FIN 351– Corporate Finance Bachelor of Arts (Business and Management) Fall Semester, 2013/2014 Academic Year Course leader: Lecturer(s): J. CHAN (Ms) J. CHAN (Ms) Department: International Study Programs Faculty of Business Administration To be advised. Email for appointment. Office hours: Availability: Course type: Prerequisites: Credits: Number of hours per semester Time of class: Venue: Phone number: 482 5448 Room: 155 (Main building) Email address: joychan@gmail.com / joy.chan@uni-corvinus.hu Core FIN 156 Basic Finance or a basic knowledge of Microeconomics, Financial Accounting and Statistics. 3 credits/6 ETCS credits The class meets each week for an 90-minute lecture and 90-minute seminar, with a total of 45 hours per semester. Monday: 1140-1310hrs (Lecture); Monday: 1340-1510hrs (Seminar Group 1); 1530-17000hrs (Seminar Group 2) To be advised Aims and objectives and description of the course: The aim of the course is to provide students with a comprehensive understanding of the principles and techniques of Corporate Finance and applying them to the main decisions faced by the financial manager. The concepts are immediately applicable to all firms, both large or small, privately run or publicly traded and involved in any industry – whether manufacturing, retail or service. Learning outcomes: • Students can confidently handle the applications of time value of money calculations to various investment, savings and financing decisions that corporations and individuals make • Students can determine the value of fixed income securities using equations and financial calculators to solve for all variables within the bond pricing equation • Students can determine the value of equity securities using Gordon’s growth model • Students can evaluate capital budgeting decisions using standard methodologies • Students can explain the impact of capital structure decisions on financial performance and determine various parameters of a company’s cost of capital • Students can appreciate how dividends are determined in practice and the influence of dividend decisions on shareholder’s wealth 1 Course description The course is divided into 3 main sections, beginning with the concept of valuation where topics covering time value of money and the valuation of income streams, share and bond valuations will be discussed. The course will thereafter extend these principles in the second section to provide an in-depth discussion and critical analysis of the various techniques used in investment appraisal decisions: Net Present Value, Internal Rate of Return, Payback Period. These techniques will be applied to more complex investment proposals, including choices between alternative projects, investment timing decisions and decisions on whether to invest. The final section explores the relationship between risk and return, diversifiable and nondiversifiable risks, and beta through the use of the Capital Asset Pricing Model (CAPM) to determine the Weighted Average Cost of Capital that financial managers use as a hurdle rate for project evaluation in order to achieve the ultimate aim of maximizing the value of the firm. Methodology to be used: All students should make an effort to read the required material before class as this would enable you to make the most out of the lecture. All students are responsible for the material covered in class, as well as the material in the handouts and required readings for each class, regardless of whether they were able to attend the class. Attendance is COMPULSORY for seminars and lectures. Missing 25% of the classes will mean that you have failed the course (see ISP rules on class attendance). There are 2 seminar groups for this course, and once students are assigned to the respective seminar groups (by the ISP office), they are not allowed to switch between the groups. A problem set or case study will be assigned for home preparation each week. Students are expected to read the assigned material, relevant sections of the textbook and prepare the home assignment for discussion during the seminars (note that homework is graded). Students are encouraged to participate actively in the discussion of the topics and numerical problems. For any additional practice questions, you should refer to your problems and question sets (with solutions) at the end of each chapter of your textbook. My teaching is most effective when students actively participate in class. This means that students must think along with me during class sessions. There must be substantial studentteacher interaction-- typically through student questions, comments, and answers to my questions. Students should have a strong impact on the class session. I expect all of us in the class to behave responsibly. Laptops/notebooks/Mobile phones & devices cannot be used during classes. Students, who behave irresponsibly, imposing costs on others (for example, talking in class or using the mobile devices continuously), should expect to bear the consequences of their action. If the student persistently fails to abide by the rules, he/she will be reported to the university administration and the student will have to withdraw from the course with a fail grade (no exceptions will be made on this). Non-Programmable Financial calculators will be used in this course. 