Wisconsin School of Business Wisconsin MBA Professor Kenneth A. Kavajecz Finance 700 4329 Grainger Hall Intro. to Financial Management Phone: 608-890-2496 Fall 2010 Email: kkavajecz@bus.wisc.edu Web: http://courses.bus.wisc.edu/course/view.php?id=1768 Office Hours: Tuesday and Thursday 12:30-1:30 PM and by appointment. Class Time Lectures FNCE 700 001 Tuesday-Thursday 9:30 -10:45PM Grainger Hall 2510 FNCE 700 002 Tuesday-Thursday 11:00 -12:15PM Grainger Hall 2510 Required Materials Lecture notes, additional readings, projects, problem sets, and old exams, all of

which are available for downloading from my instruction website listed above. While a regular calculator is all that is required, you may opt for a financial

calculator. Problem sets and exam will require you to show all your work (i.e. show the formula and its solution), although a financial calculator may be useful in checking your solutions. In the event that you decide on a financial calculator, Casio, Hewlett-Packard and Texas Instruments produce acceptable models. Note that some models use reverse polish notation (RPN).

Texts No textbook is required for this course. However, should you want a textbook I

recommend, and will most closely follow Berk and DeMarzo, Corporate Finance, 1st Edition. Note that there are many other perfectly fine corporate finance texts available that students can use, e.g. Brealy and Myers, Principles of Corporate Finance, 7th Edition; Ross, Westerfield and Jaffe, Corporate Finance, 7th

Edition.

Materials on Reserve Berk and DeMarzo, Corporate Finance, 1st

Edition.

Solutions Manual for Berk and DeMarzo, Corporate Finance, 1st

Edition.

Teaching Assistants: Chris Casteleyn (CorpFin) Travis Dowden (CorpFin) Email: casteleyn@wisc.edu travis.dowden@gmail.com Office Hours: TBD TBD Office Hour Location: TBD Grainger TBD Grainger

Todd Johnson (CorpFin) Email: tbjohnson2@wisc.edu Office Hrs: TBD financembahelp@bus.wisc.edu Business Learning Center http://www.bus.wisc.edu/blc/finance.htm

Grading Policy Keep in mind that students’ performances may vary from one year to the next and that I retain complete discretion in altering the final grade distribution. That said, I anticipate the following distribution of final grades for this course: A’s 25-30%, AB’s 45%, B’s 20-25% and BC or lower 0-5%. Exams The course grade will be based on one midterm exam, two group projects and a final exam with the following weights applied to each: Midterm exam 7:15-9:15 PM Monday, October 25, 2010 30% 1100 Grainger

Group Project 1 Due Thursday, November 11, 2010 15% In Class Group Project 2 Due Tuesday, December 14, 2010 15% 8:00AM Final exam 10:05-12:05PM Friday, December 17, 2010 40% TBA The weights placed on the following requirements are not negotiable and will not be changed. Thus explicit requests to reapportion the weighting scheme or implicit requests due to retesting or supplementary work will be denied. In case of scheduling conflicts, an alternate exam will be allowed if the student notifies the instructor of the problem within the first 2 weeks of class, otherwise the student must take the exam at the scheduled time. Both exams are closed book, but a formula sheet will be allowed. You will need a calculator. For those students unable to take either the midterm or final exam because: (i) they are ill and have a doctors confirmation; or, (ii) they have three or more exams scheduled that day, the makeup exam will occur at the start of the Spring Semester of 2010. There will be no other rescheduling of exams for any reason. Group Projects There are two group projects during the semester and descriptions of both are listed on my website. Both group projects are to be done with the previously assigned teams of students within your cohort. The first group project is a finance case study due on November 11, 2010. The second group project which is due at the end of the semester (December 14, 2010) is an integrated company analysis where your team will analyze a publicly traded company using the ideas and concepts within each of the core classes (accounting, data analysis, finance and marketing).

Be advised that late projects will not be accepted. Project write-ups are to be typed double-spaced with specific page limitations although appendices are allowed. In handing in your project make sure to provide both a paper and electronic copy. The projects will require some library work as well as require some facility with a spreadsheet. Any necessary materials can be downloaded off the internet from http://courses.bus.wisc.edu/course/view.php?id=1768.

In order to ensure a fair distribution of the overall project grade each group member will provide me with their estimate of each group member’s (including their own) overall contribution to the work. In rating your group members you should consider all aspects of the work, including but not limited to, creativity, preparation, quality and quantity of work, cooperation. All evaluations are completely confidential. Evaluations are listed as a percentage (0% to 100%). Evaluations will be averaged across group members and will determine the fraction of the project grade that you will receive. For example, if a group receives 80 points for their project and your group members award you 75% in terms of overall contribution, you will receive 60 points. Peer evaluations are due the same day as the respective project is due. You may download a peer evaluation form from my website.

