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University of San Carlos School of Business and Economics Accountancy Department

SYLLABUS
Course No. Course Title Credit Prerequisite Courses Revised : : : : : AC 513 Financial Management 3 units (lecture) Third Year Level by Jovelyn Q. Yu, CPA, MBA Revised 1st semester, AY: 2012 2013

Overview of the Course


Financial Management is the second of a three-part series of finance courses which continues the excitement and challenges of the ever-changing finance discipline due to shifts in economic conditions. Since accounting students will be future sophisticated technical users of financial management information, the course covers topics that focus on the core principles of finance such as time value of money, risk analysis, and valuation. Moreover, the course addresses topics from the point of view of an investor who is seeking to make intelligent investment choices, and as a business manager trying to maximize the value of his or her firms stock. This course is therefore offered to BSA and BSAT students to familiarize themselves with the importance and relevance of financial management to the needs of local, national, and global communities in this rapidly changing world. AC 513 is a major course under the Bachelor of Science in Accountancy and Bachelor of Science in Accounting Technology, and should ideally be taken on your third year. The subject is better learned when students are already well grounded on the basics of finance and have already undertaken its prerequisite course AC 509: Business finance with introduction to global business environment. AC 513 intends to continue the Universitys vision of molding you into a competent citizen with nobility of character and a sense of community. The University desires to make you seek and apply knowledge justly and honestly and be able to share them to the community. The University likewise, aspires to continue with this course, its Mission of transforming you into competent professionals and life-long learners, adept in research and appreciative of community involvement.

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Course Description
The course provides an extensive and stimulating look into financial management the framework of which is designed in such a way that enables the students to understand and analyze topics in a clear and concise manner. The course begins with a discussion on core principles of finance, and the topics gradually become more challenging and complex as the course progresses. The course will cover three major groups of topics; namely, (1) financial assets and time value of money; (2) investing in long-term assets; and (3) working capital management. Under financial assets and time value of money, the students will be introduced to risks and rates of return and its importance after the recent financial crisis, continued with an introduction to portfolio management and the benefits of diversification of investment. This is followed by time value of money the single most important concept of all financial concepts, followed by valuation of bonds and the various factors that influence bond prices, and lastly, the valuation of stocks and the determination of a firms intrinsic value. Under investing in long-term assets, the discussion will center four topics. (1) the calculation of cost of capital which includes the determination of different capital component costs; (2) the basics of capital budgeting, which incorporate valuable techniques in making major long term business decisions; (3) cash flow estimation and risk analysis as a necessary and integral part in evaluating long-term projects; as well as (4) real options and other topics in capital budgeting, which recognizes the inevitability of uncertainties surrounding long-term investment decisions and incorporating these uncertainties in decision making using capital budgeting techniques, particularly the NPV method. The third major topic of the course consists of two subtopics, namely: (1) managing current assets, and (2) financing current assets. Students will be introduced into the significance of working capital in business operations and how the proper amount of each current asset, as well as how a firms credit policies can affect the firms profitability and stock prices. Furthermore, sources of funding current assets are identified and its costs are measured to determine the viability of such funding source.

General Objectives
Exposed to varied, meaningful, and well-chosen learning experiences, the students should be able to: 1. Internalize the theory and practice of business finance 2. Understand the financial management methods used for analyzing the benefits of various sources of finance and capital investment opportunities 3. Be familiar with business finance reports and how these reports are prepared 4. Participate in discussions, board works, and other learning activities specifically designed for this course 5. Develop decision making skills particularly as it relates to financial management transactions

