FIN. 3403--Corporate Finance INTRODUCTION

1. FIN. 3403--Corporate Finance INTRODUCTION © R. DIGGLE, CFA University of Central Florida 1999

2. COURSE OBJECTIVES: FIN 3403 • To learn to apply the 10 Axioms of Finance in Ch. 1 of your text. • To learn to APPLY time value of money and the financial calculator in every day problems. • To understand the basics of Capital Budgeting, Cost of Capital and Leverage. • To develop an understanding of applied financial performance and ratio analysis.

3. FIN 3403 COURSE OBJECTIVES: CONTINUED • To understand the concepts of risk and return. • To gain a basic understanding of key financial instruments, markets and institutions.

4. TOPICS • WEEK 1-5 • TVM • USING FINANCIAL CALCULATOR • USING TABLES IN BACK OF TEXT • WEEK 6-10 • COST OF CAPITAL • LEVERAGE • CAPITAL BUDGETING

5. TOPICS CONTD. • WEEK 11-15 • FINANCIAL MARKETS, INSTRUMENTS AND RISK/RETURN • FINANCIAL PERFORMANCE (Financial ratio analysis --team project) • BOND AND STOCK VALUATION THEORY

6. OFFICE / HOURS GRADING Drop lowest exam Team project Homework Importance of taking notes in class LECTURE NOTES FINANCIAL CALC. Do you need to brush up on accounting? My job is to SIMPLIFY concepts in text and problems. Ask questions if you are unclear on ANY concept, problem or definition. FIN 3403: SYLLABUS REVIEW

7. WARNING • This is a quantitative course. • Homework and class lectures are designed to help you understand the material. You are encouraged to work in a study group to master this material. • Grades in this course tend to be a bi-modal distribution.

8. GETTING ORGANIZED • CLASS ROSTER • ATTENDANCE POLICY • TEAM GRADE ON PROJECT • EXAMS AND MAKE UP POLICY • WALL STREET JOURNAL SIGN UP --optional but HIGHLY recommended --you may share • QUESTIONS?

9. STUDY TIPS TO HELP YOU GET AN “A” IN THIS COURSE • Get into a study group with your team or other classmates. • Begin NOW by studying the calculator manual. • DO THE HOMEWORK PRIOR TO EACH CLASS. Exam questions are taken from this material. • Write out definitions and terms. Do not just use a highlighter. Definitions given in class will be on exams.

10. STUDY TIPS contd. • Use the Lecture Notes. They are on my Web Site and were written to help you on exams and to simplify note taking. • See me during office hours if you are confused or overwshelmed. • Ask questions until a topic is clear. • Pay close attention and participate in class. Move to front if you cannot see.

11. WEB SITE ADDRESS IS IN SYLLABUS DOWNLOAD LECTURE NOTES DOWNLOAD EXCEL PROBLEMS DOWNLOAD PPT LECTURES FOR REFERENCE IF YOU DO NOT KNOW HOW TO DOWNLOAD, GET SOMEONE IN THE COMPUTER LAB TO HELP YOU. PRINT LECTURE NOTES AND BRING TO CLASS DOWNLOAD LECTURE NOTES AND FILES FROM WEBSITE

12. BBA, MBA UNIV. OF MICHIGAN --finance and marketing PhD coursework Ohio State University --honors --finance 30 years of senior management Chartered Financial Analyst CEO largest bank --investment sub in the Intermountain West Director of Research and member of the management committee --two regional brokers BEEN THERE--DONE THAT!! My QualificationsR. Diggle, Jr. CFA

13. PLEASE SEE PAGES 5-7 OF LECTURE NOTES DEALING WITH PROJECT. PRINT THE STEPS IN THIS PROJECT FROM THE EXCEL FILE I WILL GIVE YOU IN CLASS TODAY. I WILL MEET WITH EACH TEAM. YOUR IMMEDIATE JOB IS TO GET ORGANIZED AND PICK A COMPANY TO ANALYZE. NOTE: SET A TIME FOR REGULAR TEAM MEETINGS. TEAM COMPANY REPORT

