FIN530: Corporate Finance Credit Hours: 3

Contact Hours: This is a 3-credit course, offered in accelerated format. This means that 16 weeks of material is covered in 8 weeks. The exact number of hours per week that you can expect to spend on each course will vary based upon the weekly coursework, as well as your study style and preferences. You should plan to spend 10-25 hours per week in each course reading material, interacting on the discussion boards, writing papers, completing projects, and doing research.

Course Description and Outcomes

Course Description: This course provides a comprehensive array of knowledge and skills to manage the finance function of a modern organization, and to provide the necessary background both to understand and to apply financial-management techniques in order to be successful in positions of business management. Recommended Prior Course: FIN500 & ACT500 Course Overview: This course presents the most common financial management operations of a corporation through the study of financial theories and applications. Topics include financial statement analysis, capital structure and dividend theory, valuation models, portfolio theory, stock options and capital budgeting. The course strives to present a balance between quantitative methods and the decision making required for success in corporate finance. Financial theories, focused on the valuation of securities such as stocks, bonds and stock options, are presented. Through the comprehensive study of capital budgeting, students learn to compute and analyze expected cash flows, and determine required rates of return, through the study of weighted average cost of capital. Ultimately, these decisions are made through the analysis of quantitative results. The goal of financial management is to maximize firm value. While many of financial management’s decisions may be intuitive in nature, it is important to understand the basic financial theories that support the decisions ultimately leading to maximizing a firm’s value. Thus, while this course emphasizes rigorous quantitative applications of financial theory, equally, the judgments necessary for successful financial management are examined. Course Learning Outcomes:

1. Analyze the financial condition of a firm using financial-statement analysis, financial-ratio analysis, Du Pont analysis, common-size analysis, comparative analysis, and trend analysis.

2. Calculate values of financial assets such as bonds and stocks based on the concept of the time value of money.

3. Evaluate financial assets and portfolios using fundamental analysis, modern portfolio theory, and capital assets pricing model.

SAMPLE

4. Value options using the Black-Scholes Option Pricing Model, and methods for reducing financial risks. 5. Analyze an investment proposal within a capital-budgeting framework given the weighted average cost

of capital for a firm. 6. Assess the impact of capital structure and dividend decisions on firm value.

Participation & Attendance

Prompt and consistent attendance in your online courses is essential for your success at CSU-Global Campus. Failure to verify your attendance within the first 7 days of this course may result in your withdrawal. If for some reason you would like to drop a course, please contact your advisor. Online classes have deadlines, assignments, and participation requirements just like on-campus classes. Budget your time carefully and keep an open line of communication with your instructor. If you are having technical problems, problems with your assignments, or other problems that are impeding your progress, let your instructor know as soon as possible.

Course Materials

Textbook Information is located in the CSU-Global Booklist on the Student Portal.

Course Schedule

Due Dates The Academic Week at CSU-Global begins on Monday and ends the following Sunday.

Discussion Boards: The original post must be completed by Thursday at 11:59 p.m. MT and Peer Responses posted by Sunday 11:59 p.m. MT. Late posts may not be awarded points.

Mastery Exercises: Students may access and retake mastery exercises through the last day of class until they achieve the scores they desire.

Critical Thinking Activities: Assignments are due Sunday at 11:59 p.m. MT.

Week # Readings Assignments

1

Chapters 1 & 2 in Corporate Finance: Core Principles & Applications

Chapter 3 in Corporate Finance: Core Principles & Applications, only sections 3.1. 3.2 and 3.4, Summary and Conclusions, and Closing Case

Discussion (25 points)

Mastery (10 points)

Critical Thinking (50 points)

2 Chapter 5 in Corporate Finance: Core Principles & Applications Discussion (25 points)

Mastery (10 points)

Critical Thinking (50 points)

3 Chapter 6 in Corporate Finance: Core Principles & Applications Discussion (25 points) SAMPLE

Mastery (10 points)