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Classroom Management
1. Attendance is a MUST. Attendance in all classes is required. Being present in class means that you attend each class, and come prepared having read the chapters and the exercises or cases that are assigned for that class. There are 54 sessions/hours in this course and you may incur only ten (10) absences for MWF schedules or seven (7) absences for TTH schedules. Otherwise, you will automatically be dropped from class and receive a grade of either NC (No Credit) or a failing grade of 5.0 whichever is applicable. 2. Readmission. Students who incur three consecutive (3) absences will be asked by the instructor to see the Department Chair to secure permission to be re-admitted to class. A re-admission slip should be properly accomplished for this purpose. 3. Tardiness is discouraged. Make sure that you come on time, as it becomes a source of irritation for the members of the class and the professor when students come late. As a policy for this class, you will be considered late if you come to class after 15 minutes of the time, three instances of tardiness whether incurred consecutive or not is considered one absence. Learn to be professionals; respect for other peoples time is a principle that should be valued. 4. Seat Plan. A permanent seat plan will be made at the start of the semester. You are advised to keep to your assigned seating arrangement; otherwise, you will be marked absent for that day. 5. Prayer. Classes should always start and end with a short prayer. The instructor can opt to lead the prayer or assign students to do this alternatively. 6. Classroom Management. Students should assist in maintaining the orderliness and cleanliness of the classrooms. Graffiti writing is strictly prohibited. Any student found violating this rule will be punished with the appropriate sanction. Before leaving the classroom, the instructor with the help of the students, should ensure that no litter/garbage is left behind and that chairs are in their proper order. Should the class be the last schedule for the day, the instructor should arrange that the lights and air conditioning units are switched off. 7. Mobile Phones. Use of mobile phones inside the classroom is strictly prohibited. Switch them off or place them under silent mode before entering your classes. The instructor has the right to confiscate mobile phones that rings and/or is used during class hours. The confiscated unit can only be claimed in the Deans office at the end of the semester. 8. Eating and Drinking. Food and drinks are not allowed inside the classroom and in the corridors. It is your responsibility to properly schedule your classes so that meals and snacks can be taken at its proper time. 9. Consultation Hours. Students are encouraged to see the instructor during consultation hours for any concerns, questions and assistance with regards to the course. Instructors should ensure that they are available on these hours and at the agreed location.

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10. Submissions. Timely submission of written requirements will be strictly followed. Just like when you submit a report to the Bureau of Internal Revenue (BIR), BIR would charge you penalty. The penalty is collected not for the purpose of making money; it is meant to discourage late submission of reports. It is also the same in this class. The penalty for late submission of reports is non-acceptance. 11. Reaction Paper. Everyone is required to read any ONE article that can be found on http://finance-article.blogspot.com/ and write a comprehensive reaction paper backed with research on such article. This shall be submitted on the last day of class, the 17 th Session. Paper must be printed on a short bond paper, single spaced, times new roman font, 12 font size. Failure to submit will result in non-acceptance of reaction paper. 12. Computer Applications. Students are expected to be proficient in using common applications software such as Microsoft Word, Excel and PowerPoint. This is essential as you will be submitting your computerized reaction paper. 13. Class Participation. Everyone is expected to offer his or her opinions in class discussion, to ask questions relevant to the discussion and to share information of relevance to the course. However, please do not dominate class discussions. Be conscious enough to realize when you are already spending more time talking than your classmates would appreciate. 14. Pre-discussion Reading. You are urged to read the assigned topic ahead of time, and if possible, conduct daily reading as they relate to financial management news and topics. Try to spend 10-15 minutes of your time every day reading any of the optional periodicals available in the library such as The Asian Wall Street Journal, Business World, Harvard Business Review, Fortune, Forbes, Business Week, The Far Eastern Economic Review, The Economist, and surf the relevant financial management websites suggested in this course syllabus. 15. Library Hours. Maximize the use of the library resources. The library hours are: Monday to Saturday 7:30 a.m. to 8:00 p.m. 16. Enjoy every moment of the class. Lastly, learning should be fun and exciting. Enjoy your classes! It will be such a tragedy if you will be miserable in the class. Participate so you get the most of this course.

Suggested Learning Experiences


1. 2. 3. 4. 5. 6. 7. Lecture-Discussion Advance Readings Internet Research Class Interaction Seatwork Boardwork Article Reaction Paper 1. 2. 3. 4.

