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EMG 3225 Finance for Managers


Course Description

Introduces the principles of corporate financial management. Emphasizes the time value of money in investments of real or financial assets. Covers planning for current assets and liabilities, and long-range capital. Passing grade in EST 2703 is recommended. (Requirements: Ability to use computer spreadsheets and financial business calculator, and enrollment in University Alliance.) 

Course Objectives

After completing this course, students will be able to

  • Define markets and their purpose and give examples of real and financial markets
  • Explain what makes markets efficient or inefficient
  • Describe the investment banking function and process. Contrast direct lending/borrowing and financial intermediaries
  • List the factors that affect the cost of money – interest rates. List the determinants of market interest rates and explain how each is a risk factor
  • Using various models calculate the values or returns on bonds and stocks. Define their risks, and use statistics to calculate returns and risks on individual investments or portfolios of investments.
  • Explain how a firm controls and manages working capital – receivables, inventories, credit policy, short term borrowing, and cash flows
  • Use and apply various evaluation models to long term asset acquisitions or replacements. Apply various methods to asset the riskiness or sensitivity of these models

Week 1


Lecture: Course Introduction and Welcome
Lecture: The Financial Manager and the Firm

Outcomes

  • This is a general survey of interesting topics in corporate finance. It begins with a brief discussion of the role of the financial manager and is followed by an examination of the different legal organizational forms of business. Although all of the most common organizational forms are discussed, the most common form for the purposes of the remainder of the course is the corporate form. The module then proceeds with the financial function of the manager and the goal of the firm, which is to maximize shareholder wealth. It is this goal that requires that we recognize its conflicts such as agency and ethical problems
  • Identify the key financial decisions facing the financial manager of any business firm
  • Identify the basic forms of business organization used in the United States and summarize their key characteristics, strengths, and weaknesses
  • Describe the typical organization of the financial function in a large corporation
  • Explain why maximizing the current value of the firm’s stock price is the appropriate goal for management
  • Discuss how agency conflicts affect the goal of maximizing stockholder wealth
  • Explain why ethics is an appropriate topic in the study of corporate finance

Week 2


Lecture: The Financial Environment and the Level of Interest Rates

Outcomes

  • This lecture identifies three kinds of decisions that financial managers make: (1) Capital Budgeting Decisions, which concern the purchase of capital assets; (2) Financial Decisions, which concern how assets will be paid for; and (3) Working Capital Management Decisions, which concern day-to-day financial matters.  Making sound decisions in any of these areas requires knowledge of financial markets and services.  As does your personal financial, savings, investment, and retirement decisions
  • In making capital budgeting decisions, financial managers should select projects whose cash flows increase the value of the firm.  You as an investor want to make sound savings and investment decisions that will increase your net worth and better prepare yourself for retirement.  The financial models used in evaluating these projects and analyzing investments require an understanding of financial and investment markets and interest rates. In making financial decisions, financial managers want to obtain capital at the lowest possible cost, which means they need to understand how financial markets work and what financial alternatives are available.  Finally, working capital management, whether corporate or personal, is concerned with assuring there is enough money to pay bills and how best to invest excess cash
  • This lecture provides an overview of the financial and investment sectors and the services they provide.  It covers how the financial system facilitates the transfer of money from those who have it to those who need it, direct financing through the issuing of debt and equity using investment banks, and indirect financing through financial institutions and the services they provide.  Finally there is a discussion of the factors that determine the general level of interest rates in the economy and why interest rates fluctuate over time
  • Discuss the primary role of the financial system in the economy and describe the two basic ways in which fund transfers take place
  • Discuss direct financing and the important role that investment banks play in this process
  • Describe the primary and secondary markets and explain why secondary markets are so important to businesses
  • Explain why money markets are important financial markets for large corporations
  • Discuss the most important stock market exchanges and indexes
  • Explain how financial institutions serve consumers and small businesses that are unable to participate in the direct financial markets and describe how corporations use the financial system
  • Explain how the real rate of interest is determined in the economy, differentiate between the real rate and the nominal rate of interest, and be able to compute the nominal rate of interest

