HOFSTRA UNIVERSITY Fall 1998/Sec. A

FRANK G. ZARB SCHOOL OF BUSINESS

"to provide students with a perspective on the integration of the functional areas of business,

while maximizing the use of analytical skills and knowledge for decision making in a contemporary

global business environment"

DEPARTMENT OF FINANCE

FINANCE 110 - FUNDAMENTALS OF CORPORATE FINANCE

(undergraduate course)

INSTRUCTOR’S NAME Dr. Ehsan Nikbakht

OFFICE HOUR M 5-6:20PM & M 7:50-8:30PM

W 7:50-8:50PM

LOCATION OF OFFICE 116A Weller Hall

PHONE EXTENSION ON CAMPUS 463-5679

E-MAIL ADDRESS FINEZN@HOFSTRA.EDU

GENERAL INFORMATION

Location of Department Office 221 Weller Hall

Telephone number of Department 463-5698

Department Chairperson Dr. Edward Zychowicz

DESCRIPTION OF COURSE

A study of the theoretical principles and analytical techniques used for the financial evaluation of capital budgeting, capital structure and dividend policy decisions under conditions of uncertainty. Evaluation of corporate acquisitions; financial statement analysis and overview of working capital management; and study of the international dimensions of corporate finance. Overview of the influence of the globalization process, legal and regulatory, political and social, and environmental forces on corporate finance decisions and practices. Discussion of the ethical perspectives of corporate financial decisions.

PREREQUISITES OF COURSE

PREREQUISITES: Junior Standing or above; FIN 101, ECO 2, ACCT 2.

COREQUISITES: QM 122.

REQUIRED TEXT

George E. Pinches, Essentials of Financial Management, Harper Collins Pub., 5th Edition.

CALCULATOR

Students may use any financial calculator that has the financial functions (PV, FV, NPV, IRR, etc.) but the Finance Department highly recommends that students purchase the Texas Instruments, Business Analysts (TI-BAII Plus) calculator.

OUTCOME OBJECTIVES AND METHODS OF ACHIEVING THE OBJECTIVES

The objective of the course is to teach students the theoretical principles and analytical techniques that apply in the financial management of firms that operate in the domestic as well as international markets. Students are also expected to increase their awareness of how global, political and social, legal and regulatory, and environmental forces impact and interact with corporate financial decisions and practices. Finally, course assignments aim at expanding the students' problem solving abilities by integrating computer applications.

NOTE ON PERSPECTIVES

The new AACSB guidelines require that all business majors be exposed to several perspectives area that influence the management of business organizations. Coverage of perspectives will utilize various classroom techniques like case discussion, role playing, group projects and others as found appropriate. Students should expect to be graded on the perspectives portion of the course.

SCHOOL OF BUSINESS POLICY ON MAKEUP EXAMINATIONS

To be eligible for a makeup examination, a student must submit to the instructor written documentation of the reason for missing a scheduled examination due to medical problems or death of an immediate family member. The instructor (not the student) determines whether and when a makeup is to be given. If a makeup examination is to be given, the instructor will determine the type of makeup examination. If the student misses (for any reason) the scheduled makeup examination, additional makeups are not permissible.

UNIVERSITY POLICY ON INCOMPLETE GRADES

A student unable to complete a course may, with the permission of the instructor, receive a grade of incomplete (INC). The instructor will permit the student to complete and submit the missing work no later than the third week of the following semester. All undergraduate students may accumulate up to nine credits of INC grades without penalty. Past this nine-credit limit, all subsequent INC grades not made up convert to F’s at the end of the semester following the one in which they were assigned.

ATTENDANCE POLICY

All students are required to attend all classes and to be on time. If you have to be absent for a session due to circumstances beyond your control, please notify me by writing a short memo stating the reason for your absence.

METHODS OF EVALUATING STUDENTS

Students are evaluated based on four criterion: class participation, a mid-term exam, a cumulative final exam, and a computer assignment including a report. The computer assignment is the application of a spreadsheet software in solving problems extracted from the finance textbook.