Course Requirements

Grading System
1/3 1/3 1/3 1/3 1/3 1/3

Regular Attendance Active Class Participation Passing Grades Completion & Submission of assignments 5. Right attitude towards course

For the Midterm Grade: Summary tests/quizzes Other requirements (exercises/assignments) Midterm examination For the Final Grade: Midterm grade Class standing after midterm (test & other requirements) Final examination

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For purposes of transmutation, the Department of Accountancy will use the following standard grade equivalents (at 50% passing): 95-100 94- 93 92- 91 90- 89 88- 87 86- 85 84- 83 1.0 1.1 1.2 1.3 1.4 1.5 1.6 80-79 78-77 76-75 74-73 72-71 70-69 82-81 1.8 1.9 2.0 2.1 2.2 2.3 1.7 68-67 66-65 64-62 61-59 58-56 55-53 52-50 49 & below 2.5 2.6 2.7 2.8 2.9 3.0 5.0 2.4

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Specific Objectives

Contents

Mode of Delivery / Learning Activities and Resources

Assessment Scheme

WEEK 1 ORIENTATION I. 1. 2. 3. 4. 5. 6. 7. 8. Introduction of the members of the class Setting of expectations Discussion of classroom rules and policies Revisit Vision and Mission Statements of the University of San Carlos Checking of admission slips Setting of seat plan Grouping of students Course Overview: Distribution and presentation of the course syllabus. Discussion of the content of the syllabus for the purpose of clarification. Discussion of the learning objectives of the course. Explore course structure, sequencing of subject matter. Discussion on the course requirements and grading system. Grouping and assignment of topics for oral presentations Requiring the prescribed textbook for the course A. B. C. D. E. F. G. H. Course Orientation Introduction USC Vision-Mission Course Description Course Objectives Course Requirements Alternative Activities Grading System House Rules oup dynamics eraction veling expectations and-outs (syllabi), notes H Le Int Gr Participation Question & Answer Learning Statements Recitation

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WEEK 2 = 3 hours UNIT I: FINANCIAL ASSETS AND TIME VALUE OF MONEY Risk and Rates of Return In the process of learning about the topic, students should be able to: 1. Identify the determinants of market interest rates and how to compute for various components of the market interest rates and security yields; 2. Explain why both risks and returns must be considered when evaluating potential investments; 3. Measure historical returns and expected returns 4. Measure the three measures of (statistical) risks when evaluating potential investments. 5. Enumerate the components of total risks and explain about their significance 6. Explain the importance of diversification and the concept of portfolio. 7. Describe the difference between expected rate of return and required rate of return; 8. Use the CAPM equation and calculate the required rate of return. 9. Enumerate and understand the limitations of CAPM. 10. Compare and contrast volatility versus risk.

1. Risk and returns as an evaluative tool. 2. Review on the determinants of market interest rates. 3. Computation of historical returns and expected returns. 4. Computation of the three measures of (statistical) risks. 5. Diversifiable versus non-diversifiable risk. 6. Computation of required rate of return using the Capital Asset Pricing Model (CAPM) method. 7. CAPM versus Multi-Beta Model

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Computations on a single stocks expected return, variance, standard deviation, coefficient of variation, covariance, correlation coefficient, required return

Participation Post-discussion Quiz Recitation

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WEEK 3 = 3 hours Introduction to Portfolio Management In the process of learning about the topic, students should be able to: 1. Define portfolio management and describe how diversification allows investors to manage risks; 2. Compute both the approximate and accurate measure of the nominal risk free rate; 3. Illustrate and describe a Security Market Line and explain the reasons for its movement and what securities that lie below, above, and on it means. 4. Discuss the process of portfolio management. 5. Enumerate and explain the factors affecting risk tolerance, the four return objectives and investment constraints. 6. Discuss the three portfolio management theories. 7. Illustrate an Efficient Frontier Curve and explain what securities that lie below, above, and on it means. 8. Illustrate and describe a Capital Market Line and a Characteristic Line. 9. Calculate and define a two-stock portfolios, according to its expected return, variance, standard deviation, and coefficient of variation. 10. Calculate and define the two measures of correlation: Covariance and Correlation Coefficient. 11. Measure Portfolio Weights, Portfolio Beta, and under-rewarded or over-rewarded portfolio required return.

