Financial Management / Corporate Finance
BFIN 2006
MBA PROGRAM
FALL 2008
Frederik Schlingemann
368A - Mervis Hall
412 - 648 1847 (voice)
412 - 648 1693 (fax)
schlinge@katz.pitt.edu
A.
Course Description and Objectives
Welcome to the Intro to Financial Management course. The main objective of this course
is to gain understanding of the theory and practice of financial decision making. This course
develops the tools and framework necessary to address the question what investment projects
should be undertaken to maximize shareholder wealth? To examine this question, we will learn
how to value an uncertain stream of cash flows and apply the concept of the time value of
money. This includes developing an understanding of the basic investment criteria used by
many corporations and the trade-off between risk and return. In addition, we will examine how
these tools can be used in our personal finances and investment decisions. The concept of
valuation using the discounted cash flow method (DCF) will be the key ingredient of the course.
The course will emphasize the method of valuation addressing each of five key
ingredients to making a financial decision. First, we determine the relevant and incremental
cash flows associated with the decision. Second, we learn how to value these cash flows using
the concept of the time value of money and apply this to the valuation of stocks and bonds and
various investment projects. Next, using modern portfolio theory, we arrive at deriving the
CAPM, a widely used model to determine the relevant discount rate that reflects the risk
associated with the cash flows. Then we will address whether and how financing and capital
structure choices affect project and firm value.
After taking this course you should understand the main financial decisions facing the
firm, how these decisions are related, and the tools that financial management offers in order to
help evaluate these decisions.
Frederik P. Schlingemann © 2007 - 2009 – MBA – Financial Management / Corporate Finance
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B.
Teaching Philosophy
My goal is to see you learn. Grades are like a carrot, intended to encourage learning.
Grades will vary from A to a failing grade (F), with the majority of students scoring in the B to B+
range. Following the Dean's office guidelines, approximately 30% of the students will receive A
or A– grades. I will not hesitate to give you a low - or even failing - grade if your performance
indicates to me that you have not learned the material and have not sought for help during the
semester. However, my goal is for you to do well and I will generally use a straight scale, so that
lots of people can get high grades if the class as a whole is highly motivated and performs well.
I realize that you have a busy schedule and often face difficulty in getting in enough time
to study. This makes it all the more important to get involved while you are here. This course
covers a lot of material, so if you don't keep up, you may be overwhelmed at exam time.
C.
D.
Course Materials
1
Ross, Westerfield and Jaffe (RWJ), Corporate Finance, 8th edition, Irwin
McGraw-Hill Publishers.
2.
Financial Management Course Pack - Contains lecture notes, cases, and
additional relevant course information – available through bookstore
3.
A financial calculator - or a calculator that at least can handle exponents - is
required.
4.
Suggested Readings: Wall Street Journal, Business Week, Fortune, the
Economist, and Forbes
5.
Occasional handouts in Class
Examination and Grading
Exams
There will be two exams – one midterm exam and a (non-cumulative) final exam. The
exams are closed-book, but I will provide a formula sheet for each exam, which will not have
definitions or instructions how to use the formula. Exam grades will be based on both the
approach taken and the correctness of the response. Calculators will be permitted.
There will be no make-up exams and you must take the exam during your registered
section. 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 a grade of
zero.
Frederik P. Schlingemann © 2007 - 2009 – MBA – Financial Management / Corporate Finance
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Problem Sets
There will be 7 homework assignments during the course. Students have to work
individually on these assignments and submit typed solutions according to the schedule below
before 6pm. Late submissions are under no circumstances accepted. Solutions to the
assignments will be made available during the subsequent recitation session. The problem sets
are graded and serve to prepare you for the exams. Students should not use homework
material from previous years because of differences in material!
Homework
1
2
3
4
5
6
7
Due Date
Wednesday, September 10
Wednesday, September 24
Monday, October 6
Thursday, October 16
Monday, November 3
Thursday, November 20
Wednesday, December 3
Recitation Sessions and Additional Material
During the weekly recitation sessions, you will be provided with extra problems,
examples, and supplemental explanations of course material covered in the classroom.
