Department of Finance
School of Business
The GeorgeWashingtonUniversity

Financial Management, FINA 224
Representative Syllabus

Professor: Neil G. Cohen, DBA, CFA
Office: Department of Finance, Funger Hall Suite 501, GWU, 2201 G St. NW,

Washington, DC20052
Office Hours: 11AM-12Noon, 4-5PM Mon & Wed, and by appointment
Phone, Voicemail: 202-994-7276

Fax: 202-994-5014
Email: ngcohen@gwu.edu

Website:http://home.gwu.edu/~ngcohen

Course Description

The framework for the course is the creation, transfer, and destruction of shareholder value, as practiced by corporate financial managers and the commercial and investment bankers who advise and assist them in raising the funds they need. All assignments are case studies about these topics: working capital policy, capital budgeting, financing with debt and equity, project finance, dividend policy, valuation, and investment banking in the contexts of private equity, venture capital, initial public offering, leveraged buyout, and management buyout. Part I emphasizes building skills in financial analysis using basic case studies; part II applies the skills to intermediate and advanced case studies.

Prerequisites

·MBAD 250, required

·FINA 221, strongly recommended

Materials

·Higgins, Analysis for Financial Management, latest edition (required)

·Case Studies (required – handed out in class; copyright fee of about $3 per case will be collected) 

·Articles (recommended) – Blackboard

·The Wall Street Journal (strongly recommended) 

·FATOOLS Excel Templates -Blackboard

·A financial calculator is handy during class

·Textbook from MBAD 250, FINA 221 

·…..@gwu.edu email address for Blackboard access

HOW THIS COURSE WORKS

It is a hands-on workshop – not a lecture

1- the background and facts 

2- the issue(s) 

3- analysis you did and the results 

4- your recommendation(s) for solving the problem. 

The rest of the time will be used to introduce the next assignment, or to discuss topical Wall Street Journal and New York Times articles. 

·Use of spreadsheet software is a necessity for most, but not all, of the assignments. FATOOLS templates are posted on Blackboard as well as special templates for some assignments to eliminate data-entry time. 

·Think the professor as your coach. He guides and critiques your practice.

·Learning financial analysis is cumulative - you learn it by doing it - like swimming or tennis. Your grade is determined by the effort you put in during the course and what you know how do at the end of the course. The results of your work early in the course will be rough and you will not feel comfortable about it. But if you let feelings of inadequacy stop you from practicing the analysis and making the recommendations, you won’t learn and you won’t grow.

·Current articles from The Wall Street Journal will be discussed in class regularly. You should have your own subscription.

Attendance is mandatory.

·A case-study course involves continuous student-to-student and student-to-professor discussion. Much of the learning occurs during the class, as you work through what you prepared in advance, ask questions about it, and improve on it.Therefore, attendance is mandatory. If you decide to miss a class, that is your decision. Please do not ask the professor for permission to do so. You are responsible for anything missed.

How to use the Higgins book to analyze a case study

· The Higgins book is an outstanding recipe book for doing case analysis. Use it as a reference book, not as a textbook. (Your MBAD 250 or FINA 221 textbook is a handy reference.) If you read the chapters all the way through, the material will be familiar, you will think you already know it, and you won’t learn much of anything. Instead, use the book selectively, as a reference, finding the material that applies to the case you are working on, studying only that material to go step-by-step through the analysis. 

·Think about how you should approach the problem by studying the related material in Higgins. Perform the analysis by going back-and-forth between the example provided by Higgins and the information provided in the case. 

·Interpret what the analysis is telling you, and make your recommendation based on the analysis.

·Rely on class time to ask the questions you need to have answered, so you can perfect your skills.

Case write-ups must be independently prepared in advance of each class

·Group write-ups are not acceptable, but you can use the results of teamwork and jointly prepared exhibits as the take-off point for your own writing. Cite names of each contributor on each group-prepared exhibit.

·Write-ups will be collected and graded at random several times during the semester. When they are not graded, the 90 minutes of discussion time gives you ample opportunity to appraise the quality of your work and ask the necessary questions.

·Write-ups count only for 20% of your final grade. The professor/coach does not expect perfection - he regards your case summaries as work-in-progress, not finished product. Do the best you can with every case - figure out what recommendation it leads you to, and write it down. Then you are ready to participate in the class discussion, to identify your mistakes and ask the questions to fix them.

·The write-up has a two-page maximum, plus relevant exhibits. 

1- cite the issue(s) involved very briefly, 

2- cite the recommendation(s) you are making, and make it unambiguous

3- briefly discuss the type of analysis performed and the results. Do not say “see the exhibit.” Explain the meaning of the exhibit.

4- cite the pros and cons of your recommendation(s)

·Do not repeat the facts of the case that everybody has read.

·When you use sensitivity analysis, it is not necessary to submit a separate page for each run – show the base case analysis and prepare a summary exhibit.

