimal capital structure, the effects of financial

leverage, bankruptcy, and the role of taxes.▪ Understand the dynamics of behavioral finance and its influence on individual and corporate

financial decision-making (e.g., the impact of heuristics).

These course level objectives align with selected Marshall Program Learning Goals.

Required Materials▪ Fundamentals of Corporate Finance by Ross, Westerfield and Jordan.▪ ISBN 978-1259698712

i. Calculator with financial functions: I recommend Hewlett Packard 12C. It is the student’s responsibility to learn the functions of the calculator. You should bring your calculator to all classes and exams. Please note that You will be extremely disadvantaged if you do not have your calculator during exams. During exams you will not be allowed to use cellphone calculators, computers, or any other device that can communicate to other devices, so learning how to use the financial calculator is essential for success in the class.

Prerequisites : ACCT 410, BUAD 250a, BUAD 280 or BUAD 305.

Grading Summary:

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Marshall School of Business – Fall 2015Corporate Finance

Assignments % of GradeQuizzams 25%

TESTS Midterm

25%

Final Exam 25%

Group Project, Stock Portfolio, Harvard Case Study, In Class Assignments & Homework

15%

Attendance/Participation 10%

TOTAL

100%

Final grades represent how you perform in the class relative to other students. Your grade will not be based on a mandated target, but on your performance. Historically, the average grade for this class is about a B. Three items are considered when assigning final grades:

1. Your average weighted score as a percentage of the available points for all assignments (the points you receive divided by the number of points possible).

2. The overall average percentage score within the class. 3. Your ranking among all students in the class.

ASSIGNMENTS AND GRADING DETAIL

Your grade is made up of the following categories:

1. Exams. All exams are closed book, closed notes and closed neighbors. Financial calculators are allowed and recommended, but E-devices (tablet and laptop computers such as iPad, smartphones, other texting devices, etc.) are not allowed.

2. Assignments. The homework grade will be assessed over 6 assignments, due the following week on Wednesdays before class begins. Assignments will be given a grade of “check” or “no

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Marshall School of Business – Fall 2015Corporate Finance

credit”. Homework will be assigned a “check” if and only if the assignment is reasonably complete and correct. Working in groups is encouraged, but each group member must turn in his or her own separate write-up.

Assignment Submission Policy Assignments must be turned in on the due date/time. No late assignments will be accepted. Homework will not be returned. Please keep a copy of your homework for reference.

The success of this course is dependent on adequate preparation for classes. The most effective and efficient use of classroom time aims at reinforcing or clarifying what YOU tried to learn on an individual (or group) basis prior to coming to class.

You are responsible on exams for all material covered in the lectures . There is significant lecture material not in the book and significant book material not in the lectures, but the exams come from the lectures.

This is a course that requires your daily hands-on participation. You are required to attend all class meetings, read the assigned materials, contribute to class discussions by asking questions or presenting possible solutions to the questions of others, and to complete the assigned problems.

Students bring experience, observation, and reflection to the course. This class will encourage students to think about the relationships between practice and theory, and to find ways to draw from and build for their future endeavors. At the same time, this course encourages participants to deepen their knowledge and understanding of literatures and theoretical perspectives relevant to the study of Corporate Finance. Successful students develop a sense of their goals and are motivated by questions to which they seek answers through their study, professional practice, interactions with peers and faculty, and on –going habits of inquiry.

Course Activities/Organization

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Marshall School of Business – Fall 2015Corporate Finance

Active Participation is essential to successful completion of the course. The preparation for such participation and the quality of participation each week will constitute a major portion of the final grade assessment for each class member.

Course content will focus primarily on contemporary issues representing a broad spectrum of areas in Corporate Finance. However, some allowance may be made for accommodating additional issues raised during the course of the semester by current events and the unique background of the class member interests.

This class thrives on class participation. It is critical that you attend every class as so much learning in this course occurs in the classroom. Your comments should help advance everyone’s learning and reflect an understanding of the concepts.

Availability: I care about each of my students and will make myself available as needed to ensure student understanding of the course materials. You may also email me 24 hours a day. I will be happy to meet with you during office hours or after class, by appointment.

Class Rules: Conducting yourself in a professional manner is essential to being successful in any environment. This classroom is a safe platform to practice behaving in a professional manner. Professional decorum is based on respect for your colleagues and peers. Professional decorum demands that your behavior show respect for the value of their time and yours, respect for their time and yours, respect for their expertise, and respect for earned positions.

Laptop and Internet usage are not permitted during academic or professional sessions unless otherwise stated. Use of personal communication devices, such as cell phone, PDAs, I-Phones, Blackberries, I-pods are considered unprofessional and are not permitted during academic sessions. No student may record any lecture, class discussion or meeting without prior express written permission.

Respect: Active participation in class requires a safe and trusting environment. It is important for us to respect the views and comments made by others, even if we

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disagree with such comments. I encourage critical discussion, yet it must be respectful, polite and professional.

Exam Absence PolicyStudents are required to be present for both midterm exams and the final exam. Absolutely no make up exams will be provided. Please note that if you miss the i) midterm, ii) the final exam iii) or any of the three quizzes , I will be unable to assign a complete grade to you.

