THE UNIVERSITY OF NORTH CAROLINA AT GREENSBORO Joseph M. Bryan School of Business and Economics Department of Accounting and Finance Fall 2007

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THE UNIVERSITY OF NORTH CAROLINA AT GREENSBORO


Joseph M. Bryan School of Business and Economics


Department of
Accounting and Finance

Fall 2007




I.

Meeting Time and Place




FIN 625
.01, Corporate Strategy and the Finance Function



6
:
30
p.m.


9:20

p
.m.
M
, Bryan School (Room
202

Bryan Bldg.
)


II.

Instructor




Daniel T. Winkler



Office:
473

Bryan
Bldg.



Phone:
256
-
0122



E
-
mail:
dt_winkler@uncg.edu



Blackboard:
http://blackboard.uncg.edu

(
Used extensively in this course
)



Office Hours: 11:45 a.m.


12:15 p.m., 5:30 p.m.


6:15 p.m. M; 1:15 p.m.


1:45 p.m. TR


III.

Prerequisites





Prerequisites:
MBA 605, 617; Co
-
requisite
is
MBA 620


IV.

Course Material
s




Douglas R. Emery, John D. Finnerty, and John D. Stowe
. Corporate Financial
Management
,

3
rd

Edition,
Prentice Hall

Publ
ishing (
Pearson), 2007
.

ISBN: 0
-
13
-
237939
-
2.




Harvard Business Review Cases purchased and downloaded online at:



http://harvardb
usinessonline.hbsp.harvard.edu/b02/en/cases/cases_home.jhtml




HP (Hewlett Packard) 10 B I
I, 17BII financial calculator

or the equivalent.


V.

Course Description and Purpose




The UNCG
Graduate Bulletin
describes
MBA 625
as follows:




"
Finance in the st
rategic management process; corporate strategies and shareholder value
creation, financing decisions, distribution policy, and long
-
term investment decisions.”


The learning outcomes from this course are as follows:


1.

Recognize the role played by the financ
e function in developing a global strategic
plan.

2.

Evaluate the extent to which a firm’s investment, financing, and dividend
decisions contribution to creating value for its common shareholders. Assess the
degree to which these financial policies support t
he firm’s overall corporate
strategy.

3.

Identify the major stakeholders in the modern corporation. Explain how the

2



2

interests of the stockholders in a multinational firm may be in conflict with other
stakeholders.

4.

Estimate the required rate of return for a f
irm, and where appropriate, its various
divisions. Use this financial standard as a basis for making investment decisions
that create value for the shareholders.

5.

Understand how dividends and share repurchases affect the firm’s financial
statements and ope
rating structure.

6.

Estimate the firm’s debt capacity and use it to choose a target capital structure
that is consistent with the firm’s overall corporate strategy.


VI.

Class Organization, Procedures and Expectations




There are two different versions of M
BA 625. This section is designed for evening
students who have more work experience. The
first
1


1½ hour of class will be devoted
to lectures on selected topics.
PowerPoint slides have been placed on Blackboard for you
to review and print, but due to
time constraints, I will focus on selected slides in class.
You are expected to be ready to discuss all assigned material, but in particular, it is
important that you work the Participation Challenge problems that are included t
hroughout
the PowerPoint sl
ides.

The last half of the class will be devoted to discussion of an
assigned case.
So please work the assigned case and answered the study questions
. It is
on this basis that you will receive a class participation grade.



VII.

Grades


Your final gra
de you receive in this class largely depends on your grades on exams, case
assignments and participation. The course requirements have the following grade
weights:




Graded Assignment





% of final grade



Mid
-
Session Exam






30



Group
Case Write
-
Up







2
0

Final Exam







30



Participation







20




The general format of
the
exam
s

will be
about
20
-
25

multiple
-
choice questions

and
several

short
-
answer problems.
The multiple choice questions may include definitions
,
concepts and assigned

end
-
of
-
c
hapter problems
.

The exam will be scheduled for
1 ¼
hour
.





Please see the tentative schedule for the assigned problems.
It is important that you work
the end
-
of
-
chapter problems because they will be the basis for math problems on the
examinations
. Be
cause of limited time, we will generally not have time to solve these
problems in class. However, the solutions to these problems are posted on Blackboard,
and if you have difficulty doing them after seeing the solution, please contact me.




