FIN501 Strategic Corporate Finance
Module 1 Discussion
Finance in Movies and TV/Excel for Finance
The first part of the discussion should be fun. Many of you without a background in finance may have gotten your impression of the finance world from TV or movies. Even the highly prestigious Certified Financial Analyst (CFA) Institute has published Top 20 Films about Finance: From Crisis to Con Men.
Share what your impressions are based on a recent TV show or movie, or one of the movies from the CFA Institute’s list if you can find one of the movies online. If you haven’t watched anything finance-related lately, check out the one of these movies: The Big Short, Margin Call, or Wall Street (the original one, not the awful sequel). TV shows include Billions or some early episodes of Silicon Valley that involve getting finance for the new company. Post your thoughts in the first week of the module.
For the second week of the module, dig into the assignments and start to use Microsoft Excel. There are some videos on Excel in the background reading page, but find an additional video or two that helps you get started. Share the link with your classmate and discuss the usefulness of the video you found.
FIN501 Strategic Corporate Finance
Module 2 Discussion
Tesla Motors
Tesla Motors is the “it” stock right now in the automotive industry. Tesla was a pioneer in offering cars that run 100% on electricity rather than gasoline, and it has also diversified into solar energy, purchasing the company SolarCity. Its stock price has risen high enough in recent years that it has surpassed automobile giant General Motors in market valuation.
However, not all analysts believe Tesla is a good investment at its current price. It sells less than a 100,000 cars per year, compared with General Motors which sells around 10 million cars a year. Unlike General Motors, Tesla has yet to earn a profit.
Here are some articles both pro and con about whether you should invest in Tesla. Take a look at these articles and also try to find some more recent articles on Tesla’s stock:
https://www.forbes.com/sites/johnwasik/2017/04/14/5-reasons-why-tesla-is-bubble-priced/#d0626b26c631
https://www.smarteranalyst.com/2017/03/16/5-reasons-excited-tesla-inc-tsla-stock/
Based on what you’ve read, do you think Tesla is worth its high valuation, or is it simply priced too high because it is considered new and trendy? Would you personally invest in Tesla, or would you prefer to invest in one of the more established auto companies such as GM or Ford?
FIN501 Strategic Corporate Finance
Module 3 Discussion
NPV in Your Own Life
Reading about Net Present Value (NPV) for this module, you probably thought of it as a technique used only by corporations. But the technique may also apply to your own purchases.
You may have heard a salesperson tell you, “This product pays for itself!” While this is probably rare for most products, sometimes there are future savings from certain products that will offset some of the costs. For example, if you buy a newer, more reliable, and more fuel-efficient car, it may save you on repair bills and gas prices compared with your old car. If you are a coffee connoisseur, buying a $100 espresso machine might save you money compared with constantly buying $4 drinks at your local Starbucks.
Think of a purchase you are planning to make or have recently made. How much did it cost? How much per year do you think you will save from this purchase, and for how many years will you get these savings? Estimate the present value of the savings, and subtract the cost of the product. Note that it is rare that any purchase will “pay for itself” (e.g., have a positive NPV). But are the savings enough that the product becomes a lot “cheaper” and more worthwhile for you to buy?
FIN501 Strategic Corporate Finance
Module 4 Discussion
Junk Bonds
If you have poor credit due to being delinquent on credit card debt or other issues, chances are the bank is going to charge you a higher interest rate on a personal loan, or it might not give you a loan at all. Corporations face the same problems. If a company takes on too much debt or is otherwise considered to be a credit risk, then it also gets low credit ratings. In this case, if it wants to take on more debt it needs to issue what is known as “junk bonds,” or as corporations prefer to call them, “high-yield bonds.”
Whatever you call these types of bonds, their key feature is that they pay higher interest than bonds from a corporation that has a high credit rating. If you have a 401(k) or other retirement investment fund, chances are you have the option to make a portion of your investment in these higher risk/higher return bonds.
Do some research on junk bonds. What kind of controversies do you see with them? Do you think they are a solid investment for your retirement, perhaps no riskier than most investments? Or do they deserve the derogatory term “junk”? Share the links to the articles you find with your classmates, and discuss your opinions as to whether you think the higher interest rate justifies the increased risk.
FIN501 Strategic Corporate Finance
Module 4 Reflective Discussion
Final Reflections
Has this class changed how you view investments and financial management? Are there any concepts from the class that you will use for your career? Are there any concepts that you will use for your own personal investment or money management strategies?
After responding to the Reflective Discussion questions above, please complete an anonymous Course Evaluation Survey. Instructors are not able to view course evaluation reports until after the grade submission period is over. Thank you for your feedback.
FIN501 Strategic Corporate Finance
Module 1 CASE
PRESENT VALUE AND THE RISK/RETURN TRADE-OFF
Assignment Overview
For this assignment, make sure to first carefully review all of the required readings about present value, future value, risk and return, and the CAPM. Once you are relatively comfortable with these concepts, try working through some of the examples in the background readings and try computing the answers on your own. Once you are confident you both understand the concepts and the computational steps, complete the assignment below.
