F.W. Olin Graduate School of Business

F.W. Olin Graduate School of Business

Fall 2002

Prof Olaf J.Thorp Fin 7000

Office: Babson Hall 218D Section 81

E-Mail: Thorp@babson.,edu Phone: 781-239-5662

Class Meeting Times: Thursdays from 6:30-9:00 p.m., Olin Room 102

Office Hours: Thursdays from 5:00-6:00pm; other hours by appointment.

Course Description:

The primary objective of this course is to introduce the fundamental finance skills required to be a competent businessperson. The topics covered include financial analysis, planning and forecasting, the opportunity cost of capital, the relationship between risk and required return, the discounting of uncertain future cash flows, capital budgeting, enterprise valuation, the choice between debt and equity financing, capital markets and financial engineering.

Assumed Knowledge:

ACC 7000 - Financial Accounting: You should be comfortable with financial statements and understand the relationships between the income statement, balance sheet, and statement of cash flows. Please review material from ACC 7000 as needed since we will devote little or no time in class to review of this subject. In addition, familiarity with a spreadsheet application, preferably Microsoft Excel, is assumed and will be required for case assignments.

Financial Calculators: You must have and be able to use a financial calculator— a working knowledge of financial calculators is essential.

Course Materials:

·  Ross, Westerfield, & Jaffe, Corporate Finance, 6th edition, 2002; McGraw-Hill Irwin

·  Reference texts: Damodaran, Corporate Finance, and Brigham, Gapenski, and Erhardt, Financial Management

·  Course packet containing cases, notes, and readings -- available at the Babson bookstore.

·  Assignments and supplementary readings and materials will be posted at http://blackboard.babson.edu

Course Format:

Class sessions will be devoted to case discussions and examples, discussion of the readings, and lecture. Students are expected to review the assigned readings and to work through the assigned problems and cases to the best of their ability before class.

Grading:

Course grades will be determined as summarized below:

Written case analysis (Session #3) 15%

Midterm examination (Session #7) 25%

Written case analysis (Session #12) 20%

Final examination (Session #14) 25%

Class participation (Ongoing) 15%

Total 100%

The class participation grade is a function of the quality of a student’s contributions; each student should be prepared to participate at all times – good questions are always welcome.

Written Case Analyses:

There are two written case assignments.

The first is the Play Time Toy Co. case—this case is to be done by each student on an individual basis (i.e., no group or team submissions); the Play Time Toy case is due at the beginning of Session #3. You should analyze what will happen to Play Time’s borrowing needs if the company adopts a level production plan and you should make a recommendation as to whether or not a level production plan should be adopted. Pro forma monthly balance sheets and income statements and a monthly cash budget should be prepared/submitted in support of your recommendation. The written report should be limited to one (1) page, excluding exhibits.

The second written case assignment is an analysis of the Philip Morris/Seven-Up case that is due at the beginning of Session #12. You may work together in teams up to a maximum of five (5) students in the analysis and preparation of this case. Your submission should reflect a creative and critical analysis of the strategic and financial issues; it should define the central question(s) and outline the group's plan for addressing the issues. A sound and thorough quantitative analysis, including assumptions, calculations, sensitivity tests, results, and conclusions should be provided.

The written report should be limited to a maximum of two (2) pages, excluding exhibits. All basic assumptions for the analysis should be detailed in one exhibit. Exhibits must be presented in a clear and understandable manner, with descriptive titles and footnotes; in other words, each exhibit should be easily understandable as a self-contained unit.

Exams:

In Session #7, there will be a (2-1/2 hour) mid-term examination covering material included in the first half of the course; at the end of the course, there will be a final examination.

Class Participation and Attendance:

Preparation of assigned materials, participation in class discussions, and attendance are required. It is each student’s responsibility to be informed of course content changes and announcements at all times.

COURSE OUTLINE:

Forecasting Corporate Performance

How do you predict the financial future of a company?