1. Portfolio required return, its components, nominal risk free rate. 2. SML graph. 3. Portfolio management process. 4. Factors affecting risk tolerance. 5. Four return objectives: Capital Preservation. Capital Appreciation. Current Income. Total Return. 6. Four investment constraints: Liquidity Constraints. Time Horizons. Tax Concerns. Legal and Regulatory Factors. Unique Circumstances. 7. Three portfolio management theories: Risk Aversion. Markowitz Portfolio Theory. Efficient Frontier. 8. Efficient Frontier Curve 9. Capital Market Line 10. Portfolio expected return, variance, standard deviation, coefficient of variation, covariance, & correlation coefficient 11. Portfolio weights, portfolio beta

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Exercises Management on Portfolio

Participation Seatwork Post-discussion Quiz Recitation

Computations on portfolio expected return, variance, standard deviation, coefficient of variation, covariance, correlation coefficient, portfolio weights, portfolio beta, under or overreward of portfolio required return.

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12. Explain Capital Market Theory and understand its assumptions. WEEK 4 = 3 hours Time Value of Money In the process of learning about the topic, students should be able to: 1. Explain the concept of time value. 2. Use timeline as a tool in time value analysis; 3. Discuss about five components when analyzing time value of money: Future value (FV), Present value (PV), Period/Time (n), Interest (i), Annuity payments (PMT). 4. Contrast FV from PV, lump sum from annuity payments, & ordinary annuity from annuity due; 5. Calculate FV, PV, n, and i for lump sum transactions using simple annual interest and compounded interest. 6. Calculate FV, PV, n, i, and PMT for ordinary annuity transactions and annuity due transactions. 7. Explain what a perpetuity is and compute for present value of a perpetuity. 8. Explain what uneven cash flows are and solve for the PV and FV of uneven cash flows. 9. Solve time value problems that deal with nonannual compounding and problems with a compounding period that differs from the number of times contributions are made. 10. Explain continuous compounding and compute problems related to continuous compounding. 11. Describe and calculate nominal, effective, and periodic rates. 12. Solve problems with fractional time periods 13. Describe amortized loan, solve for PMT, and construct a loan amortization table.

12. Capital market theory. 13. Characteristic Line

1. Timeline 2. Simple Annual Interest vs. Compounded Interest 3. Lump Sum vs. Annuity 4. Ordinary Annuity vs. Annuity Due 5. Perpetuity 6. Uneven Cash Flows 7. Non-annual Compounding 8. Continuous Compounding 9. Nominal, Effective, and Periodic Rate 10. Fractional Time Period 11. Loan Amortization Schedule 12. Balloon Loan

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Exercises Computations on various time value problems

Participation Seatwork Post-discussion Quiz Recitation

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14. Explain a balloon loan and construct a balloon loan amortization table. WEEK 5 (1st session) = 1.5 hours Long Exam on Risk and Rates of Return, Introduction to Portfolio Management, and Time Value of Money Having assigned three topics to study, students should be ready to: 1. Take the first long exam for AC 513. Theory and Problem Solving Test Questions from the following topics: 1. Risk and Rates of Return 2. Introduction to Portfolio Management 3. Time Value of Money

Long Exam

WEEK 5 (2nd session) = 1.5 hours Discussion of Answers of the previous exam Learning Objectives In the process of self-assessment, students should be able to: 1. Verify the correctness of their answers for the 1. Dictation of answers. long exam previously taken. 2. Corrections of errors in checking, if 2. Make clarifications in case of doubts regarding any. the answers for the long exam previously 3. Discussion of answers. taken.

Discussion of correct answers and explanations on how to derive them by the professor. Discussion of correct answers and explanations on how to derive them by the students.

Participation Question and Answer

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WEEK 6 = 3 hours Bonds and their Valuation In the process of learning about the topic, students should be able to: 1. Explain why bonds are an important source of financing for corporations; 2. Enumerate and describe the four main types of bonds, their respective characteristics, and their various differences. 3. Describe the key features of bonds. 4. Enumerate, compare, and contrast the common kinds of bonds. 5. Explain the rationale of using cost of debt to discount the cash flows that bonds are supposed to generate. 6. Value bonds by finding the present value of the cash flows that they are expected to generate. 7. Note the differences between par bonds, discount bonds, and premium bond. 8. Compute for the present value of par, discount, and premium bonds. 9. Describe the characteristics and compute for bond yields. 10. Enumerate the risks associated with bonds, and elaborate the implications of such risks for both long term and short term bonds. 11. Differentiate investment grade from junk bonds. 12. Enumerate and explain the factors that affect default risk and bond ratings.

