213 GSBA-548 Syllabus Parsons Abrams Final PDF

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GSBA 548 Fall 2021

Professors Parsons & Abrams

GSBA 548 - CORPORATE FINANCE Term Two 2020-2021: Key Principles and Valuation Term Three 2020-2021: Financial Policies and Applications Instructor: Office: Office Hours: Personal Zoom link:

Email: Course Assistants:

Term 2 Term 3 Professor Chris Parsons Professor Scott Abrams HOH 204 HOH 219 Tuesdays 3:30-5:00 p.m. or by Thursdays 3:30-5:00 p.m. or by appointment appointment https://usc.zoom.us/j/8573662422 https://usc.zoom.us/my/scottabrams ?pwd=VXp1djkzT1k4UzhUNHlQ YTJmYU9RQT09 [email protected] [email protected] Rui (Ray) Ma: [email protected] Junli Niu: [email protected] Chistopher Reeves: [email protected] Melissa Wongso: [email protected]

COURSE DESCRIPTION This course is designed to provide an introductory framework for understanding how financiers think, how they break down components of a financial problem, and how they make decisions as investors and corporations in the capital markets. COURSE OBJECTIVES By the end of the course, you should be able to: 1. Explain the fundamental concepts and applications underlying corporate finance using financial vocabulary, analytical and critical thinking, and a financial mindset. 2. Perform discounted cash flow (DCF) and net present value (NPV) analysis in making financial decisions. 3. Use the Capital Asset Pricing Model (CAPM) to highlight the central role of portfolio diversification and the beta coefficient. 4. Determine a company’s cost of capital. 5. Apply basic financial concepts and critical thinking to the valuation of companies, stocks, bonds, and capital budgeting projects. 6. Articulate the difference between efficient and inefficient capital markets. 7. Evaluate the costs and benefits of alternative short-term and long-term financing options. 8. Explain the mechanics of raising capital in the public markets. 9. Assess and communicate the effect of various alternative capital structures on firm value. 10. State the benefits and costs of alternative payout policies. The study of finance is hard work, but also relevant and useful. The last few decades have seen profound changes in financial markets and instruments. Each day we see stories in the financial press on stock and bond prices, mergers and acquisitions, restructurings, dividends, etc. Increasingly many of these stories come from outside the United States. We hope this course will bring the theory of finance to life with contemporary examples and applications.

GSBA 548 Fall 2021

Professors Parsons & Abrams

COURSE MATERIALS Required:

1. Ross, Stephen, Randolph Westerfield, Jeffrey Jaffe, and Bradford Jordan, Corporate Finance: Core Principles & Applications, 5th Edition, McGraw-Hill Education, 2018. ISBN 978-1-259-28990-3 2. Course reader containing business cases and articles

Optional:

The Wall Street Journal, Bloomberg Businessweek, The Economist, Financial Times

Calculator:

If you do not already have a financial calculator, a HP 10bII, 12C, 17BII or TI BA II Plus is recommended. The HP17B will be used in class.

USC Blackboard Course Site:

All information for this course, including announcements, assignments, solutions, recordings, and other resources, will be posted on the USC Blackboard course site (“Blackboard”) found at “https://blackboard.usc.edu/”. If you have any questions or need assistance with Blackboard, please contact the Marshall Help Desk at (213) 740-3000 or [email protected].

COURSE EXPECTATIONS 1. Students are expected to complete all assigned readings prior to each class. There are recommended questions and problems at the end of each chapter in the text that we advise doing prior to each class. Solutions to end-of-chapter problems are available on Blackboard. 2. Students are also expected to stay abreast of current events in the economy and financial markets. In particular, we will frequently refer to data and articles in The Wall Street Journal. 3. Students are responsible for any work missed due to absences from class. If you miss a class session, we encourage you to get notes and materials from your fellow group members. COURSE GRADING You will receive one course grade based on your combined score from Term 2 and Term 3. Your final course grade will be assigned with consideration of factors such as the class mean, standard deviation, and individual rank in the course. The target course GPA is 3.3. Your final grade will be based on the following: Term 2 Class Participation Portfolio Homework Team Case Assignments: 1) Airbus 2) Nike Inc.: Cost of Capital Midterm Exam Term 2 Subtotal Term 3 Class Participation Individual Molycorp Homework Team Case Assignments: 3) Blaine Kitchenware 4) Molycorp Final Exam Term 3 Subtotal 4 Quizzes (Best 3 of 4) Course Total

Percentages 1.0 4.0 5.0 5.0 30.0 45.0 Percentages 1.0 4.0 5.0 5.0 30.0 45.0 10.0 100.0 2

GSBA 548 Fall 2021

Professors Parsons & Abrams

CLASS PARTICIPATION Class participation is strongly encouraged. Your class participation grade will reflect our assessment of both the quantity and quality of your individual contribution to the classroom learning environment. We will “cold call” to encourage participation and to gain multiple perspectives and points of view. Note that regular attendance is necessary for class participation; however, it is not sufficient for a higher letter grade in the class.

