BA 500 Core Finance Fall 2014 Lance Young PACCAR 428, (206) 543-4474
[email protected] Office Hours: TBA Teaching Assistant: John Hackney Mackenzie 333, (206) 616-3993.
[email protected] Office Hours: TBA
DESCRIPTION: Finance deals with how individuals make consumption and saving decisions and how firms make investment and financing decisions. Individuals must decide how much to consume today and how much to save for consumption in the future. This decision involves how willing they are to wait to consume and how much risk they are willing to take when saving. Firms must decide how much to invest and what to invest in. They must also decide how to allocate the rights to control of the firm and to whom to allocate the firm’s future cash flows. This necessarily involves interacting with individuals who, as part of their savings and consumption decisions, provide the firm with capital to invest and receive cash flow (and control) rights in return. These interactions between firms and individuals take place in capital markets. Thus, our study of all of these decisions will involve understanding how capital markets function. In the process, we learn some interesting and extremely useful frameworks and techniques that will be of great benefit to you in helping you as develop a competitive advantage over your peers and progress in your career! COURSE RESPONSIBILITIES: Grades will be based on two things: 1) my assessment of the depth of your command of the material and 2) my assessment of the extent to which you helped to make the class a productive learning experience. To this end the grading will be broken down as follows: Depth of Command: Cases and Exercises (Group) Midterm Exam 1: Midterm Exam 2: Final Exam:
20% 20% 20% 20%
Contribution to learning experience: Participation:
20%
Both the midterms and the final, as well as your participation grade, will be based on individual performance. Cases and excercises will be turned in as a group and graded as such. The midterms and final are mandatory. All students will take the exams during the scheduled time, no exceptions except for medical or family emergencies. A note about participation: Participation is a substantial part of your grade, as much as any individual exam and more than the individual cases. There is a very good reason for this. To get the most out this class, it is necessary that everyone prepare conscientiously and participate actively in class discussions. I cannot overstate the importance of your involvement and participation in contributing to your learning experience and the learning experience of your classmates. Failure to participate not only makes the discsussion less relevant to your interests but also robs others of your perspective, insights and questions. Those who fail to participate actively are effectively taking a zero for a substantial fraction of their course grade. Those who participate actively and consistently by asking questions both of me and of other students, engaging in class debates and volunteering to present their solutions will receive high participation grades. Those who participate only sporadically and make only ‘off-hand’ or less substantial contributions will receive low participation grades. So please participate actively. Note also that participation requires conscientious preparation. This means doing the required reading and working on the cases or homework that we will be dicussing in class. This does not mean knowing all the answers. Oftentimes identifying the ‘roadblocks’ in your own understanding will be as valuable to the class as a complete answer. Do not be surprised if after conscientious preparation you still feel there are some loose ends you are not certain about. If it were otherwise, there would be nothing for you to learn in class, and I would have been guilty of presenting you with overly simple material. Your test of whether you are learning the material, and progressing adequately, should be how you feel after the class discussion, not before. You are doing fine if after a class discussion you believe you could adequately handle a similar situation in the future. In class I tend to vacillate between asking for volunteers and calling on individuals to present their analysis. If you are not prepared, please notify me before class so we can all avoid embarrassment. If you have made the effort, you should never feel embarrassed by the result. A note about the use of laptops and other electronic devices: Since finance is a quantitative subject, I encourage all students to bring their laptops to class and use them to work on the issues we are discussing in class. I do expect, however, that the laptops and other devices (tablets, iPads etc.) will be used for course work only during class.
