The University of Lethbridge
Faculty of Management
Management 3040
Finance
Fall 2010
AH 176
A.P. Palasvirta, Ph.D.
Office M4132
Phone: (403) 332-4582
e-mail: oz.palasvirta@uleth.ca
Goal of Course
There are three absolutely essential skill sets that each management student should have
competence in when they graduate with a Management degree. A management student must
understand the financial statements which firm’s compile not only to assess their own performance, but
also to give information to the stakeholders in the firm about the financial health of the firm. A
management student must understand the time value of money. And finally, the management student
must understand how firms make decisions about what asset they will buy.
Financial statements include the income statement and balance sheet. From the information
provided in these two statements, managers and other stakeholders are able to create cash flow,
sources, normalized (standardized) financial statements, pro-forma financial statements, and uses
statements. They can create ratios that measure liquidity, leverage, turnover of various asset
categories, and profitability. These are powerful tools for the manager of the firm to examine
performance on many different parts of the firm. We will learn these tools in this class.
Time value of money is a concept that we understand implicitly. We know that $100 is worth
more to us now than it is in five years. What is not implicitly understood is the methodology we use to
convert values from one period into values in another period. For example, if we are converting present
values into future value, we must compound; growth rates, returns on investments are the rates that
we use for this purpose. On the other hand, if we are converting future value into the present, we must
discount those future values; cash flows arising from buying a rental property such as buying an
apartment house would require discounting expected future cash flows back to the present to
determine whether its expect market value today is higher or lower than the price now being asked in
the market. We will learn these concepts in this class.
We purchase assets all the time, however, we are not in the habit of using a rigorous
methodology (the capital budgeting decisions) to determine whether or not it makes economic sense to
buy those assets or, if we have purchase an asset such as a Blackberry whether we are going to receive a
sufficient service return from that phone to justify its purchase price. We will learn what investment
rules are in use and which makes the most economic sense in terms of whether it adequately leads to a
proper decision about he purchase of assets. In particular we will examine net present value and learn
to use this decision rule when we need to make investment decisions.
The three major concepts that we will cover in this class are financial statements and their uses,
the time value of money, and capital budgeting. These will be extensively discussed and you should be
able to get a working knowledge of these concepts so that they are useful additions to skill set as
management students.
Text and Other Sources
Fundamentals of Corporate Finance, Seventh Canadian ed., 2010 Steven Ross, Randolph Westerfield,
Bradford Jordan, Gordon Roberts: McGraw-Hill Ryerson, ISBN 978-0-07-091989-1 ISBN 0-07-091989-5.
Administration of the Course
Each chapter will be covered over two separate periods. First, there will be a lecture covering the
material found in the assigned chapter and, then, at the beginning of the following period we will review
that same material utilizing the questions and problems found at the end of relevant chapter. It is
strongly suggested that you complete all the questions and problems at the end of each chapter prior to
this review. Much of your participation grade will come from these review sessions.
The grading in the course will be proportioned as follows:
Each term exam: 30%
Final exam: 40%
Midterm Examinations will include three types of questions: ten definitions worth three points each and
multiple short-answer and problem questions totaling 70 pts. You will have the full period, 90 minutes
to complete the midterm exams.
The final will be 150 points to include 15 definitions worth three points each and multiple short-answer
and problem questions totaling 105 points. You will have a full 120 minutes to complete the final exam.
The exams will be graded and assigned a point total with the following approximate letter grade
equivalents.
A+
A
AB+
B
BC+
C
CD+
D
F
90 – 100 pts
85 – 89 pts
80 – 84 pts
77 – 79 pts
73 – 76 pts
7 0 – 72 pts
67 – 69 pts
63 – 66 pts
60 – 62 pts
55 – 59 pts
50 – 54 pts
below 50 pts
Course Outline
Week One
1.
Learning Objectives:
Introduction to the organization of the class over the term.
September 9:
Discussion of course objectives, grading, etc
Syllabus
Week Two
Learning Objectives: We begin with an overview of corporate finance. What is the role of
the corporation, how is it organized, what are the goals of the corporation, and some thoughts
on the organization of markets. We then proceed to look at primary means by which firms
communicate information to their stakeholders: financial statements. The balance sheet is a
stock statement that takes inventory of the assets held by the firm at a particular slice in time
and how those assets were financed.
2.
3.
September 14:
September 16:
The corporation
Financial statements, balance sheet
Chapter 01
Chapter 02
Week Three
Learning Objectives: We continue our discussion of financial statements with an
examination of the income statement and sources and uses. The income statement is a flow
statement. With this we are concerned with a period of time, usually a quarter or year, during
which there have been positive and negative cash flows to the firm. The bottom line is what is
left to the stockholders from the sales by the firm after all of the other claimants against the
firm have been paid. Sources and uses identifies for the firm from where resources come to
the firm (sources) and what those resources are employed in the firm (uses).
4.
5.