Case Assignment
Present your answers to the problem below in a Word document, and also upload an Excel file with your computations. Excel is required for Questions 2 and 3. Excel is optional for Questions 1 and 4, but you are required to show your steps for all quantitative problems. Even if you get the answer wrong, you can still get partial credit if you show your work.
Calculate the following:
Suppose you wish to raise some money for your favorite local charity. This charity needs $50,000 a year to run its operation and you want to make sure that it is ensured an annual payment of this amount from now on for every year in the foreseeable future. Given an interest rate of 5%, how much would you have to fund this perpetuity to guarantee the charity a payment of $50,000 per year?
You decide to put $1,000 in a new bank account and don’t plan to withdraw the money for 10 years. If your bank does continuous compounding and the interest rate is 1%, what will be the value of this bank account in 10 years?
Suppose you won the lottery but not all of your winnings will come in one year. Instead, you will get a series of annual payments over the next five years. The table below tells you what your payment will be every year for the next five years. Use the information in the table to make the following computations:
The present and future value of your lottery ticket if the interest rate is 8%
The present and future value of your lottery ticket if the interest rate is 10%
Year | Payment |
1 | 5000 |
2 | 6000 |
3 | 7000 |
4 | 8000 |
5 | 9000 |
The table below gives the probability of different returns for three different assets. Using this table, calculate the following:
The expected return of each asset
The standard deviation of returns of each asset
The coefficient of variation of each asset
Based on your answers to B) and C) above, which asset has the highest total risk and highest relative risk?
| |||||
Asset A | Asset B | Asset C | |||
Probability | Return | Probability | Return | Probability | Return |
0.3 | 5 | 0.1 | 25 | 0.1 | 4 |
0.4 | 8 | 0.3 | 20 | 0.8 | 5 |
0.3 | 9 | 0.5 | 15 | 0.1 | 6 |
0.1 | 14 |
Suppose the market return is 8%, the risk-free rate is 1% and the beta for a given stock is 1.2. Answer the following questions based on this information:
What is the required return for this stock?
If the beta increases by 50% (but risk-free rate remains 1%), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
If the market return increases by 50% (but beta remains at 1.2), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
Suppose there are three different companies. The first one, Trendy Tech Inc., has investors who are “fair-weather friends.” When the stock market is going up, everybody wants to invest in Trendy Tech, but as soon as the market goes down everyone jumps ships and sells their shares. The second company is Oily Oil Inc. Oily’s stock price seems to depend only on the price of oil and nothing else. Finally, there is Conglomerated Conglomerate Inc. Conglomerated is a giant company with holdings in almost every industry imaginable—from cell phones to grocery stores and even amusement parks. Based on this information, which company would you think has the highest beta? The lowest beta? Which one do you think has a beta closest to 1?
FIN501 Strategic Corporate Finance
Module 1 SLP
PRESENT VALUE AND THE RISK/RETURN TRADE-OFF
For the SLP this session, you will be taking a close look at a company of your choice. You are free to choose any company you want as long as it is publicly traded on one of the major stock market exchanges such as NYSE or NASDAQ. This could be a company that you personally are interested in investing in, or a company whose product you buy, or one that you’ve read about in the news recently and would like to know more about. Do some research on this company, including recent articles. Also, look up the company on Google Finance. This will give you a wealth of information including stock prices over the last month, year, five years, etc., along with other information such as the beta or whether or not the company is profitable.
Once you have chosen a company and have done some initial research on it, write a 2- to 3-page paper discussing the following items:
Give a brief description of the company and why you find it interesting.
What is the beta of this company’s stock? Based on the magnitude of the beta, do you think it is low risk, high risk, or somewhere in between?
Now look at recent stock price movements. What is the highest price the stock has been over the last year? The lowest price over the last year? Look at the five-year pattern as well. Based on what you see, what does this tell you about the riskiness of the stock?
Look at some other companies in the same industry as your chosen company. How do they compare in terms of beta and other measures of riskiness? Would you prefer to invest in your chosen company, or do some of its competitors seem like a better bet?
FIN501 Strategic Corporate Finance
Module 2 CASE
STOCK AND BOND VALUATION
Assignment Overview
Before starting on this assignment, make sure to thoroughly review the required background materials. This assignment will require you to use the various discounted cash flow methods and dividend models to make computations. In addition to knowing the computational steps involved in stock and bond valuation, make sure you also understand the basic concepts.
Submit your answers as a Word document. Make sure to show your work for all quantitative questions, and make sure to fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 3 will require Excel, so submit an Excel file that shows your computational steps as a separate file in addition to your Word file. Question 4 is purely conceptual, no computations are necessary but make sure to apply and reference concepts from the required readings in your answers to each of the scenarios.
Case Assignment
Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions:
What is the value of this bond?
Now suppose the bond has no coupon payments (it is a “zero coupon” bond) but still pays $1000 in ten years. What is the value of this bond?
What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond?
The XYZ Corporation pays a dividend of $1 for each share and its required rate of return is 8%. Answer the following questions:
Assuming zero growth in dividends, what is the value of each share?
Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?
Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share?
