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Financial Markets and Financial Management
MBAD 6233 and 6234
FALL 2014
Monday 7:10-9:40 PM in Room 102 of the Ballston Education Center at 950 Glebe Road in
Ballston.
Instructor:
Dr. T.G. Geurts, FRICS
Phone: +1 (202) 994-7542
E-mail: TGG@gwu.edu
Room: Funger Hall 510
Teaching Assistant:
Benson Liu at liujq@gwmail.gwu.edu.
Course Overview:
This course is a study of the decision making process by Financial Market participants, both on the
supply and demand side, leading to understanding Financial Management in a corporate
environment. Building on your knowledge of financial statements from basic accounting, and a little
from basic statistics, you will learn what financial managers do to make their firms profitable. It
includes financial statement analysis, an examination of the costs of capital, capital pricing methods,
and application of Time Value of Money methodology in business and valuation decisions, as well as
forecasting capital requirements. Students review the factors involved in the issuance of capital
stock, the role of venture capital, initial public offerings, investment banking, mergers and
acquisitions, warrants and convertible securities, and corporate dividend policies.
Office Hours:
Monday = 5:00pm - 6:00pm
Tuesday = 2:00pm - 5:00pm
Wednesday = 1:00pm - 2:00pm
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Course Objectives:
By the end of the semester, students are expected to be able to:
1. Explain and construct an optimal capital structure, including the use of hybrid financing.
2. Calculate the cost of capital of a firm.
3. Construct an optimal dividend policy.
4. Analyze the effects of globalization and mergers and acquisitions on corporate wealth.
You will demonstrate these capabilities through class discussions, assignments, and exams.
Required Textbooks:
Brigham, E.F. and M.C. Ehrhardt, Financial Management: Theory and Practice, Fourteenth Edition:
Cengage Learning, 2014.
Recommended Textbooks or Readings:
The Wall Street Journal.
Course Requirements:
Class attendance and participation are strongly suggested. Attendance at exams is mandatory.
Failure to complete an exam will result in a failure for the final grade. There are no make-up exams,
unless the student has contacted the instructor before the scheduled exam. Note that the exam dates
are tentative, therefore it is possible that they change. Any changes will be announced in class. It is
the responsibility of the student to know about any announcements made by the professor!
Final Grades:
Final grades will be determined using the following weights:
Mid Term Exam
25%
Final Exam
25%
Assignments
20%
Case Study
20% (See Blackboard for the Case Study instructions).
Presentation of Case Study 10%
==== +
100%
The material to be learned for both exams will be non-comprehensive and will encompass the
lecture material, the course textbook, and class discussions. The format of the exams will be essays
and problems.
A total of 4 problem sets will be assigned throughout the course, each problem set is worth 5% of
your final grade. You have to do the assignments alone. No credit will be given for assignments
or the Case Study handed-in late, regardless of reason!!
In order to receive full credit one has to show the work leading to the answer. Assignments with
just the answers will NOT get full credit. Assignments need to be typed, hence I will ignore
handwritten assignments.
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Statement of Academic Integrity:
The School of Business at GW strives to promote an ethical learning environment and want to
ensure that all students understand the concepts of academic integrity. We see this as an extremely
important issue for the students' time at GW, but also for after graduation. Hence we require that
all students familiarize themselves with the Code of Academic Integrity as found on the following
link: http://www.gwu.edu/~ntegrity/code.html
Please read the Code of Academic Integrity carefully and make sure that you follow it whenever you
submit any work for this course.
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Sessions:
* 8/25 and 9/8 = Introduction and Basic Accounting plus Finance Review.
LITERATURE :
* Book
:
Chapters 1, 2, 3, 4, 5, 6, and 7.
* 9/15 = The Cost of Capital.
LITERATURE :
* Book
:
Chapter 9.
* 9/22 = Financial Planning and Forecasting.
LITERATURE :
* Book
:
Chapters 3 and 12.
On 9/22 ASSIGNMENT 1 is due: See page 6 of this syllabus.
* 9/29 = Capital Structure Decisions.
LITERATURE :
* Book
:
Chapter 15.
On 9/29 ASSIGNMENT 2 is due: See page 7 of this syllabus.
* 10/6 = MID TERM EXAM (25 %).
* 10/13 = Lease Financing.
LITERATURE :
* Book
:
Chapter 19.
*10/20 = Hybrid Financing.
LITERATURE :
* Book
:
Chapter 20.
* 10/27 = Distributions to Shareholders: Dividends and Repurchases.
LITERATURE :
* Book
:
Chapter 14.
* 11/3 = Evaluating Cash Flows.
LITERATURE :
* Book
:
Chapters 10 and 11.