September 21:
September 23:
Financial statements, income statement
Financial statements, sources & uses
Chapter 02
Chapter 03
Week Four
Learning Objectives: Utilizing the data contained in the financial statements, the firm
calculates ratios to track the firm’s performance in many different areas short-term & longterm solvency, asset management, and profitability. Standardizing financial statements also
allows the firm to compare balance sheets and income statements historically and cross
industry to compare performance. Finally, ratios allow the firm a starting point with which to
create pro-forma financial statements as part of the planning function of the firm.
6.
7.
September 28:
September 30:
Financial statements, ratios
Financial planning
Chapter 03
Chapter 04, except 4.4
Week Five
Learning Objectives: Time value of money is one of the key concepts of finance. Intuitively,
we know that the value of money varies over time. $1,000 a year from now does not have the
same value as $1,000 today even if we are absolutely certain of that $1,000 in a year. If we
also have uncertainty about receiving $1,000 a year from now, its current value decreases
considerably. We will learn how to transform monetary values from one period to the next.
8.
9.
October 5:
October 7:
Valuation, time value of money
Valuation, time value of money
Chapter 05
Chapter 05
Week Six
Learning Objectives:
Review and the first midterm exam.
10.
October 12:
Review
11.
October 14:
Midterm exam
Chapters 1 to 5
Week Seven
Learning Objectives: Financial contracts almost always involve multiple cash flows at
different periods of time. The valuation of annuities allows us to simplify the valuation of
these multiple cash flows.
12.
13.
October 19:
October 21:
Valuation, annuities
Valuation, annuities
Chapter 06
Chapter 06
Week Eight
Learning Objectives: Bond contracts typically break down into three different types of cash
flows: a single cash flow at some point in the future (discount or zero-coupon bonds); an
annuity cash flow which includes payment of both principal and interest simultaneously
(mortgage bonds), and an annuity payment of interest followed by the payment of principal at
term (debentures or coupon bonds). The bond indenture (contract) spells out the
characteristics of the bond through covenants (clauses). We will examine all of this as well as
yields, their components, and what they mean in this chapter.
14.
15.
October 26:
October 28:
Week Nine
Valuation, bond contracts
Valuation, bond contracts
Chapter 07
Chapter 07
Learning Objectives: The valuation of equity is different from bonds; the cash flows to the
stockholder are residual, not fixed. Consequently the valuation of equity is dependent on our
estimates of the growth of the firm and its risk as measured by the required rate of return on
equity. We will examine the valuation of equity under different assumptions about its growth
and risk. We will also examine the mechanics of issuing both equity and debt whether through
an initial public offering (IPO) or a seasoned equity offering (SEO); the primary market of the
investment bank and secondary markets in which issued securities are then traded.
16.
17.
November 2:
November 4:
Valuation, equity contracts
Raising capital
Chapter 08
Chapter 15
Week Ten
Learning Objectives: In this and next week’s discussion we identify the different methods
that are used to make investment decisions: payback, discounted payback, average accounting
return (AAR), internal rate of return (IRR), and net present value (NPV). A derivative method
to the IRR is the modified internal rate of return (MIRR) that retains the benefits of the IRR, but
gets rid or its disadvantages; we will introduce that. The profitability index (PI) is essentially
the same as NPV. We will contrast all of these methods to determine which methods give the
best answers to investment decisions.
18.
November 9:
November 11:
Investment criteria
Remembrance Day
Chapter 09
Week Eleven
19.
20.
Learning Objectives:
Continuation of investment criteria and review.
November 16:
November 18:
Investment criteria
Review
Chapter 09
Chapter 6-9
Week Twelve
Learning Objectives:
The second midterm. When we first talked about capital budgeting,
we identified that pro-forma income statements should be comprised of ALL incremental cash
flows and that these cash flows should be real cash flows as opposed to accounting cash flows.
Pro-forma balance sheets determine changes to net working capital requirements that also
must be included on the pro-forma income statements as those comprise sources of and uses
for financing of the firm.
21.
November 23:
Midterm Two
22.
November 25:
Project cash flows
Chapters 6 - 14
Chapter 10
Week Thirteen
Learning Objectives: We compete our discussion of project cash flows and finish the term’s
work by looking at how the capital budgeting process explicitly accounts for risk. Obviously the
weighted average cost of capital captures risk as viewed by the bondholders and stockholders
of the firm; they demand a certain rate of return to compensate them for perceived risk of the
firm. However, new projects of the firm may not have the same risk characteristics as the
overall firm risk. Methods of this type of risk evaluation include scenario, sensitivity, and
simulation analysis. We will also examine break-even in the context of operating leverage.
23.
24.
November 30:
December 2:
Capital budgeting
Project analysis
Chapter 10
Chapter 11
Week Fourteen
25.
26.
Learning Objectives:
We conclude our introduction to finance and review.
December 7:
December 9:
Project analysis, risk
review
Chapter 11
Chapter 11
Week Fifteen
27.
December 17
Final Exam (Friday, 14:00 – 16:00)
(date subject to change)
Chapters 1 – 11