Teaching methodology supported by Excel© in the field of corporate finance: difficult points and development prospects
Abstract
The spreadsheet is the working tool of those who deal with corporate finance. Moreover, the study of finance using Excel is based on specific educational reasons. Motives for studying are created by working through the creation of models, the discussion of simulations made on specific problems, the analysis of alternative resolving courses. This teaching methodology is surprisingly perceived as “practice”. In our Faculty of Economics we decided to reflect on the covered path with reference to this educational approach and to concentrate on its weak points and strengthening strategy. We organised a focus group with a few students and this gave us new valuation ideas. Financial modelling is more appreciated by the students than business simulation, but the first lecture-hall approach can be used only in specialised study environments. In lecture halls with great numbers, Excel can be used usefully as a formatting tool.
Giulio Tagliavini
Department of Economics – University of Parma
Via J. F. Kennedy, 6
43100 Parma (Italy)
Teaching methodology supported by Excel© in the field of corporate finance: difficult points and development prospects
Introduction
At the Department of Economics of the University of Parma, and specifically at the Credit and finance section, there is an active group of academics that has invested significantly on educational tools based on Excel for teaching the interpretation of the state of health of companies and other problems spreading over accounting and finance. These educational tools were developed rather intensively and the different solutions were gradually refined with the purpose of reaching a methodological precision and ease of interpretation. This note summarises the methodical reflection we recently started in order to prepare other patterns of educational behaviour.
Lately, we considered it useful to reopen our approach and, in order to have valid valuation tools, we organised a focus group with the students of our Master in Corporate Banking. This allowed to specify better the point of view of the students and to point out difficult points and aspects considered of greater interest. We can conclude that the Excel-based education is now absolutely essential in the field of different managerial sciences, and especially in our educational field, but it must be implemented intelligently. A methodical reflection on the educational use of Excel is however particularly proper and allows to overcome the faults of a not carefully considered lecture-hall approach.
The importance of Excel and the story of the work group
We do not know or we do not remember to whom we should give credit for so many great inventions and discoveries (e.g., fire, wheel, or even spaghetti). It is the same with the spreadsheet, of equal importance: we do not know exactly whom to thank. This fact makes us think: the main working tool of the financial analyst, perfectly natural for his way of thinking, absolutely equal all over the world, definitely started every day at the office, was conceived we do not know exactly by whom, with what expectations, with how much profits. If I have aroused your curiosity, go to
You will find that Daniel Bricklin started to think about financial problems in the form of a spreadsheet. In spring 1978, he was a student of Harvard Business School, of the MBA program. Since he had to present a financial plan supporting the discussion of the Coca-Cola case, he came up with Visicalc, a tool he developed with Bob Franckston. Visicalc, contraction of “visible calculator”, was the first spreadsheet in history, marketed starting from 1979. From a conceptual viewpoint, VisiCalc is equal to Excel; there is a huge difference for what concerns graphics and information technology; unimportant from a logical viewpoint.
Many of our students have never seen Visicalc. You can download from the Bricklin site an executable program that recreates the original environment of Visicalc in a Windows dialogue box. In this way, you can appreciate the progress made by spreadsheets over the years. It also brings very well into focus the definitely not “user-friendly” effect that the program created the first time it was used. I am (a bit foolishly) proud to say that my story with the spreadsheet started with VisiCalc. Then I passed to Multiplan, Lotus 123, Quattro-Pro, and now Excel. I belong to the last generation of students of the faculty of economics who were not introduced to the PC during their course, and studied finance with the financial calculator.
During the second half of the eighties, the eldest of the group of academics organised training initiatives and previewed to financial analysts and bank-officers decision models developed using Multiplan. We clearly sensed their astonishment in front of all that potential. We also encouraged some of our colleagues to enter into the world of the spreadsheet. We sensed amazement also in this case. Eventually, we all got used to it. Today, we realise wonderful sheets and models compared to those realised initially. However, in all likelihood, many users still exploit little the available potentials.
In the nineties, we produced several educational supports and we brought the lecture-hall presentation methods up to date. These progresses supported, and often anticipated, the diffusion of the personal computer with our students. During the initial years of the twenty-first century, the lecture halls of our Faculty were equipped with steady solutions of video projection supporting the direct utilisation of Excel in the lecture hall; today, technological problems have been fully overcome. Over the last years, we also developed some e-learning products together with publishing houses that resorted to, and then largely abandoned, an exploratory strategy of this kind of educational potentials.