Week 3


Lecture: Financial Statements, Cash Flows, and Taxes

Outcomes

  • In the earlier lectures we noted that all businesses have stakeholders – owners, managers, creditors, suppliers, and the government who have some claims on the firm's cash flows.  The stakeholders in the firm along with the shareholders, need to monitor the firm's progress and evaluate its performance. Financial statements enable them to do these things. The accounting system is a framework that gathers information about the firm's business activities and translate the information into objective numerical financial reports
  • Most firms prepare financial statements on a regular basis and have independent auditors certify that the financial statements have been prepared in accordance with generally accepted accounting principles and contain no material misrepresentations
  • This lecture reviews the basic structure of a firm's financial statements and explains how the various statements tie together. We examine the preparation of the balance sheet, income statement, a statement of retained earnings, and the statement of cash flows and then examine the Federal Tax Code
  • Explain generally accepted accounting principles (GAAP) and their importance to the economy
  • Know the balance sheet identity and explain why a balance sheet must balance
  • Describe how market-value balance sheets differ from book-value balance sheets
  • Identify the basic equation for the income statement and the information it provides
  • Explain the difference between cash flows and accounting income
  • Explain how the four major financial statements are related
  • Discuss the difference between average and marginal tax rates
  • Interpret how specific transactions impact total assets, the current ratio in net income

Week 4


Lecture: Analyzing Financial Statements

Outcomes

  • The last module reviewed the basic structure of financial statements. This module explains how financial statements are used to evaluate the company's overall performance and assess its strengths and shortcomings. The basic tool used to do this is financial ratio analysis. Financial ratios are computed by dividing one number from a firm's financial statements by another such number in order to allow for meaningful comparison between firms or to track changes within the firm over time
  • Management can use the information from this type of analysis to help maximize the firm’s value by identifying areas where performance improvements are needed
  • This module covers the construction of common-size financial statements which allow comparison between firms of different size as well as permitting the analysis of a firm's financial performance over time. There is an explanation of how to calculate and interpret key financial ratios and the comparison of these rations against benchmarks. Financial analysis is not a perfect system and thus the module concludes with a description of the limitations of the financial statement analysis
  • List the three perspectives from which financial statements can be viewed
  • Describe common-size financial statements, explain why they are used, and be able to prepare and use them to analyze the historical performance of a firm
  • Discuss how financial ratios facilitate financial analysis, and be able to compute and use them to analyze a firm’s performance
  • Explain what benchmarks are, describe how they are prepared, and discuss why they are important in financial statement analysis
  • Identify the major limitations in using financial statement analysis

Week 5


Lecture: The Time Value of Money and Discounted Cash Flows and Valuation

Outcomes

  • The module covers some of the most important concepts in finance.  To do well in this class and to fully understand finance you must completely understand all of the concepts, calculations, and utilization of present and future values, perpetuities, and annuities covered in this lesson
  • This module begins with the concept of the time value of money.  Time value includes future value which tells how funds will grow if they are invested at a particular interest rate, and present value which provides the value today of a cash payment received in the future.  The basic concept is simple.  Dollars today are more valuable than dollars to be received in the future.  The process of compounding and discounting for a single payment is explained and followed by determining the values now and in the future of multiple cash flows.  Multiple cash flows can vary in size each period or be level as in the case of annuities and can have an end date or can go on forever in the case of perpetuities.  And be sure to understand the Rule of 72, the quick and easy means of determining the number of years required to double a sum of money at a given interest rate
  • Explain what the time value of money is and why it is so important in the field of finance
  • Explain the concept of future value, including the meaning of principal amount, simple interest, and compound interest, and be able to use the future value formula to make business decisions
  • Explain the concept of present value and how it relates to future value, and be able use the present value formula to make business decisions
  • Discuss why the concept of compounding is not restricted to money, and be able to use the future value formula to calculate growth rates
  • Explain why cash flows occurring at different times must be discounted to a common date before they can be compared, and be able to compute the present value and future value for multiple cash flows
  • Describe how to calculate the present value of an ordinary annuity and how an ordinary annuity differs from an annuity due
  • Explain what a perpetuity is and how it is used in business, and be able to calculate the value of a perpetuity
  • Discuss why the effective annual interest rate (EAR) is the appropriate way to annualize interest rates, and be able to calculate EAR