Critical Thinking (50 points)

4 Chapters 10 & 11 in Corporate Finance: Core Principles &

Applications Discussion (25 points)

Mastery (20 points)

Critical Thinking (50 points)

5

Chapter 7 in Corporate Finance: Core Principles & Applications,

only sections 7.1, 7.2, 7.5, 7.6 and 7.8, Summary and

Conclusions, and Closing Case

Chapter 8 in Corporate Finance: Core Principles & Applications, only sections 8.1 and 8.2, Summary and Conclusions, and Closing Case

Discussion (25 points)

Mastery (10 points)

Critical Thinking (50 points)

6

Chapter 9 in Corporate Finance: Core Principles & Applications,

only sections 9.1 through 9.3, Summary and Conclusions, and

Closing Case

Chapter 12 in Corporate Finance: Core Principles & Applications, only sections 12.1 through 12.10, Summary and Conclusions, and Closing Case

Discussion (25 points)

Mastery (10 points)

7

Chapter 17 in Corporate Finance: Core Principles & Applications, only sections 17.1 through 17.8, Summary and Conclusions, and Closing Case

Discussion (25 points)

Mastery (10 points)

Critical Thinking (100 points)

8 Chapters 14, 15, & 16 in Corporate Finance: Core Principles &

Applications

Discussion (25 points)

Mastery (20 points)

Portfolio (350 points)

Assignment Details

This course includes the following assignments/projects: Module 1

Critical Thinking Assignment: Financial Statement Analysis Case Study (50 points)

Apple, Inc., has been riding high, becoming the largest corporation in America in 2012. One quick way to analyze Apple is by using DuPont Analysis (ROE = PM * AT * EM)

1. Go to www.finance.yahoo.com and find the most

current Income Statement and Balance Sheet for Apple and compute all 4 ratios for Apple for the past 3 years. Please use the Yahoo site so that numbers are consistent. Google is one of Apple’s primary competitors. Compute the DuPont Ratio for Google for the most current year only. Take all numbers out at least 2 places past the decimal.

When you are done computing the ratios, write an essay sharing your analysis. Be sure to discuss all four ratios of the DuPont analysis in a time series as well as the cross-sectional comparison with Google. In the essay, do not focus on the numbers used to compute ratios, but instead show an ability to interpret the economic meaning of the computed ratios.

Your paper should be in a Word document, two pages in length (double spaced) with at least one reference, plus an appendix containing all ratio calculations (including a note on the numerator and denominator used).

SAMPLE

1 Regarding the equation appearing at the beginning of this assignment, recall that the ratios included in the

DuPont Identity are as follows:

ROE = Return on equity = Net income/Total stockholders’ equity (stated as a %)

PM = Profit margin = Net income/Total revenue (stated as a %)

AT = Asset turnover = Total revenue/Total assets (stated as a whole number and not as a %)

EM = Equity multiplier = Total assets/Total stockholders’ equity (stated as a whole number and not as a %)

State your answer (for example) like the following equation: 35.01% = 15.14% * 1.25 * 1.85

Module 2

Critical Thinking Assignment: Bond Pricing and Yield Mini-Case Study (50 points)

On January 1, 2006, Joan James purchased five 7.2% semi-annual bonds with twenty years to maturity. The maturity value of each bond is $1000, and it makes its coupon payments on June 30 and December 31 of each year. At the time of the purchase, the bonds’ yield to maturity was 7.8%. On 1/1/2012, Joan sells the bonds, which are now yielding 4.6%. Answer the following questions:

1. What is the purchase price of the bonds? 2. What is the sell price of the bonds? 3. What nominal rate of return did Joan receive on this investment; i.e., what is her holding period yield?

Hint: you must consider the time value of money when answering this question. 4. When Joan purchased the bond, its yield to maturity was 7.8%. Why is her holding period yield different

than 7.8%? 5. If the average inflation rate over this holding period was 3.1%, what was Joan’s real rate of return using

the Fisher equation 5.2 in your text1?