Acme Medical Corp. is expecting the cash flows from 2018-2022 in the table below. After 2022 it is expecting growth in cash flow at an annual rate of 3%. The firm has determined that its weighted average cost of capital (discount rate) is 7%. Using the table below calculate the following:
What is the present value of Acme’s future cash flows using the discounted cash flow model?
If the firm has 200,000 common shares outstanding, zero preferred shares, and debt with a market value of $10,000,000 what would be the value of each share?
Now suppose the discount rate increases to 10%. How would your answers to a) and b) above change based on the new discount rate?
Year | Cash flow |
2018 | 500,000 |
2019 | 550,000 |
2020 | 620,000 |
2021 | 700,000 |
2022 | 800,000 |
Suppose the Alpha Manufacturing Corporation is experiencing extreme financial difficulties and is considering bankruptcy. Its shareholders are currently almost equally divided about whether or not the company should go bankrupt, with one outspoken faction pushing for bankruptcy and the other strongly opposing it. They have $50 million in debt all in the form of bonds, and bondholders are pretty well united in that they want the firm to declare bankruptcy.
The CEO announces that he is leaning against bankruptcy. This means one faction of shareholders is happy, but another faction of shareholders is very upset and the bondholders are also unhappy. Can the unhappy faction of shareholders team up with the bondholders to vote out the CEO? Explain your reasoning using references from the background readings.
Suppose Alpha ends up declaring bankruptcy. They do not have any cash in the bank but they own $60 million worth of real estate. They only have one type of shareholder—common shareholders. If they sell the real estate, how much of this will bondholders get and how much with shareholders get? Explain your reasoning using references from the background readings.
Now suppose that Alpha has two classes of shareholders—common shareholders and preferred shareholders. Preferred shareholders are owed $20 million in dividends that have been unpaid in the last two years. If Alpha goes bankrupt and sells its $60 million worth of real estate, how much will bondholders get, how much will common shareholders get, and how much will preferred shareholders get? Explain your reasoning using references from the background readings.
FIN501 Strategic Corporate Finance
Module 2 SLP
STOCK AND BOND VALUATION
For your second SLP assignment, continue to do research on the company you chose to write about for your Module 1 SLP. This time you will be doing research about the valuation of the company to try to determine if its stock price is overvalued or undervalued. You can use Google Finance, Yahoo Finance, or similar Web pages to find the financial information about this company.
Write a 2- to 3-page paper with the following items:
What is the P/E ratio of this company? How does the P/E ratio compare to other companies in this industry? Based on the P/E ratio, do you think the company is overvalued or undervalued?
Find the company’s balance sheet. Calculate the book value of each share. This can be done by taking the total assets and subtracting total liabilities. Then divide the number you get by the total number of outstanding shares. Is the number you get higher or lower than the current price of the share? Based on what you’ve found, would you say the stock is overvalued or undervalued?
Finally, do a search on what different analysts have to say about your company. Do they generally recommend buying the stock or selling the stock? What reasons to they give for their assessment? Find at least three analyst reports about this company.
FIN501 Strategic Corporate Finance
Module 3 CASE
CAPITAL BUDGETING AND THE COST OF CAPITAL
Assignment Overview
Before starting on this assignment, make sure to thoroughly review the required background materials. Make sure you fully understand both the basic concepts as well as how to calculate payback period, NPV, IRR, and WACC. Submit your answers in a Word document. Make sure to show your work for all quantitative questions and fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 2 will require Excel. Attach an Excel file to show your computations for Questions 1 and 2.
Case Assignment
The table below gives the initial investment and expected cash flows over the next five years for two different projects. Assume that the industry you are in expects a return of 10%, which you use as the discount rate in net present value (NPV) calculations and as the required rate of return for purposes of deciding on projects. Also, assume that management only wants to invest in projects that pay off within four years.
For each project, compute the payback period, NPV, and internal rate of return (IRR). Then explain whether each project should be accepted based on these three criteria.
| Project A | Project B |
Initial Investment | $40,000 | $28,000 |
Year | Cash Flows | |
1 | $10,000 | $10,000 |
2 | $10,000 | $13,000 |
3 | $10,000 | $5,000 |
4 | $10,000 | $5,000 |
5 | $10,000 | $6,000 |
Suppose you are planning on becoming a vendor at the arena where your favorite sports team plays. You are trying to decide between opening up a souvenir stand selling T-shirts, caps, etc., with your sports team’s logo or opening up a hot dog and beer stand. It is more expensive to open up the hot dog and beer stand because you need to purchase a license to serve alcohol and you need to spend money to comply with health department regulations. Revenue from the souvenir stand is likely to be unpredictable because fans of your favorite team tend to want to purchase hats and T-shirts only when the team is winning. Revenue from hot dogs and beer seem to be a little more steady since fans want to eat and drink regardless of whether the team is winning.
Below is a table with the initial investment cost of each type of stand and the annual payments you expect over the next five years. The annual payments will be different depending on how well your team does. Therefore, you will estimate how much cash flow you will get depending on whether your team does better than expected (optimistic), the same as the past few years (most likely),