University of Puget Sound
School of Business and Leadership
Principles of Financial Management
Professor Alva Wright Butcher
Spring Semester 2005
BUS 315A
Tues &Thurs 12:30-1:50
McIntyre 103
BUS 315C
Tues & Thurs 2:00-3:20
McIntyre 103
Office: McIntyre 111 I
Phone: 253-879-3349
FAX: 253-879-3156
Office Hours:
Tues & Thurs 11:00-12:00
Tues & Thurs 3:30-4:30
Wednesday 11:00-12:00
Wednesday
1:00-2:00
Note that I am always willing to schedule additional office hours by appointment. I check email
frequently, so that is also a good way to communicate. Do not hesitate to call me at home. If you
cannot reach me, please leave a number so that I can get back to you.
Email: butcher@ups.edu
Home: 206-285-3990 or 360-779-4706
Required Course Materials:
1. Ross, Westerfield, and Jordan, Essentials of Corporate Finance, Fourth Edition,
McGraw-Hill Irwin, 2004
2. Harvard Business School cases available in course packet in bookstore
 Assessing a Firm’s Future Financial Health
 Managing a 401(k) Fund
 Cartwright Lumber Company
 The Major Global Stock Exchanges
3. A financial calculator. The calculator must have functions for bond valuation, net
present valuation (NPV), internal rate of return (IRR), present value (PV), and future
value (FV). One suitable calculator is the HP10-B. It is available in the bookstore for
around $30.
Recommended:
Subscription to the Wall Street Journal
We will be working with the Wall Street Journal during several class sessions. As a
business student, you should read this publication regularly.
References and Support Materials:
1. Self-Study Software that accompanies the textbook. After you have downloaded this
on your computer, it provides multiple-choice quizzes for all chapters. The software
immediately grades your response to a question and provides hints if your answer is not
correct.
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2. Self-test problems and solutions at the end of each chapter provide excellent review
material. Note that in general, solutions to odd numbered end-of-chapter problems are
available in the back of the textbook.
3. Website supported by the publisher.
http://highered.mcgraw-hill.com/sites/0072510765/student_view0/index.html
The site provides access to many sources of financial information as well as material
specific to each chapter in the text. This includes:
 a brief chapter summary,
 online multiple choice quizzes,
 Web links Bibliography (access to web links noted in the chapter),
 What’s on the Web?(access to web links noted in these questions at the
end of each chapter),
 Excel templates for selected problems at the end of the chapter.
4. Thomas Eyssell, Student Problem Manual, Fourth Edition, McGraw-Hill Irwin, 2004.
For each chapter, this study guide provides a summary of key concepts, a concept quiz,
and problems with detailed solutions.
5. Please contact me for sources that provide other explanations of the material.
Course Objectives: The key objective of this course is to develop a conceptual and pragmatic
understanding of corporate finance. The topics and assignments are designed to prepare you to
apply both theory and techniques in the “real world” of corporate finance. Note that some of
these topics, such as the time value of money, are ones that you will also find invaluable in
handling your own personal finance. Assignments include end of chapter questions and case
analyses. You will create spreadsheets to model financial problems and will prepare professional
reports of your analyses.
The course builds upon concepts covered in Elements of Applied Statistics (Math 271) and in
Principles of Financial and Managerial Accounting (BUS 205). It is assumed that you are
proficient in the use of financial data as reported in financial statements. If you are not
comfortable with these concepts, please see me for some review problems. Since the application
of financial concepts also requires proficiency in basic algebra and geometry, we will frequently
address basic mathematical concepts and techniques.
After you have successfully completed this course, you will be able to:
 Work with financial statements to evaluate financial ratios and their implications
regarding the financial strengths of weakness of a firm.
 Use historical financial statements and assumptions about future growth to prepare
pro-forma financial statements and estimate additional financing needed to support
that growth.
 Determine the value today of cash flows to be received later.
 Evaluate the cost-benefit trade-off of costs incurred today with cash inflows expected
in the future.
 Understand the effect of compounding periods on interest rates. (What interest rate
are you really paying on that loan?)
 Understand the basic features of bonds and how they are priced.
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 Estimate the fundamental price of a common stock, using the two-stage discount
model.
 Identify the relevant cash flows for a proposed investment, and evaluate a complex
proposed investment using Net Present Value, Internal Rate of Return, and Payback
Period.
 Recognize the impact of diversification and use the Capital Asset Pricing Model to
quantify the risk-return tradeoff.
 Use financial information to estimate the required rate of return on a proposed
investment. This is known as the firm’s weighted average cost of capital.
 Have a basic understanding of the Efficient Market Hypothesis and its implications
when you are presented with a “hot tip”.
 Use an essential tool in real world business finance – the application of computer
models in financial analysis.
