GSBA 548: Corporate Finance
Syllabus – Spring 2016
Professor:
Office:
Office Hours:
Email:
Alexander S. Gorbenko
HOH 711
Wednesday 4:00 pm – 6:00 pm, Saturday 5:30 pm – 7:30 pm
[email protected]
COURSE DESCRIPTION
This course covers the foundations of finance with an emphasis on financial-decision
making. We will discuss many of the major financial decisions made by corporations and
investors. Essential in most of these decisions is the process of valuation, the discussion of
which will be an important emphasis of the course. Topics include criteria for making
investment decisions, valuation of financial assets and liabilities, relations between risk and
return, market efficiency, capital structure choice, payout policy, the effective use and
valuation of derivative securities (such as options and convertible securities), real options,
and risk management. The course is rigorous, but practical. Our goal is to understand general
principles and then apply them in practically important scenarios.
Finance is a challenging topic – indeed, finance professors believe (rightly) that finance is
the most challenging topic taught in business schools. Although challenging, this course will
be fun and in particular will consist of fun games – that may help you understand the tricks
of finance better than solid textbooks. Welcome to finance!
COURSE LEARNING OBJECTIVES
Through lecture, case analysis, worked samples, and by learning to apply appropriate
mathematical and financial formulas and functions, you will be able to:
1. Understand basic types, goals, and implications of financial management and the role
of the financial decision-maker.
2. Interpret financial statements and how they influence long-term planning and
growth.
3. Understand the meaning of time value of money and how to evaluate the trade-off
between dollars today and dollars sometime in the future.
4. Understand how firms decide to commit capital and its impact on cash flow
(discounted cash flow).
5. Understand the different criteria used to evaluate proposed investments (e.g., net
present value (NPV), IRR, payback period).
6. Understand interest rates and bonds and realize how interest rates impact bonds.
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7. Determine the cost of capital, and understand and apply the concepts of the weighted
cost of capital (WACC) and adjusted present value (APV).
8. Recognize and understand the elements of optimal capital structure, the effects of
financial leverage, bankruptcy, and the role of taxes.
9. Understand how asymmetric information and difference in incentives of various
market participants affect valuation of the firm, choice of investment and the means
through which it is optimally financed.
10. Understand derivatives, or options, in the context of corporate finance.
FORMAT AND TEACHING METHODS
There will be a reading assignment for each session as well as a case or other problems to
prepare for some sessions. PowerPoint lecture notes will be posted on Blackboard well
before the class. You should be prepared for each session by doing the reading and working
on the assigned case or problems. Cold calling will be used.
STUDENTS’ RESPONSIBILITIES
This course covers a large amount of material in significant depth (including many Nobelprize winning ideas, past and future) and because it is only eight weeks in length, it is
necessarily quick-paced and tough. You are strongly encouraged to be prepared for each
class and to keep up with the material as we go along. This course is structured so that each
lecture’s material builds upon the concepts introduced in prior lectures.
This course is fun (I promise) but also difficult and intensive. It is crucial to attend all
sessions. Session attendance is mandatory. Punctuality is important.
You are absolutely encouraged to ask questions in class (given limited amount of time, I
may not have time to answer all questions in class but do intend to answer all questions after
class if there are any outstanding questions).
GROUP ASSIGNMENTS AND WORK
Do all cases and assignments in study groups. The hand-in assignments should be handed in
on the dates specified before the start of the class. No late submissions will be accepted.
Submit one report per group of students. State the names of group's members clearly on the
first page. Each report should be printed and contain at most 10 standard, single-sided pages.
GRADING
Your course grade will be determined by your group assignments (three assignments, 10%
each, 30% total), your performance on the exam (50%), your class attendance (10%) and
participation (10%). Specifically, failure to attend one class deflates your course grade by
2
5% out of maximum 100%; failure to attend two or more classes -- by full 10% out of
maximum 100%.
TEXTBOOK, COURSE FOLDER, MATERIALS, AND READINGS
The textbook for this course is Corporate Finance, authored by Jonathan Berk and Peter
DeMarzo, Third Edition, published by Pearson.
Other required readings are included in the syllabus or will be made available on Blackboard
during the course.
If you are interested in some entertaining supplementary reading on financial markets, the
following books can be of interest. The first is an informative book about the origins of
modern finance:
Capital Ideas: The Improbable Origins of Modern Wall Street, authored by Peter L.
Bernstein, 2005 Wiley edition.
The second is a well-known and enjoyable book that takes a pragmatic look at investing in
the stock market:
A Random Walk Down Wall Street, authored by Burton G. Malkiel, 2007 9th W.W. Norton
& Company edition.
COURSE ETIQUETTE
Tech equipment (tablets, laptops) may be used in class only as long as they are used for notetaking or to support class participation. Cell phones are not allowed.