1 Equation 5.2: 1 + R = (1 + r) (1 + h) where R = nominal rate of return, r = real rate of return, and h = the

inflation rate.

Complete your work in a Word or Excel document. Show your work wherever possible. If you use a financial calculator to solve these problems, note your keystrokes. If you use the spreadsheet to solve these problems, leave your commands in the spreadsheet cells.

Module 3

Critical Thinking Assignment: Stock Valuation Mini-Case Study (50 points)

In this chapter our textbook authors demonstrate two methods for computing the value of a stock, the dividend discount model (DDM) and the P/E model. In this assignment you will be applying these models to IBM, Inc.

1. Let’s assume that IBM is a constant-growth firm with its quarterly dividends paid as an annual dividend at the end of each year; i.e., find total dividends paid in the previous year and assume they were paid in one lump sum at the end of the previous year. Assume that the dividend paid during the past year grows at a

rate of g, and g = 5%. The price estimate of IBM stock would be

using the dividend discount model.

Let’s assume R is calculated using the Capital Asset Pricing Model (CAPM), where the risk-free rate of return is 3% and the market rate of return is 10%. You can find IBM’s price history and beta at http://finance.yahoo.com/. Compute the value of IBM stock given this information.

2. Now let’s assume the P/E (price-earnings ratio) model gives us a better estimate of IBM stock value. In 2011, IBM’s P/E range was 13.19-13.43 and its 12/31/11 EPS was $13.06. You should assume that EPS will grow by an annual rate of g% (see part 1). Analyst estimates on 12/31/11 are that the P/E will rise by 12-13.5% in the next several years. Find the price range estimated for the stock at the end of the current year SAMPLE

using the P/E model. Find the present value of the expected prices using your CAPM R (from part 1) as the discount rate.

3. Compare the two estimates of stock price to IBM’s stock price at the end of the most recent year. Discuss your findings in a 1-page essay. If one of the valuation methods does not work well, be sure to discuss why that may be true. No references are required.

Complete your work in a Word or Excel document. Show your work wherever possible. If you use a financial calculator to solve these problems, note your keystrokes. If you use the spreadsheet to solve these problems, leave your commands in the spreadsheet cells.

Module 4

Critical Thinking Assignment: Risk and Return Study (50 points)

Attached is a spreadsheet that has the annual return measured for 12 different stock investments. The spreadsheet shows the average return and standard deviation of the return for the past 15 years. Use this spreadsheet and spreadsheet commands to do the following:

1. Compute the return for each year on a portfolio that contains an equal investment in all 12 securities. 2. Compute the 15-year average return and standard deviation of return for the portfolio that consists of all

12 securities with equally weighted investment. 3. Compute the correlation and covariance between the return on company #12 and the return on the

equally-weighted portfolio. Hint: There is a spreadsheet command that does this calculation. 4. Compute the beta of Company #12 using the information you have collected. 5. Now using the beta you created for Company #12, compute the required rate of return using the Capital

Asset Pricing Model (CAPM), assuming that the average market return is the return of your equally-weighted portfolio and the risk-free rate of return is 2.5%.

6. If you were told that analysts estimate Company #12 will have a 5% rate of return next year, would you buy the stock? Why or why not?

Complete your work on the Excel spreadsheet provided. Be sure to keep your formulas or commands in the cells on your Excel spreadsheet. Include on the Excel sheet any brief explanatory remarks needed.

Module 5

Critical Thinking Assignment: Capital Budgeting Mini-Case Study (50 points)

Consider two mutually exclusive R&D projects that ADM is considering. Assume the discount rate for ADM is 15%.

Project A: Server CPU .13 micron processing project. By shrinking the die size to .13 micron, ADM will be able to offer server CPU chips with lower power consumption and heat generation, meaning faster CPUs.