On 11/3 ASSIGNMENT 3 is due: See page 8 of this syllabus.
* 11/10 = IPOs, Mergers, LBOs, Divestitures, and the Role of Investment Banks.
LITERATURE :
* Book
:
Chapters 18, 22 and 24.
* 11/17 = No lecture, instead preparation for Case Study and Presentation.
* 11/24 = Multinational Financial Management.
LITERATURE :
* Book
:
Chapter 17.
On 11/24 ASSIGNMENT 4 is due: See page 9 of this syllabus.
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* 12/1 = Presentation of the Case Study results.
CASE STUDY (20%) is due.
FINAL EXAM (25 %) in Finals Week.
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ASSIGNMENT 1:
1.
Discuss the agency problem and the associated risk that debt holders face when lending money
to a company.
2.
Suppose a firm has 14.5 million shares of common stock outstanding with a par value of $1.00
per share. The current market price per share is $12.75. The firm has outstanding debt with a
par value of 66.0 million selling at 102% of par. What weight would you use for debt when
computing the WACC, if 5% of the firms total market capital consists of preferred shares?
Explain.
3. A company has a bond outstanding which is priced at $958.12 and which has the following
characteristics: Maturity in 7 years and coupon rate is 6%. It is planning to issue new bonds that
mature in 15 years.
It also has preferred stock outstanding, which are priced at $79 and pay $9.50 dividend.
Finally, the common stock is priced at $28.75, which paid $2.34 recently. The dividend is
expected to grow at 4%. Historically the market return has been 11% and the T-bill rate 4%,
while the beta of the firm is 0.78.
Flotation cost equal 1% for debt, $2.75 for preferred stock and 7% for common stock. The
target capital structure is 10% preferred stock, 40% debt, and 50% equity, while the company
has $340,000 in retained earnings. The tax rate= 33%.
Calculate both WACCs and put them in a graph.
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ASSIGNMENT 2:
1. The following information is known about the Geurts Corporation:
2014 BALANCE SHEET
Cash & Securities
Accounts Receivable
Inventory
Total Current Assets
$ 20
$ 240
$ 240
$ 500
Net Fixed Assets
$500
Total Assets
$1,000
Accounts Payable And Accruals
Notes Payable
$ 100
$ 100
Total Current Liabilities
Long-Term Debt
Common Stock
Retained Earnings
$ 200
$ 100
$ 500
$ 200
Total Liabilities And Equity
$1,000
2014 INCOME STATEMENT
Sales
Less: Variable Costs
Fixed Costs
Earnings Before Interest And Taxes
Interest
Earnings Before Taxes
Taxes (40%)
Net Income
$ 2,000.00
$ 1,200.00
$ 700.00
$ 100.00
$
16.00
$
84.00
$
33.60
$
50.40
Of Net Income the firm paid out 30% as dividends, thus $ 15.12, while the rest, $35.28, was added
to Retained Earnings.
Sales next year are expected to grow by 20% to $2,400. The Net Fixed Assets were operating at
95%. New machines have a capacity of $200 worth of sales each and cost $600. It is expected that
the firm will have the same profit margin and dividend pay-out ratio next year. Calculate how much
capital they need to raise to finance next years sales.
2. Can managers influence business risk? Explain.
3. Discuss how financial risk is measured.
4. Find a “signal”-article. Discuss the article and explain what you think management is trying to
signal.
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ASSIGNMENT 3:
1. Discuss how a firm can use its dividend policy to signal confidence in the earning potential of its
products.
2. Find a company that has issued a warrant. Which right does the warrant give?
3. Find a company that has issued a convertible security. What are the specifics of this convertible
security?
4. Why do some companies report their financials on a “diluted basis”?
5. What does the time value of a warrant represent?
approaches expiration?
Why does it decline as the warrants
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ASSIGNMENT 4:
1. Assume you are a CFO of a company that wants to acquire a competitor. You could do it by
either a friendly or a hostile takeover. Would there be a difference in valuing the target
company? Explain.
2. Investment Banks have been under a lot of criticism in the recent years, due to the fact that their
recommendations for the general public with respect to buying and selling securities were often
not very accurate, e.g. having a “Buy” recommendation on Enron and WorldCom as these firms
sunk into bankruptcy. One of the solutions that is being proposed is that the Merger and
Acquisition department of an Investment Bank should be separated from the general public
brokerage department. Explain why that would solve the aforementioned problem.
3. Find two firms that have merged (either friendly or hostile) in the past and discuss whether you
think it was a wise strategy for both firms. Make sure that you discuss issues like product
and/or geographical diversification and stock-price movements before and after the merger.