Practice Problems and Problem Sets The Berk and DeMarzo (BD) book contains some practice problems. Solutions to all of BD’s problems are on reserve in the UW-Madison Business Library located in Grainger 2200. Please note that the practice problems from BD are at times elementary and should not be used to measure the difficulty of the midterm and final exams. Supplementary materials for the BD text may also be found at http://www.myfinancelab.com In addition to the BD’s practice problems, my website contains problems sets, old midterms and an old final exam. These questions are representative of what you are likely to encounter on this semester’s midterm and final exam. The teaching assistants and I will be available in office hours to go over any of the practice problems, problems sets, or old exams. Note that problem sets will not be collected, rather they are provided as an aid for students to help them practice applying the material covered in class. Review Sessions There will be four review sessions held throughout the semester. Each session entails a short structured overview of the material since the last review session as well as time for student questions and problem solving. These review sessions are scheduled as follows: Review I: Monday, September 27, 2010, 7:00-9:00 PM, 2120 Grainger Review II: Monday, October 18, 2010, 7:00-9:00 PM, 2120 Grainger Review III: Monday, November 15, 2010, 7:00-9:00 PM, 2120 Grainger Review IV: Friday, December 10, 2010, 2:00-3:00 PM, 2120 Grainger Regrade Policy Exams and group projects will be accepted for regrade only if they are accompanied by a signed Regrade Request Form (downloadable from my website) and are submitted within the timetable outlined below. Note if an exam/group project is submitted for regrade, the entire exam/group project will be regarded by me. Deadlines for regrade requests: Group Projects: 2 weeks from the day the project was returned. Midterm Exams: 2 weeks from the day the exam was returned. Final Exams: 2 weeks after the beginning of the following semester. Attendance As a good learning environment depends critically on your involvement, I expect that you will make an effort to attend class on time. Should you not be able to attend class I expect that you will notify me, in advance if at all possible, why you are not able to make class. Academic Integrity Academic Integrity is an important part of all of the classes you take at the Wisconsin School of Business and this one is no exception. While I know that you have signed a personal statement verifying that you understand the honor code and promise to abide by it, additional measures will be implemented in all MBA classes to keep academic integrity in the forefront. First, both the specific honor code is listed below for your review. Second, for each piece of work that will be evaluated for a grade you will be required to attach the following statement:

“On my honor, I have neither given nor received unauthorized aid in completing this academic work.” Please note that any suspected violation of the Honor Code will be reviewed by, and subject to, the decision and recommended punishment of the Honor Board.

School of Business MBA Academic Integrity Policy

Honor Code

• Discrimination I understand that it is the policy of the University of Wisconsin-Madison to not discriminate on any grounds, and especially not on the basis of gender, race, color, religion, national or ethnic origin, disability, or sexual orientation. I support this policy and will not tolerate any deviations from it in the classroom. If I feel that some form of discrimination has been directed toward me or another during class time, it is my right to contact the Honor Board (or Dean) immediately.

• Plagiarism

I understand that plagiarism is a major offense at this University and that it is my duty to understand what plagiarism is and actively seek out advice when I have a question about my work. Plagiarism is defined by this University as:

“Plagiarism means presenting the words or ideas of others without giving credit. I should know the principles of plagiarism and the correct rules for citing sources. In general, if my [work] implies that I am the originator of words or ideas, they must in fact be my own.

[Specifically], if I use someone else’s exact words, they should be enclosed in quotation marks with the exact source listed. I may put someone else’s idea in my own words as long as I indicate whose idea it was.

If I am unsure about the proper ways to give credit to sources, I may ask my instructor or consult the Writing Center at 6171 Helen C. White Hall (phone: 608/263-1992, e-mail: writing@wisc.edu) for a copy of their handout "Quoting, Paraphrasing and Acknowledging Sources."” Excerpt taken from http://www.wisc.edu/students/saja/misconduct/misconduct.html

• Exams

I understand that all exams whether in-class or take-home are strictly individual efforts. I will not communicate with any student regarding any aspect of the exam such as, content, coverage, etc., until all students have taken the exam. Moreover, I will be certain that anyone with whom I discuss the examination has previously handed in their examination.

• Individual Homework

I understand that homework that is not handed in for a grade may be discussed with the professor and other students; indeed, I am encouraged to do so. However, individual homework assignments that are to be handed in for a grade may not be discussed with students or others outside the class, such as other faculty members, alumni, etc., unless specified by the instructor. Note that similar or identical homework may have been assigned in previous semesters; I may NOT access solutions from any source for those previous semesters. Difficulties with, or questions regarding, graded and ungraded work may always be directed to the instructor of the class.

