Faculty
Professors Karl B. Diether, Katarzyna A. Lewellen
Objectives
This course develops basic principles of corporate finance and provides practical tools for financial decisions and valuation. The course focuses on two broad topics:
1. Financial Policy: In Section I, we will examine the factors that determine a company’s need for external financing, be it debt or equity. We will then consider the optimal mix of debt and equity financing.
2. Valuation: In Section II, we will develop the tools needed for valuing investment projects, including the estimation of relevant project cash flows, estimating the cost of capital (discount rate), and dealing with risk. We will then use these tools as a basis for selecting investment projects and valuing companies.
Requirements
Teaching Methods
We will develop the main insights of corporate finance theory, but emphasize the application of the theory to real business decisions. Each session will involve class discussion. In some instances, discussion will be centered on lectures; in others it will be centered on a business case. Students are expected to read and prepare all cases, come to class, and participate in class discussion. Student participation is critical to the success of the course.
Prerequisites
Students must be familiar with the material covered in Accounting and Capital Markets, including pro-forma statements, the CAPM, and basic option pricing theory.
Review Sessions
Background review sessions will cover basic analytical skills. Q&A review sessions will help students practice problem-solving techniques as well as review class material and previous case solutions. Prior to each review session, please e-mail the responsible TA questions and topics that you would like to be reviewed. Dates and topics for review session are summarized below.
REVIEW SESSIONS OUTLINE (SUBJECT TO ADJUSTMENTS)
Thu, Jan 8 Background:Accounting basics 5-6PM
Wed, Jan 14 - Q&A: Financial planning 5-6 PM
Thu, Jan 15 - Q&A: MM Theorem 6:15-7:15 PM
Thu, Jan 22 - Q&A: Taxes & distress -5-6 PM
Fri, Jan 23 - Q&A: Taxes & distress 6:15-7:15 PM
Wed, Jan 28 - Q&A: Signaling 5-6 PM
Thu, Jan 29 - Q&A: Free cash flows 6:15-7:15 PM
Wed, Feb 4 - Midterm review:Practice exam 6-7 PM
Wed, Feb 4 - Midterm review:Practice exam 7-8 PM
Wed, Feb 11 - Q&A: Un- & relevering betas 5-6 PM
Thu, Feb 12 - Q&A: WACC & APV 6:15-7:15 PM
Wed, Feb 18 - Q&A: WACC & APV 5-6 PM
Thu, Feb 19 - Q&A: Real options 6:15-7:15 PM
Wed, Feb 25 - Q&A: Real options 5-6 PM
Thu, Feb 26 - Q&A: Company valuation 6:15-7:15 PM
Wed, Mar 4 - Q&A: Company valuation 5-6 PM
Thu, Mar 5 - Final review: Practice exam 6:15-7:15PM
Thu, Mar 5 - Final review: Practice exam 7:15-8:15 PM
Location:
All review sessions except for the midterm and final review sessions and the session on January 15 will be held in the General Motors classroom. The session on January 15th will be held in Rosenwald. The midterm and final review sessions will be held in the Cook Auditorium.
TEACHING ASSISTANTS:
Francisco Barua, Francisco.Barua@tuck.dartmouth.edu
Papri Bhattacharya, Papri.Bhattacharya@tuck.dartmouth.edu
Rafael Coelho, Rafael.Coelho@tuck.dartmouth.edu
Allen Coker, Allen.Coker@tuck.dartmouth.edu
Nicolae Cristea, Nicolae.Cristea@tuck.dartmouth.edu
Andrea Eaton, Andrea.Eaton@tuck.dartmouth.edu
Andrew Ervin, Andrew.Ervin@tuck.dartmouth.edu
Andrew Grimson, Andrew.Grimson@tuck.dartmouth.edu
Darryn Lowe, Darryn.Lowe@tuck.dartmouth.edu
Nelson Lucas, Nelson.Lucas@tuck.dartmouth.edu
Melinda Mraz, Melinda.Mraz@tuck.dartmouth.edu
Mahesh Murarka, Mahesh.Murarka@tuck.dartmouth.edu
Ed Pena, Ed.Pena@tuck.dartmouth.edu
Derek Riesenberg, derek.riesenberg@tuck.dartmouth.edu
Daniel Rowe, daniel.rowe@tuck.dartmouth.edu
Paul Schned, paul.schned@tuck.dartmouth.edu
Teguh Situmorang, Teguh.Situmorang@tuck.dartmouth.edu
Charles Smith, charles.smith@tuck.dartmouth.edu
Cameron Soelberg, cameron.soleberg@tuck.dartmouth.edu
Nicholas Thorndike nicholas.thorndike@tuck.dartmouth.edu
Anja Veckenstedt, anja.veckenstedt@tuck.dartmouth.edu
Scott Waterstredt scott.waterstredt@tuck.dartmouth.edu
Samuel Wilson
Samuel.Wilson@tuck.dartmouth.edu
Jason Wynegar, Jason.Wynegar@tuck.dartmouth.edu
Materials
Readings/Books
The required textbook is: Corporate Finance, Ross, Stephen A., Randolph W. Westerfield and Jeffrey Jaffe, 8th edition, Irwin/McGraw-Hill (RWJ). Students should already have this textbook, as it was previously used in the Fall 2008 Capital Markets course. Wheelock Books and the Dartmouth Bookstore should still have a few copies on hand, should anyone need to purchase it.
