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   Course Title    Financial Analysis
Lecturer    Marek Jochec
Institution    Omsk State University
Country    Russian Fedaration


1. Overview of the course

This course is a two-semester introductory finance course. It consists of two semester-long modules: Financial Analysis I. (fall term) and Financial Analysis II. (spring term). Financial Analysis II. is a direct continuation of the course Financial Analysis I. Financial Analysis course forms the foundations for more advanced finance courses such as speculative markets, investment, security analysis, fixed income securities, valuation, and corporate finance.

The course serves two functions. First, it provides a framework for analyzing investment and financial decisions of corporations. Second, the course introduces certain topics in the investment area of finance, which are considered essential for all business students. The emphasis is on fundamental principles of modern finance and the approach will be analytical and rigorous. The perspective throughout the course will be that of financial manager of medium and large corporations and of institutional investor. At the same time students will be exposed to the elementary financial terminology and jargon and will learn about the basic elements, features, and functions of todayís world capital markets. Finally, but not least importantly, students will learn how to effectively read and understand the information published by the world financial periodicals such as Wall Street Journal or Financial Times, and will acquire valuable skills working with PC, Internet, and e-mail. Upon the completion of the course students will be able to handle problems of an intermediate to advanced complexity in Excel, work with Internet browser, attach files to e-mail messages etc.

The principal topics covered are:

Financial Analysis I. (fall term):

1. Introduction into stocks, bonds, and mutual funds (sources of capital)

2. Mathematics of Finance (simple and compound discount, annuities, perpetuities, bonds, debt amortization)

3. DCF (discounted cash flow) analysis and time value of money

4. Capital budgeting techniques

Financial Analysis II. (spring term):

5. Capital budgeting and risk

6. Portfolio analysis and CAPM (the capital asset pricing model)

7. Practical problems in capital budgeting

The nature of the material and a problem-solving approach necessitate a steady absorption of the material throughout the semesters. The class attendance and regular work on assignments is therefore crucial. Also, most of our work will be done on a PC. It is absolutely necessary to have an access to PCs (such as from student computer lab or your home computers), Internet and e-mail.

Only students who have successfully completed the Financial Analysis I. course will be allowed to enroll into the Financial Analysis II. course. Basic knowledge of accounting, microeconomics, and statistics, and good knowledge of Excel (or similar spreadsheet software) is necessary.

2. Course Materials

The course materials are of two types: readings (not available in an electronic version - mostly copies of selected chapters from assigned textbooks) and computer files (MS Word or MS Excel). Necessary is also scientific or financial calculator (capable to solve powers and logarithms), and access to PC equipped with Microsoft Excel, Microsoft Word, e-mail, and Internet (or at least Intranet).

2.1. Readings

One or more reading packets will be available in the student library or study room (for exact instructions refer to my web page). The reading packets contain all material to be read in two semesters, sorted by chapters. The material may not be signed off and taken home - you may use it only in the library. I encourage you to make your own copies for your home study and to bring the copies to classes, since we will often refer to exhibits or tables when discussing the material in class.

The readings consist of selected chapters from:

  1. Brealey and Myers, Principles of Corporate Finance, 5th edition (main text) - further reference "BM"
  2. The Wall Street Journal Guide to Understanding Money and Investing (easy and popular read providing basic terminology and understanding of financial products and markets)
  3. Zima and Brown, Mathematics of Finance, 2nd edition (Chapters 4, 5, 6, 7, 9, and 10) - further reference "M of F"
  4. Selected articles and case studies

2.2. Computer files

We will constantly work with computer files throughout the course. We will use Microsoft Word files (".doc") for class outlines, organization materials, announcements etc., and Microsoft Excel files (".xls") for solving exercises and problems. Questions to exams, problem sets and group problems (see below) are also in the form of word files, whereas solutions are in the form of Excel files. The way of distribution of these files to students is through the instructor's web page, where the files are available for download in a structured form.

The instructor's web page is a crucial tool in our course. The web page address will be announced to you by administration together with instruction how to access it. You should quickly familiarize yourself with the structure of the web page and visit it regularly throughout the semester to read announcements and download necessary files. The section designed for you is "Financial accounting"; you will see it after you open the title page and enter it by clicking on it with a mouse. It is structured in the following way: it starts with important announcements and information such as when and where our class meets, how to contact me (office, telephone, e-mail), and where to get readings etc. It then continues with class outlines, exams, problem sets, group problems. Finally, at the bottom there is an organization section where you find syllabus, academic calendar and schedule of classes, my resume and other documents related to the course organization. There might be also a "career development" section. You will find other useful information on my web page such as study abroad information and announcements of student conferences in the section "Student conferences and study abroad information", my e-mail address etc.

