University of Maryland
Advanced Financial Management
Professor Gordon M. Phillips
Office Hours: W 10:45-12:00, or W 1:00-2:00
Course WEB Site:http://www.mbs.umd.edu/finance/gphillips/bmgt741home.html
This course is an advanced topics course in Corporate Finance. The course covers five major subject areas. Each area can be viewed as a self contained topic area. The first area focuses on advanced project and firm valuation. It is an extension of topics addressed in your previous finance courses. The second area deals with initial public offerings (IPOs). Third, we will examine leveraged buyouts and advanced security pricing. Forth, we will then apply facets of the debt/equity decisions to bankruptcy and restructuring. We will end with a discussion of risk management & international capital markets.
The pedagogy is lectures interspersed with case studies. Sections begin with lecture-discussion. Students have substantial responsibility (and incentives) for coming to class prepared to engage in active discussion. Each student is expected to work in a team to analyze the cases. Teams will be 3-4 students each. The team will turn in a brief memo on the case (see following page).
Course Examination: There is only one exam in the course. It is thus given about 3/4 of the way through the course. It will either be a comprehensive case or several long problems that require conceptual and numerical analysis.
Final Project: The final project is a large research project that is described on the last two pages of this handout. It is because of this large project that there is only one test in the course. You should choose this project with care as it is expected that you will be spending a large amount of your time working on it. The final project will be done individually or with a maximum of 2 individuals.
Lecture notes and cases will be the primary source of material for this course.
There will be a case packet that you can pick up at the copy center (CP)
The suggested textbook for the course is: Financial Markets and Corporate Strategy, by Mark Grinblatt and Sheridan Titman, publisher: Irwin-McGraw Hill.
The BMGT 640 Textbook is also useful for reviewing specific sections of the course and gives alternative treatments to several of the topics in the course: Ross, Westerfield, and Jaffe, Corporate Finance, Fourth Edition, Chicago: Irwin, 1995. (RW&J).
Grading:Course grades are based on
Case Memos Written (5% each)
Advanced Security Pricing assignment
Final Project (5% of project grade based on presentation to class)
4 case write-ups are required and 1 presentation - for a total of 5/8 cases to be analyzed. You may also do 1 extra case writeup for extra credit. The case studies are placed at the end of a particular topic and are to be used as analytical and discussion tools. The objective in using case studies is to provide examples of companies or individuals that have faced the topic at hand and to apply theoretical tools to real problems. Included in this syllabus are questions and ideas that you may use as guidelines for analyzing the case. The content of the case write-up is as follows:
If your name is on the report as part of the group, it means you participated in the analysis. You are on the honor code to observe this requirement.
Class Participation: It is important that everyone come prepared to "open the case" and to discuss in detail the problem and its potential resolution. After the class as a whole has discussed the basic problem of the case, a group of students will prepare a team presentation presenting their analysis of the problem facing the firm and their proposed "solution". Following each presentation the discussion will then open to the whole class. Questions are encouraged both during and after the presentation. Ideally the class as a whole will interactively come to an understanding of the problems presented in the case.
Each group will be responsible for one case presentation of approximently 30 minutes. Note that groups presenting the case need not turn in a case write-up.
Daily Class Schedule
I. Overview of Course - Valuation and Financing Decisions
Monday, August 31
Read: "Note on the Free Cash Flow Valuation Models"
Grinblatt & Titman, Chapter 9
Reference: REVIEW: Ross, Westerfield, and Jaffe, Chapter 7
Wednesday, September 2 - Wednesday, September 9
Topic: Risk and Sensitivity in Valuation
Read: "Risk Analysis in Capital Budgeting", D. Hertz
Read: Grinblatt & Titman, Chapter 10
Reference: REVIEW: Ross, Westerfield, and Jaffe, Chapter 8
Monday, September 14: Case Analysis - Dynatronics
Topic: Interaction of Financing and Investment Decisions,
Security Design, Why issue different securities?
II. Initial Public Offerings: Birth of Public Corporations
Wednesday, September 16 & Monday, September 21
Read: Going Public: Initial Public Offerings
"Initial Public Offerings", Ibbotson, Sindelar, and Ritter
"The Costs of Going Public," J. Ritter
"Note on the Financial Perspective: What Should Entrepreneurs Know?"
"A Method For Valuing High-Risk Long Term Investments"
Reference: Grinblatt & Titman, Chapter 3.
Wednesday, September 23
Topic: Going Public: Case Analysis – Thermo Electron
Thermo Electron Case Questions:
Monday, September 28
Topic: Initial Public Offerings Continued- Case Analysis: Easel Corp.
NOTE: Easel (B) (C) will be handed out in class
This is a very long case - but I encourage everyone to examine it closely. It is perhaps one of the most interesting and realistic cases in the package.
Because of its length and to organize the class debate in order to focus our analysis on choosing an underwriter, 2 groups will present analyses before the class. If you are doing a written analysis of this case pick two of the 4 underwriters and analyze their strengths and weakness.
Group 1: Evaluate Hambrecht & Quist and Alex Brown
Group 2: Donaldson, Lufkin & Jenrette & Robertson, Stephens, & Co.:
You will have 15 minutes to present your case. The rest of the class is responsible for asking questions. Following each presentation we will have a 5-10 minute question and answer session.
After the 2 presentations we will attempt to pick out the best elements of each presentation and decide what EASEL wants its ideal investment bank proposal to look like.