TEXT: Jonathan Berk and Peter DeMarzo, Corporate Finance: The Core (Third Edition), Pearson Education, 2014. 2
RECOMMENDED READING: Burton G. Malkiel, A Random Walk Down Wall Street (Ninth Edition), W.W. Norton and Company, 2007. COURSE MATERIALS: Lecture slides and selected readings are available on Canvas. CASE STUDIES: Yields, Prices and Default: All materials available on Canvas Diversification Exercise: All materials available on Canvas HP Buy or Build: All materials available on Canvas Midland Energy Resources, Inc.: Cost of Capital, Timothy A. Luehrman; Joel L. Heilprin, Harvard Product Number: 4129-PDF-ENG, purchase link: http://hbr.org/product/midlandenergy-resources-inc-cost-of-capital-brief-case/an/4129-PDF-ENG REVIEW SESSIONS: Either John or I will be holding review sessions on Friday according to the following schedule: Weeks 2&3: 3:00pm - 4:20pm Weeks 1,4-9 and 11: 11:00am -12:20
Course Schedule Basic Concepts: NPV and Time Value of Money Class 1 (Wednesday, Sept. 17th) Jump Start #1: Introduction: The Law of One Price, NPV and the Time Value of Money Reading: Berk and DeMarzo, Chapter 3 and Chapter 4 (4.1-4.5) Class 2 (Thursday, Sept. 18th) Jump Start #2: Introduction: The Law of One Price, NPV and the Time Value of Money, con’t Reading: Berk and DeMarzo, Chapter 3 and Chapter 4 (4.1-4.5) Class 3 (Friday, Sept. 19th) Jump Start #3: Bond Fundamentals Reading: Berk and DeMarzo, Chapter 6 (6.1-6.2,6.4) Class 4 (Thursday, Sept. 25th): Stock Fundamentals Reading: Berk and DeMarzo, Chapter 9 (9.1-9.2, and 9.5) Class 5 (Tuesday, Sept. 30th): Due: Yields, prices and default excercise
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Class 6 (Thursday Oct. 2nd): Market Efficiency Reading: Berk and DeMarzo, Chapter 9 (9.5) Ebiz Journal Fall 2003 pp. 16-22. Background Reading: A Random Walk Down Wall Street, Burton Malkiel
Class 7 (Tuesday, Oct. 7th): EXAM # 1
Risk, Return and Discount Rates Class 8 (Friday, Oct. 10th): Risk and Return- Diversification Reading: Berk and DeMarzo, Chapters 10. Class 9 (Tuesday, Oct. 14th): Risk and Return- CAPM, con’t Reading: Berk and DeMarzo, Chapter 11. Class 10 (Thursday, Oct. 16th): Due: Diversification Excercise Class 11 (Tuesday, Oct. 21st): Risk and Return- CAPM Reading: Berk and DeMarzo, Chapter 11.
Valuation under Uncertainty Class 12 (Thursday Oct. 23rd): NPV Project Valuation- Alternative Investment Criteria Reading:
Berk and DeMarzo, Chapter 7. Berk and DeMarzo, Chapter 6 (6.1-6.4).
Class 13 (Tuesday, Oct. 28th): NPV Project Valuation- Cash Flow Projections Reading: Berk and DeMarzo, Chapter 7. Berk and DeMarzo, Chapter 6 (6.1-6.4) Class 14 (Thursday, Oct. 30th): NPV Project Valuation- Cash Flow Projections Reading: Berk and DeMarzo, Chapter 7. Berk and DeMarzo, Chapter 6 (6.1-6.4)
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Class 15 (Tuesday, Nov. 4): Due: Case- HP Printer Part Buy vs Build Class 16 (Thursday, Nov. 6th): EXAM #2
Capital Structure Class 17 (Monday, Nov. 10th): Capital Structure- The Modiglianni and Miller Theorem Reading: Berk and DeMarzo, Chapter 14.
Class 18 (Thursday, Nov. 13th): Capital Structure- The Modiglianni and Miller Theorem Reading: Berk and DeMarzo, Chapter 14.
Class 19 (Tuesday, Nov. 18th): Capital Structure-Violations of the MM Assumptions, Part 1 Background Reading: Berk and DeMarzo, Chapter 15 and Chapter 16.
Class 20 (Thursday, Nov. 20th): Capital Structure-Violations of the MM Assumptions, Part 2 Background Reading: Berk and DeMarzo, Chapter 15 and Chapter 16.
Class 21 (Tuesday, Nov. 25th): Midland Case
Class 22 (Tuesday, Dec. 2nd): Midland Case
Class 23 (Thursday, Dec. 4th): Course Overview and Exam Review
FINAL EXAM: TBA
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