1. Bonds as a source of financing. 2. Main types of bonds: Treasury Bonds. Corporate Bonds. Municipal Bonds. Foreign Bonds. 3. Key features of bonds: Par Value. Coupon Interest Rate. Maturity and Issue Date. Call and Sinking Fund Provisions. 4. Common kinds of bonds: Floating Rate Bond. Zero Coupon Bond. Original Issue Discount Bond. 5. Cost of debt to discount bond CFs. 6. Valuation of cash flows generated by bonds (par, discount, or premium). 7. Bond Yields: Yield to Maturity/Yield to Call Current or Interest Yield. Capital Gains Yield. Total Yield. 8. Risks associated with bonds and their implications: Interest Rate Risk.

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Exercises Computations on bond value and bond yields

Participation Seatwork Pre-discussion Quiz Post-discussion Quiz Recitation

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Reinvestment Rate Risk. Default Risk. 9. Bond ratings, bond classification, and factors affecting default risk. WEEK 7 and 8 (1st Session) = 4.5 hours Stocks and their Valuation In the process of learning about the topic, students should be able to: 1. Explain why stocks are an important source of financing for corporations. 2. Enumerate the legal rights and privileges of common shareholders. 3. Compare and contrast the different types of common stock 4. Explain the distinction between a stocks price and its intrinsic value; 5. Estimate a stocks intrinsic value using various models and assumptions. 6. Enumerate the limitations of each model used to estimate a stocks intrinsic value. 7. Compute for various stock yields. 8. Enumerate the key characteristics of preferred stock. 9. Estimate the intrinsic value of preferred stock.

1. Stock as a source of financing. 2. Legal rights and privileges of common shareholders: Control. Right to elect directors. Preemptive right. 3. Different types of common stocks: Classified Stock. Founders Shares. 4. Distinction between a stocks market price and its intrinsic value. 5. Calculation of a common stocks intrinsic value using: Discounted Dividend Model. Gordon Growth Model (constant/ non-constant dividend growth). Corporate Value Model. Market Multiples Approach Economic Value Added Approach. 6. Stock yields: Dividend Yield. Capital Gains Yield. Total Yield. 7. Characteristics of preference shares,

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Exercises Computations of common and preferred stock intrinsic value using different models and scenarios. Computation yields. of various stock

Participation Seatwork Pre-discussion Quiz Homework Recitation

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a hybrid security. 8. Calculation of a preferred stocks intrinsic value.

WEEK 8 (2nd session) = 1.5 hours Long Exam on Bonds and their Valuation and Stocks and their Valuation Theory and Problem Solving Test Having assigned two topics to study, students Questions from the following topics: should be ready to: 1. Bonds and their Valuation. 1. Take the second long exam for AC 513. 2. Stocks and their Valuation. WEEK 9 MIDTERM EXAMINATIONS Long Exam

WEEK 10 = 3 HOURS UNIT II: INVESTING IN LONG-TERM ASSETS THE COST OF CAPITAL In the process of learning about the topic, students should be able to: 1. Describe weighted average cost of capital (WACC) and explain why WACC is used in capital budgeting 2. Enumerate and describe the component costs of capital. 3. Estimate the costs of different capital components using different approaches 4. Apply retained earnings breakpoint concept in computing for WACC. 5. Combine the different component costs to

1. Weighted Average Cost of Capital as Lecture-discussion the rate used in capital budgeting. 2. Four component costs of capital: Interaction Cost of Debt. Cost of Preferred Stock Powerpoint presentation Cost of Retained Earnings. Illustrative examples Cost of Common Stock. 3. Approaches of computing cost of Exercises retained earnings using:

Participation Seatwork Post-discussion Quiz

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determine/estimate the firms WACC. 6. Enumerate the factors that affect the WACC. 7. Adjust the cost of capital for risk. 8. Enumerate the problems that firms face with cost of capital estimates.

4. 5.

6. 7.