No student may record any lecture, class discussion or meeting with me without my prior
express written permission. I reserve all rights, including copyright, to my lectures, course
syllabi and related materials, including summaries, prior exams and all supplementary
course materials available to the students enrolled in my class.
EXAMS
The exam will be given on 27 (Wed class) and 30 (Sat class) April 2016.
Please reserve this date in your calendar as there will be no scheduled alternatives.
The exam is open book. Mock exams will be posted on Blackboard at the beginning of the
quarter.
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Type
of Submission
assessment
date
Weighting
Group/Individual
Submission Information
Assignment 1 March
9
(Wed class) /
March
5
(Sat class)
Assignment 2 March
30
(Wed class) /
April
2
(Sat class)
Assignment 3 April
20
(Wed class) /
April
23
(Sat class)
Final exam April
27
(open-book)
(Wed class) /
April
30
(Sat class)
Midterm
March
26
(open-book,
(both classes)
offline)
Class
n/a
participation
Attendance
n/a
10%
Group
Electronic/Hard copy
10%
Group
Electronic/Hard copy
10%
Group
Electronic/Hard copy
50%
Individual
Hard copy
Extra 1%
Individual
Electronic/Hard copy
10%
n/a
n/a
10% if no n/a
missed classes
5% if one
missed class
0% if two or
more missed
classes
n/a
STATEMENT FOR STUDENTS WITH DISABILITIES
Any student requesting academic accommodations based on a disability is required to
register with Disability Services and Programs (DSP) each semester. A letter of verification
for approved accommodations can be obtained from DSP. Please be sure the letter is
delivered to me as early in the semester as possible. DSP is located in STU 301 and is open
8:30 a.m.–5:00 p.m., Monday through Friday. The phone number for DSP is (213) 740-0776.
For more information visit www.usc.edu/disability.
STATEMENT ON ACADEMIC CONDUCT
USC seeks to maintain an optimal learning environment. General principles of academic
honesty include the concept of respect for the intellectual property of others, the expectation
that individual work will be submitted unless otherwise allowed by an instructor, and the
obligations both to protect one’s own academic work from misuse by others as well as to
avoid using another’s work as one’s own. All students are expected to understand and abide
by these principles. SCampus, the Student Guidebook, contains the Student Conduct Code
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in Section 11.00, while the recommended sanctions are located in Appendix A.
http://www.usc.edu/dept/publications/SCAMPUS/gov/
Students will be referred to the Office of Student Judicial Affairs and Community Standards
for further review, should there be any suspicion of academic dishonesty. The Review
process can be found at: http://www.usc.edu/student-affairs/SJACS/ Failure to adhere to the
academic conduct standards set forth by these guidelines and our programs will not be
tolerated by the USC Marshall community and can lead to dismissal.
EMERGENCY PREPAREDNESS / COURSE CONTINUITY
In case of emergency, and travel to campus is difficult, USC executive leadership will
announce an electronic way for instructors to teach students in their residence halls or homes
using a combination of Blackboard, teleconferencing, and other technologies. Instructors
should be prepared to assign students a "Plan B" project that can be completed at a distance.
For additional information about maintaining your classes in an emergency please access:
http://cst.usc.edu/services/emergencyprep.html
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COURSE SYLLABUS
Note 1: Preliminary and subject to change!
Note 2: Chapter readings refer to the textbook by Berk and DeMarzo
FEBRUARY 24 (Wed class) / 20 (Sat class): SESSION 1
Prepare:
Case: Callaway Golf
Part 1: Financial Decision Making
Background Reading:
Chapter 2: Introduction to Financial Statement Analysis (2.1-2.4)
Chapter 3: Financial Decision Making and the Law of One Price
Read:
Chapter 4: The Time Value of Money
Chapter 8: Fundamentals of Capital Budgeting (8.1-8.2)
Part 2: Financial Analysis I: Capital Budgeting
Read:
Chapter 8: Fundamentals of Capital Budgeting (8.3,8.5)
MARCH 2 (Wed class) / FEBRUARY 27 (Sat class) : SESSION 2
Prepare:
Case: Should you pay cash for a new car?