ASSIGNMENTS

Note: Further details for each assignment will be posted on Blackboard at the appropriate time. For team case assignments, your team (the 4-7 member team assigned by the Marshall MBA Program Office) will be collectively responsible for team case assignments. Portfolio Homework (Individual) (Term 2) Airbus Capital Budgeting Team Case Assignment (Term 2): Your team’s task is to evaluate the proposal of building/developing the A3-XX which, at the time, the largest commercial aircraft in the world. Nike: Cost of Capital Team Case Assignment (Term 2): For this individual assignment, you will apply the unlevered free cash flow and weighted average cost of capital (UFCF-WACC) valuation model to determine Nike’s enterprise value and intrinsic value per share of common stock. Molycorp Homework (Individual) (Term 3): Molycorp’s management team is faced with a serious funding shortfall. In this assignment, your task is to quantify the shortfall. Blaine Kitchenware Inc. Team Case Assignment (Term 3): Blaine Kitchenware is a midsize producer of small kitchen appliances. The firm’s CEO is considering undertaking a leveraged recap. Your team will assess the company’s current capital structure and formulate a recommendation for changes by assessing the benefits and risks of increased leverage both quantitatively and qualitatively. Molycorp Group Case Assignment (Term 3): Molycorp’s management team is faced with a serious funding shortfall. Management has to decide: how much to raise, what kind to raise, and when to raise it. Your team will design a financing plan that will enable the firm to implement its business strategy while not exposing it to excessive financial risk. QUIZZES/EXAMS There will be four in-class quizzes. Each quiz will include four questions for a total of 10 points. Your lowest quiz score will be dropped and your remaining three quiz scores will be counted towards your final course grade. 3

GSBA 548 Fall 2021

Professors Parsons & Abrams

There will be one midterm exam and one final exam. The midterm exam will only cover material from Term 2, and the final exam will mainly cover material from Term 3 that builds on Term 2 material.

The quizzes and exams will be closed book, but you will be allowed to use financial calculators and programs (which includes Excel) on quizzes and exams. If you use your laptop to access Excel, any other use including accessing the web or communicating with others constitutes academic dishonesty. Quizzes and exams may not be made up. If you are unable to take a quiz or exam, you must obtain written permission from the professor of the applicable term for missing the quiz or exam prior to the relevant date. A missed quiz or exam will result in a score of zero.

STATEMENT OF ACADEMIC CONDUCT AND SUPPORT SYSTEMS Academic Conduct: Plagiarism – presenting someone else’s ideas as your own, either verbatim or recast in your own words – is a serious academic offense with serious consequences. Please familiarize yourself with the discussion of plagiarism in SCampus in Part B, Section 11, “Behavior Violating University Standards” policy.usc.edu/scampus-part-b. Other forms of academic dishonesty are equally unacceptable. See additional information in SCampus and university policies on scientific misconduct, policy.usc.edu/scientific-misconduct. Support Systems: Counseling and Mental Health - (213) 740-9355 – 24/7 on call studenthealth.usc.edu/counseling Free and confidential mental health treatment for students, including short-term psychotherapy, group counseling, stress fitness workshops, and crisis intervention. National Suicide Prevention Lifeline - 1 (800) 273-8255 – 24/7 on call suicidepreventionlifeline.org Free and confidential emotional support to people in suicidal crisis or emotional distress 24 hours a day, 7 days a week. Relationship and Sexual Violence Prevention Services (RSVP) - (213) 740-9355(WELL), press “0” after hours – 24/7 on call studenthealth.usc.edu/sexual-assault Free and confidential therapy services, workshops, and training for situations related to gender-based harm. Office of Equity and Diversity (OED) - (213) 740-5086 | Title IX – (213) 821-8298 equity.usc.edu, titleix.usc.edu Information about how to get help or help someone affected by harassment or discrimination, rights of protected classes, reporting options, and additional resources for students, faculty, staff, visitors, and applicants. Reporting Incidents of Bias or Harassment - (213) 740-5086 or (213) 821-8298 usc-advocate.symplicity.com/care_report Avenue to report incidents of bias, hate crimes, and microaggressions to the Office of Equity and Diversity |Title IX for appropriate investigation, supportive measures, and response.