During 2004, we realised our own educational publication (Giulio Tagliavini, 2005) whose purpose is to approach the actual use by the corporate finance analyst to the potentials of Excel. It does not introduce particularly sophisticated or innovative themes on corporate finance; it describes some classic corporate themes developing an Excel model, giving some ideas of the most rational realisation tips and methods. Hence, the purpose of the publication is purely and typically educational.
In the current stage, we set out to reflect on the progress made with reference to this educational approach and to concentrate on its weak points and strengthening strategy[i].
Spreadsheet undoubtedly represents the main working tool of the financial analyst. As it is not always clear how a new analyst can achieve the competence for realising his own models, we thought we have offered a useful tool. The aim of the book is to help the reader develop his own thorough capacity to resolve problems by setting working diagrams on spreadsheet. Each lesson describes one problem of corporate finance and directs to a clear, sharp and creative solution through Excel's potentials, studied gradually in detail. The book comes complete with a CD-ROM containing the files proposed in each chapter.
The work was developed by a group of academics who realised the first edition of Master in Corporate Banking of the Faculty of Economics of the University of Parma, during the 2002-2003 academic year. This concerns teaching material used in this initiative and then prepared, according to this lecture-hall experience, for the following editions of this Master and for this book. Within this master, we have encouraged the model construction approach. This choice is consistent with the idea that a newly-graduated in finance shall probably work with Excel every day.
The main proficiency that is worth forming in our students is the capacity to build models consistent with the nature of problems and sophisticated enough to be important operationally; this must be accompanied by the capacity to understand the results produced by the models. The aim of the said book is the first one; several authors of this book have worked organically on the second aim during a previous publishing occasion (Eugenio Pavarani, McGraw-Hill, 2002).
According to our experience, during the initial phase of a training initiative on Excel and finance the serious risk often incurred in is to “overestimate” the capabilities of the participant. The latter is inclined not to understand and interpret even the simplest models. Always according to our experience, during the final stage of the initiatives, there is the risk of “underestimating” the capacity, capability, interest and subtlety of the participant keen on the subject. Our work considers this element roughly; whereas there are no special indications for those who need a specific help on the “basics” of Excel.
General lines of the educational approach
Our idea of basing the teaching methodology on Excel and of creating a publication on Excel for finance or on finance for Excel is not new. There are several excellent manuals offering this approach. However, we decided to work along this trend because we thought we had the corresponding teaching material that did not overlap with what already existed.
The work of Kurt Hess (2003) has pointed out the teaching importance of this initiative and the importance of training finance experts who are immediately functional at their work place. Through Excel, it is possible to train finance experts with more concrete and functional behaviours but, furthermore, the theoretical profile of the corporate finance is brought better into focus. Excel is a tool that does not trivialise but develops theory. Through Excel you can very well make out an ineffectual theoretical approach from an “excellable” approach, i.e. clear and convincing.
Corporate finance is undoubtedly a current theme, maybe rightly perceived by the students as relatively complicated. Many universities tackle corporate finance with a “hands-on” approach: they do not confine themselves to describing a model but they propose the student to try and realise it almost always on a spreadsheet. This approach is undoubtedly of great value on the operational front and as conceptual assimilation. The advantage derives from the fact that it is difficult to find business school students thinking algebraically, whereas it is relatively easier to make a working diagram on “spreadsheet”. It is important for the student being able to realise an Excel model. In this way he is convinced that he has really understood the problem. This convincement is questionable but this does not mean that the positive feedback does not strengthen the desire to continue the study of corporate finance with enthusiasm. Discussing how an Excel model works allows to compare different opinions and to grow more effectively. Even wrong Excel models play a role[ii].
Studying finance with Excel has specific educational reasons. All the students attending our course are certainly quite intelligent to understand the proposed problems and to pass the examination, in general. But this does not happen. Some students lack motivation. Motives for studying are created by working through the creation of models, the discussion of simulations made on specific problems, the analysis of alternative resolving courses. Using Excel, perceived surprisingly as a “practical” approach, and reading books, which is defined as “the theory”, widens the stimulus to study, lengthens the time dedicated to this subject, brings a greater number of students to a successful conclusion.