Bond Valuation Assignment
Part 1: Financial Analysis II: Return on Investment. How Not to Be Duped
Read:
Chapter 5: Interest Rates
Chapter 7: Investment Decision Rules
Part 2: Interest Rates and Bond Valuation
Read:
Chapter 6: Valuing Bonds
MARCH 9 (Wed class) / 5 (Sat class): SESSION 3
Assignment 1 to hand in:
Case: Airbus A3XX
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Part 1: Valuing the Firm
Airbus A3XX Case Discussion
Read:
Chapter 9: Valuing Stocks
Part 2: Risk and the Cost of Capital
Read:
Chapter 10: Capital Markets and the Pricing of Risk
Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model (11.111.6)
MARCH 23 (Wed class) / 12 (Sat class): SESSION 4
Prepare:
Case: Cost of Capital at Ameritrade
Part 1: What Finance Tells You about Portfolio Choice
Read:
Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model (11.711.8)
Part 2: Estimating the Cost of Capital
Cost of Capital at Ameritrade Case Discussion
Read:
Chapter 12: Estimating the Cost of Capital (12.1-12.6)
MARCH 30 (Wed class) / APRIL 2 (Sat class): SESSION 5
Assignment 2 to hand in:
Nike
Part 1: Midterm Review
Midterm and Nike Case Review
Part 2: How Do Firms Fund Investment
Read:
Chapter 14: Capital Structure in a Perfect Market
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APRIL 6 (Wed class) / 9 (Sat class): SESSION 6
Part 1: Leverage and Payout Policy I: Debt and Taxes
Read:
Chapter 15: Debt and Taxes
Chapter 18: Capital Budgeting and Valuation with Leverage (18.1-18.3)
Part 2: Leverage and Payout Policy II: Managerial Incentives and Information
Read:
Chapter 16: Financial Distress, Managerial Incentives, and Information
Practice Exam and Problems Review
APRIL 13 (Wed class) / 16 (Sat class): SESSION 7
Prepare:
Case: New Raggedly Bear Company
Part 1: Leverage and Payout Policy III: Financial Distress and Bankruptcy
Read:
Chapter 16: Financial Distress, Managerial Incentives, and Information
Part 2: Financial Ratios and Short-Term Financing
New Raggedly Bear Case Discussion
APRIL 20 (Wed class) / 23 (Sat class): SESSION 8
Assignment 3 to hand in:
Debt Policy at UST
Prepare:
Case: Arundel Partners
Part 1: Options in Real Life
Read:
Chapter 20: Financial Options (20.1-20.5)
Chapter 21: Option Valuation
Chapter 22: Real Options
Part 2: What Is Missing In The Picture?
Read:
Relax!
We will discuss (important) topics and issues we have not covered in the introductory
course
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CALLAWAY GOLF (Session 1)
Questions:
1. What are the key costs and benefits of the FX-1 product?
2. What is the gross margin for the FX-1 product? How does it compare with
Callaway Golf overall?
3. How would FX-1 change Callaway Golf’s earnings each year?
4. How would the FX-1 change Calaway Golf’s available cash each year?
5. Does the project justify the upfront investment, and the other resources it will
consume?
6. How would you determine the value of this opportunity?
7. Should Callaway Gold launch the FX-1 irons?
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SHOULD YOU PAY CASH FOR A NEW CAR (LA Times) (Session 2)
Consider the LA Times article: “Should You Pay Cash for a New Car?” Assume, based
on the information given in article that the cost of car is $8,239.05, that the loan is given
for 48 months at 14.2% APR, and that the savings rate is 8% APR. Note that this loan,
as most consumer loans (mortgages, car loans), has equal payments over the life of the
loan.
Questions:
1.
2.
3.
4.
What is the monthly payment Keppel will need to make on his car loan?
What is the “Total Interest Paid” (total payments minus the price) on the loan?
How much interest will he earn on his savings?
What is Sperling’s Rule? What is the right decision? Why?
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BOND VALUATION ASSIGNMENT (Session 2)
CASE 1: Consider the US Treasury note 2-Year Treasury Note with $100 million face
value, paying 2% coupon rate (in semi-annual payments). It was issued on September
30, 2008 and matures on Sept 30, 2010. It was sold for $99.775954 (per $100 face value)
on September 30, 2008.
Questions:
1. Draw a diagram showing the cash flows you should expect to receive from this
security if you bought it on September 30, 2008
2. What was the yield to maturity of this note (assuming a semi-annual convention)
on that day?
3. Did this note trade at premium, discount, or at par on that day?
4. If the price of the note increases to 100.025, what is the yield to maturity of the
note?
5. What is the yield of this note when it is traded at par?
CASE 2: The table below gives the yields to maturity (annualized rate) of zero-coupon
Treasury securities:
Year
YTM
(%)
1
2
3
4
3.306
3.975
5.156
5.737
Questions:
1. What is the price of the Treasury Note that pays 100 coupon in each year 1
through 4 (i.e., there are 4 payments each of 100) and 1000 face value in year 4?
2. What is the yield to maturity of this security?
3. If the market price of this security is $1,137.50, could you make an arbitrage
trade? If yes, then specify the details?