14. Sign up for a team today. Get names and phone number of teammates Pick a time when you ALL can meet to work on your project. See lecture notes for details. Pick an INDUSTRIAL company. Write for original last annual report ASAP (do not use internet copies) I will give each team an Excel disk to use to analyze your company TEAM PRESENTATIONUSING EXCEL, COMPUSTAT AND POWERPOINT

15. GO TO MY WEB SITE CHECK OUT POSSIBLE COMPANIES ON BIGCHARTS AND NASDAQ DATABASE. CHECK EDGAR --SEC DATABASE MUST HAVE AT LEAST 5 YEARS OF HISTORY (NO RECENT IPOs) AND SALES OF AT LEAST $500 MILLION. MUST BE MAKING A PROFIT I WILL HELP YOU. TEAM REPORT CONTD.

16. OBJECTIVES OF THIS TEAM REPORT (15% of grade) • To become more comfortable making a formal presentation before a group. • To learn how to use Powerpoint effectively • To function as a team. This is a skill you will need throughout your career. • Peer evaluations will be made. I know many of you work. Set team meeting times that work for all members.

17. THIS IS MS POWERPOINT • It is EASY to learn • All you need to do is outline your talk • Pick your slide format and type slides from your outline. USE LARGE FONTS • You may add Clip art to jazz up your talk

18. Be creative!!! It is fun • You can change the presentation designs. Just make sure text is easily visible in back of room • Be sure slide 1 lists the names of team members and your topic, class & date • USE Windows 95 or Windows NT version

19. When you have some slides done you can select the SLIDE SORTER VIEW LIKE THIS……. You can use the cut icon to move slides around You can insert spreadsheets of photos Use the “notes” icon 2nd from right atbottom to write your “script.” Click on the “podium” icon at the lower right when you are ready to test a full page view for your talk. Save on a floppy and put on C drive before class. POWERPOINT IS POWERFUL

20. TEAM MEETINGS --30 MIN • EXCHANGE NAMES, PHONE NUMBERS AND E MAIL ADDRESSES AND GIVE INSTRUCTOR A COPY • SET TIME FOR WEEKLY TEAM MEETING AND STUDY GROUP MEETING • SELECT CANDIDATES FOR COMPANY PRESENTATION I will spend 5 minutes with each team

21. Balancing risk and reward is a key role of a manager. Some risk can be diversified away. Some cannot as we will see. TVM -- our next lecture topic. Money received now is worth more than money received in future. Cash is king!. Think incrementally! Competition is a great equalizer. Companies with consistently high margins are rare. Capital markets are “Efficient.” Efficiency is created by free flow of information and capital. Owners and management objectives may not coincide. Taxes affect ALL business decisions. Some risk can be diversified away and some can’t 10 Ethics are important. Axioms of Finance--TEXT CH 1

22. In this course we will focus on PUBLIC CORPORATIONS Other forms of organization are discussed on pp 4-6 of your text A Public Corporation is responsible to its owners The Board of Directors are chosen by the shareowners to oversee management. In the U.S. there is no National Corporation Act. Corporations are incorporated in a state. GOAL OF THE CORPORATION

23. What is the MOST IMPORTANT goal of the Modern Public Corporation? • See TEXT P. 2: IT IS NOT profit maximization. • The goal is “maximization of shareholderwealth” by increasing the price of the common stock over the long term. There are many ways to accomplish this goal. Let us list a few:

24. Wealth Maximization is the key!! • Profit maximization is very important but is only one way to increase shareholder value. • Increasing profits should be an important goal however. • Wall Street focuses on Earnings per Share (not net income) in measuring profits. • Wealth maximization reflects ALL factors that contribute to a higher stock price.

25. Return on Equity (ROE) Net income / SH equity OR ROA divided by Total debt/ total assets THIS IS CALLED THE DUPONT MODEL SEE TEXT P. 107 Increasing ROE > sales > net income > net margin Make an acquisition where margins are improved Make a divestiture where profits > Buy back stock HOW DO WE MEASURE WEALTH MAXIMIZATION?