Students are highly encouraged to attend these sessions and work on the relevant problems
with their recitation instructor as much as possible. In order to understand finance and do well
on the exams, practicing and working on the examples is a must.
Participation
Course participants are expected to be well-prepared in class and have reviewed the
necessary material before each class. This will allow for more interesting and efficient class
discussions. Students are required to have read carefully chapters 1 and 2 of the textbook prior
to the start of classes.
Case Projects
Course participants are required to work on one case assignment for a grade. The case
report on Lex Services PLC should be limited to 5 pages (typed, double-spaced, any 12-point
font) and is due before 5:00 p.m. on Friday, December 12, 2008. Late submissions will be under
no circumstances accepted. Participants are encouraged to work with other members of their
Katz assigned group, or form their own group (up to a maximum of 6 members), and submit one
group copy of the analysis. As a rule, grades for the case assignment will be assigned equally to
each group member without exceptions to this rule. Each name should appear on the case
analysis for a member to receive credit. The questions you need to address in analysis are
provided starting on page 5 section G. Absolutely no help or material from any external source,
like the web or anyone outside your project group can be consulted for the project.
Frederik P. Schlingemann © 2007 - 2009 – MBA – Financial Management / Corporate Finance
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Two other cases, the Super Project and Marriott Corporation will be discussed in class (see
course schedule). Students are expected to have read these cases thoroughly before class in
order to make for more interesting discussions. All cases are provided in the last section of the
course package.
Overall Grading
I will curve the course grades based on relative performance if the class average is
below 70% (this is not likely). Otherwise a straight scale will be used with the +/ system.
E.
Assignment
Homework
Midterm Exam
Case Analysis
Final Exam
Total Grade
Percent
20
25
20
35
100
Score
93 – 100 points
89 – 92
85 – 88
81 – 84
77 – 80
71 – 76
65 – 70
59 – 64
0 – 58
Grade
A
A
B+
B
B
C+
C
D
F
Katz Best Practice Partners & Executive Spotlight Visits
The Katz Best Practice Partner Program is an alliance between the Katz Graduate
School of Business and those companies that exemplify Best Practice in the school’s MBA
course areas. This program, together with the Executive Spotlight Visits, has added an
important segment to the Financial Management class in the form of lectures and presentations
by world-class “Executive Faculty”. Participants in the class are required to attend these
presentations, which are scheduled outside the regular class time. Information regarding
speakers will become available during the semester.
F.
Other Course Policies
Academic Integrity
Students in this course will be expected to comply with the University of Pittsburgh’s
Policy on Academic Integrity. Any student suspected of violating this obligation for any reason
during the semester will be required to participate in the procedural process, initiated at the
instructor level, as outlined in the University Guidelines on Academic Integrity. This may include,
Frederik P. Schlingemann © 2007 - 2009 – MBA – Financial Management / Corporate Finance
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but is not limited to, the confiscation of the examination of any individual suspected of violating
University Policy.
Disabilities
If you have a disability for which you are or may be requesting an accommodation, you
are encouraged to contact both your instructor and Disability Resources and Services (DRS),
216 William Pitt Union (412-648-7890/412-383-7355(TTY)), as early as possible in the term.
DRS will verify your disability and determine reasonable accommodations for this course.
Lectures
Lectures will stress the most important issues addressed in the text and course
material. You are responsible for all material covered in class, assigned readings, suggested
problems and study questions, and problem sets. Lectures may - and usually - go beyond the
scope of the textbook for certain topics. Therefore, it is important for you to attend class.
Remember to bring a calculator to class so that you may work problems and participate in class.
Contact information
It is easy and effective to email me your questions and I will reply as soon as I can,
usually within 24 hours. I do not have scheduled office hours, but will gladly schedule
appointments with you at any time possible. I intend to hold review sessions before each
scheduled exam.