There is also an optional textbook: Analysis for Financial Management, Robert C. Higgins, 7th edition, Irwin/McGraw-Hill (RH). This book provides a more basic treatment of the course topics than RWJ and it is available for purchase at Wheelock Books as well as the Dartmouth Bookstore. One copy of will be on reserve in Feldberg Library.
Students unfamiliar with Corporate Finance may consider buying a dictionary such as: Dictionary of Finance and Investment Terms (Barron's Financial Guides), Downes, John, Jordan Elliot Goodman, Barrons Educational Series. Campbell R. Harvey’s “Hypertextual Finance Glossary” (http://www.duke.edu/~charvey/Classes/wpg/glossary.htm) is also a very valuable resource.
Class Attendance
You are expected to attend every class, unless you have an excused absence due to illness or an emergency. It is Tuck School policy that recruiting activities and interviews are not considered an excused absence from class. It is your responsibility to work with recruiters and Career Services to minimize these kinds of disruptions. The Professor recognizes, however, the importance of your job search and understands that in some cases, such conflicts are unavoidable. If you must miss a class, please notify the professor in advance. Even if you miss class, you must do your share of work for the assignment due that day. If you miss more than two sessions during the term, you will receive zero class participation credit for the classes beyond two that you miss.
Honor Code
In every aspect of the course, students are required to adhere to the standards of conduct as stated in the Tuck School Academic Honor Principle. Note that some of the cases and homework assignments used in this class may have been used before at Tuck or other institutions. You may not consult with students previously enrolled in this class, or use their class notes, or other materials that were otherwise provided in the past. Moreover, you may not use material or solutions from other institutions (e.g. posted on the Internet), unless otherwise instructed in class for a particular assignment.
Use of Laptops
The Tuck Laptop Policy applies in all respects to this course. Laptops may be used in class only when required for the class session. When not in direct use, the screen should be closed. Checking email or surfing the Internet during class is unacceptable.
Seating Chart and Name Cards
In order for the professor to get to know you and evaluate your class participation, students are required to display name cards in class at all times. If you forget your original name card, please write your name in large, dark letters on a large piece of paper. Starting with the second class, please choose your seat in class and use the same seat for the remainder of the term.
Mid-term and Final Exams
Documented evidence that you were seriously ill or had a serious emergency at the scheduled time of an exam are the only valid excuses for missing an exam.
Both the mid-term and final exams are closed-book, but students may use a set of formula sheets, which the instructors will prepare in advance and make available one week prior to each test. Students may use hand-held calculators or laptop computers while taking exams, but laptop computers may be used for making calculations only.
E-mail
When Professor Rendleman’s students send him an e-mail, they should put “CF:” as the first three characters of the subject line. This will help him distinguish between e-mails sent by students in his Corporate Finance and Futures and Options classes.
Grading
Case write-ups 15%
Assignments and Case Write-ups
For some lectures, you will be required to answer study questions. Students don't need to turn in answers to these questions. For each business case, in contrast, you will be required to provide written answers to a set of guideline questions. Students should work with members of their regular study group and submit a two-page memorandum with answers to the guideline questions. Each student is expected to be familiar with the case, to understand his or her group's analysis and conclusions, and be ready to answer questions when cold-called.
Figuring out how to “crack” the case may take you some time. The process of figuring out what the relevant information is and which of the many ideas discussed in class or in the textbook are applicable to the case is an essential component of learning through the case method. You will get better with practice. Please don’t be discouraged if your answers to the guideline questions are wrong or if class discussion moves beyond the study questions.