Class outlines provide the basic information for each class such as what will be covered and what are the assigned homeworks. You must download and read the respective class outline before each class. I recommend you to make a printout, too. I may update or change some outlines without notice, so download them shortly before our class.

As you will see in class outlines, I frequently ask you to work out the solution to homeworks in the form of computer files. Usually, you should bring a printout to class and e-mail me the file as an e-mail attachment one day before the respective class. I require that each student has his or her own e-mail account. E-mail is a primary way of communication between the instructor and students, and you must check your e-mail frequently, ideally before each class. I will make various announcements and forward you interesting documents (about scholarship opportunities, for example) using e-mail.

3. Office Hours

Office hours are by appointment only in my office (or other agreed room). Contact information will be provided on my web page.

4. Course Requirements

4.1. Financial Analysis I.

At the end of the course the students will receive Pass/Fail grades (i.e. "credit" or "no credit"). In order to receive a Pass grade, students must receive a minimum of 600 points throughout the course out of possible 1,000, and must receive a minimum of 180 points on the final exam out of possible 350. Points will be received for the following:

5. Individual work

  1. Midterm exam 200 pts.
  2. Final exam (must be taken and passed in order to pass the course) 350 pts.

B. Group work

Problem sets/case assignments (5 graded problem sets/cases, maximum 75 points each): 375 pts.

C. Class participation 75 pts.

Maximum total: 1,000 pts.

Required to pass the course: 600 pts.

out of which minimum gained on the final exam: 180 pts.

Note that the weights of the individual respectively group portions are approximately 2/3 and 1/3.

Individual work:

The midterm exam will be a written in-class examination. I will announce the exact date at least two weeks in advance on my web page. Final exam is a comprehensive written in -class examination. You must take the final and receive at least a passing grade in order to pass the course. Passing grade is 60% of the maximum of 300 points, i.e. minimum 180 points. Exams will include one of the problems previously distributed in problem sets and group problems. This is to encourage your work on group problems and discourage free riding on problem sets.

Group work:

To simulate teamwork usual in todayís professional businesses, some assignments will be performed in groups of 4-6 students. The groups will be formed in our first class; that's why it is necessary to come to the first class (I will announce the date, time, and room on my web page). I will assign students to groups in order to make sure that the teams are well balanced and mixed; this is to make sure that students of different backgrounds and skills join and take advantage of cross-learning. The groups are permanent throughout the course.

Problem sets are be problem-oriented group homework assignments. The purpose is to drill basic concepts taught in class and acquire routine in elementary computations and problem solving. There will be five problem sets distributed throughout the semester. You are strongly encouraged to work regularly on problem sets, since they help you to understand the material covered in class. You should work out one solution for your group. All group members are equally responsible for the work and will receive the same score. The exact form, deadline, and other instructions are given in the respective class outline or in the problem set itself. In most cases problems should be downloaded from instructor's web page.

"Group problems" are non-graded group homework assignments. They must be handed in before the deadline, however they are not graded. They are a crucial part of the learning process. For late or missed group problems I will subtract 10 points from your score. In such case the obligation to work out and hand in the group problems is automatically transferred to the next class. The penalty is cumulative, i.e. you keep receiving the penalty each class until you finally hand in your work.

I may use some case studies to illustrate the practical use of the material we cover at class. The analysis and write-ups are to be done in groups. I will copy the cases and distribute them to groups. Cases will be discussed in class on the date they are due. Classes based on case discussion are interactive and input from students is critical. You must come prepared to discuss the case. Groups will present their analyses to the rest of class on a voluntary basis. If there will be no volunteers I will call randomly the group, so each group should be ready to present the case. Not only the content but also the format and professional level of the presentation will be evaluated. A well-prepared presentation with valuable input presented in a professional manner will be rewarded when grading the write-ups. On the other hand, not being prepared to present the case will lower your grade. Either the whole group or the group representative(s) may present the case.

Late problem sets, case write-ups, and group problems will not be considered. All problem sets, group problems or case write-ups must be professionally typed in Word or Excel, with accompanying documentation in the form of Excel spreadsheets and charts, whenever applicable.

Class participation is strongly encouraged. Class participation means not only the regular and on-time class attendance, but also your active approach to learning, participation in class discussions, and other forms of contribution to improve and enrich our learning environment. Not the quantity, but the quality of contributions will be evaluated. At the end of the semester I will assign 0 to 50 points for class participation. In order to encourage a regular and on-time attendance, I will keep attendance records for each class session. For each missed or late class session I will subtract 10 points from studentís score. Students are allowed to miss or to be late for 2 sessions per semester without loosing points. Students must attend at least 50% of classes during the semester in order to qualify for a credit ("zachot") or grade.

Student regularly attending the class, participating in class discussions, working regularly outside the class on problem sets/cases, and submitting problem sets in a timely manner is unlikely to fail the course.

