PROVISIONAL SYLLABUS DECEMBER 03 Robert H. Smith Schoo o! B"#i$e## U$i%er#it& o!

M'r& '$( 't Co e)e P'r* BUFN714-0101 ADVANCED FINANCIAL MANAGEMENT Spring 2004 I$#tr"ctor+ Vo,i# '% M'*#imo%ic O!!ice+ V'$ M"$chi$) H' 0012 O!!ice Ho"r#+ B& '..t. E3m'i + %m'54rh#mith."m(.e(" Pho$e+ 00637176 Course Objective -o (e%e o. e5.erti#e i$ '$' &8i$) ' !i$'$ci' .rob em9 !orm" 'ti$) ' . '$ o! 'ctio$9 '$( .re#e$ti$) it to '$ i$tere#te( '$( critic' '"(ie$ce. :e ;i !oc"# o$ c'.it' b"()eti$) (eci#io$# <(oe# thi# i$%e#tme$t .ro,ect m'*e #e$#e=> '$( !i$'$ci$) (eci#io$# <'re ;e borro;i$) too itt e or too m"ch= Ho; (oe# the !i$'$ci$) '!!ect o"r %' "e '$( ri#*=>. :e ;i #.e$( m"ch o! o"r time '$' &8i$) c'#e# th't 'ri#e i$ the re' ;or (. -he ."r.o#e o! the c'#e# i# t;o!o (. ?ir#t9 the& .ro%i(e .r'ctice i$ '.. &i$) co$ce.t# e'r$e( i$ other co"r#e# <BU?N@00 i# ' .rereA"i#ite !or thi# co"r#e '$( it is import nt t! t "o# ! $% &#'' (omm n) o& t!% m t%ri ' i$ th't co"r#e.> Seco$(9 the& .ro%i(e e5.erie$ce i$ t'c* i$) .rob em# th't &o" m'& $ot h'%e .re%io"# & #t"(ie( i$ c '##. -hi# i# .'rtic" 'r & im.ort'$t bec'"#e it i# "$ i*e & th't &o" ;i h'%e #t"(ie( i$ (et'i <'$( ;i remember> mo#t o! the !i$'$ci' .rob em# th't &o" ;i e$co"$ter 't ;or*. Ho;e%er9 &o" c'$ .re.'re &o"r#e ! to meet $e; ch' e$)e# b& t'c* i$) "$!'mi i'r .rob em# '$( (i#c"##i$) them i$ c '##. B& the e$( o! the co"r#e &o" #ho" ( be 'b e to m'*e ' #i)$i!ic'$t co$trib"tio$ to ' te'm or t'#* !orce #etti$) !i$'$ci' .o ic&. Yo" #ho" ( be 'b e to he . .ro%i(e ' co$ce.t"' !r'me;or* !or '$' &#i#9 to i$(e.e$(e$t & 'cA"ire the tech$iA"e# reA"ire( to com. ete the '$' &#i# #"cce##!" &9 to co$trib"te to the )ro". (i#c"##io$#9 '$( to .re.'re ' .re#e$t'tio$. -he co"r#e co%er# !i%e m',or #"b,ect 're'#. E'ch 're' c'$ be %ie;e( '# ' #e !3co$t'i$e( to.ic 're'+ A(%'$ce( .ro,ect '$( !irm %' "'tio$. I$iti' P"b ic O!!eri$)# <IPO#>. O.tio$# i$ Cor.or'te ?i$'$ce+ Re' O.tio$# '$( Com. e5 Sec"ritie# Hi)h3 e%er')e tr'$#'ctio$# '$( b'$*r".tc& Ri#* m'$')eme$t. -A+ A.ri /$i V'$ M"$chi$) H' E3m'i + '*$i 4rh#mith."m(.e("