The memorandums should be typed and double-spaced. They should be written as if you were making a presentation to your business colleagues. Even though you will probably use Excel to work up most of your calculations, your memorandums should be written in a way that does not require the reader to have access to your Excel file to understand your analysis of the case. The two-page limit is for text only. You may attach as many numerical calculations as you wish. Each write-up is due at the beginning of class on the day to which it is assigned. Each student should retain a copy for reference during class. Case memorandums will not be accepted after class has met.
There are no single correct solutions for the cases. Therefore you will not be graded for “correct” solutions in your case write-ups. The grading system is designed so that all “good faith efforts” will result in full credit.
Midterm 30%
There will be a comprehensive in-class mid-term exam on Thursday, February 5, during the regularly-scheduled class period.
Final Exam 40%
There will also be a comprehensive in-class final exam Tuesday, March 10, 9:00 A.M.-12:00 Noon.
Class participation 15%
Re-Grades
If you believe that there was a mistake in the grading of your exam, within one week following the return of the exam, submit the original exam and a separate written explanation of the points of contention. If the re-grade request is made after one week or without an accompanying written explanation, no re-grade will be given. There are no exceptions to this rule. All re-grade decisions are final. The Professor reserves the right to correct all mistakes made grading an exam submitted for a re-grade.
Optional Homework
A number of optional homework problems from the RWJ text are listed in OPTIONAL_HOMEWORK_PROBLEMS.pdf, available in the GENERAL DOCUMENTS folder on the TuckStreams website, and solutions are available in the RWJ SOLUTIONS folder. This homework will not be graded, and solutions should not be turned in. However, students should think of the optional homework as practice problems that help to reinforce the main concepts of the course.
Schedule
Thursday, 01/08/2009
Session I: Course Overview
Thursday, 01/08/2009
Optional: REVIEW SESSION, General Motors Classroom: Background: Accounting basics, 5:00-6:00 PM
Friday, 01/09/2009
Session 2: Case on Financial Planning
Case:
"Cartwright Lumber Co.," Piper, Thomas R., [HBS 9-204-126], Boston, MA: Harvard Business School Publishing, 2004.
Required Readings:
1. RWJ, "Financial Statements Analysis and Long-term planning," Chapter 3, pages 43-78.
2. RWJ, "Short-Term Finance and Planning," Chapter 26 (sections 1-3), pages 745-751.
Optional: Optional Readings:
1. RH, “Evaluating Financial Performance,” Chapter 2, pages 31-73.
2. RH, “Financial Forecasting,” Chapter 3, pages 83-106.
3. RH, “Managing Growth,” Chapter 4, pages 115-137.
Wednesday, 01/14/2009
Session 3: Capital Structure 1: Modigliani-Miller Theorem
Required Reading:
RWJ, "Capital Structure: Basic Concepts," Chapter 15 (1-4), pages 423-439.
Background Reading:
RWJ, "Long Term Financing: An Introduction," Chapter 14, pages 405-421.
Optional: Optional Reading:
RH, Chapter 6: “The Financing Decision,” pages 191-223.
Wednesday, 01/14/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: Financial planning, 5:00-6:00 PM
Thursday, 01/15/2009
Session 4 Capital Structure 2: Taxes & Distress
Required Readings:
1. RWJ, "Capital Structure: Basic Concepts," Chapter 15 (section 5 up to Fig. 15.5), pages 439-443.
2. RWJ, "Capital Structure: Limits to the Use of Debt," Chapter 16 (section 1-4), pages 455-466.
Thursday, 01/15/2009
Optional: REVIEW SESSION, Rosenwald classroom: Q&A: MM Theorem, 6:15-7:15 PM
Thursday, 01/22/2009
Session 5: Case on Taxes
Case:
"Debt Policy at UST, Inc.," Mitchell, Mark, [HBS 9-200-069], Boston, MA: Harvard Business School Publishing, 2001.
Thursday, 01/22/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: Taxes & distress, 5:00-6:00 PM
Friday, 01/23/2009
Session 6: Case on Distress Costs
Case:
Massey-Fergusson, 1980, Baldwin, Carlis, Scott Mason, and Jennifer Hughes. Boston, MA: Harvard Business School Publishing, 1990. Case No. 9-282-043.
Required Reading:
"Advantage of Corporate Bankruptcy Is Dwindling," by Jonathan D. Glater, New York Times, November 18, 2008.