Session 1
Sept 5 / Topic A: / Introduction to Finance and Financial Ratios
Reading: / Ross, Chapter 1 (Including Appendices)
Shawn Tully, "The Real Key to Creating Wealth, Fortune, 9/20/93
Case (Bring to Class): / Assessing a Company’s Future Financial Health (HBS-297-063)
Topic B: / Estimating Cash Flows and Working Capital
Case: / Butler Lumber Co. (HBS 9-292-013)
Reading: / Ross, Chapter 2 (Including Appendices)
Homework: / RWJ Problems 2.5,2.6,2.7,2.8
Session 2
Sept 12 / Topic A: / Cash Flows and Cash Budgets
Case: / Hampton Machine Tool (HBS 9-280-103)
Reading: / Shawn Tully, “Raiding a Company’s Hidden Cash”, Fortune, 8/22/94, pgs., 82-87.
Session 3
Sept 19 / Topic A: / Estimating Cash Flows with Seasonality
Case: / Play Time Toy Co. (Case submissions due at the beginning of class)(HBS 9-292-003)

Time Value of Money and Capital Budgeting

(How do you choose which investments to undertake?)
Topic B: / Time Value of Money
Reading: / Ross, Chapter 4, Chapter 5 pgs. 102 - 107
Session 4
Sept 26 / Topic A: / Time Value of Money (Cont.)
Homework: / RWJ Problems: 4.1, 4.2, 4.7, 4.12, 4.15, 4.19, 5.7, and 5.10
Additional Problems: / TVOM Problems and Solutions (Weston, Essentials of Managerial Finance)
Topic B: / Introduction to Capital Budgeting
Reading: / Ross, Chapter 6
Homework: / RWJ Problems: 6.16, 6.17,6.19
Session 5
Oct 3 / Topic A:
Case: / Capital Budgeting (Cont)
Interstate Food Co. and Aluminum Fabricating Co. (Darden UVA-F-0558)
Reading: / Ross, Chapter 7
RWJ Problems: 7.1, 7.2, 7.4, 7.6
Session 6
Oct 10 / Topic A: / Advanced Capital Budgeting
Case: / Airbus A3XX (A & B) (HBS 5-201-040)

Reading:

/ Ross, Chapter 8
Homework: / Problems: 8.10
Topic B: / Introduction to Cost of Capital
Reading: / Ross, Chapter 10
Homework: / Problems: 10.8, 10.13
Session 7
Oct 17 / Midterm Exam (In Class)
Session 8
Oct 24 / Topic A: / Cost of Capital (Cont.)
Exercise: / In-class handout
Reading: / Ross, Chapter 11
Homework: / RWJ Problems: 11.2, 11.4
Case: / Star Appliance Company (A) (Darden UVA-F-0421)
Session 9
Oct 31 / Topic A: / Advanced Cost of Capital
Case: / PepsiCo, Inc. (Darden UVA-F-0981)
Reading: / Ross, Chapter 12
Homework: / RWJ Problems: 12.3, 12.13

Valuation

How do you value an enterprise?

Topic B: / Introduction to Enterprise Valuation
Reading: / Valuing a Business Acquisition Opportunity, (HBS Note 9-289-039)
Exercise: / Fruit of the Loom (In-class handout)
Session 10
Nov 7 / Topic A: / Advanced Enterprise Valuation
Case: / Omni Services, Inc. (Darden UVA-F-438)
Topic B:
Reading: / Introduction to Capital Structure
“Theories at the Bottom of their Jargon”, The Economist, 4/27/91 and “Financial Leverage and Beta”, Craig Stephenson, 1999
Ross, Chapters 14 & 15
Homework: / RWJ Problems: 15.5, 15.9
Session 11
Nov 14 / Topic A:

Case:

/ Capital Structure (Cont)
American Home Products Corp (HBS9-283-065)
Reading: / Ross, Chapter 16
Homework: / RWJ Problems: 16.1, 16.5, 16.6
Topic B: / Advanced Capital Structure

Case:

/ Sealed Air Corporation’s Leveraged Recapitalization (A) (HBS 9-294-122)
Topic C: / Capital Markets--Overview
Session 12
Nov 21 / Topic A: / Review Philip Morris, Inc/Seven-Up Acquisition (Case submissions due at the beginning of class) (Darden UVA-F-478)
Reading: / “The Case Against Mergers”, Business Week, 10/30/95, pgs 122-138
Topic B: / Capital Markets (Cont.)
Reading: / Ross, Chapters 13 & 14

Putting It All Together

Session 13 / Topic A: / Capital Markets--Unpredictable Markets
Dec 5 / Reading: / Capital Market Myopia (HBS 9-288-005)
“Big Cap Stocks are a Sucker Bet,” WSJ 3/14/00
“Psyching it Out,” Forbes, 8/21/2000
“What Makes Stock Prices Move?” Fortune, 10/88
“Mr. Buffett on the Stock Market,” Fortune 11/22/99
“Not For Bread Alone” (Konosuke Matsushita) -- Handout
Topic B: / Course Summary
Session 14—Date TBD /

Final Examination

6

OJTSyllabus.doc