BU
BostonUniversitySchoolofManagement
BostonUniversityQuestromSchoolofBusiness
FE810:Finance2
Module4:SPRING2016ClassSchedule
Session Date Day Topic
UNIT1:FINANCIALPOLICYUNIT
1
3/14 M • Introduction,Overview,andReview
2
3/16 W • CapitalStructureinaPerfectMarket
3
3/21 M • DebtandTaxes
4
3/23 W • FinancialDistress
5
3/28 M • PayoutPolicy
6
3/30 W • Exam1
UNIT2:FIRMVALUATIONUNIT
• ValuationwithLeverage
7
4/4 M
• BBBYandUST(TeamCases)
• ValuationandFinancialModeling
8
4/6 W
• InfineonandIntel(TeamCases)
UNIT3:OPTIONSUNIT
9
4/11 M • FinancialOptions
10
4/13 W • FinancialandRealOptions
• RealOptions
11
4/20 W
• ArundelandLauraMartin(TeamCases)
• ReviewandWrap-Up
12
4/25 M
• MWPetroleumandMerck(TeamCases)
13
4/27 W Exam2
Readings
(bookchapters)
Assignments
(duepriortoclass)
• 14
• 15
• 16
• 17
• Chapter14DataCase
• PracticeProblems1
• Chapter15DataCase
• PracticeProblems2
• 18
• Chapter17DataCase
• 19
• PracticeProblems3
• 20,21
• 21,22
• Chapter18DataCase
• 22
• PracticeProblems4
BU
BostonUniversityQuestromSchoolofBusiness
BostonUniversitySchoolofManagement
FE810:Finance2
Instructor:
DirkHackbarth
Office:
Room564
OfficePhone: (617) 358-4206
e-mail:
dhackbar@bu.edu
OfficeHours: 2-3pm on Tuesdays o r by appointment
We will have plenty of TA office hours, which are completely voluntary. Their aim is to help students who
strugglewithsomeofthetheoreticalandpracticalconceptsdiscussedinclass.Thedetailsaregivenbelow.
Teaching Assistant
Email
BenCourtney
blc11@bu.edu
TAOfficeHours
Tu11.00-12.30
(Room518L)
W15.30-17.00
COURSEDESCRIPTION
Thecoursecanbedividedintothefollowingthreebuildingblocks.
1. FinancialPolicy
We consider first how the choice of debt and equity affects firm value in a perfect capital market.
ThereweapplytheLawofOnePricetoshowthataslongasthecashflowsgeneratedbythefirm’s
assets are unchanged, then the value of the firm—which is the total value of its outstanding
securities—doesnotdependonitscapitalstructure.Therefore,ifcapitalstructurehasaneffecton
firmvalue,itmustcomefromchangestothefirm’scashflowsthatresultfrommarketimperfections,
suchasbankruptcycostsandtaxes.Henceweanalyzetheroleofdebtinreducingthetaxesafirmor
itsinvestorswillpay,andconsiderthecostsoffinancialdistressandchangestomanagerialincentives
thatresultfromleverage.Finally,weconsiderthefirm’schoiceofpayoutpolicyandask:Whichisthe
bestmethodforthefirmtoreturncapitaltoitsinvestors?
2. FirmValuation
Weintegrateourunderstandingofrisk,return,andthefirm’schoiceofcapitalstructure.Wedevelop
the three main methods for capital budgeting with leverage and market imperfections: weighted
averagecostofcapital(WACC)method,adjustedpresentvalue(APV)method,andflow-to-equity(FTE)
method.Wewillidentifyconditionsthatcanmakeonemethodeasiertoapply.Wethenvalueafirm
(Ideko)inthecontextofaleveragedacquisition,whichservesasacapstonecasethatillustrateshowall
theconceptsdevelopedthusfarareusedtomakecomplexreal-worldfinancialdecisions.
3. Options
Weturntosettingsinwhichafirmoraninvestorhasanoptionbutnotanobligationtobuyorsellan
assetinthefuture.Financialoptionsareanimportanttoolforcorporatefinancialmanagersseeking
to manage or evaluate risk. The growth of derivatives markets can be traced to the discovery of
methodsforvaluingoptions,whichwederiveinusingtheLawofOnePrice.Animportantcorporate
applicationofoptiontheoryisintheareaofrealinvestmentdecision-making(orrealoptions).
COURSEOBJECTIVES
• Buildingonconceptscoveredinthefinancemoduleofthecorecurriculum(Module2),this
courseextendsfundamentalconceptsofcorporatefinance,capitalmarketsandassetpricing
introducedinthecore.ThecoursepreparesfinanceconcentratorsforthespecializedMBA
financeelectivesofferedinthesecondyear.Thecoursewillprovideskillsrelevantforallfinance
electivesandisrequiredforallfinanceconcentratorsinthefulltimeMBAprogram.Itwillhelp
studentstoacquirenecessaryknowledgeforasuccessfulsummerinternship.