GRADING POLICY

Class participation 10 points

Computer assignment (including a report) 10 points

Mid-term Exam 35 points

Final Cumulative Exam 45 points

100 points

Students will be assigned a letter grade based on the total points they achieve as follows:

A (96 and above)

A- (above 90 and below 96)

B+ (above 88 and below 90)

B (above 82 and below 88)

B- (above 80 and below 82)

C+ (above 78 and below 80)

C (above 72 and below 78)

C- (above 70 and below 72)

D+ (above 68 and below 70)

D (above 60 and below 68)

F (below 60)

COURSE OUTLINE

1. INTRODUCTION

Overview of business finance and the role of the financial manager. Description of the main financial decisions of capital budgeting, capital structure and dividend policy under the objective of firm market value maximization. Review of present and future value concepts and formulas.

TEXT: Chapter 1 and Review of Chapters 3 and 4

SUGGESTED READING:

Cornell, B. and A. Shapiro, "Corporate Stakeholders and Corporate Finance," Financial Management 16:1 (1987), 15-21

2. OVERVIEW OF THE GLOBALIZATION PROCESS IN CORPORATE FINANCE

An overview of the impact of global developments in the organization and structure of corporations, capital costs, and relationships of industrial and banking firms on the financial performance of the American firm. Brief discussion of trends and consequences in cross-border corporate acquisitions and investments.

Reading Supplement: Jennings, Marianne. "Twenty Years of FCPA: Bribery, Facilitation, and International Business," Corporate Finance Review, August 1997, pg. 39-43.

SUGGESTED READINGS:

Choi, F., and R. Levich, "International Accounting Diversity: Does It Affect Market Participants?," Financial Analysts Journal, 47:4, (1991), 73-82.

Ang, James, and T. Y. Lai, "The Cost of Capital for a Multinational Corporation, International Review of Economics and Finance 1:4 (1992), 305-314.

3. FINANCIAL STATEMENTS AND CASH FLOW ANALYSIS

Basic analysis of financial statements and ratios to evaluate the liquidity, financial leverage, efficiency, and profitability of firms. Simple forecasting concepts and the preparation of cash budgets and pro-forma statements.

TEXT: Chapter 19 and 20

Reading Supplement: Jennings, Marianne. "The Codification of Ethics in Financial Reporting," Corporate Finance Review.

SUGGESTED READINGS:

Barnes, P. "The Analysis and Use of Financial Ratios: A Review Article," Journal of Business Finance and Accounting 14:4 (1987), 449-462

4. OVERVIEW OF WORKING CAPITAL MANAGEMENT

The structure of assets and liabilities; choices concerning current and fixed assets, and short- and long-term liabilities; implications for firm risk and profitability.

TEXT: Chapter 15

SUGGESTED READING:

Gentry, J., "State of the Art of Short-run Financial Management," Financial Management 17 (Summer 1988), 41-57

5. A SURVEY OF CAPITAL BUDGETING TECHNIQUES

Examination of the criteria for investment decisions: The Net Present Value, the Internal Rate of Return, and the Payback Period; advantages and disadvantages. The relationship between NPV and IRR and conflicts in the ranking of projects. Definition and measurement of relevant cash flows for capital budgeting decisions. Ethical issues in corporate investment decisions.

TEXT: Chapters 7 and 8

SUGGESTED READINGS:

Statman, M. and D. Caldwall, "Applying Behavioral Finance to Capital Budgeting: Project Terminations," Financial Management 16:4, (1987), 7-15.

Ross, M. "Capital Budgeting Practices of Twelve Large Manufacturers," Financial Management 15:4, (1986), 15-22.

6. OVERVIEW OF ENVIRONMENTAL ISSUES IN FINANCE

An overview of major environmental concerns when investors and corporations make investment decisions. Incorporating externalities and subsidies in investment evaluation.

SUGGESTED READINGS:

Black, B., "Institutional Investors and Corporate Governance: The Case for Institutional Voice," Journal of Applied Corporate Finance 48:3, (1992/1993), 19-32.

Muoghalu, M., "Valuation of Toxic Waste Mismanagement Lawsuits: A Capital Market Approach," International Journal of Finance 3:1 (1990/1991), 65-85.

7. THE COST OF CAPITAL

Consideration of risk in the capital budgeting process. The justification for a weighted average cost of capital. Estimating the component costs of capital by means of various approaches. Calculating the weighted average cost of capital.

TEXT: Chapters 5 (pp. 122-133), 6, and 9

SUGGESTED READINGS:

Amihud, Y. and H. Mendelson, "Liquidity and Cost of Capital Implications for Corporate Management, Journal of Applied Corporate Finance 2:3, (Fall 1989), 65-73.