2 Detailed class schedule, 1st – 15th week: Date of class Week 1 9 Sep Week 2 16 Sep Week 3 23 Sep Week 4 30 Sep Week 5 7 Oct Week 5 14 Oct Week 6 21 Oct Week 7 28 Oct Week 8 4 Nov Topics to be discussed, readings required for the class Lecture 1: Introduction to Corporate Finance: Taking the mystery out of Corporate Finance - The Corporate firm and Goals of the firm - Corporate securities as claims on the firm - Financial markets BD Chpt 1 Class Exercise Lecture 2: Time value of Money I - Review of time value of money concepts - Present and Future values - Annuities, Annuities Due, Perpetuities BD Chpt 4 Class Exercise Lecture 3: Time value of Money II - Applications on Time value of Money concepts – retirement, investments & savings BD Chpt 4 Class Exercise Lecture 4: Financial Statements Analysis - Review of financial statements - Financial statement analysis BD Chpt 2 Class Exercise Lecture 5: Bond Valuation - Bond valuation calculations - Bond pricing and risks BD Chpt 8 Class Exercise Lecture 6: Stock Valuation - Stock valuation calculations - Growth estimates, payout ratios and Return on Equity BD Chpt 9 Class Exercise Lecture 7: Risk & Return - Risk free rates and risk premiums - Betas and Capital Asset Pricing Model BD Chpt 10 & 12 Class Exercise Mid term exam (covering Lectures 1-6) Review of mid term exam Lecture 8: Corporate Investment Decisions using the Net Present Value rule I - Net Present Value - Other methods for valuing investments: Internal Rate of Return, Profitability Index, Payback Period BD Chpt 6 3 Week 9 11 Nov Week 10 18 Nov Week 11 & 12 25 Nov & 2 Dec Week 13 9 Dec Week 14 16 Dec Week 15 (Date be advised) Class Exercise Lecture 9: Corporate Investment Decisions using the Net Present Value rule II - Mutually Exclusive Projects and Project Interactions - Equivalent Annual Cost and Capital Rationing - Why NPV leads to better investment decisions than other criteria BD Chpt 7; Keown Chpt 9 Class Exercise Lecture 10: Corporate Investment Decisions using the Net Present Value rule III - Discounted and incremental cashflows - Cashflows and inflation BD Chpt 7 Class Exercise DUE: Group report submission & Project presentation Lecture 11: Cost of Capital and Capital structure - Weighted average cost of capital - Determining individual cost of capital Keown Chpt 11 Class Exercise Revision Lecture & Class Exercise Comprehensive Final Exam (covering Lectures 1-11) Assignments: Group Project (20 points) A group assignment will be handed to you in week 3 and you will be required to work in groups of 4 or 5 and submit the findings in a hard-copy report submission as well as a group presentation in Week 11. This report and presentation will comprise of 15 points and 5 points respectively of your total grade. Each member of the group may be asked to assess each other’s contribution to the group project and hence, the report grades may be scaled depending on peer assessment. Presentation grades, however, will be individually assessed by the instructor. Proper referencing and plagiarism rules are strictly enforced for all written assignments. Assessment, grading: The assessment for the course comprises of 4 parts, with the following weights: 10 points Home assignments & Class participation 20 points Project & Presentation (see above) 30 points Mid term exam 40 points Final exam * Grading is based on the total score in line with standard grading patterns in the ISP. * To pass the course, you will need to pass the final exam. Final Exam (40 points) & Mid term Exam (30 points) The dates for the exams are in accordance with the ISP academic calendar. 