• Thiscoursecoversthecoreoffinancewithanemphasisonapplicationsthatarevitalfor
corporate,riskandportfoliomanagers.Wewilldiscussmanyofthemajorfinancialdecisions
madebymanagersbothwithinthefirmandininteractionswithothermarketparticipants.We
willemphasizetheroleofrisk,howitismanagedandhowrisk,uncertainty,informationand
incentivesinteractandcanbeaddressedbydesigningappropriatemechanisms.
• The course aims to provide you with a set of analytical tools necessary to answer the most
importantquestionsrelatedtofinancialpolicy,firmvaluation,andoptions.Overall,thesecourse
objectives contribute towards the MBA learning goals by enabling graduates to deepen their
understandingofcoreconceptsoffinance,andbyhelpinggraduatestobeabletosuccessfully
applycriticalandanalyticalthinking.
COURSEPEDAGOGY
• Thecoursewillbeamixof
o Lectures
o Casestudiesandexamples
o PracticeproblemssolvedinExcel
o Discussionsofcurrentdevelopments
• Studentsshouldalwaysbringanddisplaytheirnamecardsinclass.
COURSEMATERIALS
• Required textbook: Corporate Finance by Jonathan Berk and Peter DeMarzo, 3rd edition
(withoutMyFinanceLab),PrenticeHall,ISBN-13:978-0-13-342415-7.
We will discuss a series of cases, which are available electronically for purchase from the
HarvardBusinessSchoolwebsite(http://hbsp.harvard.edu/),andcanbefoundasaCoursepack
atthefollowingsiteatHBSpublishing:https://cb.hbsp.harvard.edu/cbmp/access/48069115.
It is expected that the required readings pertinent to each class will be completed before the
lecture. We reserve the right to pose questions to individual students during lectures ("cold
calls")inordertostimulateclassparticipation.
• Additional materials: Lecture notes and additional content will be available on the course
website on QuestromTools (see below). You are required to print out the course materials
pertinenttoeachmeetingandbringthemwithyoutoclass(orhavethemavailableonatablet
deviceoralaptop).
• Coursewebsite:Allclassmaterialswillbepostedonthecoursewebsite.Inadditiontoallclass
materials, I will also post practice exams, problems, and repeat important announcements on
thewebsite;itisyourresponsibilitytovisititfrequently,anddefinitelybeforeeachclass.
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PERFORMANCEEVALUATION
Thefollowingevidencewillbeusedtodetermineyourgrade:
Component
Exam1(March30)
Exam2(April27)
DataCases
TeamCases
ClassParticipation
Weight
20%
30%
20%
15%
15%
DetailsonPerformanceEvaluation.
• Exams:Theexamswillcoverthematerialofthecourse.Youwillbeallowedtouseuptotwo
lettersizepages(oratwo-sidedpage)as“cheatsheet”preparedinadvanceoftheexam.
• Data Cases (spreadsheet assignments): Building spreadsheet models helps to achieve one of
the main goals of this course – learning the logical relationships among financial variables.
Moreover,theabilitytoworkcomfortablywithspreadsheetmodelsisanessentialskillthatcan
onlybeacquiredthroughpractice.Therewillbefourspreadsheetassignmentsfromthecourse
textbook, which you are to complete and submit throughout the semester. The spreadsheet
assignmentsaretobepreparedindividuallyanddueonlineonthedatelistedintheschedule.
• TeamCasePresentations:Groupsof3studentspresenttheirsolutionstothecasesonthefirst
pageofthesyllabus.Ondatesinwhichcasesaredue,therewillbeatleasttwostudentorteam
presentationsofeachcase.Youareencouragedtosign-upassoonaspossible(again,thereisa
maximumof3studentsperslot).Thelistoftheavailableslotswillbegiveninclass,andslotsare
first-come,first-serve.
• ClassParticipation:Iwillexpectactiveparticipationbystudents.“Activeparticipation”doesnot
meanthatyouneedtotrytoanswereverysinglequestionposedinclass.Thoughtfulquestions,
answers,andremarkswillberewarded.“Thoughtful”doesnothavetocoincidewith“correct”.
Thegoalofparticipationistoarrivetogetherattherightanswer.
• PracticeProblems:Thoughnotpartoftheperformanceevaluation,studentsshouldindividually
workthroughallpracticeproblemsandconsultwiththeTAincasetheyhaveanyquestions.
ACADEMICINTEGRITY
Wewillabidebytheschool’scodeofacademicintegrity:http://questromworld.bu.edu/acc/.Note
thatworkingaspartofagroupimpliesthatyouareanactiveparticipantandfullycontributedto
theoutputproducedbythatgroup.
ATTENDANCEATEXAMS
Nomake-upexamswillbegiven.Unexcusedabsencewillresultinazerobeingenteredfortheexam
grade. Excusedabsence(veryrare)willresultinthefinalgradebeingdeterminedbytheother
evaluationinputs.An excusedabsencemustbearrangedwiththeinstructorbeforetheexam.
Universitylettersallowingspecialexam takingproceduresmustbeprovidedtotheinstructoratleast
oneweekpriortotheexam.
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