 Read financial data as reported in the Wall Street Journal and have a basic
understanding of primary versus secondary markets.
 Evaluate your “stock pick” and reflect on your “virtual” gains or losses.
Class Preparation and Participation: Preparation for class is extremely important. Prior to
class, you are expected to have read the assigned reading material. You are also expected to have
analyzed any assigned discussion problems and to be prepared to participate in the class
discussion. If for some reason you are not prepared to participate in the discussion please let me
know prior to class.
Your presence and contribution to class discussion are important. There are three categories:
present, absent with leave, and AWOL.
Online Course Management Platform – Blackboard
We will be using an online course management platform this semester. The key benefit is that it
provides an excellent means of communication. You will be able to download the syllabus,
homework assignments, homework solutions, sample exam problems etc. from the Internet at any
time. It also provides a platform for threaded discussion. Another feature allows discussion
among group members on their group project; access is restricted to members of the group.
You can access this at blackboard.ups.edu. Click on “Course Catalogue.” Find the course,
Principles of Financial Management, and click on “Enroll.” You will need a password in order to
enroll. I will provide this in class.
If this is your first course on Blackboard, you will need to create an account and specify your
user-id and password. (Click on “Create Account.”) During this process, you will be asked for
additional information, such as your name, email address etc. Please begin both your first and
last name with a capital letter, and enter the other letters in lower case. If you have other courses
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on Blackboard, I would suggest that you use the same user-id and password for all classes. Once
you have enrolled in Blackboard, subsequent contacts only require that you open
blackboard.ups.edu and click on “Login”. You will be asked for your id and password.
Homework: Homework assignments are listed on the course outline and are due at the
beginning of class on the date indicated on the outline. These assignments are designed to
reinforce your familiarity with the material, to train you in the use of your financial calculator and
computer spreadsheets, to identify areas in which you may be having difficulty, and to serve as a
basis for classroom discussion.
The end of each chapter includes Critical Thinking and Concepts Review and Questions and
Problems. Most homework questions are from the end-of-chapter Questions and Problems. A
critical thinking question will have the notation CT3, i.e. question 3 under Critical Thinking and
Concepts Review. The course outline notes two categories of homework: discussion and written.
Written homework assignments will be collected at the beginning of class, and a subset of these
problems will be selected on a random basis for grading. Solutions to homework assignments
will be available after class on the online course management platform, blackboard.ups.edu
(under Assignments).
Homework assignments are due at the beginning of the class period. To
receive credit you must clearly show the logic behind your solution. Late
homework assignments will not receive full credit.
Case Analyses and Projects: Several case studies and projects will be assigned during the term.
These are utilized to enable you to: 1) practice effective communication techniques, both written
and oral; 2) engage in an active learning situation; 3) perform data interpretation and analysis; 4)
gain experience in decision making under uncertainty. They are also designed to give you an
opportunity to use an essential tool in real world business finance - the application of computer
models in financial analyses.
Each case study will require a written report and/or an Excel spreadsheet. Some of these reports
will be short memos; others will require more lengthy exposition. Reports must be typed, with
exhibits inserted in the narrative where appropriate, or at the end of the report. Additional details
will be available on Blackboard, the online course platform. (blackboard.ups.edu Check under
Assignments)
If the case requires an Excel spreadsheet please submit a printed copy of your spreadsheet at the
beginning of class. An online version of your Excel spreadsheet must be submitted prior to the
beginning of the class period, either as an email attachment or via the Blackboard digital drop
box.
The cases will be discussed in detail during a regular class session. You should be prepared to
respond to specific questions, and to the comments of other students. Grades for both written
reports and class discussions will be based on content, exposition, and clarity.
Late written reports and Excel spreadsheets will not be accepted. These are due at the beginning
of the class period. Please make an extra copy for your use during the class discussion.
Exams: There will be three midterm exams and a comprehensive final. Exams will be problem
oriented, but will also include short essay questions. Exams are closed book, but you may use
one side of an 8 by 11 paper for notes and formulae.
As a general policy, makeup exams will not be given.
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Extra Credit Quizzes: During the term, there will be unannounced pop quizzes. These will
consist of a few multiple choice or true false questions, and will cover material presented in the
prior one or two class sessions. As with homework problems, these are designed to reinforce the
material, and to identify problem areas. By keeping current with the material, these quizzes also
provide you with a means of earning extra credit points.