Durand, D., "Afterthoughts on a Controversy with MM, Plus Thoughts on Growth and the Cost of Capital," Financial Management 18:2, (1989), 12-18.

8. CAPITAL STRUCTURE DECISIONS

The concepts and measurement of operating the financial leverage. Defining business and financial risk. The relationship between firm value and capital structure. The Modigliani and Miller propositions. The definitions of levered and unlevered cost of equity and average cost of capital, equity and firm market value. The impact of bankruptcy and agency costs in determining the capital structure of the firm. Methods used to set the capital structure and various factors influencing the capital structure decisions of corporations.

TEXT: Chapter 12

SUGGESTED READINGS:

Miller, M., "The Modigliani-Miller Propositions After Thirty Years," Journal of Applied Corporate Finance 2:1, (1989/1990), 6-18.

Pinegar, J. and L. Wilbricht, "What Managers Think of Capital Structure Theory: A Survey," Financial Management 18:4, (1989), 82-91.

9. THE DIVIDEND POLICY DECISIONS

Dividend policy and payment mechanics. The Miller and Modigliani irrelevance proposition. Other theories: the clientele effect theory, and the informational content theory. Factors for and against the distribution of dividends. Stock repurchases, stock splits, and stock dividends.

TEXT: Chapter 13

SUGGESTED READINGS:

Rozeff, Michael S. "How Corporations Set Their Dividend Payout Ratios." Issues in Corporate Finance, New York: Stern, Stewart, Putnam and Macklis Ltd.

Asquith, Paul, and D. W. Mullines, "Signaling with Dividends, Stock Repurchases, and Equity Issues," Financial Management 15:3 (Autumn 1986), 27-44.

10. CORPORATE ACQUISITION AND CONTROL ACTIVITIES

An overview of corporate acquisition and control activities like mergers, tender offers, leveraged and management buyouts, sell offs and divestitures. Financial evaluation of corporate acquisitions. Impact of mergers on stakeholders.

TEXT: Appendix 8B (pp. 241-246)

SUGGESTED READINGS:

Mitchell, M., "The Value of Corporate Takeovers," Financial Analysts Journal 74:1, (1991), 21-31.

Pound, J., "Raiders, Targets, and Politics: The History and Future of American Corporate Control," Journal of Applied Corporate Finance 5:3, (1991/1993), 6-18.

Jensen, M. "Corporate Control and the Politics of Finance," Journal of Applied Corporate Finance 4:2, (1991/1992), 13-33.

11. INTERNATIONAL FINANCIAL DECISIONS

Introduction to foreign exchange rates and currency risk, and the investment and financing decisions of multinational corporations.

Class Lecture and Handout

SUGGESTED READINGS:

Hodder, J., "Evaluation of Manufacturing Investments: A Comparison of U.S. and Japanese Practices," Financial Management 15:1, (1986), 17-24.

Pringle, J., "Managing Foreign Exchange Exposure," Journal of Applied Corporate Finance 3:4 (1990/1991), 73-82.

12. BANKRUPTCY, REORGANIZATION, AND LIQUIDATION

Brief discussion of the financial consequences of business failures leading to bankruptcy, and reorganization or liquidation. Consequences for managers, stockholders, debtholders and other firm stakeholders.

TEXT: Chapter 11 (pgs. 332-333), Chapter 12 (pgs. 352-354)

SUGGESTED READING:

Gilson, S., "Managing Default: Some Evidence on How Firms Choose Between Workouts and Bankruptcy," Journal of Applied Corporate Finance 4:2, (1991/1992), 62-70.

13. OVERVIEW OF LEGAL AND REGULATORY AND SOCIAL AND POLITICAL ISSUES IN CORPORATE FINANCE

An overview of the legal and regulatory provisions that apply to business combinations, tender offers, proxy fights and other control activities, and bankruptcy. Impact of institutional investors and the role of managers, stockholders, and other stakeholders in the financial decisions of modern corporations.

SUGGESTED READINGS:

O'Barr, W. and J. Conley, "Managing Relationships: The Culture of Institutional Investing," Financial Analysts Journal, 48:5, (1992), 21-27.

Haugen, R. and Lemma Senbet, "Corporate Finance and Taxes: A Review," Financial Management 15:3, 5-21.

Briffett, R., "Avoiding New Evils by Applying New Remedies: Taxes and the Cross-Border Transaction," Journal of Applied Corporate Finance 4:4, (1991/1992), 109-116.