Friday, 01/23/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: Taxes & distress, 6:15-7:15 PM
Wednesday, 01/28/2009
Session 7: Capital Structure 3: Signaling
Required Reading:
RWJ, "Capital Structure: Limits to the Use of Debt," Chapter 16 (sections 5-7), pages 468-475.
Wednesday, 01/28/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A:Signaling, 5:00-6:00 PM
Thursday, 01/29/2009
II: VALUATION
Session 8: Free Cash Flows
Required Reading:
RWJ, “Making Capital Investment Decisions,” Chapter 7 (1-4), pages 197-213.
Review Reading:
RWJ, “Discounted Cash Flow Valuation,” Chapter 4, pages 89-117.
Thursday, 01/29/2009
REVIEW SESSION, General Motors Classroom: Q&A: Free cash flows, 6:15-7:15 PM
Wednesday, 02/04/2009
Session 9: Case on Free Cash Flows
Case:
Diamond Chemicals PLC (A): The Merseyside Project, Bruner, Robert. Charlottesville, VA: University of Virginia Darden Business Publishing, 2001. Case No. UVA-F-1351.
Required Reading:
RWJ, “Net Present Value and other Investment Rules,” Chapter 6, pages 161-185.
Wednesday, 02/04/2009
Optional: REVIEW SESSION, Cook Auditorium: Midterm review: Practice exam - 6-7 PM & 7-8 PM
Thursday, 02/05/2009
Session 10: Midterm Exam
Wednesday, 02/11/2009
Session 11: Case on Cost of Capital
Case:
Cost of Capital at Ameritrade, Mitchell, Mark, and Erik Stafford. Boston, MA: Harvard Business School Publishing, 2001. Case No. 9-201-046.
Required Reading:
RWJ, “Risk, Cost of Capital, and Capital Budgeting,” Chapter 12, (sections 1-3), pages 342-351.
Background Reading:
RWJ, “Return and Risk: The Capital-Asset-Pricing Model (CAPM),” Chapter 10, pages 279-319.
Wednesday, 02/11/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: Un- & relevering betas, 5-6PM
Thursday, 02/12/2009
Session 12: WACC and APV
Required Reading:
RWJ, “Valuation and Capital Budgeting for the Levered Firm,” Chapter 17, pages 488-509.
RWJ, "Risk, Cost of Capital and Capital Budgeting," Chapter 12, pages 352-361.
Optional Reading:
RH, “Discounted Cash Flow Techniques,” Chapter 7, pages 231-265.
Thursday, 02/12/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: WACC & APV, 6:15-7:15 PM
Wednesday, 02/18/2009
Session 13: Case on WACC and APV
Case:
Dixon Corporation: The Collinsville Plant. Kester, W. Carl. Boston, MA: Harvard Business School Publishing, 1999. Case No. 9-298-165.
Wednesday, 02/18/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: WACC & APV, 5:00-6:00 PM
Thursday, 02/19/2009
Session 14: Real Options
Required Reading:
RWJ, Risk Analysis, Real Options, and Capital Budgeting, Chapter 8 (Section 1, 3 and 4), pages 229-236 and 241-248.
Thursday, 02/19/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: Real options, 6:15-7:15 PM
Wednesday, 02/25/2009
Session 15: Case on Real Options
Case: MW Petroleum Corporation (A), Wall, Barbara D., Boston, MA: Harvard Business School Publishing, 1994. Case No 9-295-029.
Wednesday, 02/25/2009
REVIEW SESSION, General Motors Classroom: Q&A: Real options, 5:00-6:00 PM
Thursday, 02/26/2009
Session 16: Valuing a Company
Optional Reading:
RH, “Business Valuation And Corporate Restructuring,” Chapter 9, pages 319-352.
Thursday, 02/26/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: Company valuation, 6:15-7:15 PM
Wednesday, 03/04/2009
Session 17: Case on Valuing a Company
Case: Southland Corp (A), Rubach, Richard S. and McNair, Elizabeth H. Boston, MA: Harvard Business School Publishing, 1997. Case No 9-291-038.
Wednesday, 03/04/2009
Optional: REVIEW SESSION, General Motors Classroom: Q&A: Company valuation, 5:00-6:00 PM
Thursday, 03/05/2009
Session 18: Review
Thursday, 03/05/2009
Optional: REVIEW SESSION, GM: Final review: Practice exam, 6:15-7:15 PM & 7:15-8:15 PM
Tuesday, 03/10/2009
FINAL EXAM, 9 AM - 12 NOON - CLASSROOMS TBA
Exam