PROVISIONAL SYLLABUS DECEMBER 03

Case Study Presentations D"ri$) the !ir#t ;ee* o! the co"r#e ;e ;i or)'$i8e i$to three3 or !o"r3.er#o$ )ro".#. E'ch )ro". ;i be re#.o$#ib e !or m'*i$) T*+ c'#e .re#e$t'tio$#9 to be cho#e$ b& ot !rom the i#t be o;. -he .re#e$t'tio$# #ho" ( hi)h i)ht the i##"e# r'i#e( i$ the c'#e9 e%' "'te the o.tio$# '%'i 'b e to the !irm '$( #"))e#t ' co"r#e o! 'ctio$. E'ch )ro". ;i be '##i)$e( ' )r'(e !or e'ch .re#e$t'tio$. I$ '((itio$9 e'ch .'rtici.'$t i# reA"ire( to r'te the .'rtici.'tio$ o! other member# o! the )ro".. -he#e r'ti$)# ;i be "#e( to he . .ro%i(e '$ i$(i%i("' )r'(e !or e'ch )ro". member. A# the c'#e# 're )r'(e(9 "o#r gro#p,s pr%s%nt tion m#st -% - s%) on'" on t!% .or/ -" t!% gro#p m%m-%rs. P e'#e (o not (i#c"## the c'#e ;ith member# o! other )ro".# or '$&bo(& o"t#i(e &o"r )ro".. I! &o" 're tot' & #t"c*9 '$( (o$Bt *$o; ho; to .rocee(9 . e'#e co$t'ct the i$#tr"ctor. O$ the mor$i$) o! the .re#e$t'tio$9 . e'#e e3m'i me the Po;er.oi$t # i(e#. Yo" 're $ot reA"ire( to .ro%i(e ' !orm' ;ritte$ re.ort. Ho;e%er9 &o" m'& ;'$t to .re.'re ' brie! h'$(o"t to be (i#trib"te( i$ the c '##.

Readings: Lecture notes and cases will be the primary source of material for this course. There will be a case packet that you can obtain on-line from Harvard Business School Publishing. I will announce the date on which the packet will be ready. You should retain a copy of the BUFN 640 text (Ross, Westerfield, and Jaffe, Corporate Finance, Fifth dition, !hica"o# $r%in& (RW'J((& $t co)ers the funda*entals and "i)es alternati)e treat*ents to #e%er' of the topics in the course& You %ill %ant to refer to it closely as %e "o alon"& A book of readings, Advanced Financial Management BMGT741, is also assigned. The readings consist of selected chapters from t;o boo*#. -he te5t .ortio$ i# (r';$ !rom Fin n(i ' M r/%ts n) Corpor t% Str t%g"9 b& M'r* Cri$b 'tt '$( Sheri('$ -itm'$9 ."b i#her+ Ir;i$3McCr'; Hi . -hi# i# ' )re't boo* !or .ro%i(i$) .er#.ecti%e o$ the m'teri' 9 it i# e## "#e!" !or e'r$i$) thi$)# !or the !ir#t time. A((itio$' re'(i$)# 're (r';$ !rom The New Corporate Finance: Where Theory Meets Practice (McGraw-Hill) edited by Chew. I will be suggesting readings from this collection as we go along. You can use these readings in two ways. If you understand the concepts we cover well, the readings provide a wealth of additional useful information about the uses to which these concepts are put in practice. If you are struggling with the concepts, the readings often include a short presentation of what you really need to know. You might also find Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron by Bethany McLean and Peter Elkind (Publisher: Portfolio; (October 13, 2003) ISBN: 7

PROVISIONAL SYLLABUS DECEMBER 03 1591840082) an interesting book to read during the course. Grading: Course grades are based on Case Presentations Class Participation + Case Memos Final Examination 40% 30% 30%

Final Examination: There is only one in test for the course. It is given at the end of course. It will be a case that either extends a previous topic or a case that introduces a totally new area of analysis. In the latter event, you will have an opportunity to apply your financial expertise to a novel situation.