4 This course has ONLY one mid term and one final exam. The final exam is a closed-book cumulative exam, covering the material expounded during the whole course. The grade obtained for the course is marked against the standards of the ISP and as such, is final and non-negotiable. No emails/conversations on trying to better your score will be entertained after the exam. You must take the exams during the allotted timeslots. Exams are scheduled well in advance so that you can plan around these dates. Do not ask to be excused from exams for matters of personal convenience. An unexcused absence without supporting documentation (e.g., doctor’s note or police report) will result in an F grade. According to Corvinus University regulations, there might be a RESIT exam. Do note that you will have to take the FIRST SCHEDULED FINAL EXAM, and having failed it will you be permitted to take the resit exam. The resit exam is comprehensive in its coverage and, incrementally tougher (and it will replace all your earlier grades). The best grade you could receive for a resit exam is a Grade C-. The course grades will be curved based on relative performance if the class average is below Hungarian Grade 3/ISP Grade C- (this is not likely). Otherwise a straight scale will be used with the +/− system. You will be treated fairly in all matters pertaining to your grade. Home assignments (5 points) and Class participation (5 points) Home assignments will be distributed after each lecture. You will need to complete the home assignments for submission in the next seminar class. All home assignments attempted will be noted and this will comprise of 5 points. The rationale for assigning homework is that there is a strong correlation between good grades and completing home assignments. Most students who fail this course (usually about 10-15% of the students fail each semester) because they do not attempt the assigned homework during the semester and instead, try to cram in the week before the exams. This is a futile attempt. Finance cannot be learnt in a week. You need be consistent in your study efforts throughout the entire semester. If you fail to submit your home assignments on more than 3 occasions (unless you have a valid medical reason with supporting documentation), you will obtain 0 points for your home assignment grades. Class participation comprises of 5 points. You can easily obtain 5 points if you offer your solutions in class (by writing on the board), asking relevant questions, providing answers to questions asked. Almost all participation noted by the instructor will increase the student’s class participation grade, but negative class participation includes disrupting class (e.g. by coming in late), talking in class, not paying attention during a student presentation, other forms of rudeness toward your fellow students, and a lack of cooperation with methods to ensure that no cheating occurs during exams will result in a deduction of points (which might exceed 10 points depending on the extent of disruptive behavior). Grading class participation is necessarily subjective and no subdivision of the grade will be available to students. Do note that the coursework component is a bonus to you and can significantly improve your overall score. Most students who submit home assignments and participate in class will obtain between 8-10 points. In similar vein, if you have not participated in class, you will obtain a zero grade. 5 Do note that every point is earned, not negotiated. Compulsory readings: There are two textbooks used in this course: Jonathan Berk & Peter DeMarzo, Corporate Finance –Global Second Edition (2010), Pearson Addison-Wesley Keown, Arthur J., Martin, John D., Petty, J.William, Scott, David F. Jr., Foundations of Finance – 5th Edition, Prentice Hall, 2006 Lecturer’s Handouts Video recording of Class lectures available at http://ondemand.homburgacademy.org/course/corporate-finance/ Recommended readings: Students could also use, as reference, R. Brealey and S. Myers, Principles of Corporate Finance, McGraw-Hill, (or any other earlier/later editions of Brealey & Myers). This is a classic textbook that everyone serious about a career in finance should own. It does an excellent job explaining institutional details and established theories. Students should read “The Wall Street Journal Europe,” “Financial Times,” “The Economist” or other business publications every week, and look for real world examples that relate to class topics. Note: This syllabus is subject to revision before or during the course at the discretion of the instructor. Hungarian and ECTS grading scale Percentage achieved 87-­‐100 International grading scale Hungarian ECTS Explanation for the Hungarian grade equivalent grade 5 A Excellent Percentage achieved 97-­‐100 International grade A+ 94-­‐96 A 77-­‐86 4 B Good 90-­‐93 A-­‐ 67-­‐76 3 C Satisfactory 87-­‐89 B+ 60-­‐66 2 D Pass 84-­‐86 B 0-­‐59 1 F Fail 80-­‐83 B-­‐ DNA Did not attend (no credit) 77-­‐79 C+ I C 70-­‐73 C-­‐ 67-­‐69 D+ Megtagadva R Incomplete (no credit) Signed (no credit) Refused (no credit) 74-­‐76 Nem jelent meg Nem vizsgázott Aláírva 64-­‐66 D 60-­‐63 D-­‐ 0-­‐59 F S 6