Grades:
Grades will be based on the following weights:
Three Midterm Exams
45%
Comprehensive Final Exam
24%
Projects and Case Analyses
Stock Project (7%)
21%
Financial Forecasting Case (7%)
Cartwright Lumber Company
Capital Budgeting Case (7%)
Homework and Class Discussion
10%
Total
100%
Unannounced Quizzes
5% (extra credit)
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Course Outline
Tues
1/18
Introduction to the Course
Establish the Dartboard Portfolio
Chapter 1: Overview of Financial Management
Chapter 2: Financial Statements, Taxes, and Cash Flow
Homework
Discussion
Thurs 1/20
Chapter 1:
Critical Thinking CT1.2, CT 1.3, CT1.6, CT1.7, CT1.12
Chapter 2: Problems 1, 2, 3
Chapter 3: Working with Financial Statements
Math Concept: Review of Algebraic Manipulation
Note: Please bring your financial calculator to class.
Excel tutorial
McIntyre 324 during the last 50 minutes of the class period.
Homework
1. Register on Blackboard, the online course platform.
2. Discussion Chapter 3: Critical Thinking: CT3.1, CT3.4, CT3.5,
3. Discussion Chapter 3: Problems 1,3,9
4. Written
Chapter 2: Problems 6,7
5. Stock Project
Submit names of 3 potential firms for your stock project. Please list firms in
order of preference.
You are encouraged to pick a company in which you have some interest. This
could be a firm that employs someone in your family, one in which you would
like to own stock, one with products or services you admire or use often. The
firm must be publicly traded and in an identifiable industry. Financial
institutions, such as banks, are not allowed.
Tues 1/25
Harvard Business School Case Discussion
Assessing a Firm’s Future Financial Health
Note This is one of the cases in the packet available in the bookstore.
Homework
1. Written Chapter 3: 2, 4,6, and 34 (a,b,d,e,f,g,j,l,m,n)
In problem 34, calculate ratios for 2003. Use the year-end information.
2. Prepare for the discussion of the Harvard Case
a. Read the discussion of the essence of long-term financial health
b. Work through the programmed text on financial ratios. Answer each of the
questions and be sure you understand the calculation and meaning of each of
the ratios. Be prepared to discuss your results in class. This does not need to
be handed in.
Note: You do not need to calculate the following ratios:
 Return on funds provided by equity & interest bearing debt, page 10
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 Fixed asset turnover ratio, page 11
 Total debt ratio at market, page 12
c. Using any approach you find helpful, identify three of the five unidentified
industries (pages 14, 15 and 17 of the case). The case is designed to help you
recognize the range of distinctive patterns in financial statements for
different industries. For example, different industries will have different
inventory turnover rates, different asset structures (high versus low levels of
plant property and equipment), different inventory turnover ratios, different
collection periods for accounts receivable etc. You are asked to play the
financial detective here, and to use selected financial data to identify
companies in 5 industries. Note that the balance sheets shown in Exhibit 3
are common size balance sheets. That is all items are calculated as a
percentage of total assets.
Be prepared to discuss your results in class and to explain your rationale.
What were the key screening devices or key clues that you used to identify a
particular industry? This does not need to be handed in.
Thurs 1/27
Financial Forecasting Case Discussion - AWOL
You have been asked to analyze whether an expected increase in AWOL sales
will require additional financing. The analysis of this case will provide a good
background for your preparation of the Cartwright Lumber case.
Under Assignments on Blackboard you will find a folder named AWOL. This
folder contains the following:
 Instructions for the case
 An Excel file that contains the most recent financial statements
for fiscal year 2002 and the assumptions.
Homework
1. Use this Excel file to prepare your forecasts for 2002 and to calculate the
specified financial ratios. Please bring a hard copy of your Excel solution to
class for class discussion. You will not need to hand in your analysis, but
you should be prepared to share your analysis with the class.
2. Be prepared to discuss features of a well-written financial forecast.
Tues 2/1
Chapter 7: The Stock Markets (Sections 7.2 and 7.3)
Harvard Business School Case: The Major Global Stock Exchanges
We will be working with the Wall Street Journal
I will provide copies of the newspaper for you.
Video Wired: Wall Street and Silicon Alley Square Off
Homework
1. Discussion
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Thurs 2/3
Chapter 4: Introduction to Valuation: The Time Value of Money
Please bring your financial calculators to class.
Homework
1. Harvard Business School Case: Written Report and Case Discussion
Cartwright Lumber Company
You will find the instructions for this financial forecasting case under
Assignments on Blackboard. Please submit your Excel file for this case via the
Blackboard Drop Box. Your excel file should be named “your name
CARTWRIGHT”. A file with a virus will not be accepted, and the grade for this
project will be discounted depending on the length of the delay
2. Discussion Chapter 4: CT1, CT2, CT3, CT4, CT8, CT9
3. Discussion Chapter 4: 1,2,3,4
Note that problems 2,3,and 4 each have four parts. You only need to be prepared
to discuss the first part.