Case Reports: For each case you will be required to write a brief report. The reports purpose is to prepare you to participate in the discussion following the presentation of each case. The reports can be in bullet form or note form. The reports are graded on a plus, zero, and minus scale. All we are looking for is evidence that you have given the case some thought. Please keep a copy of the reports you hand in they may be helpful in preparing for the examination. 1. The case write-up to be a two-page single spaced (maximum) report. The two page maximum does not apply to exhibits such as graphs and tables, but please keep these to a minimum. You may use as many exhibits as necessary but the exhibit must be referred to in your write-up. The case write-up should be in 12 point type with 1 inch margins. 2. The case questions are designed to help you streamline the issues to be addressed. If you believe that these questions do not effectively address the problems in the case, feel free to go outside the parameters of the questions. 3. It is not necessary to rehash the case situation in your write-up. Do not, however, assume that I know every single number and detail. Use your best judgment on how much of the case to include in your write-up. 4. Most importantly, you must take a position regarding the problem in the case and make specific recommendations on how to solve it. Support your recommendation as succinctly and as effectively as you can. 5. Note that groups presenting the case should not turn in a case report. Academic Integrity: -he U$i%er#it&D# Co)% o& A( )%mi( Int%grit" i# (e#i)$e( to e$#"re th't the .ri$ci. e# o! 'c'(emic ho$e#t& '$( i$te)rit& 're ".he (. A #t"(e$t# 're e5.ecte( to '(here to thi# Co(e. -he Smith Schoo (oe# $ot to er'te 'c'(emic (i#ho$e#t&. A 'ct# o! 'c'(emic (i#ho$e#t& ;i be (e' t ;ith i$ 'ccor('$ce ;ith the .ro%i#io$# o! thi# co(e. P e'#e %i#it the !o o;i$) ;eb#ite !or more 3

PROVISIONAL SYLLABUS DECEMBER 03 i$!orm'tio$ o$ the U$i%er#it&D# Co(e o! Ac'(emic I$te)rit&+ htt.+EE;;;.i$!orm."m(.e("EC'm."#I$!oEDe.'rtme$t#EFPOEAcI$te)Eco(eG'ci$te)7'.htm O$ e'ch e5'm or '##i)$me$t &o" m'& be '#*e( to ;rite o"t '$( #i)$ the !o o;i$) . e()e. HI p'%)g% on m" !onor t! t I ! $% not gi$%n or r%(%i$%) n" #n #t!ori0%) ssist n(% on t!is %1 m2 ssignm%nt3H Special Needs: A$& #t"(e$t ;ith #.eci' $ee(# #ho" ( bri$) thi# to the 'tte$tio$ o! the i$#tr"ctor '# #oo$ '# .o##ib e9 b"t $ot 'ter th'$ the #eco$( ;ee* o! c '##. Preliminary Class Schedule Please note that the attached schedule is preliminary. While most of the topics and readings are firmly set, I may substitute some of the cases depending on such factors as class size and the prior experience of the participants. The final schedule will be posted on the course BB by January 25th. So, please do not order the cases until then.

PROVISIONAL SYLLABUS DECEMBER 03

----------------------------------------------------------------------------------------------------Daily Class Schedule ----------------------------------------------------------------------------------------------------I. Overview of Course - Valuation and Financing Decisions Monday, Jan 26 Wednesday, February 4 V' "'tio$EC'.it' B"()eti$) Re'(+ Ro##9 :e#ter!ie (9 '$( F'!!e9 Ch'.ter# 29 I9 '$( 12 HNote o$ the ?ree C'#h ? o; V' "'tio$ Mo(e #H JNote o$ A ter$'ti%e Metho(# !or E#tim'ti$) -ermi$' V' "eK J-he A(,"#te( Pre#e$t V' "e Metho( !or C'.it' A##et#K Che; J-he EVA ?i$'$ci' M'$')eme$t S&#temK Re!ere$ce+ Grinblatt & Titman, Chapter 10, 11, and 13 Monday, February 9: Case Analysis Airbus A3XX: Developing the Worlds Largest Commercial Jet Topic: Evaluation of Investment Opportunities Case 1: Airbus A3XX: Developing the orld!s "argest Commercial #et.