·The write-up can be in any form you choose - paragraphs, outline, bullet points, sentence fragments. It must be word processed. Eliminate cover sheets, plastic covers, etc. Just put your name and the name of the case at the top of the first page and staple it. It’s a homework assignment, not a term paper. Keep it simple!

·You can write on it during class – it’s your homework. If it is collected, turn it in.

GWU Code of Academic Integrity

· This course follows the provisions for academic integrity published by the University. Violation of any provision is grounds for a course grade of F. 

Grading

·Attendance is required. 

·Late papers are not acceptable because that defeats the purpose of the course – advance preparation for class discussion. Please do not ask for permission to hand in a late paper.

·Class Participation50% 

·Written Summaries20% 

·Mid-Term Exam30%

·No make-up for missed exam

·You are graded as an individual, not as a member of a group. If you are silent, and turn in only group products, there is no basis for your grade. 

ASSIGNMENTS

If GWU closes because of snow or another emergency, class will be conducted on-line, at the scheduled time, using a Blackboard chatroom.

Part I of the course runs from January 24 – March 7, consisting of mostly basic, single-issue cases emphasizing the tools of financial analysis, closing with an exam:

Jan 24

Capital Budgeting

Higgins, Chapter 7

CASE: Economy Shipping

1. Compute NPVs for the rehabilitation of the Conway and the purchase of the diesel boat, decide which alternative is best, and be ready to defend your choice.
2. See FATOOLS05 Generic Capital Budgeting template and determine why it does not fit the Economy Shipping data very well. 
3. How does the lease proposal enter into the analysis? Determine if it is it better to lease than purchase?

Jan 31

Financial Statement Analysis and Forecasting 

Higgins, Chapter 3

Caselette: AYOG Industries

1. Calculate the standard financial ratios and explain what they say about the performance of Ayog. Use FATOOLS05 Long-Form Forecast template
2. Using Excel, forecast the income statement and balance sheet for the years 2005-2007, and use the plug figure to show how much borrowing is needed. Use the Short Form Forecast template only if you want a short-cut approach. The Long-Form Forecast template gives a more accurate result. IMPORTANT: If your last name begins with A-J, use an 8% per year sales growth rate as the driver for your forecast. If your last name begins with K-Z, use a 30% per year sales growth rate.

Feb 7
Part I -Valuation

Higgins, Chapter 8, 9
Caselette: AYOG Industries, continued

1. Working with your previously established forecast and the historical financial statements, determine the weighted average cost of capital for Ayog. Use FATOOLS05 Cost of Capital template.
2. Working with your forecast and financing plan for Ayog, determine the value of its equity using two approaches, Free Cash Flow and Market Multiples. Use the FATOOLS05 Valuation template. Get market multiples from the internet – Yahoo Finance is one good source among many. 

 

Part II - Dividend Policy

Case: Dividend Policy at FPL Group (A)

1. Why do companies pay dividends? What are the pros and cons of cash dividends as opposed to stock dividends?

2. What are the most important issues confronting FPL Group in May 1994?
3. From FPL’s perspective, is the current payout ratio appropriate? Would a higher or lower payout be better?
4. From an investor’s perspective, is FPL’s payout ratio appropriate?
5. As Kate Stark, what would you recommend about investing in FPL’s stock – buy, sell, or hold?

 

Part I - Raising Permanent Financing 

Caselette: AYOG Industries, continued

Higgins, Chapters 5-6

1.Working with your previously established forecast for Ayog, determine the maximum amount of borrowing Ayog can handle, i.e., its debt capacity. You probably view the production capacity of a business as a resource. Should you view its debt capacity as a resource? Be ready to explain.

2.Using FATOOLS05 Financing template, decide if the external financing needed financed should come from debt or equity sources. Be ready to discuss your recommendation in terms of the income, risk, control, marketability, flexibility, and timing aspects of the two alternatives.

Part II - Lease vs. Borrow
Case: AMTRAK Acela Financing 

1. Using the Acela template posted on Blackboard, calculate the NPV of the lease payments and the NPV of the loan payments, using the after tax cost of debt as the discount rate. 
2. Can you discern what the driving force behind this decision is? Is it the residual values? What other factors may be involved?
3. Be ready to explain how the deal is structured, i.e., how the leveraged lease works and how the risks are apportioned.
4. Is this lease going to be on the AMTRAK balance sheet? Does is reduce AMTRAK’s debt capacity dollar-for-dollar as would borrowing? Is this an investment decision (capital budgeting) or a financing decision (debt vs. equity?)

Feb 21 – President’s Day, University is Closed 

Feb 28

Case: Dell’s Working Capital

1. How was Dell’s working capital policy a competitive advantage?
2. How did Dell fund its 52% growth in 1996?
3. Assuming Dell’s sales grow 50% in 1997, how might it fund its growth internally? How much would working capital need to be reduced and/or profit margin increased? What do you recommend? (HINT: Make a spreadsheet from data in the case exhibits, setting it up to enable sensitivity testing based on the key drivers for working capital and financing needed.)
4. If Dell repurchases $500 million of its common stock in 1997, and repays its long- term debt, how will your recommendation change?