4.2. Financial Analysis II.

At the end of the course the students will receive grades as usually (i.e. "5" for "excellent", "4" for "very good" and "3" for "good"). In order to receive a passing grade (i.e. any of grades 5, 4, or 3), students must receive a minimum of 600 points throughout the course out of possible 1,000, and must receive a minimum of 180 points on the final exam out of possible 350.

The grade assignment will be following:

Points received: Grade:

710-1,000 5

610-710 4

600-610 3

less than 600 no credit

Points will be received for the following:

A. Individual work

  1. Midterm exam 200 pts.
  2. Final exam (must be taken and passed in order to pass the course) 350 pts.

B. Group work

Problem sets/case assignments (3 graded problem sets/cases, maximum 100 points each): 300 pts.

C. Class participation 150 pts.

Maximum total: 1,000 pts.

Required to pass the course: 600 pts.

out of which minimum gained on the final exam: 180 pts.

All other rules from semester I. apply to semester II. (i.e. class attendance rules, penalty for missed classes, penalty for late or missed group problems).

 

5. Session Schedule (draft - assumed 14-week semester, two sessions per week, 2x45 minutes each)

Class Session Topic

Financial Analysis I.

1. Introduction

  • Course organization
  • Course description
  • Email/Web/Excel exercise
  • Instructor's web page for students

2. Introduction cont.

3. U.S. Dollar, Stocks, Bonds (Guide to Understanding Money

& Investing)

  • Stocks: Sharing a Corporation
  • The Value of Stock
  • Selling New Stock
  • Bonds: Financing the Future

4. Why Finance Matters (BM Chapter 1)

  • Corporation
  • Creation of Value
  • Investing/Financing
  • Perspective of a Financial Manager

5. Simple Interest (MofF Chapter 3)

  • Solving problems

6. Present Value and the Opportunity Cost of Capital (BM

Chapter 2)

7. Compound Interest and Compound Discount (MofF

Chapter 4)

  • Solving problems

8. How to Calculate Present Values (BM Chapter 3)

  • Valuing Long-Lived Assets
  • Perpetuities and Annuities
  • Compound Interest and Present Values
  • Valuing Bonds

9. Annuities I. (MofF Chapter 5)

  • Financial Tables and How to Use Them

10. Annuities II. (MofF Chapter 6) + Review

11. Feedback Exam

12. The Value of Common Stocks (BM Chapter 4)

  • Feedback Exam results and solutions
  • How common stocks are traded
  • How common stocks are valued
  • Capitalization rate, Earnings per Share (EPS)

13. Valuing a Business by Discounted Cash Flows

14. Solving Financial Problems in Excel (in a computer class)

  • Financial Modeling; Problem Setup
  • Financial Functions in Excel
  • Solver & Goal Seeker in Excel

15. Solution to Problem Set #1

16. Why NPV Leads to Better Investment Decisions (BM

Chapter 5)

  • Payback
  • Average return on book value
  • Internal rate of return (IRR)

17. Debt Amortization and Mortgages (MofF Chapter 7)

  • Amortization of a Debt
  • Mortgages

18. Solving Financial Problems in Excel II. (in a computer

class)

  • Loan amortization, NPV, IRR
  • Use of "Help" in Excel
  • Dates and number of days
  • How to use "Solver" in linear and integer programming

19. Solution to Problem Set #2

20. Midterm Exam

21. Solution to Midterm Exam

22. Interpreting Financial Statements

23. Making Investment Decisions with the NPV Rule (BM

Chapter 6)

  • Capital Budgeting
  • What to discount
  • Project Interactions

24. IM&G Project (see BM Chapter 6)

  • Problem Setup in Excel
  • Emphasis on Cash Flows
  • Treatment of Depreciation
  • Treatment of Taxes (Income Tax, Capital Gain Tax)

25. Solution to Problem Set #3

26. "Super Project" Case Study (= Problem Set #4)

27. Solution to Problem Set #5

28. Review

29. Final Exam

30. Course Results & Grading

Financial Analysis II.

1.-4. Modeling Risk in Financial Decisions I

- Portfolio risk and return

- Diversification and efficient portfolios

- The Capital Asset Pricing Model

5.-10. Modeling Risk in Financial Decisions II

- CAPM: Implications and Test

- Application of CAPM to capital budgeting

11. Security Market Efficiency

12. Review

13. Midterm Exam

14.-21. Capital Structure and the Cost of Capital

- How corporations issue new securities

- Leverage and firm value, cost of equity finance

- Cost of capital

- Tax effects and costs of financial distress

- Investment and financing interactions

22., 23. Dividend Policy

24. Case # 2

25. (if enough time remains) Options

26. Review & Summary

27., 28. Final Exam & Grading






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