C'#e L"e#tio$#+ 1. :h& i# Airb"# i$tere#te( i$ b"i (i$) the A3MM= :h't 're it# ob,ecti%e#= 7. Ho; m'$& 'ircr'!t (oe# Airb"# $ee( to #e i$ or(er to bre'* e%e$ o$ the i$%e#tme$t= I# thi# $"mber )re'ter or e## th'$ &o"r e#tim'te o! tot' (em'$( !or %er& 'r)e 'ircr'!t <VLA> o%er the $e5t 70 &e'r#= <Hi$t+ Co$#i(er ' c'.it'
.ro%i(er# '# ' #i$) e e$tit& '$( c' c" 'te the bre'*3e%e$ ret"r$ to them co ecti%e &. -o c' c" 'te the bre'*3e%e$ $"mber o! . '$e#9 c' c" 'te the .re#e$t %' "e o! the reA"ire( '$( o$3)oi$) i$%e#tme$t9 '$( com.'re it to the .re#e$t %' "e o! ' )ro;i$) .er.et"it& o! c'#h ! o;# !rom . '$e# #' e# be)i$$i$) i$ 700I. P e'#e '##"me '$ eA"it& ri#* .remi"m o! @N !or ' &o"r '$' &#i#.>

3. A# Boei$)9 ho; ;o" ( &o" re#.o$( to thi# #it"'tio$= Ho; (oe# &o"r '$#;er (e.e$( 0. Sho" ( Airb"# commit to b"i ( the A3MM= Ho; m'$& or(er# #ho" ( Airb"# h'%e be!ore committi$) to (e%e o. the . '$e= Wednesday, February 11- Monday, February 16 Topic: Resolution of Risk and Information in Valuation Re'(+ Ro##9 :e#ter!ie (9 '$( F'!!e9 Ch'.ter I Re!ere$ce+ Grinblatt & Titman, Chapter 11

II.

Initial Public Offerings: Birth of Public Corporations 6

PROVISIONAL SYLLABUS DECEMBER 03

Wednesday, February 18 Monday, February 23 Coi$) P"b ic: Initial Public Offerings Re'(+ Ro##9 :e#ter!ie (9 '$( F'!!e9 Ch'.ter# 13 '$( 1O. Che; 3 HI$iti' P"b ic O!!eri$)#9H b& Ibbot#o$9 Si$(e 'r9 '$( Ritter HBS re'(i$)+ HC'.it' M'r*et M&o.i'H HBS re'(i$)+ HA Metho( !or V' "i$) Hi)h3Ri#* Lo$) -erm I$%e#tme$t#H Reference: Grinblatt & Titman, Chapter 3. *%)n%s) "4 F%-r# r" 25 Topic: Coi$) P"b ic+ C'#e A$' &#i# Case 2: Netscape!s $nitial Public O%%ering C'#e L"e#tio$#+ 1. :h& h'# Net#c'.e bee$ #"cce##!" to ('te= Ho; ri#*& i# it# com.etiti%e .o#itio$= :h't m"#t it (o to rem'i$ #"cce##!" i$ the o$)3r"$. 7. Doe# Net#c'.e $ee( to )o ."b ic to #'ti#!& it# c'.it' $ee(#= :h't ;o" ( &o" e#tim'te mi)ht be the m')$it"(e o! it# c'.it' $ee(# o%er the $e5t 336 &e'r#= :h't other #o"rce# o! c'.it' mi)ht be t'..e( to #'ti#!& the#e $ee(#= 3. Sho" ( the Net#c'.e bo'r( be co$cer$e( ;ith "$(er.rici$)= :h& '$( ;h& $ot= 0. C'$ the recomme$( o!!eri$) .rice o! P7I .er #h're be ,"#ti!ie(= III. External Financing, Information, Financial Distress, and Managerial Incentives Monday, March 1 *%)n%s) ", March 3 Topics: The Role of the Corporation, the Market for Corporate Control and Bankruptcy Re'(+ Ro##9 :e#ter!ie (9 '$( F'!!e9 Ch'.ter# 1@ '$( 31. A #o 30.1. Reference: Grinblatt & Titman, Chapter 18. Che;+ -he Mo(er$ I$("#tri' Re%o "tio$K Monday, March 8 Case analysis: Adding the market for corporate control to the mix Case 3: &ul% Oil 1. :he$ C" ! ;'# . 'ce( o$ the '"ctio$ b oc*9 ' mi$im"m bi( e%e ;'# e#t'b i#he( 't P20 .er #h're. Yet o$ & ' !e; mo$th# be!ore9 C" ! ;'# tr'(i$) i$ the P00 r'$)e. Ho; co" ( C" ! become #o m"ch more %' "'b e i$ #"ch ' #hort .erio( o! time= 7. E%e$ i! the Pic*e$# )ro". ;ere tot' & #"cce##!" i$ their te$(er o!!er9 the& ;o" ( o$ & co$tro 71N o! C" !B# #toc*. :h& (i( the C" ! I$%e#tor# Cro". imit their o!!er to 71N o! eA"it&= @

