UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN

College of Commerce and Business Administration

DEPARTMENT OF FINANCE

 Finance 321: Advanced Corporate Finance

Spring, 2005

Sarab Seth

432 Wohlers

265-0276

s-seth@uiuc.edu

 

Course Web Page:    www.cba.uiuc.edu/~s-seth/fin321

                                       (back-up page at www.cba.uiuc.edu/~s-seth/fin321a)

Office Hours:            MW      10:15 - 11:45 pm

                                 TTh      10:45 - 11: 45 pm  &  1:15 - 4 pm

                                 & by appointment

Required Text:      Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance, 7th Edition (McGraw-Hill, 2003). 

Subscriptions:       Subscriptions to the Wall Street Journal and Barrons are available at student rates.  See me for sign-up forms.

Course Description: Finance 321 provides a broad exposure to the principles and techniques of financial management.  It examines the responsibilities of the corporate financial manager, and the nature of financial decision making in the context of a public corporation.  We examine in detail the three fundamental decisions that corporate financial managers make: the investment decision (what projects to accept), the financing decision (how much of the firm’s capital should be debt and how much equity) and the dividend decision (what fraction of cashflows should be paid out as dividends).  

                                    In terms of classroom style, this will be primarily a lecture course.  Nevertheless, students should come to class prepared to participate in discussions, and to both ask and answer questions.  Please note that if you ask me to write a recommendation letter for you later, how strong a letter I can write will depend upon the quality of your class participation (in addition to your grade, etc.)

                              The material will be challenging, at times.  But hopefully a huge amount of useful learning will occur by the end of the semester.

Prerequisites:        Finance 221 (Corporate Finance) and Finance 300 (Financial Markets). No exceptions.

Grades:                 I will use plus/minus grades (e.g. A-, A, A+).  Overall grades will be determined as follows:

 1)        Question of the day (10% of overall grade):

Each class will start with a short question to which you turn in a short answer on an index card in 2 or 3 minutes.  Questions will be drawn from the previous class, as well as the material assigned for that day’s class.  Questions will be graded out of 10 points: 5 just for being present and turning in an index card, and 5 for the quality of your answer.  There will be 26 classes with questions.  You get 6 free passes for the semester.  The 20 best scores will count for 10% of your grade.  (If you're late for class, you will miss the Question for that day.  You can still turn in a blank card to me, and get 5 points for attendance.)

2)         Four problem sets (15% of overall grade):

The problem sets constitute essential preparation for the exams.  Reviewing class notes and working through the practice problems on the web page will get you prepped for solving the problem sets.  In turn, the problem sets will get you prepped for the exams.  You are encouraged to discuss the questions with other students, but you are expected to complete the problem sets on your own.   Under no circumstances should you simply copy the answers from someone else.  (If you do fall prey to this temptation, you will find out the hard way why you shouldn't do this when you get back your exam.)

All problem sets are due at 4 p.m. on the designated date.  You may turn them in to me in class or drop them off in my mailbox in 340 Wohlers Hall.  Under no circumstances should you slip them in under my office door.  Turning in a problem set late will result in a substantial penalty.  The lowest problem set score will be dropped; the remaining scores will determine 15% of the course grade.  The schedule for problem sets is as follows:

Problem Set

Date Available

Date Due

1

2/2

2/9

2

2/9

2/16

3

3/9

3/16

4

4/27

5/4

3)         Group Project (10% of overall grade):

At the beginning of the semester, you pick a company from the list posted on the web page.  Each group must choose a different company.  You will turn in two reports over the semester consisting of various financial analyses of your company.  The first report (due 3/14) will essentially consist of a financial statement analysis.  The second report (due 4/27) will involve three tasks:

an analysis of stock price changes over the last year

a decomposition of the stock price into the PV of existing assets and PVGO

an estimate of WACC and asset beta. 

4)         Two mid-term examinations (20% each of overall grade):

Midterm exams will be evening exams, as per the following schedule (location will be announced in class and posted on the web page):

                        Midterm 1      Feb. 28                      7 - 9 pm     

                        Midterm 2      Apr. 4                        7 - 9 pm     

The class that will be cancelled against the first midterm is the last class before Spring Break (3/16).  So we will have class the day of the first mid-term.  For the second mid-term, there will be no class the day of the exam.  An optional review session will be held instead during the regular class time.  This will be a question-answer session, so come armed with questions.  If you have a conflict with any exam, please send me an email at least one week before the exam (be sure to specify fully what you have a conflict with, including details like course number, course name, instructor, etc).  I will not be able to offer you a conflict exam if you fail to let me know in time.

5)         Final Examination (25% of overall grade):

The final exam will be cumulative to some extent; this will be explained further in class.  It will be held during the regularly scheduled time slot for our class, namely 8 - 11 am on Thursday May 12.  This does mean no conflict exam will be offered.