Content: Clearly present your firm's case responding to the Request For Quotation in Exhibit 6. Evaluate the following from exhibit 6. Where relevant use data specific to your firm. Feel free however to change details such as pricing from that in exhibits 9-11 that your firm is "thinking" about presenting. Be prepared to defend and explain why you choose specific features and assumptions.
Wednesday, September 30 & Monday, October 5
Topic: Leveraged Buyouts & High Risk Securities
Read: "How to Value Recapitalizations and Leveraged Buyouts"
"Leveraged Buyouts", Kohlberg, Kravis, Roberts & Co.
"Eclipse of the Public Corporation", M. Jensen.
Reference: Grinblatt & Titman, Chapter 19, Section 6.
Wednesday, October 7
Topic: Capital Structure and Strategy
Read: Chapter 16, Grinblatt and Titman
Monday, October 12
Case Analysis: USG Corp.
Wednesday, October 14
Topic: Advanced Security Design, valuing complex securities
using option theory (includes review of option theory)
Read: Grinblatt and Titman, Chapter 11 Section 2
Review: Ross, Westerfield, Jaffe, Chapter 21 and
Grinblatt and Titman, Chapter 8 (Review)
Monday, October 19
Topic: Pricing Convertible Debt, Financial innovation
Read: Ross, Westerfield, Jaffe, Chapter 22.
Wednesday, October 21: Case Analysis: Flowers Industries
IV. Bankruptcy & High Risk Securities
Monday, October 26
Topics: Financial Distress and Bankruptcy
Read: "Managing Default: Some evidence on How Firms Choose between
Workouts and Chapter 11", S. Gilson
"The Economics of Pre-packaged Bankruptcy", J. McConnell and H. Servaes
Reference: Grinblatt & Titman, Chapter 15.
Wednesday, October 28
Topic: Bankruptcy continued: Legal Code & Financing Decisions
Affect of Capital Structure on Investments
Read: "Bankruptcies, Workouts and Turnarounds: A Roundtable Discussion"
Haugen, R.A. and L.W. Senbet, 1978, The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure, Journal of Finance, Vol. 33 383-93.
Monday, November 2
Case Analysis: Marvel Entertainment
V. Risk Management
Wednesday, November 4 & Monday, November 9
Topics: Interest Rate Risk
Read: Interest Rate Derivatives, Harvard Business School Note
Reference: Grinblatt & Titman, Chapter 20, Chapter 21, pp. 743-750.
Wednesday, November 11: Case Analysis
Topic: Interest Rate Risk Management,
Read: Grinblatt & Titman, Chapter 22.
Wednesday, November 11: Case: Liability Management at General Motors
Monday, November 16 & Wednesday, November 18
Topics: Risk Management, Hedging Exchange Rate Risk
Read: Currency Swaps, Harvard Business School Note
Reference: Grinblatt & Titman, Chapter 20, pp. 732-740,
Chapter 21, especially pp. 767-780.
Read for Nov. 18:
"Identifying, Measuring, and Hedging Currency Risk at Merck
"Managing Currency Exposure: The Case of Western Mining
Monday, November 23: Case Analysis - Walt Disney Yen Financing
Exam: Wednesday, November 25,
Exam will be a case or a sequence of problems. You can take the exam at 5:30PM on Tuesday, November 24th (Thus getting out early for Thanksgiving) or 8:30AM on the 25th and you will have 3 1/2 hours to complete the case. I will make arrangements for rooms based on the number of students choosing either time.
Presentation of Final Projects
December 7 and December 9: Student Presentations
& Remaining Presentations during Final Exam Period
Now its time for some real world analysis! This project will determine 30% of your grade. The reports can vary in length but should be no more than 30 pages including exhibits. Reports should be double spaced with normal margins. I strongly recommend that you talk directly to the company’s executives when possible. Many companies in the area are willing to talk to MBAs and it will give you some direct (hopefully high level) exposure.
The project will involve groups of 2 people. (2 people maximum)
The following represent potential topics for projects: Financial Restructuring, Leveraged Buyouts, Bankruptcy Proceedings and Initial Public Offerings. Pick a topic area that you can consult with some firms in the Washington area to both improve your analysis and report and to gain additional insights.
I. Leveraged Buyouts/Financial Restructuring/Bankruptcy Proceedings:
Several sample industries include:
- The Gypsum Industry- U.S. Gypsum, National Gypsum, Republic Gypsum
- Athletic Footwear: Interco Inc.
- Airline Industry
- Tractor Trailer Industry- Fruehauf, Monan, Trailmobile, Dorsey
- Retail Industry - Woodword and Lathrop (Woodies), Macys, Campeau Corporation (owners of Bloomingdales and other major department stores.)
1. A discussion of debt and capital structures over time - Address how the existing securites affect the restructuring experience/ bankrupcy or workouts.
2. How did the firm's cash flows and business risk affect its "performance".
3. The influences and factors leading to changes in the capital structures of firms.
4. What happens to required rates of return for stocks, bonds. If you bought into the firm's securities, how would you have done? What about buying the securities after bankruptcy filings.
5. Discuss the changes in investment, after any capital structure change or bankruptcy, if any, for firms in the industry.
6. Discuss the experience of its creditors in Chapter 11.
II. Going Public: Analyze the performance of Initial Public Offerings after going public to determine whether you should continue to invest in initial public offerings. Also consider the perspective of the company going public. Why are they going public? Is the price set "right"? What factors are important for this firm.
Examples of Industries:
A. The Computer Industry: AOL etc.
B. The Biotechnology Industry: Focus on Genetic, Amgen and others -
C. The Medical Technology Industry:
Your Analysis should include (again not merely comprise) the following issues:
BMGT 741: Advanced Financial Management