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Finance (M.B.A. – Full time)
Fall 2006
Professor André Farber
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 Seventh edition, Irwin 2005 (RWJ)
Website: www.ulb.ac.be/cours/solvay/farber
Tutorials
Teaching assistant: Céline Vaessen (02 650 4945 – cvaessen@ulb.ac.be)
Exams and Grading
The grade will be based on five problem sets (10% each) and a final exam (50%).
Solutions to problem sets can be prepared in groups of maximum 4 students. The composition
of each group should not vary. Problem sets will be distributed at the end of tutorials 1 to 5.
Solution should be sent by email to Céline before next tutorial.
Course outline
As the time that we have for this introductory finance course is limited, I plan to use the “Boeing
7E7” case (UVA-F-1449SSRN) throughout the course. I will refer to it in each session. Read the case
a first time before the first session. Don’t go into details and do not worry if many notions remain
obscure. They will become clearer (hopefully) as the course proceeds. Read also the mini-case The
Boeing Co that will be used in Session 1
Questions for session 1
1. What decision would Boeing’s Board of Director have to take in 2004?
2. How would the Board know if the 7E7 project will create value?
Session 1 (Tu Oct 31, 10-12AM) : Introduction (Chap 1) - Financial Statement
Analysis(I) (Chap 2 – Appendix 2A + 15.3)
This session will provide a general introduction to financial analysis. We will examine what
finance is about, identify the main financial decisions and analyse the objective of value
creation (or shareholders' wealth maximization). Financial markets will be introduced and
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their central role for financial decision making will be stressed. The DuPont system of
financial control will be presented and we will analyse at the impact of leverage on ROE.
Session 2 (Fr Nov 3, 4-6 PM) : Accounting Statements and Cash Flows (Chap 2) +
Financial planning (Chap 3 & 26)
We will first review the Statement of Cash Flows. We will then develop a framework for
financial planning that relates accounting numbers (income statements and balance sheets)
and cash flows. We will thereafter anlyze sustainable growth.
Tutorial 1 (Th Nov 9 4-6 PM) Carrefour + Bud + PS1
Session 3 (Fr Nov 10, 2-4 PM) : Present Value (Chap 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 analyse some simple investment decisions.
Session 4 (Th Nov 13 4-6 PM) Bonds valuation(Chap 5 + 25.5)
We will apply our newly acquired knowledge of present value calculation to the valuation of
discount bonds and level-coupon bonds. We will then examine the relation between bond
prices and interest rates.
Tutorial 2 (Tu Nov 14, 4-6 PM) PV & Bond Math + PS2
Session 5 (Fr Nov 17, 2-4 PM) : Stock valuation: Dividend Discount Model (Chap 5)
We will show that the share of a stock is worth the present value of future dividends. Several
situations will be analyzed: zero growth of dividend and constant growth of dividend. A
formula for calculating the growth rate will be presented.
Session 6 (Tu Nov 21, 10-12 AM): Stock valuation: Free Cash Flow Model (Chap 5)
In this session we will go beyond the dividend discount model. We will identify free cash
flows as the main determinant of the value of a company.
Tutorial 3 (We Nov 22, 10-12 AM) ZAC + PS3
Session 7 (Fr Nov 24, 2-4 PM) Investment Rules and 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 be
analyzed. We will then examine how to apply the NPV rule: identifying the cash flows to be
discounted and taking inflation into account.
Session 8 (Mo Nov 27, 3-6 PM) More on capital budgeting (Chap 7,8) + Introduction to
risk (Chap 9)
This session is the follow up of the previous one. We will analyze investment of unequal lives
and have a closer look at the economic significance of a positive net present value. We will
also develop various useful technique to assess the relialibility of NPV calculations.
We will then appproach the topic of valuation when the future payoff are risky. The statistical
properties of past returns will be examined, a statistical measure for the risk of a portfolio.
Tutorial 4 (Tu Nov 28, 4-6 PM) Youpee+Widget + PS4
Session 9 (Mo Dec 4, 9-12 AM) Risk & expected returns-CAPM(Chap 10,11)
In this session, we will examin the importance of diversification for measuring the risk of an
individual securities. We will then analyse the Capital Asset Pricing Model (CAPM) which a
method to relate the expected return on a security to its risk.
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Tutorial 5 (Tu Dec 5 10-12 AM) Aunt Agatha + PS5
Session 10 (Th Dec 7, 10-12 AM) Risk, return and capital budgeting (Chap 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.
Session 11 (Mo Dec 11, 10-12 AM) Unfinished business, Review
Tutorial 6 (Tu Dec 12 10-12 AM) 3Z
FINAL EXAM: Tu Dec 19 2:30-5:30 PM
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