Project B: New telecom chip project. Entry into this industry will require introduction of a new chip for cell phones. The know-how will require a large amount of up-front capital, but success of the project will lead to large cash flows later on.

Year A B

0 -$650,000 -$975,000

1 320,000 260,000

2 320,000 350,000

3 230,000 360,000 SAMPLE

4 175,000 400,000

5 120,000 500,000

Requirements of the Assignment

1. Using either a spreadsheet or a financial calculator, compute the NPV and IRR of each project. Round NPV to the nearest dollar and IRR to the nearest tenth of a percent. If using NPV, which project should be accepted? If using IRR, which project should be accepted?

2. What two patterns in cash flows have caused a conflict in your choices?

3. Compute the incremental cash flows of Project B over A and then compute your incremental IRR and NPV. What conclusion can be formed from these calculations?

Complete your work in a Word or Excel document. Show your work wherever possible. If you use a financial calculator to solve these problems, note your keystrokes. If you use the spreadsheet to solve these problems, leave your commands or equations in the spreadsheet cells.

Portfolio Project: Requirement 1 (0 points)

This week you should begin work on Requirement 1 of the assignment. Using Excel, create a spreadsheet that calculates all relevant cash flows (i.e., initial investment, periodic cash flows, and terminal value). Note: The spreadsheet should have data at the top and the cash flow calculations completely in equations, or picking up numbers from a previous cell. The instructor should be able to change inputs. The spreadsheet automatically adjusts to those changes. Round all numbers to the nearest dollar.

Submit the spreadsheet by Sunday of Week 5 so the instructor can review your work and provide suggestions for improvement. No points will be assigned for this, but points will be deducted from your final grade on the Portfolio Project if you fail to submit this assignment by the end of Week 5. Additionally, work received later than Week 6 of the course will not receive feedback prior to the final grading of the portfolio project.

Module 6

Portfolio Project: Requirement 2 (0 points)

Compute the weighted-average cost of capital (WACC) for the chosen firm on your spreadsheet. Take this number out to the nearest hundredth of a percent (e.g. 33.33%). There is no preferred stock in the company. Determine the weight of debt and common equity by the current market value. Complete Requirement 2 and submit your work by Sunday of this week so that your instructor can review and provide suggestions for improvement. No points will be assigned for this, but points will be deducted from your final grade on the Portfolio Project if you fail to submit this assignment by the end of Week 6. Additionally, work received later than Week 7 of the course will not receive feedback prior to the final grading of the portfolio project.

Module 7

Critical Thinking Assignment Options Problems (100 points)

1. You can buy a 6-month call contract (i.e., for 100 shares) with an exercise price of $65 for a cost of $2.10 *100. Assume the risk-free rate of return is 0%.

a. What is your dollar profit (loss) and percentage return if you purchase one call contract, and in 6

months ABC stock is selling for $85?

SAMPLE

b. What is your dollar profit (loss) and percentage return if you purchase one call contract, and in 6 months ABC is selling for $45?

c. What is your dollar profit (loss) and percentage return if you purchase one call contract, and in 6 months ABC is selling for $25?

2. You can buy a 6-month put contract (i.e., for 100 shares) with an exercise price of $50 for a cost of $4.15 *

100. Assume the risk-free rate is 0%.

a. What is your dollar profit (loss) and percentage return if you purchase one put contract, and in 6 months the underlying stock is selling for $40?

b. What is your dollar profit (loss) and percentage return if you purchase one put contract, and in 6 months the underlying stock is selling for $45?

c. What is your dollar profit (loss) and percentage return if you buy one put contract, and in 6 months the underlying stock is selling for $50?

3. Assume the risk-free rate is 0%. What is your total dollar profit (loss) if you buy a 50 December put

contract on XYZ, Inc., quoted at $2.15 AND buy a 49 December call contract on XYZ, Inc. at $3.50 and the ending price of XYZ is:

a. $28 b. $38 c. $48 d. $58

Hint: It is easiest to compute each option’s profit or loss and then add them together.