There are no

makeup exams
.
The weight attributable to a missed exam will be allocated
to the final exam. Unless you receive permission from me, you are not permitted to take
an exam in one of my other classes.
If you plan to take an early exam,
please
n
otify me

3



3

at
least 48 hours
prior to

the exam.
You must

notify me

regarding
the reason for your

absence

from

an exam
within 24 hours
after

the scheduled exam

or an
F grade (exam
score of zero)

will be recorded
.

At the time of notification, I will determine whether to

consider the absence as excused or unexcused and follow University policy. If you miss
an exam because of medical or psychological circumstances, you must provide me with
written verification.





In the event of a fire alarm or bomb threat, I will
quick
ly
collect the exams and we will
proceed outside the building. If an alternate test site is available and we can quickly
reassemble, you will complete the exam at that site. If not, I will give you time the
following class period to complete the exam.


T
he final grading scale is as follows:




Letter


Numerical

Letter


Numerical



Grade


Score


Grade


Score



A


92
-
100


C


70
-
77.9



A
-


90
-
91.9


F



0


69.9



B+


88
-
89.9





B


82
-
87.9





B
-


80
-
81.9





C+


78
-
79.9




Once everything is taken into cons
ideration, the numerical score is rounded no more than
one
-
half point to determine your letter grade. Once final grades are submitted, I will not
change grades based on subjective considerations or re
-
grade old exams or assignments.


VIII.

Group
Case Write
-
Up


There are
three

cases eligible for a write
-
up

and you must choose
one

of them. The
eligible cases

are indicated in the Tentative Schedule shown on page 6
. Write
-
ups should
be no longer than
four

pages in
clusive of exhibits (such as tables, charts and fig
ures).
In
addition to these
four

pages, you may have a cover page, and
another page (
the last page
of the write
-
up)
should be an assessment of group member contributions (to be discussed
later).
Please use an 11 point font with a 1.5”
margins

(for my cor
rections and
comments)
.
A suggested format is as follows
(the explanation is provided in
parentheses):


Statement of the Problem
(One or two sentences that clearly state the problem to be
solved)

Underlying
Cause

(
I
dentify what has caused this problem in
one or two sentences)

Proposed
Solutions

(
List and briefly describe
proposed alternatives
)

Recommend
ed

Solution
(C
learly indicate

what the company should do

and why
)

Implementation (
Explain how to implement your recommended solution
)


The
recommended

solut
ion should be based on the available data in the case and address
the decision and/or policy issues facing the firm
. The proposed discussion questions are
designed to help you think through the problem, the underlying cause, and proposed and

4



4

recommended s
olution, however,
please focus your write
-
up on what you believe ar
e most

relevant considerations.


The grade you receive on the case write
-
up will is based on your ability to identify the
problem and cause, propose good alternatives, and
provide a recomme
nded solution that
you can defend well from an organization policy/strategy point of view and that is also
supported by a strong financial analysis. In addition, you will be graded on grammar,
spelling,
punctuation,
format and general appearance of your c
ase write
-
up.


The case write
-
up is designed to be a group effort. You should have
three (3)
students
per group.
If the class size does not permit a group size of three for all groups, one or two

groups may have a group size of two (2).
I
f a student wit
hdraws from the c
lass, each
remaining group member is
responsible for completing the case
, either as a group or
individually (only if no other group members are available)
.
However, no additional credit
is given
to groups with a lesser number of students.

You select your own group members,

and the only names that appear on the paper will receive the credit for the case write
-
up.

The last page
of the case write
-
up
will be a one page synopsis of group member
contributions. Please

allocate 100 points among

the three

members
. Keep
in mind that if
all group members provide the same contribution, each will receive the same group grade.

Students who have a greater than equal contribution will receive a higher grade than the
overall group grade, while those co
ntributing less than an equal contribution will receive a
grade lower than the overall group grade.
The overall weighted average of the group
member grades, however, must average to the group grade. If group member
contributions are
allocated
unequal
ly
,
please provide a brief paragraph or more stating the
rationale for the point allocations. The rationale should be based on the allocation as
decided by the majority. However, a dissenting group member may send me an email
describing his/her point of view

with regard to the point allocation and rationale.


When writing
up
your case, please follow these guidelines:


1.

Your

recommended solution
should be

clearly explained, and that it focused.
Please make a focused decision and be sure that your decision is c
learly
conveyed to the reader.