Week 6


Lecture: Risk and Return, Bond Valuation, and the Structure of Interest Rates

Outcomes

  • There is a relationship between risk and return.  Investors, including businesses and individuals, require a higher rate of return from riskier assets.  Thus it is important to understand the risk concepts and their measurement.  Knowing the risk involved in investments, it is vital to employ means of lowering the risk on a group of assets through diversification
  • Apply the concept of diversification, and know that the benefits fall off quickly after 12 securities
  • Define dollar return and rate of return
  • Identify how risk aversion influences required rates of return
  • Examine the distribution of realized returns (1926–2006) and understand the returns by security class
  • Understand diversifiable risk and market risk and be able to explain which of these is relevant to a well-diversified investor
  • Explain the concepts of beta
  • Discuss various techniques to lessen a portfolio’s risk
Lecture: Bond Valuation and the Structure of Interest Rates

Outcomes

  • This section is all about bonds, their characteristics, and how they are valued or priced in the market.  Essentially bonds are valued at the present value of the promised cash flows (coupon and principal payments), discounted at the current rate of interest for bonds of similar maturity and risk
  • List the main classifications of bonds and differentiate among them
  • Identify the key characteristics common to all bonds
  • Calculate the value of a bond with annual or semiannual interest payments
  • Explain why the market value of an outstanding fixed-rate bond will change as market rates increase or decrease
  • Calculate the value of an outstanding bond with a given coupon rate when market interest rates rise and fall
  • Understand why a change in interest rates will have a greater impact on bond values for bonds with long maturities than ones with short maturities
  • List the major types of corporate bonds and distinguish among them
  • Explain the importance of bond ratings and list some of the criteria used to rate bonds
  • Read and understand the information provided on the bond market pages of The Wall Street Journal
  • Define the calculation, slope, and meaning of yield curves

Week 7


Lecture: Stock Valuation

Outcomes

  • This module provides important and useful information on common and preferred stocks. Moreover, the valuation of stocks reinforces the concepts covered in earlier modules. It is important to understand the characteristics of common and preferred stocks, theoretically how stocks are valued in the market, and how stock prices are reported in the press
  • Differentiate between common and preferred stock
  • Read and understand the stock market pages in the WSJ
  • Know why preferred stock is often considered more like a bond rather than an equity security
  • Summarize the theoretical models for calculating the value of common stock

Week 8


Module: Capital Budgeting

Outcomes

  • Capital budgeting is the process of deciding which capital investments a firm should make. There are five techniques in common use today.  The payback period, the discounted payback period, the net present value, the internal rate of return and the modified internal rate of return all have practical applicability in the evaluation of independent, mutually exclusive and contingent projects
  • Define capital budgeting, explain why it is important, and state how project proposals are generally classified
  • List the steps involved in evaluating a capital budget project
  • Calculate payback period, discounted payback period, Net Present Value (NPV), and Internal Rate of Return (IRR) for a given project and evaluate each method
  • Define NPV profiles and explain the rationale behind the NPV and IRR methods, their reinvestment rate assumptions, and how to use each method when evaluating independent versus mutually exclusive projects
  • Calculate the Modified Internal Rate of Return (MIRR) for a given project and understand the concept

The course description, objectives and learning outcomes are subject to change without notice based on enhancements made to the course. December 2013