V3
SOLVAY BUSINESS SCHOOL
UNIVERSITÉ LIBRE DE BRUXELLES
PROFESSOR HUGUES PIROTTE*
Finance (MBA Part Time)
Detailed plan, Fall 2002
Structure
Course Description
This course is intended to introduce students to the basic concepts and tools of financial analysis.
Corporations are confronted with two main types of decisions: capital budgeting decisions (how
much to invest and what real assets to invest in) and financing decisions (what securities to issue
in order to raise the cash required). This course will mainly deal with valuation and capital
budgeting decisions. Financing decisions will be examined in one of the electives (Advanced
Corporate Finance).
The first part covers present value analysis and its link with stock valuation.
Risk and uncertainty are dealt with in the second part.
An introduction to financing decisions will be provided in the third part.
Recommended Textbook
Ross, Westerfield and Jaffe, Corporate Finance, 6th edition (5th is good as well), Irwin - McGraw
Hill College Div, February 2002, ISBN: 0072831936.
Other Teaching Material
Cases will be used for the presentation of the sessions. They will be provided at the end of every
session to be read and analyzed for the beginning of the following session. Cases will always cover
the themes presented the session before.
Commented slides of the presentations will be distributed as well as specific documents.
Exams and Grading
The grade will be based on a midterm exam (40%) and a final exam (60%).
Session development
Except for the first one, every session will be structured in two parts:
•
•
Part A: analysis of the case, based on the prior course
Part B: presentation of the following course
A small outline of the following session as well as an introduction on the case and its requirements
will be presented at the end of each session.
The instructor is available at: hugues.pirotte@finmetrics.com and the material at:
http://www.ulb.ac.be/cours/solvay/farber/.
Outline Details
Cases should be distributed a week earlier than mentioned. All sessions take place at 6-9 PM.
Session
n°
1
Date
Day of
week
04.11.2002 Monday
Theme
Readings
prior
COURSE: Introduction + Financial statement analysis and forecasting (Chap 1+2) RWJ 1+2
This session will provide a general introduction to financial analysis. We will examine what
finance is about, identify the main financial decisions and analyze the objective of value
creation (or shareholder’s wealth maximization). Financial markets will be introduced and
their central role for financial decisions making will be stressed.
We will also introduce a number of useful techniques to assess the financial health of a
company. We will cover ratio analysis, liquidity analysis based on the statement of cash
flows and financial forecasting.
2
18.11.2002 Monday
î CASE: Carrefour or Great Universal Stores? + Bayern Brauerei
COURSE: Present value (Chap 3)
RWJ 3+4
We will introduce present and future values, present the general present value formula
and examine its meaning. We will then present some simplifying formulas for specific
streams of cash flows. These formulas will be used to analyze some simple investment
decisions.
3
25.11.2002 Monday
î CASE: The Investment Detective
COURSE: Bonds and stocks valuation (Chap 4+5)
RWJ 5
We will first apply our newly acquired knowledge of present value calculation to the
valuation of discount bonds and coupon-bearing bonds. We will then examine the
relationship between stock prices and future dividends and try to see through the veil of
dividends to uncover the core variable underlying the value of companies.
4
02.12.2002 Monday
î CASE: Interbrew
COURSE: Investment Rules + Capital Budgeting (Chap 6+7)
Even though the net present value rule is the best for evaluating capital budget projects,
this rule has contenders that are commonly used by companies. In this session, they will
RWJ 6+7+8
be analyzed. We will then examine how to apply the NPV rule: identifying the cash flows
to be discounted and taking inflation into account.
We will also analyze investments of unequal lives and have a closer look at the economic
significance of a positive net present value. We will also develop various useful techniques
to assess the reliability of NVP calculations and introduce flexibility (or real options) in the
analysis.
5
14.01.2003 Tuesday
î CASE: United Metal
COURSE: Capital Market Theory (Chap 8)
RWJ 9+13
In this session, we will approach the topic of valuation when the future payoffs are risky.
The statistical properties of past returns will be examined, a statistical measure for the
risk of a portfolio identified, and we will have a first look at the importance of
diversification for the determination of the expected return of individual securities.
6
15.01.2003 Wednesday
COURSE: Portfolio Selection + Risk and Expected Return (Chap 9+10)
RWJ 10+11
This session will be devoted first to an analysis of the causes of diversification. We will
develop a method to choose an optimal portfolio.
Then, we will analyze the Capital Asset Pricing Model (CAPM) which is a method to relate
the expected return on a security to its risk.
7
08.02.2003 Saturday
î CASE: Beta Management Company + Aunt Agatha
COURSE: Risk, return and capital budgeting (Chap 11)
RWJ 12
Drawing upon the CAPM, we will discuss in this session capital budgeting analysis when
future cash flows are uncertain. The distinction between the average cost of capital and
the cost of equity will be introduced.
8
11.02.2003 Tuesday
î CASE: Pioneer Petroleum
COURSE: Review + Guest speaker
*My sincere acknowledgements go to Prof. André Farber for its kindness and support in structuring this course, while sharing material
and a long teaching experience.