2.

The final paper should be void of grammatical, spelling, punctuation and
formatting mistakes.

3.

Use your allotted space effectively by assuming that the reader already knows
the details of the case. These details need not be r
epeated.

4.

An important determinant of your grade is how well you support your decisions
such as alternatives and your proposed solution. It is important that your
recommendations flow from your analysis and that these are logical. There is not
normally “o
ne right answer” but rather there are many possible answers with the
best one being the one that you are able to best support. In other words,
concentrate your efforts on supporting your answer rather than finding “the right”
answer.

5.

Be sure that you beco
me familiar with terminology or details that you do not
understand. You are responsible for learning anything in the case that you need
to know.


5



5

6.

Do not raise additional questions that you cannot answer. They waste space and
annoy the reader.


The write
-
u
p is due at the beginning of class on the night that we discuss the case. No
late case write
-
ups will be accepted.



6



6

I
X.

Attendance

and Participation





Participating in class will give you the opportunity to learn from the diverse experiences
and knowle
dge of your colleagues.
The participation will be based on the assigned cases,
but also on selected problems in the PowerPoint slides that you are asked to work.


Although I may sometimes call on volunteers in class

to answer questions
, I will also call
o
n
those who have not volunteer
e
d
. The reason is that calling on non
-
volunteers will help
to learn to think through one’s view, and articulate and defend the view. It will also
motivate preparation for the class. Sometimes the questions will have one cor
rect
answer, and other times,
there will not be one “right” answer. The explanation and
thought process are always important in the evaluation of participation. Grading will be
based on my discretion and observation of an individual’s performance.

When I

evaluate
participation, it will be based on the quality of participation rather than the quantity. That
is,

your addition to everyone else’
s understanding is the basis of the class participation
grade rather than how many minutes of “talk time” were gene
rated. Students who do not
contribute can expect lower class participation grades.




Letter Grade

Numerical Score

Basis of Evaluation



A


95 or 100


Entirely

correct; very
(to extremely)
insightful



A
-



90



Not quite

entirely

correct;
very
good ins
ight



B


85



Largely

correct

(some errors)
;
good
insight



B
-


80



Largely incorrect

or

offers little
insight



C


75



Largely

incorrect

and

offers little insight



F


50



Was not present in class to answer the question


It is your responsibility to a
sk me about your
participation grade if you are unsure about
how you are being evaluated
.

Please

keep in mind that you are responsible for any
announcements made du
ring class even if you absent.




Attendance is expected in this class, and therefore, I w
ill keep an attendance record. The
first step towards having first
-
rate participation is to be present in class.
After missing
one class (a grace period), each additional class missed will results in an F grade (score of
50) in class participation for the

class missed. Therefore, missed classes will quickly
affect
a student’s

overall class participation grade.


Although a student’s att
itude is not explicitly in the participation grade
, it may be
considered in the determination of the final grade. Discou
rteous and/or unprofessional
behavior to me and/or fellow students may adversely affect a student’s grade. The
amount of the grade reduction is at my discretion.


X
.

Other


The Bryan School has adopted expectation guidelines for faculty and students which

can
be found at
http://www.uncg.edu/bae/faculty_student_guidelines.pdf
.


We will implement

these guidelines. In addition, a
dherence to the Academic Integrity Policy is ex
pected and
required of all students for all exams and assignments. Failure to abide by this policy will
result in disciplinary action. Details of the Academic Integrity Policy are available
at:


7



7

http://saf.dept.uncg.edu/studiscp/Manual.html
.






In the event of inclement weather, the class will strictly follow the University schedule.
The University posts on its web page the status of class cancellation.


This is an important course, and may d
ifficult for some students. If you are difficulty with
understanding the concepts or doing the problems, please see me as soon as possible.
This course builds on cumulative knowledge from other courses, and also, it builds
cumulatively within the course.