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ASSIGNMENT TO BE HANDED IN ON MARCH XX AT THE BEGINNING OF
CLASS
AIRBUS A3XX (Session 3)
Case Questions
1. Why is Airbus interested in building the A3XX? What are its objectives?
2. How many aircraft does Airbus need to sell in order to break even on the investment?
Is this number greater or smaller than your estimate of total demand for very large
aircraft (VLA) over the next 20 years?
a. Hint: Consider all capital providers as a single entity and calculate the breakeven return to them collectively. To calculate the break-even number of
planes, calculate the present value of the required investment and compare it
to the present value of a growing perpetuity of cash flow from planes sales
beginning in 2008.
3. What is the NPV? What is your decision based on the NPV analysis?
4. What are the most important assumptions you made to obtain NPV? Which
assumptions are less reasonable?
5. As Boeing, how would you respond to this situation? How does your answer depend
on what you think Airbus is likely to do?
You are the Airbus CEO. Should Airbus commit to building the A3XX? How many
orders should Airbus have before committing to develop the plane?
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COST OF CAPITAL AT AMERITRADE (Session 4)
Note that we may not have time to discuss all the questions below in class.
Questions:
1. What are Ameritrade’s primary sources of revenue?
2. How risky are these cash flows? How are they related to the stock market?
3. How can the CAPM be used to estimate the cost of capital for a real investment
decision?
4. What is the estimate of the risk-free rate that should be employed in calculating
the cost of capital for Ameritrade?
5. What is the estimate of the market risk premium that should be employed in
calculating the cost of capital for Ameritrade?
6. What do we use for beta?
7. What comparable firms do you recommend as the appropriate benchmarks for
evaluating the risk of Ameritrade’s planned advertising and technology
investments?
8. How to estimate the asset betas of comparables?
9. What is the cost of capital?
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ASSIGNMENT TO BE HANDED IN ON APRIL XX AT THE BEGINNING OF
CLASS
NIKE (Session 5)
Make sure you carefully explain your solution.
Questions:
1. Do you agree with Joanna Cohen's WACC calculation? Why or Why not?
Provide as many reasons as possible.
2. If you do not agree with Joanna's analysis, calculate your own WACC for Nike.
Justify all your assumptions.
3. What should Kimi Ford recommend regarding an investment in Nike?
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NEW RAGGEDLY BEAR (Session 7)
Questions:
1. What does an analysis of the company's financial ratios tell you?
2. If sales are $38.4 million in 2008, what will be company's funds needs?
3. Will the additional bank loan solve the company's problems? Is it appropriate?
What is appropriate?
4. You are:
a. You are Ms Natasha Perelman: What would you do?
b. You are Mr Jonathan Lamb: What would you do?
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ASSIGNMENT TO BE HANDED IN ON APRIL XX AT THE BEGINNING OF
CLASS
DEBT POLICY AT UST (Session 8)
Your job is to analyze the effect of leverage on UST, and to propose a recapitalization
plan (or not). Throughout, ignore the effect of personal taxes as well as make other
assumptions that you consider reasonable. Please list and justify all the assumptions that
you make.
Note that this is a “soft” case: there is no one correct solution and your group should do
your best to provide insightful and reasonable analysis of the situation. Grading will
take into account your analysis and justification of your decisions and assumptions.
Questions:
1. How well is UST doing?
2. What are the main sources of risk for UST cash flows?
3. Is the current capital structure of UST a good one? If yes, what are its main
benefits? If not, why not? What might explain why UST has such a capital
structure?
4. From the standpoint of credit analysts and potential bondholders, what are factors
of importance when analyzing UST? What credit rating would you assign for a
moderate addition of debt? (Note: Total interest expense on existing debt is $7.3
million.)
5. Analyze the effects of $0.5 billion and $1.0 billion in new debt and concurrent
share repurchase (and subtraction of equity). What happens to Earnings per share
(EPS) in case of addition to debt? Why?
6. Summarize the likely costs and benefits of leveraging UST. Articulate and defend
an “optimal” capital structure for UST. Should UST undertake a major
recapitalization of the company?
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ARUNDEL PARTNERS (Session 8)
Questions:
1. What is the proposed deal structure between Arundel Partners and the studios?
2. Where can you see value creation for Arundel Partners?
3. What is the timing of the typical film sequence? When does it make sense for
Arundel to buy sequels?
4. Calculate the NPV for an average sequel. Should Arundel purchase sequels
according to this NPV rule? Is this the right decision? Justify your answer.
5. Calculate the NPV accounting for real options: Arundel can choose which
sequels to produce. Is this NPV above or below the NPV for an average sequel
calculated in 4? Should Arundel purchase sequels according to this NPV rule?
6. Explain the assumptions used to obtain the NPV. Are there any assumptions to
which the NPV rule is particularly sensitive? Justify your answer by providing
the modified NPV under alternative assumptions.
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