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GSBA 548 Fall 2021

Professors Parsons & Abrams

The Office of Student Accessibility Services - (213) 740-0776 osas.usc.edu Support and accommodations for students with disabilities. Services include assistance in providing readers/notetakers/interpreters, special accommodations for test taking needs, assistance with architectural barriers, assistive technology, and support for individual needs. USC Campus Support and Intervention - (213) 821-4710 campussupport.usc.edu Assists students and families in resolving complex personal, financial, and academic issues adversely affecting their success as a student. Diversity at USC - (213) 740-2101 diversity.usc.edu Information on events, programs and training, the Provost’s Diversity and Inclusion Council, Diversity Liaisons for each academic school, chronology, participation, and various resources for students. USC Emergency - UPC: (213) 740-4321, HSC: (323) 442-1000 – 24/7 on call dps.usc.edu, emergency.usc.edu Emergency assistance and avenue to report a crime. Latest updates regarding safety, including ways in which instruction will be continued if an officially declared emergency makes travel to campus infeasible. Emergency Preparedness / Course Continuity: In case of a declared emergency if travel to campus is not feasible, the USC Emergency Information web site (http://emergency.usc.edu/) will provide safety and other information, including electronic means by which instructors will conduct class using a combination of USC’s Blackboard learning management system (blackboard.usc.edu), teleconferencing, and other technologies. USC Department of Public Safety - UPC: (213) 740-6000, HSC: (323) 442-120 – 24/7 on call dps.usc.edu Non-emergency assistance or information.

HOW CAN YOU DO WELL IN THIS COURSE? The material for this course can only be absorbed gradually and consistently. On the quizzes and exams, we will frequently ask you to apply your problem solving abilities to unfamiliar situations. Memorizing the materials will not adequately prepare you for the exams. Here are a few suggestions for effective learning of this subject:  Complete all assigned readings prior to each class and stay current with the recommended questions and problems.  Focus your attention on the lectures and participate as much as you can in our class discussions. (All electronic devices, including cell phones, must be turned off during class meetings.) Ask relevant questions in class; this will help your classmates too.  Understand the materials, including the assigned readings, lectures, slides, and the recommended questions and problems along with their solutions.  Stay abreast of the current events in the economy and financial markets through daily reading of (at least the cover page of) The Wall Street Journal.  Whenever possible, apply what you have learned to your daily financial life.  Work effectively with your team.

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GSBA 548 Fall 2021

Professors Parsons & Abrams

COURSE INSTRUCTORS Chris Parsons, Professor of Finance & Business Economics, Marshall School of Business Experience: PhD in Finance (2008), BS Chemical Engineering (1997) University of Texas at Austin Served on faculties of UNC Chapel Hill, University of Washington, UC San Diego, McGill University, and Harvard Business School Recipient of multiple teaching awards for classes in general (core finance), real estate, behavioral economics, and investments Published in general economics and finance journals including the American Economic Review, Journal of Labor Economics, Journal of Finance, Review of Financial Studies, and Journal of Financial Economics Scott Abrams, Assistant Professor of Clinical Finance & Business Economics Experience: Instructor of the USC Marshall Student Investment Fund Class Recipient of the Golden Apple Teaching Award for the FTMBA Core (2016 and 2021) and various awards for the MS Finance core Executive Director, Motion Picture Finance, Sony Pictures Entertainment Manager, Finance, Warner Bros. Entertainment Senior Accountant, Deloitte MBA in Finance, USC Marshall; BA in Business Economics, UCLA CPA, State of California (Active)

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GSBA 548 Fall 2021

Professors Parsons & Abrams

COURSE OUTLINE AND ASSIGNMENTS Session-Date (Day)

Topic

Week 1 (Term 2) 1-Aug. 24, 2021 (T)

Introduction and Course Overview Assignments:  Required Readings: o Chapter 1 Introduction to Corporate Finance (especially Sections 1.3-1.5)  Recommended Questions and Problems: Chapter 1: 1-3, 5-6, 8-10 Key Questions:  Why is Corporate Finance a fundamental component of an MBA and how is it relevant to your career?  Who are the main players in financial markets?  What is the key principle of corporate finance?  What is the agency problem? What financial goal should always motivate the actions of a firm’s top management?