Mar 7

Exam: closed book-closed note, bring financial calculator

 

Part II of the course applies the analysis skills from Part I to intermediate and advanced multiple-issue cases, closing with a two-day negotiations simulation:

Mar 21

Capital Budgeting

Case: Diamond Chemicals (A) & (B)

For the (A) case:

1. What is the Transport Division’s suggestion? Does it have merit?
2. What is the Director of Sales’ suggestion? Does it have merit?
3. What did the analyst from the Treasury staff mean by his comment about inflation? Do you agree?
4. How should Frank Greystock modify his analysis? Use the Merseyside template posted on Blackboard.
5. What is the Merseyside project worth to Diamond Chemicals?

For the (B) case:

1.Are the Merseyside and Rotterdam projects mutually exclusive?

2.How do the two projects compare using NPV, IRR, and Payback Period as ranking criteria?

3.The managerial flexibility in the Merseyside does not get quantified and is therefore not included in Frank Greystock’s cash flow analysis. Is this omission serious? 

4.Consider the differences in style between Lucy Morris (Merseyside) and Elizabeth Eustace (Rotterdam) and whether that can affect the outcome of the decision?

5.If you are James Fawn, which project would you propose to the CEO?

Mar 28
Capital Budgeting

Case: Euroland Foods (use template posted on Blackboard)

1. Compute all relevant decision criteria for each proposed project.
2. Rank the projects and decide which ones to accept.
3. You will be assigned a role matching one of the parties in the case. Be ready to advocate the persons project(s).

Apr 4
Investment Banking, Private Equity, Initial Public Offering

Articles:

1. Who Brought Those Duds to Market
2. The IPO Controversy
3. Why Don’t Issuers Get Upset

Case: Teleswitch (A)

1. Evaluate Teleswitch’s decision to go public by establishing the criteria that determine readiness for an IPO, and whether or not they are ready.
2. In a cross-classified table, portray and analyze the valuation results used by each of the perspective underwriters. 
3. What value would you put on Teleswitch in November 1996?
4. If you are Bob Goodman, what are your priorities for choosing an underwriter? Choose one, and explain.

Apr 11
Merger and Acquisition
Case: The Acquisition of Consolidated Rail Corporation (A)

1. Using data in Ex. 1, explain the strategic reason(s) why CSX wants to buy Conrail? 
2. Analyze the structure of CSX’s offer for Conrail: (a) Why did CSX make a two-tiered offer and what effect does this structure have on the transaction? (b) What are the economic rationales for, and the takeover implications of, the four provisions in the merger agreement, no-risk clause (A-G), lock-up options (H-M), break-up fee (N-S), and poison pill shareholder rights plan (T-Z)? Be ready to explain at front of room according to initials of your last name.)
3. Using Ex. 6 (template posted on Blackboard), what, in your opinion, backed up by analysis, is a fair price for Conrail?
4. Using Ex. 7 (template posted on Blackboard), what, in your opinion, backed up by analysis, is a fair price for Conrail?
5. If you are a Conrail stockholder, would you tender your shares to CSX at $92.50 in the first-stage offer? Why or why not?
6. Starting with your best estimate of what the deal price should be, figure out if CSX has the debt capacity to borrow enough money to finance the deal. Explain.

Apr 18

Articles: 

1. LBO Video Handout

2. CFO Magazine on Spin-Offs
3. CFO Magazine on Equity Carve-Outs 
4. WSJ article file on LBOs
5. Alchemy of LBO’s – McKinsey Quarterly article



Case: Norris Industries (use templates posted on Blackboard)

1.Explain the structure of the LBO.

2.Is $43.05 a fair price from the viewpoint of the selling shareholders?

3.As Sam Mencoff, would you accept the KKR offer? 

Apr 25

Merger & Acquisition

Case: Pinkerton’s (A) (use templates posted on Blackboard)

1. How is value created if Wathen acquires Pinkerton’s? 
2.  What is the proper cost of capital for the valuation? 
3. Develop and value the free cash flows from Pinkerton and the CPP margin improvements, i.e., what is the value of Pinkerton alone, CPP alone (without synergy), and CPP with synergy?
4. Which financing choice/capital structure should Wathen choose if a $100 million deal is made?  
5. How should Wathen respond to Morgan Stanley? 

May 2

Merger & Acquisition Negotiation

Case: GM-Euroslavia

Students will be divided into groups, Red and Blue, for this two-day negotiations simulation. Each group will be divided into four teams, representing the parties at interest in General Motors attempt to purchase an automobile manufacturer being privatized by the Polish government; Polish Privatization Agency, GM Treasury, GM Marketing and Planning, and GM Opel Manufacturing.

1. Teams prepare their plan and negotiating strategy. 
2. Negotiations take place with all four teams participating, separate negotiations for each group. 
3. Groups report on their plans, results, and how they were achieved.  

May 4 - (designated Monday, required class)

Case: GM-Euroslavia, continued








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