8



8


TENTATIVE

SCHEDULE



Session 1
:

Topic: Overview of Corporate Financial Strategy, and Investment vs. Financing Decisions

Reading:
Review
1

Chapter
s

1, 2, 3


Topic: Capital Budgeting

Reading: Chapter 10 (Review Chapter 9)

Problems (Chapter 10)

2
: A2, A10
, A11, B2, B4, B7, B9, B10, B15, B20

Minicase: The Power to Cool Off in Florida (end of Chapter 10)


Session 2
:

Topic: Capital Budgeting in Practice

Reading: Chapters 11

Problems
: A5, A7. A8, A9, B2, B4, B6, B8

Minicase: Getting Off the Ground at Boeing (
end of Chapter 11)


Session 3
:

Topic: Cost of Capital

Reading: Chapter 8 (Review Chapter 7)

Problems

(Chapter 8):
A3, A4, A5, A9, B6, B8, B10, B13, C2

Case: Cost of Capital at Ameritrade (9
-
201
-
046)
(eligible for write
-
up)


Session 4
:

Mid
-
Session
Exam: 1
s
t

hour


Topic:
Why
Capital Structure

Matters

Reading: Chapter 16

Problems: A2, A4, A6, A8, B1, B5, B7, B8

Minicase: PepsiCo’s Capital Structure Choice


Session 5
:

Topic:
Managing
Capital St
r
ucture

Reading
: Chapter
17

Problems:
A2, A3, B1, B4, B6, B7, B13

C
ase: Debt Policy at UST Inc.

(9
-
200
-
069)
(
eligible for write
-
up)


Session 6
:

Topic: Dividend Decisions

Reading
: Chapter 18

Problems: A1, A7, A9, B3, B4, B5, B6, B8

Case: Dividend Policy at Linear Technology

(9
-
204
-
066)
(eligible for write
-
up)


Session 7
:



1

Class discussion will focus primarily on the reading chapter(s) directly on the topic for the evening. Review
chapters are recommended background reading already discussed in MBA 605.

2

Solut
ions to problems have been posted on Blackboard. Contact me if you have any questions.


9



9

C
ase: Dividend Policy at Linear Techno
logy . . .continued

Final Exam


10



10

Case Study Questions



Cost of Capital at Ameritrade


1.

What factors should Ameritrade management consider when evaluating the proposed advertising
program and technology upgrades? Why?

2.

Ho
w can the capital Asset Pricing Model be used to estimate the cost of capital for a real (no
financial) investment decision?

3.

What is the estimate of the risk
-
free rate that should be employed in calculating the cost of capital
for Ameritrade?

4.

What is the e
stimate of the market risk premium that should be employed in calculating the cost of
capital for Ameritrade?

5.

In principle, what are the steps for computing the asset beta in the CAPM for purposed of
calculating the cost of capital for a project?

6.

Ameritrad
e does not have a beta estimate as the firm has been publicly traded for only a short
time period. Exhibit 4 provides various choices of comparable firms. What comparable firms do
you recommend as the appropriate benchmarks for evaluating the risk of Ame
ritrade’s planed
advertising and technology investments?

7.

Using the sotck price and returns data in exhibits 4 and 5, and the capital structure information in
Exhibit 3, calculate the asset betas for comparable firms.

8.

H
ow sho
u
ld Joe rickets, the CEO of Amer
itrade, view the cost of capital estimate you have
calculated?


Debt Policy at UST Inc.


1.

What are the primary business risks associated with UST Inc.? What are the attributes of UST
Inc.? Evaluated from the point of view of a bondholder.

2.

Why is UST Inc.
considering a leveraged recapitalization after such a long history of conservative
debt policy?

3.

Should UST inc. undertake the $1 billion recapitalization? Calculate the marginal (or incremental)
effect on UST’s value, assuming that the entire recapitaliza
tion is implemented immediately
(January 1, 1999).


a.

Assume a 38% tax rate.

b.

Prepare a pro
-
forma income statement to analyze whether UST will be able to make
interest payments.

c.

For the basic analysis, assume the $1 billion in new debt is constant and perpetu
al. Should
UST alter the new debt via a different level or a change in the amount of debt through
time?

4.

UST Inc. has paid uninterrupted dividends since 1912. Will the recapitalization hamper future
dividend payments?


Dividend Policy at Linear Technology


1.

Describe Linear Technologies payout policy.

2.

What are Linear’s financing needs? Should Linear return cash to its shareholders? What are
the tax consequences of keeping cash inside the firm?


11



11

3.

I
f Linear were to pay out its entire cash balance as a special
dividend, what would be the
effect on value? On the share price? On earnings? On earnings per share? What if Linear
repurchased shares instead? Assume a 3% interest rate. Why do firms pay dividends? Why
has the rate of dividend initiations changed o
ver time?

4.

What should Paul Coghlan recommend to the board?