FINANCIAL POLICY FOR MANAGERS Spring 2013
MANAGEMENT 466A
Professor: Jason C. Hsu
EMAIL: hsu@rallc.com
*Emails to other addresses will not be answered.
TA: Phillip Wool
EMAIL: phillip.wool.2012@anderson.ucla.edu
This document will be revised from time to time and be reposted on the class website. I will
alert you to changes when they occur.
COURSE STRUCTURE
This is an introductory course that covers many of the most basic topics in Managerial
Finance. The aim is to prepare you for the advance finance classes which you will take
later. The course is primarily focused on capital budgeting—which covers topics related
to the making of investment decisions. Specifically, we will learn how to value and
compare different projects, which produce different cashflow profiles. Critical to the
valuation technique that we apply in the course is to first understand the relationship
between cashflow “risk” and the “discount rate” that should be applied to the risky
cashflow.
Topics and tools for understanding capital budgeting
A. Valuing assets and projects
a. Discounting cash flows and the present value concept
b. Understanding the risk free rate yield curve
c. Understanding discount rates
d. Valuing fixed income securities
e. Valuing firms/projects using the Gordon model framework
B. Making investment decisions using the NPV rule
a. Understanding when/why financing costs do not matter
b. When facing capital (financing) constraint
c. Comparing mutually exclusive investments with different horizons
C. Optimal reinvestment policy
a. Understanding the relationship between reinvestments (plowback) and
return on equity (ROE)
b. Setting optimal investment policy given the firm’s ROE and cost of
capital.
D. Determining the firm’s cost of capital
a. Quantifying risk and determining the appropriate risky discount rate
b. Using the CAPM framework to determine project risk and expected
return
c. Using the WACC method to benchmark the firm’s cost of capital
E. Market Efficiency
a. Understanding the three definitions of market price efficiency
b. Understanding market functional efficiency
c. Understanding the importance of market efficiency on capital
budgeting and capital structure
TEXT
Corporate Finance (2nd Edition) [Hardcover] by Jonathan Berk and Peter DeMarzo
EVALUATION
There will be a mid-term examination and a final examination.
Homework Assignments and Cases
20%
Class Participation and Attendance
20%
Mid-term Examination
30%
Final Examination
30%
Total
100%
EXAM
The mid-term will be held in-class on Weekend of April 26 (set for Friday 26th
tentatively).
The final exam will be held in-class on June 8th (the Sat of the last week of the term,
tentatively).
Students who are unable to take the mid-term examination for an *approved reason* will
have 60% of their course grade determined by the final examination. There will be no
make-up examination. There will no negotiation on this point. If you just miss the final
because you didn’t properly study, you will receive a *0* for your mid-term grade and
that *0* will count toward 30% of your final grade.
HOMEWORK
HW, assigned readings from the textbook and cases should be completed before the
lectures. In addition, practice questions based on the assigned readings will be assigned
bi-weekly to improve the understanding of the material presented in class. These
questions are listed at the end of this handout by the class in which they are assigned and
should be submitted at the start of class in the subsequent class. They will be graded on a
satisfactory (S) or unsatisfactory (U) basis.
CASES
Short cases will be assigned throughout the class to help emphasize various concepts and
to better illustrate their application in practice. The cases will generally be open ended.
They will not have one correct solution. Rather, they help you think through various
approaches, which may all be valid and appropriate for arriving at a logical answer. The
emphasis here is not in getting the right conclusion or numbers, but in the thought process
and the creative application of the formulas and concepts developed in class. All cases
should be prepared in your pre-assigned groups.
CLASS PARTICIPATION
Class participation is both encouraged and necessary. This isn’t just to make sure that you
are alive and alert in class, it is to force you to think about the materials presented and to
raise questions and request clarifications on the spot to improve everyone’s
understanding. I realize that there will be subjectivity in how class participation scores
are assigned. I hope you also understand this situation and do you very best to impress
me with your questions and comments in class.
OPTIONAL READING
From time to time I will email you interesting articles to read. These are great additional
materials for students who are interested in additional outside reading. They are not
required for the exams or for the HW.
TA SESSIONS
The teaching assistant for the course will conduct tutorial sessions to supplement the
lecture materials. Your attendance at these sessions is purely optional, and your course
grade will not be affected by whether or not you attend. In these sessions, solutions to the
problem sets will be discussed and class material will be reviewed. Please reserve your
more complex questions for the TA session; these complex questions usually are hard for
the TA or the professor to address via email.
PROFESSOR OFFICE HOURS
I am generally widely available after class to discuss anything that you find interesting or
puzzling. You can also make appointments with me. Otherwise, you can always try to
hunt me down in Room C404 on Fridays and Saturdays.