PROVISIONAL SYLLABUS DECEMBER 03 Di( the rei$cor.or'tio$ i$! "e$ce the r'i(er#B #tr'te)&= Ho;= 3. I! &o" ;ere o$e o! the .ro#.ecti%e C" ! b"&er#9 ho; m"ch ;o" ( &o" bi( to 'cA"ire C" ! Oi cor.or'tio$= 0. :o" ( the ;'& i$ ;hich &o" !i$'$ce the t'*eo%er o! C" ! i$! "e$ce the ;'& &o" ;o" ( r"$ C" ! '!ter the t'*eo%er= Wednesday, March 10 Topic: Capital Structure & Mangerial Incentives Re'(+ Grinblatt & Titman, Chapter 16 Che;+ H-he Metho(# '$( Moti%e# o! Cor.or'te Re#tr"ct"ri$)H Che;+ JLe%er')e( Rec'.# '$( the C"rbi$) o! Cor.or'te O%eri$%e#tme$tK Monday, March 15 Case Analysis: Restructuring and Incentives Case 4: USG Corp C'#e L"e#tio$#+ 1. :h't i# the #it"'tio$ !'ci$) Robert D'&= :h't 're hi# ' ter$'ti%e#= 7. V' "e the .ro.o#e( rec'.it' i8'tio$ "#i$) both (i#co"$te( c'#h! o; tech$iA"e# '$( m" ti. e# o! c'#h ! o;= E5. 'i$ '$& (i!!ere$ce#. Ci%e '(%ice to #h'reho (er# ;hether or $ot to te$(er their #h're# to De#ert P'rt$er# or ;'it !or USCD# .ro.o#e( rec'.it' i8'tio$.

Wednesday, March 17 Case Analysis: The End Game Case 5: 'estructuring (ulong!s Project Debt 1. :h& (i( B" o$) (e!'" t i$ F'$"'r& 7000= :ere the .rob em# c'"#e( b& b'( "c*9 b'( #tr'te)&9 or b'( e5ec"tio$= :ere '$& o! the !'ctor# th't e( to the (e!'" t !ore#ee'b e= 7. Ho; (i( Pre#to$ re#tr"ct"re the (ebt= :h& h'# it bee$ #o (i!!ic" t to re#tr"ct"re the (ebt= 3. :i the #eco$( .ro.o#e( re#tr"ct"ri$) . '$ ;or*= :ho ;i #"..ortEo..o#e the . '$ co$t'i$e( i$ the #cheme o! 'rr'$)eme$t= :h't 're the ' ter$'ti%e# i! the . '$ i# $ot '..ro%e(= 0. :h't 're the e##o$# !rom the c'#e= :h't me'#"re# mi)ht h'%e .re%e$te( (e!'" t i$ the !ir#t . 'ce9 or !'ci it'te( re#tr"ct"ri$) )i%e$ th't (e!'" t h'( occ"rre(= V. The Firms Growth Strategy

Monday, March 29 Topic: Capital Structure & Mangerial Incentives Re'(+ Grinblatt & Titman, Chapter 12 2

