F.W.OlinGraduateSchool of Business
FIN 7000—Spring 2004
Prof Olaf J.Thorp Office: Babson Hall 218D
E-Mail: Thorp@babson,edu Phone: 781-239-5662
Class Meeting Times:Mondays from 6:30-9:00 p.m. (Tomasso Room 202)
Office Hours:Mondays 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, cash planning and forecasting, the discounting of uncertain future cash flows, capital budgeting,the opportunity cost of capital, the relationship between risk and required return, enterprise valuation, the choice between debt and equity financing, and an introduction to capital markets.
Assumed Knowledge:
ACC 7000 - Financial Accounting: You should be comfortable with financial statements and you should understand the relationships between the income statement, balance sheet, and statement of cash flows. Please review material from ACC 7000 (or other introductory accounting courses that you have taken) as needed since we will devote little or no time in class to the review of this subject.
Financial Calculators: You must have and be able to use a financial calculator— a working knowledge of financial calculators is essential; in addition, familiarity with a spreadsheet application, preferably Microsoft Excel, is assumed and will be required for case assignments.
Course Materials:
Text: Higgins, Analysis for Financial Management, 7th Edition, 2004;McGraw-Hill
Reference Texts:Ross, Westerfield, & Jaffe, Corporate Finance;Damodaran, Corporate Finance; Brigham, Gapenski, and Erhardt, Financial Management
Course Packet containing course notes, cases, and supplementary readings (available at the Babson Bookstore)
Software: PROFORMA at
- Assignments and supplementary readings and materials will be posted at
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) 10%
Midterm examination (Session #7) 25
Written case analysis (Session #12) 20
Final examination (Session #14) 30
Class participation (Ongoing) 15
Total 100%
The class participation grade is a function of the quality of a student’s contributions; students 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 and be 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 New England Airlines, Inc. case that is due at the beginning of Session #12. You may work together in teamsup to a maximum of five (5) studentsin the analysis and preparation of this case. Your submission should reflect a thoughtful, creative, and critical analysis of the strategic and financial issues; it should define the central question(s), and outline the group's plan and recommendations for addressing the key issues. A sound and thorough quantitative analysis, including assumptions, calculations, sensitivity tests, results, and conclusions should be provided to support your team’s recommendations.
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 in-class mid-term examination covering material included in the first half of the course; there will be a final examination at theend of the term.
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.
Academic Accommodation:
Any student who is entitled to an academic accommodation based on the impact of a documented disability should contact me privately to discuss your specific needs. Please also contact Erin Evans, Coordinator of Disability Services in Hollister Hall at 781-239-4075 to coordinate appropriate accommodations.
COURSE OUTLINE:
Forecasting Corporate Performance
How do you predict the financial future of a company?
Session 1Jan 26 / Topic A: / Introduction to Finance and Financial Ratios
Readings: / Higgins, Ch 2(Evaluating Fin. Performance)
Shawn Tully, "The Real Key to CreatingWealth, 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: / Higgins, Ch 3 (Financial Forecasting)
Homework: / Higgins 3.1, 3.3 and 3.5; Supplementary Problems: RWJ 2.5,2.6,2.7,2.8
Session 2
Feb 2 / Topic A: / Cash Flows and Cash Budgets
Case: / Hampton Machine Tool (HBS 9-280-103)
Readings: / Higgins, Ch 4 (Managing Growth) Shawn Tully, “Raiding a Company’s HiddenCash”, Fortune, 8/22/94, pgs., 82-87.
Session 3
Feb 9 / 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:
Homework: / Higgins, Ch 7, Pgs 231-239(DCFTechniques),
Higgins, 7.1
Session 4
Feb 16 / Topic A: / Time Value of Money (Cont.)