EMAIL RESPONSE TIME
As much as possible, we would like to respond to your emails within 24-48 hours.
However, it may not always be possible as the professor and the TA from time to time
may have to attend to other priorities. It is extremely advisable that you do not start your
HW or case study late in the week and thus require instant responses from us to help you
complete your work. Additionally, I have instructed the TA to not give you the solution
outright when helping you with your work; it would not be fair to your classmates who
spend significant hours figuring problems out by themselves; it is also my belief that you
will learn the material much better by struggling and thinking through your confusion for
a day or so instead of getting immediate solution the instant you get stuck.
COMPUTER USAGE IN CLASS
My preference is that you do not use your laptop in class. It really is more effective for
you to look at the instructor and the whiteboard instead of looking at the slides on your
computer. MSN, web browsing and emailing are strictly prohibited.
EXAMS AND GRADES
The exams are designed to challenge you. They are designed to be hard. If you are top
20% of the class in your comprehension of the material, you should expect to score in the
range of 80-100% on these exams. If you place around median in your comprehension,
you should expect the exams to be quite challenging—that is you will struggle to
complete the exam with time to review your answers and you will feel unsure about some
of your answers. Do not worry; the final grade for the course is curved.
Suggested Course Outline for MANAGEMENT 466A
Subject to revision! Please pay attention
in class and read emails from your
professor and TA!
Class 1:
Key Topics:
We will conceptually introduce topics which we will re-introduce more
formally later
1. “no-arbitrage”
2. “market prices” vs. “personal valuation”
3. Time value of money
4. Risk premium
Readings:
Chapter 3
Background reading: Ch. 1 and 2. These will not be tested and may be
information that you already are familiar with.
HW 1: Chapter 3 - #4, #6, #8, #9, #10, #12, #17
Class 2:
Key Topics:
We now apply the time value of money concept to build the DCF valuation
framework
1. Discounted Cashflow (DCF) framework
2. The basic building blocks of DCF: annuity, growing annuity, perpetuity and
growing perpetuity
Readings:
Chapter 4
HW 2: Chapter 4 - #6, #8, #15, #19, #26, #31, #35, #40
Class 3:
Key Topics:
1. Understanding the risk free interest rate and the yield curve
2. Understanding the risk premium
Readings:
Chapter 5
HW 3: Chapter 5 - #4, #9, #15, #26, #30, #33, #38
Class 4:
Key Topics:
1. Understanding the impact of taxes
2. Understanding the NPV decision rule
3. Refining the NPV decision rule in the context of “mutually exclusive projects”
and “financing constraints”
4. Valuing bonds
5. Valuing other “fixed-income” like assets
Readings:
Chapter 6
Chapter 8
HW 4:
Chapter 6 - #2, #3, #5, #9, #12, #24, #28
Chapter 8 - #2, #3, #4, #7, #10, #12, #19, #31
Class 5: MID-TERM EXAM (Friday Apr. 26th)
**The Mid-term exam will cover everything through class#4.
Class 6:
Key Topics:
1. Projecting corporate cashflows
2. Understanding firm’s reinvestment policy
3. Valuing firms using the Gordon growth model
Readings:
Chapter 7
Chapter 9
HW 5: Chapter 7 - #2, #3, #6, #8, #12, #14, #18
Chapter 9 - #3, #5, #6, #10, #14, #18, #23, #29
Class 7:
Key Topics:
1. Measuring risk
2. Estimating expected returns
3. The relationship between risk and return
4. The implication of market efficiency
Readings:
Chapter 10
HW 6: Chapter 10 - #14, #18, #24, #28, #29, #30, #33, #36
Class 8:
Key Topics:
1. Mean-variance portfolio analysis
2. Capital Asset Pricing Model (CAPM)
3. Investment implication of the CAPM
Readings:
Chapter 11
Chapter 12
HW 7: Chapter 11 - #2, #10, #11, #18, #30, #33, #35, #44
Chapter 12 - #3, #9, #17, #20, #23, #25, #26
Class 9:
Key Topics:
1. Newer/Alternative asset pricing models
2. APT
3. Fama-French 3-factor risk model
4. Benchmarking
Readings:
Chapter 13
HW 8: Chapter 13 - #2, #15, #16, #25, #26, #27
Class # 10: FINAL EXAM ON JUNE 8th!
TA Review Sessions and Office Hours:
(Locations to be announced by email)
Physical review sessions (bi-weekly):
TBA
Online review sessions (also bi-weekly):
TBA
Office hours (weekly):
TBA