Tues 2/8
Chapter 4: Time Value of Money continued
Chapter 5: Future and Present Values of Multiple Cash Flows (Section 5.1)
Chapter 5: Valuing Level Cash Flows: Annuities and Perpetuities (Section 5.2)
Homework
1. Discussion Chapter 4: 18, 24
2. Written
Chapter 4: 8, 11, 14
3. Discussion Chapter 5: 1, 4, 5, 12, 17
4. Written Report
Stock Project: Part One -A Profile of Your Firm
See Part 1 of the Stock Project for details.
Thurs 2/10
Chapter 5: Discounted Cash Flow Valuation continued
Math Concept: Continuous Compounding
Homework
1. Discussion Chapter 5: 24, 25, 35, 53
2. Written
Chapter 5: 2, 6, 8, 14
Tues 2/15
Chapter 5: Discounted Cash Flow Valuation continued
Homework
1. Written
Chapter 5: 16, 18, 20, 55
Thurs 2/17
Chapter 6: Interest Rates and Bond Valuation
1. Discussion Chapter 6: CT6, 2, 3
2. Discussion What are some differences between bonds and stocks?
Tues 2/22
Chapter 6: Interest Rates and Bond Valuation continued
Integration and Review
Homework
1. Discussion Chapter 6: 21 (a, b)
Thurs 2/24
Exam 1: Chapters 2, 3, 4, 5, and Financial Forecasting
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Tues 3/1
Interest Rates and Bond Valuation continued
Homework
1. Written
Chapter 6: 6, 7, 8
2. We will be working with the Wall Street Journal
Please bring a copy of the Monday edition, 2/28/05, or today’s edition
Thurs 3/3
Chapter 7: Stock Valuation (Sections 7.1 and 7.2)
Homework
1. Discussion Chapter 7: CT1, CT2, CT3, CT 6
2. Discussion Chapter 7: Problems 4, 5
3. Written
Chapter 6: 19, 25
Tues 3/8
Chapter 7: Stock Valuation continued
Chapter 8: Net Present Value and Other Investment Criteria
(Skip sections 8.3 and 8.5)
Homework
1. Discussion Chapter 8: CT5, CT6
2. Written
Chapter 7: 7, 12, 15, 16
3. Stock Project: Part 2- Examine Historical Daily Returns
See Part 2 of the Stock Project for details.
Thurs 3/10
Chapter 8: Net Present Value and Other Investment Criteria continued
Chapter 9: Making Capital Investment Decisions
Homework
1. Discussion Chapter 8: CT8.5, CT8.6
2. Written
Chapter 8: 10, 22
Spring Recess
Tues 3/22
Chapter 9: Making Capital Investment Decisions continued
Homework
Written
Chapter 9: 5, 6
Thurs 3/24
Chapter 9: Making Capital Investment Decisions continued
Homework
Written
Chapter 9: 20
Tues 3/29
Capital Budget Case – Written Report and Case Discussion
Additional details are available on Blackboard under Assignments. Please
submit your Excel file for this case via the Blackboard Drop Box. Your file
should be named “your name Budget”. Files with a virus will not be accepted;
the grade for this project will be discounted depending on the length of the delay
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Thurs 3/31
Chapter 10: Some Lessons from Capital Market History
Efficient Market Hypothesis
Math Concept: Sample Mean and Standard Deviation
Homework
1. Discussion: Chapter 10: 1, 2, 7
2. Discussion: Chapter 10: CT5, CT10
Tues 4/5
Exam 2: Chapters 6, 7, 8, 9
Thurs 4/7
Chapter 11: Risk and Return
Math Concept: Linear Regression and Basic Inferential Statistics
Homework
1. Discussion Chapter 11: CT 1, CT3
2. Written
Chapter 10: 9, 10, 17
Tues 4/12
Chapter 11: Risk and Return continued
Homework
1. Written Chapter 11: 7(Stock B only), 16, 19(Assume that CAPM is true), 31
Thurs 4/14
Chapter 12: Cost of Capital
Homework
1. Discussion Chapter 12: CT 8
2. Stock Project: Part 3 – How Risky is Your Firm?
See Part 3 of the Stock Project for details.
Tues 4/19
Cost of Capital continued
Harvard Business School Case Discussion
Managing a 401(k) Portfolio
Homework
1. Discussion Questions for the case will be distributed in class
2. Written
Chapter 12: 3, 6, 15
Thurs 4/21
Guest Speaker
Tues 4/26
Exam 3: Chapters 10, 11, 12
Thurs 4/28
Bulls and Bears Ball
Stock Project: Report 4 – Present Your Virtual Profit or Loss
See Part 4 of the Stock Project for details.
Tues 5/3
Bulls and Bears Ball continued
Integration and Review
Comprehensive Final Exam BUS 315A Thursday May 12th, 12:00-2:00 pm
Comprehensive Final Exam BUS 315C Friday May 13th, 12:00-2:00 pm
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