Homework: / Higgins, 7. 5; Supp. Problems: RWJ 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)—In Coursepack
Topic B: / Introduction to Capital Budgeting
Reading: / Higgins, Ch 7, Pgs 240-258
Homework: / Higgins, 7.7; Supp Problems: RWJ 6.15, 6.17
Session 5
Feb 23 / Topic A:
Case: / Capital Budgeting (Cont)
Interstate Food Co. and Aluminum Fabricating Co. (Darden UVA-F-0558)
Homework: / Supp Problems: RWJ 7.1, 7.2, 7.4, 7.6h
Session 6
Mar 1 / Topic A: / Advanced Capital Budgeting
Case: / Airbus A3XX (A & B) (HBS 5-201-040)
Homework: / Supp Problem: RWJ 8.10
Sess 6 (Cont) / Topic B: / Introduction to Cost of Capital
Reading:
Homework: / Higgins, Ch 8, Pgs 273-297 Higgins, 8.1, 8.3, 8.5
Session 7
Mar 8 / Midterm Exam (In Class)
Session 8
Mar 22 / Topic A: / Cost of Capital (Cont.)
Exercise: / In-class handout
Reading: / The Corporation’s Cost of Capital and Weighted Average Cost of Capital
Homework: / Supp Problems: RWJ 10.8, 11.2, 11.4
Case: / Star Appliance Company (A) (Darden UVA-F-0421)
Session 9
Mar 29 / Topic A: / Advanced Cost of Capital
Case: / PepsiCo, Inc. (Darden UVA-F-0981)
Reading: / Higgins, Ch 8, Pgs 302-313
Homework: / Supp Problems: RWJ 12.3, 12.13
Valuation
(How do you value an enterprise?)
Topic B: / Introduction to Enterprise ValuationReading: / Higgins, Ch 9, Pgs. 321-352 (Business Valuation and Corporate Restructuring)
Exercise: / Fruit of the Loom (In-class handout)
Session 10
Apr 5 / Topic A:
Readings: / Advanced Enterprise Valuation
Higgins, Ch 9 Appendix, Pgs. 352-359
Valuing a Business Acquisition Opportunity, (HBS Note 9-289-039)
Sess 10 (Cont) / Case: / Omni Services, Inc. (Darden UVA-F-438)
Topic B:
Readings:
Homework: / Introduction to Capital Structure
“Theories at the Bottom of their Jargon”, The Economist, 4/27/91 and “Financial Leverage and Beta”, Craig Stephenson,BabsonCollege,1999
Higgins, 9.1, 9.7 and Omni Valuation
Session 11
Apr 12 / Topic A:
Case:
/ Capital Structure (Cont)American Home Products Corp (HBS9-283-065)
Reading: / Higgins, Ch 6, Pgs. 193-223
Homework: / Higgins, 6.1, 6.3, 6.5,
Topic B: / Advanced Capital Structure
Case:
/ Sealed Air Corporation’s LeveragedRecapitalization (A) (HBS 9-294-122)Topic C: / Capital Markets--Overview
Session 12
Apr 19 / Topic A: / Review New England Airways, Inc(Case submissions due at the beginning of class)
Reading: / “The Case Against Mergers”, Business Week, 10/30/95, pgs 122-138
Topic B: / Capital Markets (Cont.)
Reading: / Higgins, Ch 5, Incl Appendix (Financial Instruments and Markets)
Putting It All Together
Session 13 / Topic A: / Capital Markets: Unpredictable Markets?Apr 26 / Readings: / Capital Market Myopia (HBS 9-288-005); “Big Cap Stocks are a Sucker Bet,” WSJ3/14/00; “Psyching it Out,” Forbes,8/21/2000; “What Makes Stock Prices Move?”,Fortune, 10/88; “Mr. Buffett on the Stock Market,” Fortune11/22/99; “Efficient Market Hypothesis”, CFA Magazine, Nov-Dec 2003
“Not For Bread Alone” (Konosuke Matsushita) -- Handout
Topic B: / Course Summary
Session 14 May 3 /
Final
Examination
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FIN7000SyllSpr2004.doc