Studying corporate finance through Excel has two other advantages: the first is that non-mathematicians can tackle problems that, without Excel, would surely require the intervention of a specialised competence in mathematics. Let us consider the need to valuate an option through the modelling of the geometric Brownian motion: with Excel we can do it by ourselves, without Excel we need a quantitative model. The second advantage is that without Excel we need a programming specialist. The realisation of each model requires a programmer; with Excel, the corporate finance expert realises the model directly, preparing it while he develops it.
It is clear that there are particularly complicated corporate finance problems that require strong quantitative competences. For example, pricing modelling of an exotic option is usually carried out involving a financial analyst with a background in physics or in mathematics.
Books and courses on Excel and finance can be more “Excel oriented” or more “finance oriented”. Our approach is quite balanced from this viewpoint. We have willingly omitted marked complications for what concerns Excel and corporate finance. We have imagined our user of reference as having the characteristics of our master students: good general preparation in economics, knowledge of the basic rules of financial mathematics, some knowledge on the basic profiles of financial analysis, common sense, enthusiasm and desire to expand on the subject.
Development of the student's requirements
Our experience induced us to point out the following:
1) At an initial stage (corresponding to the second half of the eighties), the student interested in Excel applications was already working professionally in a company, bank or independently. The university student was rather far from the minimum background preparation for the individual use of Excel. Universities continued to teach information technology with reference to wide-ranging hardware systems and/or with reference to specialised computational problems. Later on, the educational use of information technology, at least in the Faculty of Economics, passed, in its own good time, from mathematicians and statisticians to management academics. It is clear that this process was also affected by the progress of the generations of academics of corporate finance.
2) At a second stage (corresponding to the second half of the nineties), the opinion that the educational approach based on Excel was important for teaching corporate finance took shape. However, this trend, well sensed and gradually represented by a growing availability of teaching material, was obstructed by two elements: a) first of all, the student of the faculty of economics started the studies in economics without the minimum requirements of information technology background and this brought forth the need to base teaching not on application problems but on more modest courses for increasing the background information technology competences, in order to obtain the autonomous use of the PC; 2) secondly, normally the student of the faculty of economics had no PC at home. At that time, the purpose of our faculty of economics was to understand these training requirements; this period was also characterised by the preparation of information technology rooms, base and diffusion courses of the utilisation rules of the most important software applications (and of Internet).
3) In the following stage (second half of the nineties), we observed that every year there were more students at our Faculty with a greater information technology background and with their own portable or home PC. This implied a difficult period for what concerns educational opportunities: one part of the students presented quite elementary education requirements while the desire of a more complicated education of others grew considerably year by year. We have tackled this stage trying to mediate widely varying requirements. However, we must consider that the shortcomings of every educational approach that can be proposed are high.
4) Today, the progress has been accomplished. The students entering the Faculty of economics are already perfectly autonomous for what concerns information technology and their educational requirements are well-developed. First-year students were acquainted with the PC at the age of the elementary school. Few students who do not have the “basic” information technology background are sent to remedial lessons.
5) Employees working in the field of business and bank do not have strong educational requirements. The space of creation of one's own valuation models was compressed by the often followed policy of creation of “closed” procedures, standardised at the whole organisation level. The demand of education concerning the construction of models remains strong only for jobs in which a creative contribution is required related to non recurrent problems (analysts, consultants).
On the basis of the previous brief considerations, we have realised that: a) today, the educational space for very simple problems and models is substantially closed; b) with reference to high-level students (post graduate and professionals) it is more important to present hints and paths for the creation of personal models rather than present predefined solutions; c) for undergraduate students, it is important to point out the interpretation implications of the realised model, relieving the component of the creation of a personal model. The approach based on Excel allows to point out the following objectives: a) the taught contents end up with a more concrete sense; b) the utilisation of models allows to apply easily the basic theory to concrete news cases; c) the utilisation of models allows to stimulate the student and provide him the occasion to extend the time dedicated for learning a specific subject.
The results of the focus group
The discussion with the students of Master in Corporate Banking pointed out, in some cases unexpectedly, the following aspects and the following opinions as for the demand of educational services.