26. Increasing sales Internal growth Acquisition Increasing profit margins Decreasing costs Emphasizing profitable lines or products Buying back stock Using “Financial Leverage” (Debt) to magnify return to shareowners Reducing taxes Can you think of other ways? Ways to Maximize S/H Value

27. Maximizing Shareholder ValueBy buying back stock • RECAP ROE = NET INCOME / TOTAL COMMON EQUITY • COMMON EQUITY = VALUE OF COMMON STOCK ON BALANCE SHEET • USING CASH TO BUY BACK COMMON STOCK REDUCES COMMON EQUITY

28. ACCOUNTING REVIEW FIN 3403

29. Has it been more than 2 years since you had basic accounting? SUGGESTION Please STUDY ch 3 p. 81-111 NOW While this chapter is assigned later to study ratios, it is important for you to review this material since accounting knowledge is assumed in this course. Ask questions if you are unclear on any concept in this chapter. I am here to help.

30. SALES (units x price) less Cost Goods sold = GROSS INCOME less SG&A less depreciation = OPERATING INCOME plus other income less interest expense= EBIT (Earnings before interest and taxes) EBIT less interest exp. = PRETAX INCOME less FIT paid = Net Income less Dividends paid to Common shareholders= Contribution to Retained Earnings (PLOWBACK) E.P.S. = Net income / common shs outstanding Income statement review:ACCOUNTING PROFIT

31. Why does Wall Street Focus on E.P.S.? • EPS measures the return to the shareowner. Stock prices are usually measured in terms of the PRICE / EARNINGS RATIO which relates S/H value to earnings. • Many things impact E.P.S. Some are outside control of management such as tax rate or mandated depreciation rules.

32. Sales growth internal growth acquisitions Margins Raw material costs Product line emphasis Use of leverage (debt) Depreciation Taxes New product development (R&D) Our system rewards innovation with 14 year patent protection New products and services tend to have higher margins Share repurchase Other ideas????? E.P.S. is impacted by many of the same things as S/H Wealth

33. CASH FLOW Simple definition= net income + depreciation and other non cash charges SEE Axiom 3 & 4 in text p. 16--cash flow is the measure we use not accounting profits The Efficient Markets Hypothesis (axiom 6) External or macroeconomic factors impacting stock prices: 1. Interest rates & inflation 2. Economic growth, currency & tariffs 3. Competitive pressure 4. Investor confidence Income statement review contd:

34. ASSETS Cash + AR + Inv = Current Assets Current = less than 1 year ___________________ Long term assets Plant & equipment “Goodwill” TOTAL ASSETS LIABILITIES AND S/H EQUITY Current Liabilities ______________________________________________________ Long term liabilities LT debt + Pfd stock COMMON EQUITY= CS + SURPLUS + RE “Net worth” or equity capital = TA - TL TOTAL LIAB + S/H EQ. Balance Sheet Review

35. Why do we use historical cost? LIMITATIONS ADVANTAGES The Weyerhaeuser Example ASSETS AT COST LESS LIABILITIES = S/H EQUITY BVPS = S/H EQUITY / COMMON SHS OUT What about a company that grew by acquisition? What is “Goodwill?” When you buy a company do you pay book value or market? Companies are often measured in terms of stock price / BVPS or Price/book. What is wrong with this? The Historical cost concept

36. ASSIGNMENT • SEE SYLLABUS FOR ASSIGNMENTS • MEET WITH YOUR TEAM OUTSIDE CLASS. • CHECK OUT WEB SITE • DOWNLOAD LECTURE NOTES AND OTHER FILES • READ CH. 1 • STUDY CALCULATOR MANUAL AND GET FAMILIAR WITH KEYS