4. Some of the quotes below are clearly mispriced. In fact, there are at least 6 quotes that violate various

price behaviors of options. Identify the mispriced options by their nature (call or put), their strike price, and the expiration month and then state which relationship/pricing rule is being violated.

SAMPLE

Calls Puts

Option and NY

Close

Exercise/

Strike

Price

Expiration

Vol.

Last

Vol.

Last

GM 5 November 89 1.12 41 .15

6.80 5 December 85 1.15 22 .10

6.80 8 November 5 1.15 41 1.10

6.80 8 February 60 .45 55 1.20

5. What are the prices of a call option and a put option with the following characteristics?

Stock price = $73

Exercise price = $70

Risk-free rate of return = 4%, compounded continuously

Maturity = 8 months

Standard deviation = 49% per year.

Complete your work in a Word or Excel document. Show your work wherever possible. If you use a financial

calculator to solve these problems, note your keystrokes. If you use the spreadsheet to solve these problems,

leave your commands in the spreadsheet cells.

Module 8

Portfolio Project: Comprehensive Capital Budgeting Problem (350 points) Blue Bottling, Inc. (BBI), is a bottling company and is considering expanding into filling 16-ounce bottles. In order to do so, BBI must purchase a new bottling machine. The machine would not replace the machine used to fill 32-ounce bottles. The risk of this project is similar to the current risk of the company. BBI uses Net Present Value as its investment decision method. Therefore, BBI executives have decided that their weighted average cost of capital would be an appropriate discount rate to use when analyzing the project.

About the Machine BBI managers estimate the cost of the machine to be $260,000. In order for the machine to be usable for BBI, it must be modified, costing $40,000. The machine will be depreciated using straight-line depreciation, assuming a 7-year life and $30,500 salvage value. BBI managers believe that the machine will be replaced at the end of 7 years at which time it will be sold for its salvage value. During the 7 years of its use, managers estimate annual earnings before interest, depreciation and taxes (EBITDA) to be $60,000. There will be an increase in net working capital of $5000 with the new press, due to increased accounts receivable and inventory costs. Weighted Average Cost of Capital SAMPLE

Current investigation shows that the firm has a 40% marginal tax rate. (Round all numbers to one-hundredth of one percent). Debt The firm has 7000 of its $1000 par, 18-year, 5% semi-annual bonds that are currently outstanding and being quoted at 104:8. Common Stock BBI common stock is currently trading for $50 per share and there are 100,000 shares issued and outstanding. There are two methods of computing the cost of capital, and you should average the two values for your final cost of common stock. The firm will pay annual dividends of $3.00 per share in the coming year. The firm’s dividends and earnings have been growing at an annual rate of 3.5%, and this is expected to continue in the future. Lang’s beta is currently .8 and the current 90-day t-bill rate is 2.5%, while the historic market average is 10%. Requirements of the Assignment 1. (Due Module 5) Using Excel, create a spreadsheet that calculates all relevant cash flows (i.e., initial

investment, periodic cash flows, and terminal value). Note: The spreadsheet should have data at the top and the cash flow calculations completely in equations, or picking up numbers from a previous cell. The instructor should be able to change inputs. The spreadsheet automatically adjusts to those changes. Round all numbers to the nearest dollar. Submit the spreadsheet by Sunday of Week 5 so the instructor can review your work and provide suggestions for improvement. No points will be assigned for this, but points will be deducted from your final grade on the Portfolio Project if you fail to submit this assignment by the end of Week 5. Additionally, work received later than Week 6 of the course will not receive feedback prior to the final grading of the portfolio project.