Frederik P. Schlingemann © 2007 - 2009 – MBA – Financial Management / Corporate Finance
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Lex Services PLC – Case Questions
G.
Use the information in the case and any assumptions you feel are necessary and make sure
your case analysis answers the following question. Make sure to write the case as a selfcontained report you could submit to your board of directors (i.e., not just a list with answers).
1.
Why is Lex Service PLC concerned about its cost of capital in 1993? What role will an
estimate of the cost of capital play within Lex? In general, how can and do companies
make use of cost of capital estimates?
2.
Using the data provided in the case, estimate the cost of equity for Lex under its future
target capital structure for the consolidated company.
a. What risk-free rate did you use to obtain your estimate? Justify your choice.
b. What risk premium did you use? How did you obtain this estimate?
c. Is your estimate of the cost of equity for Lex appropriate as a discount rate for
Lex’s total operating cash flows? Why or why not?
3.
If Lex had no debt in its capital structure, what would be its cost of capital? How could
Lex use this estimate in their valuation?
4.
If Lex operated with essentially no leverage in its capital structure and then added a
moderate amount of debt, how would this affect its total value? How might we capture
this value impact of debt in our valuation analysis?
5.
Should Lex use a single corporate-wide discount rate or multiple discount rates (one for
each line of business) to evaluate investment projects? Explain your answer and show
what the discount rates would be for each of its divisions.
6.
What sort of sensitivity analysis would you suggest?
Frederik P. Schlingemann © 2007 - 2009 – MBA – Financial Management / Corporate Finance
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H.
Course Schedule for Full-time MBA Program
Date
Monday, August 25
Topic
NPV: First Principles of Finance
Readings & Assignments
Appendix of Chapter 4
Wednesday, August 27
Time Value of Money and NPV
Chapter 4
Wednesday, September 3
Time Value of Money and NPV
Chapter 4 & HW 1 assigned
Friday, September 5
Valuing Bonds and Stock
Chapter 5
Monday, September 8
Valuing Bonds and Stock
Chapter 5
Wednesday, September 10
Valuing Bonds and Stock
Chapter 5
Monday, September 15
Valuing Bonds and Stock
Chapter 5 & HW 2 assigned
Wednesday, September 17
Alternative Investment Criteria
Chapter 6
Monday, September 22
Capital Budgeting
Chapter 7
Wednesday, September 24
Capital Budgeting
Chapter 7, HW 3 assigned
Monday, September 29
Capital Budgeting
Super Project Case
Wednesday, October 1
Risk and Return
Chapter 9 & 10
Monday, October 6
Risk and Return
Chapter 9 & 10
Wednesday, October 8
Risk and Return
Chapter 10 & HW 4 assigned
Monday, October 13
Risk and Return
Chapter 10
Wednesday, October 15
Risk and Return
Chapters 10
Monday, October 20
Review for Midterm Exam
Chapters 1-7, 9-10
Wednesday, October 22
Midterm Exam
Chapters 1-7, 9-10
Monday, October 27
Market Efficiency
Chapter 13 & HW 5 assigned
Wednesday, October 29
Market Efficiency
Chapter 12
Monday, November 3
Risk and Capital Budgeting
Chapter 12
Wednesday, November 5
Capital Structure
Chapter 15
Monday, November 10
Capital Structure
Chapter 16 & HW 6 assigned
Wednesday, November 12
Capital Structure
Chapter 17
Monday, November 17
Capital Structure
Chapter 22
Wednesday, November 19
Capital Structure
Chapter 22-23 & HW 7 assigned
Monday, December 1
Capital Structure & Valuation
Marriott Case
Wednesday, December 3
Review for Final Exam
Chapters 12-13, 15-17, 22-23
December 8 – 12
Final Exam
Chapters 12-13, 15-17, 22-23
Frederik P. Schlingemann © 2007 - 2009 – MBA – Financial Management / Corporate Finance
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