37. TVM AND THE USE OF THE TI BA2+ FINANCIAL CALCULATOR FIN 3403UCF School of Business R. DIGGLE, CFA

38. We learned about Powerpoint and how you will be using it. We examined the concept of Wealth Maximization We compared an income statement and a cash flow statement We reviewed the 10 axioms of finance summarized on p. 26 of your text. If you are rusty on accounting --STUDY chapter 3 ASAP Are there questions from last time??? RECAP OF LAST LECTURE

39. ARE YOU SIGNED UP WITH A TEAM? HAVE YOU PICKED A COMPANY? DO YOU HAVE A REGULAR TIME SET FOR TEAM MEETINGS THAT IS OK WITH ALL? All teams will meet with HAVE YOU CHECKED OUT MY WEB SITE? DO YOU ALL HAVE A TIBA2 + CALCULATOR? HAVE YOU STUDIED CALC.MANUAL? me at end of this class TEAM ORGANIZATION

40. Company Ratio Analysis Project • Read instructions in Lecture Notes. • Copy ALL Excel spreadsheets on disk onto blank disks for each team member. Return original disk to instructor. Do NOT write on my disk. • Print instructions for each team member. Work on assigning tasks for everyone. • Make a list of questions for instructor.

41. TVM • IN ALL TOPICS WE WILL PROCEED AS FOLLOWS: • THEORY • APPLICATIONS • TEXT PROBLEMS • ADDITIONAL PRACTICAL PROBLEMS • QUESTIONS AND REVIEW • WE WILL REFER TO LECTURE NOTES FIRST AND THEN TO TEXT.

42. TIME VALUE OF MONEYsee lecture notes p. 8-10 CONCEPT I: The “PRESENT VALUE” of one dollar received in the FUTURE is worth less than a dollar received today. CONCEPT 2: The further out in the future money is received the less is its “NET PRESENT VALUE” CONCEPT 3: When we compound money (as in a savings account) the FUTURE VALUE is increased in direct proportion to the rate of interest and the number of compounding periods. THE FINANCIAL CALCULATOR AND TVM TABLES HELP YOU MEASURE PV AND FV

43. PRACTICAL THINGS YOU WILL LEARN IN THIS PART OF THE COURSE • Determining how much money you must save for retirement. • Computing a mortgage payment. • Determining a lease payment on a car. • Figuring how much you need to save to put a child through college. • Measuring return on investment

44. QUESTION 1: • ALBERT EINSTEIN WAS ASKED WHAT THE MOST IMPORTANT INVENTION OF MANKIND WAS? WHAT WAS HIS REPLY? • HINT: HE DID NOT SAY E = MC2

45. HOW MANY OF YOU BELIEVE YOU WILL BE A MILLIONAIRE? • RAISE YOUR HANDS IF YOU FIRMLY BELIEVE YOU CAN DO THIS. • WHAT IS YOUR ACTION PLAN?

46. CAN YOU SAVE $300 PER MONTH? • ASSUME YOU ARE OUT OF UCF AND WORKING. • UCF FINANCE/ACCTG. MAJORS SHOULD START AT $35K • RAISE YOU HAND IF YOU THINK YOU CAN SAVE $300 PER MONTH

47. You can be a Millionaire. I will show you how! Can you Save $300 per month

48. SEE LECTURE NOTES PP. 8-14 • Turn to page 9 NOW • You may wish to either take notes on Lecture notes or incorporate class notes in with lecture notes. • All material in the next slides is also discussed in lecture notes. • THIS MATERIAL IS THE MOST IMPORTANT MATERIAL IN THE COURSE. REVIEW IT IN YOUR TEAM

49. FV CONCEPTS • An INCREASE in I/Y > FV • AS N increases FV > • The more frequent the compounding (P/Y) the more FV >. • FVn= PV (1+r)n Learn this formula. See lecture notes. Formulas will be provided in exam

50. NPV CONCEPTS (See lec notes p 9) • As the interest rate I/Y > the < PV • The longer the time period N, the more PV <. • The more frequent the compounding P/Y the more PV <. • PV = FV nlump sum (1+r)n Annuity • PVA = FV + FV + FV (1+R)(1+R)2(1+R)n