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Faculty
Paul Eberle, Florida Southern College

Course Coordinator
ISUP Secretariat

Prerequisite/progression of the course

Principles of Financial Accounting.
Closed for CBS students studying BSc.IB.

Course content, structure and teaching

An examination of the use of analytical financial tools and techniques. Topics financial statement analysis, time value of money, stock valuation, bond valuation, capital budgeting, risk analysis, cost of capital, and capital structure. This is an introductory course in managerial finance.

Course content

• Analysis of Financial Statements
• Time Value of Money
• Characteristics of Bonds and Long Term Debt
• Valuation Bonds and Long Term Debt
• Characteristics of Equity
• Valuation of Equity
• Risk & Return
• Capital Budgeting
• Project Cash Flow & Risk
• Cost of Capital
• Leverage

Learning Objectives

Financial Statements

• Analyze and evaluate annual reports and financial information.
• Calculate and interpret basic financial ratios.

Time Value of Money

• Explain the concepts of compounding and discounting
• Demonstrate the calculation of a future value of a lump sum using compounding.
• Explain the concept of opportunity cost.
• Demonstrate the calculation of a present value of a lump sum using discounting.
• Demonstrate the calculation of an interest rate in both the present and future value formats.
• Differentiate between an ordinary annuity and an annuity due.
• Demonstrate the calculation of the future value of an annuity.
• Demonstrate the calculation of the present value of an annuity.
• Demonstrate the calculation of the value of perpetuity.
• Demonstrate the calculation of both future and present value of an unequal stream of cash flows.
• Demonstrate the present and future values with compounding periods other than annual.
• Compare nominal and periodic rates.
• Compute the periodic payments or interest rate on an amortized loan
• Compute the annual rate of interest on an investment

Bond Characteristics and Valuation

• Describe the characteristics of bonds.
• Describe the different kinds of bonds.
• Explain the characteristics of a bond including par value, coupon payment, coupon interest rate, period, maturity, and call provisions.
• Demonstrate the calculation of the value of a bond.
• Explain the principles behind bond value changes over time.
• Demonstrate the calculation of a premium and a discount on a bond.
• Compute bond yields.
• Explain the important relationships relating to bond valuation.
• Explain the principles behind bond values approaching par value as it approaches maturity.
• Explain and demonstrate the calculation of a bond's yield to maturity.
• Demonstrate the calculation of the value of a bond with payment periods other than annual.
• Explain the concept of interest rate risk.
• Explain the concept of reinvestment rate risk.

Stock Characteristics and Valuation

• Explain the concepts used in stock valuation including dividend, market price, intrinsic value, growth rate, required rate of return, realized rate of return, dividend yield, capital gain yield, and expected total return.
• Describe the factors that determine the value of preferred stock and show how these factors can be combined to calculate the value of preferred stock.
• Demonstrate the calculation of the value of preferred stock.
• Calculate the expected rate of return on preferred stock.
• Describe the factors that determine the value of common stock and show how these factors can be combined to calculate the value of common stock.
• Calculate the expected rate of return on common stock.
• Demonstrate the calculation of the value of a stock with zero and constant growth.
• Demonstrate the calculation of a dividend yield.
• Demonstrate the calculation of a capital gains yield.
• Demonstrate the calculation of expected total return for a stock with zero and constant growth.
• Demonstrate the calculation of an actual or realized rate of return
• Define, discuss, and explain the process of valuing stocks and bonds.

Capital Budgeting

• Apply capital budgeting techniques to the evaluation of investment projects.
• Evaluate capital budget and investment projects using financial models
• Describe and compute Net Present Value, Profitability Index, Internal Rate of Return, Modified Internal Rate of Return, payback period and discounted payback period and evaluate the advantages and disadvantages of each of these techniques.
• Evaluate the guidelines for estimating the cash flows associated with capital budgeting alternatives
• Demonstrate a net present value calculation for an expansion project.
• Demonstrate a net present value calculation for a replacement project.
• Demonstrate an internal rate of return calculation for an expansion project.
• Demonstrate an internal rate of return calculation for a replacement project.
• Demonstrate a modified internal rate of return calculation for a replacement project.
• Demonstrate a modified internal rate of return calculation for an expansion project.
• Explain the advantages and disadvantages of the internal rate of return and net present value methods.
• Explain the condition the leads to multiple Internal Rate of Returns.
• Explain the conditions that lead to ranking conflicts between Net Present Value and Internal Rate of Return.
• Explain the concepts of sunk costs, opportunity costs, and side effects.
• Explain the how net working capital affects cash flow from assets.
• Explain the how financing costs affects cash flow from assets.
• Demonstrate the cash flow from assets calculation for a capital budgeting project using straight-line depreciation.
• Describe the system used to classify the cash flows associated with a capital budgeting alternative and indicate the important cash flows included in each classification
• Demonstrate how the depreciation method affects the cash flows from assets for a capital budgeting project.
• Estimate the cash flows associated with a new investment project and decide whether or not to undertake the investment.
• Discuss the need to adjust the discount rate applied to projects for investments with differing levels of risk.
• Discuss real options.
• Provide examples of real options.

Cost of Capital

• Identify and explain the various components of corporate capital.
• Explain the concept of the weighted average cost of capital.
• Demonstrate the calculation of after-tax cost of debt.
• Demonstrate the calculation of cost of preferred stock.
• Demonstrate the calculation of cost of retained earnings using the CAPM and discounted cash flow methods.
• Explain the concept of optimal capital structure.
• Describe the nature of the cost of capital and explain how it is used.
• Analyze the sale of new common stock versus debt issuance
• Demonstrate the calculation of a weighted average cost of capital (WACC).
• Explain the concept of marginal cost of capital (MCC).
• Identify the problem areas in determination of costs of capital and optimal capital structure.
• Compute a firm's cost of capital given the appropriate data and explain how the cost of capital might reflect the risk of a project.
• Explain the nature of business risk and financial risk.
• Describe the nature and importance of operating, financial, and combined leverage.
• Explain the concepts of capital structure and financial structure.
• Describe actual management practice with respect to capital structure policy.
• Explain the relationship between dividend policy and stock price.
• Describe the dividend policies actually followed by firms and the factors affecting those policies
• Describe cash dividends, stock dividends, stock splits and stock repurchases.

Risk and Return

• Calculate the historical mean & standard deviation.
• Calculate the covariance of two time series.
• Calculate the standard deviation of an expected return.
• Calculate the covariance of expected returns.
• Calculate the correlation coefficient of expected returns.
• Evaluate and assess risk using financial models.
• Define and measure the expected rate of return of an individual investment.
• Define and measure the expected rate of return of a portfolio of assets.
• Define and measure the riskiness of an individual investment.
• Define and measure the investment risk of a portfolio of assets.
• Evaluate the merits of diversification.
• Explain the concept of Capital Asset Pricing Model (CAPM) and show the relationship between risk and return on the Security Market Line (SML).

Teaching methods

Lectures and working problems.

Examination

Final exam: 4-hour written exam (open book)

Exam aids:

• Open book – Open notes
• Students have four hours to complete the exam.
• Problems, essay, and multiple choice.
• Financial & programmable calculators, etc allowed.
• Dictionaries allowed

Re-take exam: 24-hour written exam.

Recommended literature

Essentials of Managerial Finance, 14th Edition by Besley and Brigham
ISBN-10: 0324422709 ISBN-13: 9780324422702

Last updated by ISUP Secretariat 23/02/2010