TutoringTutoring is offered through the Marshall Office of Undergraduate Advising as a supplement to classroom instruction. Tutors are able to assist students in understanding difficult concepts, but tutoring sessions are only effective if students regularly attend class and actively engage in the process of thinking critically about the course content. Tutoring will begin on the Monday of the third week of classes. Students can choose to participate in group tutoring sessions or drop-in tutoring sessions. Group tutoring is available every Monday-Wednesday from 8-9 pm and drop-in tutoring is available Monday-Wednesday from 9-10 pm, both in the Experiential Learning Center (ELC) in BRI-3. For more information on tutoring, visit the Marshall Office of Undergraduate Advising in BRI-104 (213-740-0690), or http://students.marshall.usc.edu/undergrad/advising/

MARSHALL GUIDELINESAdd/Drop Process In compliance with USC and Marshall’s policies classes are open enrollment (R-clearance) through the first week of class. All classes are closed (switched to D-clearance) at the end of the first week. This policy minimizes the complexity of the registration process for students by standardizing across classes. I can drop you from my class if you don’t attend the first two sessions. Please note: If you decide to drop, or if you choose not to attend the first two sessions and are dropped, you risk being not being able to add to another section this semester, since they might reach capacity. You can only add a class after the first week of classes if you receive approval from the instructor.

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 (or to TA) 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.

Statement on Academic Integrity

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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.http://www.usc.edu/dept/publications/SCAMPUS/gov/

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: http://www.usc.edu/student-affairs/SJACS/ 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 dismissalEmergency 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: http://cst.usc.edu/services/emergencyprep.html

Please activate your course in Blackboard with access to the course syllabus. Whether or not you use Blackboard regularly, these preparations will be crucial in an emergency. USC's Blackboard learning management system and support information is available at blackboard.usc.edu.

Incomplete GradesIn incomplete (IN) grade may be assigned due to an “emergency” that occurs after the 12th week of classes. An “emergency” is defined as a serious documented illness, or a documented unforeseen situation that is beyond the student’s control, that prevents a student from completing the semester. Prior to the 12th week, the student still has the option of dropping the class. Arrangements for completing an IN course should be initiated by the student, and negotiated with the instructor. Class work to complete the course should be completed within one calendar year from the date the IN was assigned. The IN mark will be converted to an F grade should the course not be completed.

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COURSE READINGS/CLASS SESSIONS

Date Topic Chapters

8/25 Introduction to Corporate Finance:What does a financial manager do? Forms of business organization, Goal of financial management, agency problem, Principal-agent problem, incentive

1

8/27 Financial Statements:Balance sheet, Income statement, Average versus marginal tax rates, Operating cash flow, Change in net working capital, Standardized financial statements, Sources and uses of cash, Ratio analysis

2, 3

9/1 Long Term Financial Planning and Growth:Growth as a goal, Asset requirements, External financing, Internal growth rate, Sustainable growth rate

4

9/3 The Time Value of Money:Future Value and Compounding, investing for a single period, compound growth, lump sum versus payments, Present Value and discounting, present versus future value, determining the discount rate, single period present value, lump sum versus payments

5

9/8 Discounted Cash Flow Valuation:Future and present values of multiple cash flows, Valuation of annuities, Perpetual bonds, Future value of annuities, Annuities due

6

9/10 Discounted Cash Flow ValuationEffective annual rates, Calculating and comparing rates, EAR versus APR, Continuous compounding, Loan types, Amortization

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9/15 Loan Amortization  

9/17 Mortgage CalculationsDraft 1 of Group Project DUE

9/22 Interest Rates and Bond Valuation:Bonds and valuation of bondsBond features, Interest rate risk, Default and credit risk, Re-investment rate

7

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Date Topic Chapters

risk, Bond indenture, Debt or equity? Long term debt, Government bonds, Corporate bonds, Mortgage bonds, Zero coupon bonds

9/24 Quiz 1 Administered9/2910/1

Interest Rates and Bond Valuation:Bond ratings, Moody’s and Standard and Poor’s, Investment grade versus high yield (junk) debt, Real versus nominal rates, Fisher effect, Term structure of interest rates – Yield curve

Stock Valuation:Zero growth, Constant growth model, Shareholder rights, Common stock versus preferred stock, Cumulative versus non-cumulative

8

10/6

10/8

Stock Valuation

Net Present Value and Other Investment Criteria:NPV estimate, Payback rule, Internal rate of return, Discounted payback, Profitability index, Capital budgeting, IRR versus NPV, Mutually exclusive projects, Acceptance and rejection rules for each capital budgeting criteria

Harvard Case Study Due

8

9

10/13 Making Capital Investment Decisions:Incremental cash flows

10

10/15

10/20

Practice of Capital Budgeting

Capital Budgeting Continued

10/22 Some Lessons from Capital Market History:Returns through time for different asset classes, Historical record

Draft 2 of Group Project DUE

12

10/27 Review for Midterm Exam

10/29 Midterm Examination Administered

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Date Topic Chapters

11/3 Risk Assessment, Variability of Returns

11/5 Historical Variance and Standard Deviation

11/10 Return, Risk, and the Security Market LineExpected returns and variances, portfolio weights and expected returns, diversification

13

11/12 Stock Portfolio Due11/17 Return, Risk, and the Security Market Line:

Systematic risk and beta, Portfolio beta, Reward to risk ratio, Beta and the risk premium, Capital asset pricing model (CAPM), Cost of capital

Last Quiz Administered

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11/19 Cost of Capital:Cost of capital, Cost of equity, Cost of debt, Cost of preferred stock,Weighted average cost of capital (WACC),

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11/24 Bankruptcy and Liquidation Process

12/1 Group Project Presentation12/3 Review for the Final Exam

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