• Group Work

Basic Rules: I understand that group work must be done solely within the group and when required I must hand in a single set of answers for my group. I must contribute equitably in the assignment’s/case preparation if I am to take full credit for it. This does not mean that my ideas must be included. It means that I should make a significant contribution to the overall process. If that did not happen for some individual, I can include in my report an estimate of that person’s contribution relative to others in my group.

On Consulting with Others: I may not discuss the group work with anyone outside my group, with the exception of my professor or TA. That necessarily means that I will have no discussions with other groups, with those in other cohorts, or with anyone who may have previously studied the case. The only exception may be if my professor allows cross-group discussion as part of an assignment. Even in this case, however, I am obligated to be sure my work is not too similar to another group’s work in its completed version.

Using Sources: The set of materials to be used in completing the group work will be clearly defined by the professor; under no circumstances am I to use sources outside the allowed set. This may include company or knowledgeable sources interviews or library/online searches. All sources, whether written, oral, or online, must be cited properly.

Note on the Internet: I understand that unless explicitly instructed, the use of any internet materials to complete an exam, homework or group work, not explicitly assigned to the class are strictly prohibited.

• Cases and Case Discussions:

I understand that case write-ups are to be done individually, or within your assigned group, as your professor/instructor designates. In addition, case discussions conducted in class are to be done within my section or cohort unaided by alumni, 2nd year students or students in other sections/cohorts who have already reviewed the case. Discussing the analyses, arguments, logic, etc. that go into the case compromises the equitable distribution of class participation and more importantly, undermines the learning process. Thus, since the path taken to arrive at an answer is as important as the answer itself, it is critical that case discussions are a product of my own thinking.

• If you are unsure about a rule or policy:

Finally and very importantly, I recognize that the principle ingredient in the successful operations of the honor code is good faith among all parties. From time to time, situations will arise in which the application of the honor code is unclear. In such cases, it is important that I contact my Professor/instructor immediately for clarification.

Course Outline The goal of this course is to provide you with an introduction to core ideas in finance as well as provide a solid foundation for further study. The course is broken down into a series of modules. A module is best described as a collection of ideas that are best presented as a unit. An outline of the course topics follows. Module 1 Introduction to Finance [1 Lecture] Finance within the Business Core The Financing Function and the Financial Manager Players and Perspectives Goals and Objectives of the Course Module 2 The Time Value of Money [2.5 Lectures] Compounding and Future Value Discounting and Present Value Perpetuities Annuities Nominal versus Real Interest Rates Module 3 The Net Present Value (NPV) Rule [2 Lectures] Theoretical Background Alternatives to the NPV Investment Rule Payback Average Return on Book Internal Rate of Return Profitability Index Module 4 Applications of NPV: Valuation of Safe Cash Flows [3.5 Lectures] Valuing Treasury Securities Term Structure of Interest Rates Forward Rates Pricing Treasury Securities Capital Budgeting under Certainty Using the NPV Rule for Capital Budgeting How to Treat Inflation Project Interaction Capital Budgeting under Resource Constraints Module 5 Risk, Returns and Capital Asset Pricing Model [4 Lectures] Statistics Reminder Statistics and Stock Portfolios Risk-Return Relationship The Effect of Diversification The Capital Asset Pricing Model Efficient Portfolios Effect of Borrowing and Lending CAPM Empirical Tests of the CAPM

Module 6 Arbitrage Pricing [1 Lecture] The Law of One Price and the Law of No Arbitrage An Arbitrage Pricing Application: Foreign currencies The Arbitrage Pricing Theory (APT) Module 7 Application of the NPV Rule under Uncertainty:

Valuation of Risky Cash Flows [3 Lectures] The Valuations of Stocks Capital Budgeting under Uncertainty Weighted Average Cost of Capital

Module 8 Market Efficiency [1.5 Lectures] Efficient Capital Markets: Theory and Evidence The Three Forms of Market Efficiency Technical Analysis Efficiency and Current Information Module 9 Capital Structure [2.5 Lectures] The Sources of Long-term Financing How Corporations Issue Securities Debt Policy Leverage in Perfect Capital Markets Where to Look for Violations of MM’s Propositions Corporate Taxes Personal Taxes Bankruptcy Costs Agency Costs The Pecking Order Theory of Capital Structure Module 10 Payout Policies [2 Lectures] Dividend Policy How Dividends are Paid Litner Dividend Model Stock Repurchases Dividends in Perfect Capital Markets Dividends and Market Perfections Dividends as Signals The Effect of Taxes The Effect of Agency Costs Module 11 Interaction of Investment and Financing Decisions [1 Lecture] The Adjusted Present Value Rule Module 12 Hedging and Derivative Securities [3 Lectures] Review of Arbitrage Pricing Option Contracts Strategies Pricing: Binomial Model and Black-Scholes Model Applications Corporate Securities and Firm Valuation Executive Compensation