6) If you have any questions about the grading of any exam or report, you must come and talk to me within one week of my returning that exam or report in class.  Please note that I will not entertain questions after one week.  This applies to any and all questions about the exam/report, including "What's wrong with my answer?" or  "What’s the right way to do this? "

Test Procedures:

      You must bring a calculator to each exam.  (Sharing of calculators is not permitted.  If you forget to bring a calculator, this will adversely affect your exam score.)  Financial and scientific calculators are permitted.  Graphing calculators, and any other calculators which permit storage of text and/or formulas, or which can be programmed to perform a sequence of computations, are not permitted.  If you have any doubt whether a given calculator is permitted or not, please check with me well before the exam. Anyone found using an illegal calculator at an exam will be asked to leave the exam, and receive a score of zero.

      Financial calculators will be required on some exams. 

      Unless otherwise specified in class for certain types of problems, you should adopt the following rules for rounding:

Do not round off intermediate numbers in calculations, but carry them to 8 places of decimals.

This does not mean you have to write out each number in your exam to 8 decimal places.  You can write them rounded to two decimal places as long as the values actually used in your calculations are correct to 8 decimal places.

In your final answer, round off dollar values to the nearest cent (e.g. $555.555 will become $555.56), percentages to two decimal places (e.g. 6.2325% can be written as 6.23%, or .0623), and anything else to two decimal places.

In problems with multiple parts, if your answer to part a is 3.55555556, you can write it as 3.56.  However, if you have to use that number again to compute something in part b, you must use 3.55555556 in the calculation.  In other words, since it is an intermediate number for the part b calculation it must be accurate to 8 places.

So the general rule is: in your exam you can write numbers to 2 decimal places if you like, but all numbers entered into your calculator must be correct to 8 places.  

      A formula sheet will be provided for each exam.  I will post a proposed formula sheet on the web page roughly one week before each exam.  If you would like anything added to the formula sheet, please let me know well before the exam.  

 

Academic Integrity:

Students are reminded of the University’s policy on Academic Integrity (described in Rule 33 of the Code of Policies and Regulations Applying to Students).  Please note that violations of Academic Integrity of any kind will be treated as an extremely serious matter; the minimum penalty will be a grade of F for the course.  No exceptions.  (If a group commits an academic integrity violation, all members of that group will get the same penalty.  Once again, no exceptions.)

 

COURSE OUTLINE

Lecture #  Date                                            Subject                                                   Assignment    

    1.         1/19        Syllabus                                                                                     

    2.         1/24        Introduction, Present Value                                                           Chaps. 1, 2

    3.         1/26        PV                                                                                              Chaps. 2, 3

    4.         1/31        Financial Statement Analysis                                                         Chap. 29

    5.         2/2          Financial Statement Analysis, Stock Valuation                                Chap. 4

    6.         2/7          Stock Valuation                                                                            Chap. 4

    7.         2/9          Inv. Decision Rules                                                                       Chap. 5

    8.         2/14        Using the NPV Rule                                                                       Chap. 6

    9.         2/16        Using the NPV Rule                                                                       Chap. 6

  10.         2/21        Risk, Return and the CAPM                                                            Chaps. 7, 8

  11.         2/23        Risk, Return and the CAPM                                                            Chaps. 7, 8 

  12.         2/28        Midterm # 1

  13.         3/2          Risk, Return and the CAPM, Capital Budgeting and Risk                  Chaps. 7, 8, 9

  14.         3/7          Cap. Budgeting & Risk                                                                   Chap. 9

  15.         3/9          Sensitivity Analysis, Decision Trees                                                Chap. 10

  16.         3/14        Decision Trees , Practical Issues in Cap. Budgeting                         Chaps. 10, 11, 12

  17.         3/16        Market Efficiency and Corporate Financing                                     Chap. 13

  18.         3/28        Market Efficiency and Corporate Financing, Dividend Policy             Chaps. 13, 16

  19.         3/30        Dividend Policy                                                                              Chaps. 16, 17

  20.         4/4          Midterm # 2

  21.         4/6          Debt Policy in PCM                                                                        Chap. 17

  22.         4/11        Debt Policy in PCM, Debt Policy with Imperfections                          Chaps. 17, 18

  23.         4/13        Debt Policy with Imperfections                                                         Chap. 18

  24.         4/18        Debt Policy with Imp., Impact of Debt Policy on Capital Budgeting      Chaps. 18, 19

  25.         4/20        Impact of D. Policy on Cap. Bud., Discussion of Group Project           Chap. 19

  26.         4/25        Real Options                                                                                   Chap. 22

  27.         4/27        Real Options                                                                                   Chap. 22

  28.         5/2          Real Options                                                                                   Chap. 22

  29.         5/4          Mergers                                                                                          Chap. 33

 

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