2. (Due Module 6) Compute the weighted-average cost of capital (WACC) for the chosen firm on your spreadsheet. Take this number out to the nearest hundredth of a percent (e.g. 33.33%). There is no preferred stock in the company. Determine the weight of debt and common equity by the current market value. Complete Requirement 2 and submit your work by Sunday of this week so that your professor can review and provide suggestions for improvement. No points will be assigned for this, but points will be deducted from your final grade on the Portfolio Project if you fail to submit this assignment by the end of Week 6. Additionally, work received later than Week 7 of the course will not receive feedback prior to the final grading of the portfolio project.

3. Using Excel equations, compute the NPV and IRR.

4. BBI management expressed concern over their estimate of EBITDA of $60,000, especially if the economy deteriorated suddenly. Because of this concern, you’ve been asked to complete a sensitivity analysis, computing the NPV if EBITDA were $54,000 instead of $60,000. (Note that if your spreadsheet is set up correctly, you should be able to change the $60,000 data input to $54,000 and all calculations will change automatically, including the calculation of a new NPV and IRR.) In fact, managers would like an estimate of the break-even level of EBITDA, if you could provide that information.

5. BBI management has also expressed concern over the cost of the new machine. There has been increased demand for the larger bottles, so prices have risen recently on the machine. It is possible that the machine will cost 10% more (i.e., $286,000), with installation not changing. If this occurs, managers believe that salvage value will also rise by 10%. Managers want to be sure the project is still a good one to accept if the machine costs more than originally anticipated. Use EBITDA of $70,000. SAMPLE

6. Write a 1-3 page memo (no more, no less) to the managers of BBI discussing your findings. Assume that the managers do not understand capital budgeting, therefore you should minimize financial jargon in your memo. You should assume that the managers will review your spreadsheet prior to reading the memo and before making a final decision.

7. Submit both your spreadsheet and memo by the end date of the course.

Course Grading

Course Grading

20% Discussion Participation 45% Critical Thinking Activities 35% Final Portfolio Paper

Grading Scale and Policies

A 95.0 – 100

A- 90.0 – 94.9

B+ 86.7 – 89.9

B 83.3 – 86.6

B- 80.0 – 83.2

C+ 75.0 – 79.9

C 70.0 – 74.9

D 60.0 – 69.9

F 59.9 or below

In-Classroom Policies For information on late work and incomplete grade policies, please refer to our In-Classroom Student Policies and Guidelines or the Academic Catalog for comprehensive documentation of CSU-Global institutional policies.

Academic Integrity Students must assume responsibility for maintaining honesty in all work submitted for credit and in any other work designated by the instructor of the course. Academic dishonesty includes cheating, fabrication, facilitating academic dishonesty, plagiarism, reusing /re-purposing your own work (see CSU-Global Guide to Writing and APA Requirements for percentage of repurposed work that can be used in an assignment), unauthorized possession of academic materials, and unauthorized collaboration. The CSU-Global Library provides information on how students can avoid plagiarism by understanding what it is and how to use the Library and Internet resources. Citing Sources with APA Style All students are expected to follow the CSU-Global Guide to Writing and APA Requirements when citing in APA (based on the APA Style Manual, 6th edition) for all assignments. For details on CSU-Global APA style, please review the APA resources within the CSU-Global Library under the “APA Guide & Resources” link. A link to this document should also be provided within most assignment descriptions on your course’s Assignments page. Netiquette Respect the diversity of opinions among the instructor and classmates and engage with them in a courteous, respectful, and professional manner. All posts and classroom communication must be conducted in accordance

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with the student code of conduct. Think before you push the Send button. Did you say just what you meant? How will the person on the other end read the words? Maintain an environment free of harassment, stalking, threats, abuse, insults or humiliation toward the instructor and classmates. This includes, but is not limited to, demeaning written or oral comments of an ethnic, religious, age, disability, sexist (or sexual orientation), or racist nature; and the unwanted sexual advances or intimidations by email, or on discussion boards and other postings within or connected to the online classroom. If you have concerns about something that has been said, please let your instructor know.

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