2-Aug. 26, 2021 (Th)

Discounted Cash Flow Valuation Assignments:  Required Readings: o Chapter 4 Discounted Cash Flow Valuation, Sections 4.14.4  Recommended Questions and Problems: Chapter 4: 1-5, 9, 12, 17, 22, 23, 26, 55, 68 Key Questions:  Why and how do you value investments?  How do you value a single cash flow and multiple cash flows?

Week 2 3-Aug 30, 2021 (M)

Discounted Cash Flow Valuation (Cont’d) Assignments:  Required Readings: o Chapter 4 Discounted Cash Flow Valuation, Sections 4.54.6  Recommended Problem: Chapter 4: 58 Key Questions:  What is the difference between compounding and discounting?  What is an annuity? A perpetuity? What are the differences between an annuity, growing annuity, a perpetuity and growing perpetuity?

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GSBA 548 Fall 2021

4-Aug 31, 2021 (T)

Professors Parsons & Abrams

Quiz 1 Bond Valuation and Interest Rates Assignments:  Required Readings: o Chapter 5 Interest Rates and Bond Valuation  Recommended Questions and Problems: Chapter 5: 1-3, 7, 16-17, 24, 26-27 Key Questions:  What is a bond? What are the key features of a bond? How can you value a bond?  How do you determine the yield to maturity of a bond? How are bond prices and yields related?  What is the yield curve? What is interest rate risk? What is credit risk? What do bond ratings measure?

Week 3 5-Sept. 2, 2021 (Th)

Bond Valuation and Interest Rates (Cont’d)

6-Sept. 7, 2021 (T)

Stock Valuation Assignments:  Required Readings: o Chapter 6 Stock Valuation o Read: Airbus A3-XX: Developing the World’s Largest Commercial Jet  Recommended Questions and Problems: Chapter 6: 1, 2, 9, 22, 31, 35 Key Questions:  What is common stock?  How do you value a stock using the dividend discount model?  How do you value a stock using the market multiples approach?  How do you value a stock using DCF approach?

Week 4 7-Sept. 9, 2021 (Th)

NPV and Other Investment Rules Assignments:  Required Readings: o Chapter 7 Net Present Value and Other Investment Rules (NPV, IRR and the payback period method.)  Recommended Questions and Problems: Chapter 7: 1, 7, 13, 16, 20 Key Questions:  What capital budgeting methods do corporations use?  What is the most redeeming quality of each alternative (compared to the NPV) investment decision rule?  The biggest shortcoming? 8

GSBA 548 Fall 2021

8-Sept. 14, 2021 (T)

Professors Parsons & Abrams

Quiz 2 Making Capital Investment Decisions Assignments:  Required Readings: o Chapter 8 Making Capital Investment Decisions (Section 8.5 will not be covered) o NIKE Inc.: Cost of Capital case  Recommended Question and Problems: Chapter 8: 2, 9, 24 and Key Questions:  What are relevant cash flows for making capital investment decisions?  Why are relevant cash flows sometimes called unlevered free cash flows (UFCF)?

9-Sept. 16, 2021 (Th)

Risk and Return: Lessons from Market History Assignments:  Required Readings: Chapter 10 Risk and Return: Lessons from Market History  Recommended Questions and Problems: Chapter 10: 1, 7-8 Key Questions:  What are the historical returns for various investments? What is the difference between the arithmetic and geometric average of stock returns?  What is the tradeoff between risk and return?  What is the equity risk premium? What is a good estimate of the historical annual (short-term) equity risk premium?

Week 5 10-Sept. 20, 2021 (M)

Airbus Capital Budgeting Team Case Assignment Due Learning objectives: The case is designed to provide you with the opportunity to conduct a full-fletched valuation on a large-scale project. You will gain practice working with free cash flows (distinct from operating earnings), as well as learn how to make long-range forecasts under extremely uncertain environments. Note: although this case refers to events in the fairly distant past, recent developments in the airline sector – particularly the highly uncertain contemporary environment – make the core concepts in this case highly relevant.

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GSBA 548 Fall 2021

11-Sept. 21, 2021 (T)

Professors Parsons & Abrams

Diversification and Portfolio Construction Assignments:  Required Readings: Chapter 10 Risk and Return: Lessons from Market History  Recommended Questions and Problems: Chapter 10: 22, 25-26 Key Questions:  How does the risk change when you form portfolios of single stocks?  How does leverage impact portfolio risk and return?  How do the benefits of diversification change as the number of stocks increases? How many stocks are required for a diversified portfolio?

12-Sept. 23, 2021 (Th)

The Capital Asset Pricing Model (CAPM) Assignments: ...