FIN101 What did we learn today?

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Stock valuation

  • Three methods to obtain the price per share:
    1. Constant growth dividend discount model (CGM): P0 = D1/(Rs-g)
    2. Discounted free cash flow model (DCF): V0 = FCF1/(WACC-g) plus several other steps to arrive at P0
    3. Market multiple analysis:  Pibm = Eibm * (P/E industry); Vibm = EBITDAibm * (V/EBITDA industry)
  • Preferred stock: a perpetuity Pps = Dps / Rps

Risk and return

  • Sum vs. product notation
  • Differences between historical return (geometric mean), expected return, required return
  • Read the risk & return presentation

 

Bond valuation, problem 16, Meade Corporation

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This one is a bit tricky.  However, the same problem with different numbers is on page 125 of Brigham and Daves (2010).  Current yield is defined as the coupon payment dvidided by the current price.  The capital gains yield can be obtained two different ways.

  1. Compute the bond price so you can compute the current yield.  Once you have the the current yield and yield to maturity you can utilize the expression: YTM = CY + CGY where CGY is the capital gains yield.
  2. Compute the bond price one year from now.  To do that, reduce N by one year (or two semi-annual periods in this case) and re-calculate PV.  Then the change of PV from the old N to the one-year less N is your CGY.

Learn the material

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What does “Learn the material” mean to you?  Does it mean simply attending class?  Does it mean scanning through the textbook?  Or, does it mean doing whatever you need to do to learn the material?

As exams approach I occasionally receive emails of the nature “I am just not grasping the information.”  Well, this may be a surprise to some, but odds are you will not learn 100% of the material by just attending a lecture.  In fact, in my 11 years of college education, after three degrees, at three schools, in three different states, only once can I remember learning all the material by simply attending the lecture.  Even then, I had to rehearse what I learned by doing assigned homework.  For the 99.9% of the other classes I had to obtain different books, work with study groups on occasion, stop by the professor’s office hours, email the professor, and stay in the library until it closed most days of the week.  Are you doing that?

A student taking one of my classes is fortunate.  I have made a wealth of resources available.  Allow me to summarize what is available to you:

  1. efficientminds.com: Entire lecture notes
  2. efficientminds.com: Eight Learning Modules such as this one on Risk and Return.
  3. efficientminds.com: Extra credit explanations
  4. efficientminds.com: Homework helpers
  5. efficientminds.com: Additional finance-related posts such as this one
  6. efficientminds.com:: Microsoft Excel examples
  7. A wealth of supplemental articles and links to video organized by topic on my Google Drive.
  8. The end of chapter problems in your textbook.
  9. Alternate textbooks on library reserve:
    • Ross, Westerfield, and Jaffe. Corporate Finance, ninth edition
    • Parrino and Kidwell. Fundamentals of Corporate Finance, University of Memphis edition.
    • Brigham and Daves. Intermediate Financial Management, ninth edition.
  10. Thousands of worked out example problems organized by topic (use the table of contents and index), also on library reserve:
    • Schaum’s Outline of Mathematics of Finance
    • Schaum’s Outline of Financial Management
    • Schaum’s Outline of Basic Business Mathematics
  11. BlackBoard
    • Homework with feedback
    • Discussion forums
  12. Business student services Business Tutoring Program
  13. The internet: Google searches, Investopedia, Khan Academy, YouTube, etc.
  14. My office hours (and I make appointments if the regularly scheduled time does not work for you).
  15. My email

So, whenever a student tells me “I am not grasping the material” I must question if that student has utilized the long list of available resources.  If, and that is a big if, after going through the whole list and spending 7 hours/week outside of the class studying you are not grasping the material then we need to talk.

Finally, and I must admit frustration here, is the comment “the exams don’t match the homework” or “the homework is totally different from the lecture” or “the lecture is totally different from the book.”  I believe all such statements are bogus.

To begin, the homework problems are selected from the CD that came with the instructor’s edition of the textbook.  I base my exams off the same CD. So the book-homework-exam connection is irrefutable.  Now, as of Fall 2012 I must give a final exam prepared by committee.  The wording of that exam will vary from the wording of my textbook.  However, we are all supposed to understand English and the material leading up to the final.  Also, I asked one student in the Fall 2012 semester “what did you think of that final?”  His reply?  “It was a gimmie compared to your exams.”  Moral of the story: if you understand English and understand the material you will do well on the final.

Now, regarding my lecture notes.  Guess what I based them on?  You got it. The same textbook.  So the book-lecture-lecture note-homework-exam connection is also solid.  I interpret any comments suggesting that connection is weak as “I really haven’t spent the necessary time.” or “I am lazy and I am asking you to work out the same problem in class that is on the homework that is on the exam.  Do not give me any problems worded in different ways.  I just want to pass the exams.”  This is related to the spoon-feeding I spoke about in this post (be sure to read the comments to that post also).

Let me end with a quote from my very first calculus class at Purdue University back in 1990:

Do not study for the test.  Study to learn the material and the test will be easy.

I sure hope you heed that timeless advice not only in my class, but all of your classes.

2012H2 FIN101 XC03 – Lowpoint coffee example

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Lowpoint coffee’s after-tax cash flows are currently $100,000 annually but will grow at 3% indefinitely.  With a 15% discount rate how much should Starbucks offer to takeover this mom-and-pop coffee shop assuming a 15% discount rate?

Using the present value of a growing annuity formula:

Internally, Starbuck’s knows this is what Lowpoint is worth.  However, upper management would like to offer $750,000 instead.  At what interest rate can a $750,000 offer be justified?  Just rearrange the PVA formula a bit:

Textbook information

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I intentionally chose to go with the previous edition textbook (10th edition vs. the new 11th edition) this semester. That choice was made to save students hundreds of dollars. I totally disagree with a large publisher making minimal changes to a textbook and effectively transferring wealth from struggling students to greedy executives. In that vain, I use the university’s Blackboard system instead of the publishers homework management system (which would cost students additional subscription fees).  You need not worry about paying for the “access card.”

The last time I stopped by the bookstore  I saw some ridiculously high prices: $186 used, $248 new. The last time I checked on Amazon, there were 91 used copies available with a starting price of about $20 and 24 new copies available with a starting price of about $100: click here to see.  Lower prices are also available at half.com.

Finally,  my choice of the same “Intermediate” text for FIN101 and MBA220 is again related to efficiency.  I reviewed both the introductory and intermediate texts written by the same author.  It turns out that entire paragraphs are copied verbatim from the introductory text to the intermediate text (or vice versa).  It appears that the big publishers are again trying to get you to purchase multiple $200 books with minimal differences between them.  So, in a nutshell, the “Intermediate” text is a superset of the “Introductory” text.  I hope you will retain this “super” book as a reference.

The only material covered in my course that is not in the intermediate text is the Time Value of Money chapter.  No problem, it is available for free from the book publisher.  I have copied the file and made it available here to save you a little search time.