PROVISIONAL SYLLABUS DECEMBER 03

Wednesday March 31

Case 6: Service Corporation $nternational C'#e L"e#tio$#+ 1. A tho")h SCIB# #toc* i# tr'(i$) 't 'ro"$( P31 .er #h're i$ F" & 1OO69 '$' &#t# 're .re(icti$) it co" ( be 'ro"$( P01 .er #h're ;ithi$ ' &e'r or t;o. :o" ( &o" b"& SCIB# #toc* 't thi# time= :h& or ;h& $ot= 7. Ho; (oe# SCI m'*e mo$e& i$ it# i$("#tr&= I# it# #tr'te)& #"#t'i$'b e= 3. Doe# SCIB# 'cA"i#itio$ #tr'te)& cre'te %' "e i$ North Americ'= I$ i$ter$'tio$' m'r*et#= 0. Sho" ( SCI co$ti$"e to )ro;= 6. Ho; m"ch (ebt #ho" ( SCI h'%e i$ it# c'.it' #tr"ct"re= Ho; #ho" ( SCI !"$( !"t"re 'cA"i#itio$#=

VI.

Real Options

Monday, April 5 and Wednesday, April 7 Topics: Real Options and Contingent Securities Re'(+ Ro##9 :e#ter!ie (9 '$( F'!!e9 Ch'.ter# 77 '$( 73 Re!ere$ce+ Cri$b 'tt Q -itm'$9 Ch'.ter# 17. E5erci#e+ RWJ Problems: 22.16, 22.18, 22.26, 23.5, and 23.6.

Monday, April 12

Case 6: "aura )artin: 'eal Options and the Cable $ndustry C'#e L"e#tio$#+ 1. What functions do equity analysts fulfill? What constituencies do they serve? What are their incentives? 2. Consider the DCF analysis presented in Exhibit 7. How realistic are the assumptions? How about the multiples analysis? 3. How can the stealth tier be incorporated into the DCF analysis and the multiples analysis? 4. Would you purchase Cox Communications on the basis of Martins analysis? Why?

PROVISIONAL SYLLABUS DECEMBER 03 Turn in Option Pricing Assignment, April 16

IV.

Advanced Security Design

Wednesday, April 14 Topic: Advanced Security Design, valuing complex securities using option theory Read: Ross, Westerfield, Jaffe, Chapters 24 Chew: The Origin of LYONS Chew: The Use of Hybrid Debt in Managing Risk Chew: Convertible Bonds: Matching Financial and Real Options.. Reference: Cri$b 'tt Q -itm'$9 Ch'.ter 12 Mon) "4 Apri' 167 Case Analysis: PERCS Case 7: Ce$er' Motor#+1OO1 EA"it& ?i$'$ci$) C'#e L"e#tio$#+ 1. :h't ;'# CMB# #it"'tio$ i$ the e'r & 1OO0ie#= :h't #ho" ( CMB# !i$'$ci' .o ic& be=. 7. :h't 're PERCS= Ho; co" ( PERCS !'ci it'te the 'tt'i$me$t o! CMB# !i$'$ci' .o ic&= 3. :ho ;o" ( b"& PERCS= 0. Ho; #ho" ( CM .rice it# PERCS= Read: Ross, Westerfield, Jaffe, Chapters 21 & 22 Reference: Cri$b 'tt Q -itm'$9 Ch'.ter 8, Ch'.ter 11 Section 2

V. Risk Management Wednesday, April 21-Monday, April 26 Topics: Ri#* m'$')eme$t '$( He()i$) Re'(+ A##i)$e( ch'.ter# !rom St" 8 boo* or Ross, Westerfield, Jaffe, Chapters 25 Chew: Strategic Risk Management Chew: Rethinking Rick Management Chew: Value at Risk: Uses and Abuses Reference: Grinblatt & Titman, Chapter 21 Wednesday, April 28: Case Analysis O

PROVISIONAL SYLLABUS DECEMBER 03 -o.ic+ Ri#* E5.o#"re '$( Ri#* M'$')eme$t Re!ere$ce+ Grinblatt & Titman, Chapter 20, 22.

Case *: #aguar P"C Case Questions: 1. To be announced in class.

Monday, May 10: Review and topics of interest to the class.

10