8. 9. WEEK 11 and 12 (1st Session) = 4.5 hours THE BASICS OF CAPITAL BUDGETING In the process of learning about the topic, students should be able to: 1. Explain the importance of capital budgeting; 2. Enumerate and discuss the uses of capital budgeting in decision making. 3. Calculate and use the five major capital budgeting criteria for decision making 4. Enumerate and discuss the advantages and disadvantages of the five capital budgeting methods. 5. Resolve the problem of multiple internal rates of return. 6. Construct the NPV profile and compute the Fisher or crossover rate. 7. Explain why NPV is the best capital budgeting

CAPM Computations of WACC; different Bond Yield + Risk Premium component costs of capital. Discounted Cash Flow Computation of cost of common stock. Determination whether to use cost of Computation of Retained Earnings Breakpoint retained earnings or cost of common stock through the retained earnings breakpoint concept. Calculation of WACC. Factors affecting WACC: Controllable Factors. Uncontrollable Factors. Risk-adjusted Cost of Capital and Hurdle Rate. Problems of cost of capital estimates.

1. Importance of capital budgeting when making long-term decisions. 2. Some uses of capital budgeting: Replacement Decisions. Expansion Decisions. Safety Projects. Environmental Projects. Mergers. 3. Computation of capital budgeting problems and making decisions for independent and mutually exclusive projects using the five major capital budgeting criteria:

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Exercises Computations using payback period, discounted payback period, NPV method, IRR method

Participation Seatwork Post-discussion Quiz Recitation

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tool. 8. Explain how the NPV overcomes problems inherent in the other methods; and 9. Perform a post-audit of investment projects. 4. 5. 6. 7. 8. WEEK 12 (2nd session) = 1.5 hours Long Exam on The Cost of Capital and The Basics of Capital Budgeting

and MIRR method. Payback Period. Discounted Payback Period. NPV profile illustration Net Present Value Method. Internal Rate of Return. Modified Internal Rate of Return. Advantages and Disadvantages of each of the five major capital budgeting criteria. Multiple internal rate of return problem due to non-normal cash flows and how to overcome such problem. NPV profile graph Fisher rate (graphical and calculator method) Post-audit.

Having assigned two topics to study, students Theory and Problem Solving should be ready to: Questions from the following topics: 1. Take the third long exam for AC 513. 1. The Cost of Capital 2. The Basics of Capital Budgeting WEEK 13 (1st session) = 1.5 hours Discussion of answers for the previous exam Learning Objectives In the process of self-assessment, students should be able to: 1. Verify the correctness of their answers for the

Test

Long Exam

1. Dictation of answers.

Discussion of correct answers and

Participation

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long exam previously taken. 2. Corrections of errors in checking, if 2. Make clarifications in case of doubts regarding any. the answers for the long exam previously taken. 3. Discussion of answers.

explanations on how to derive them by the professor. Discussion of correct answers and explanations on how to derive them by the students.

Question and Answer

WEEK 13 (2nd Session) and 14 (1st Session) = 3 hours CASH FLOW ESTIMATION AND RISK ANALYSIS In the process of learning about the topic, students should be able to: 1. Explain why cash flow estimation and risk analysis is an essential part in capital budgeting analysis. 2. Discuss about the conceptual issues in cash flow estimation. 3. Identify relevant cash flows that should and should not be included in a capital budgeting analysis. 4. Estimate a projects relevant cash flows and put them into a time line format that can be used to calculate a projects payback period, discounted payback period, NPV, IRR and MIRR, and other capital budgeting metrics. 5. Describe and estimate the risks involved in capital budgeting. 6. Explain how risk is measured and use this measure to adjust the firms WACC to account for differential project riskiness. 7. Perform scenario analysis to determine the possible effects to capital budgeting metrics when various scenarios are presented. 8. Calculate the NPV of mutually exclusive

1. Conceptual issues surrounding cash flow estimation: Cash Flow versus Accounting Income. Timing of Cash Flows. Incremental Cash Flows. Replacement Projects. Sunk costs. Opportunity Costs. Externalities. 2. Identification and estimation of relevant cash flows. 3. Capital Budgeting risks that affect cash flows: Stand-alone risk Corporate risk or Within-firm risk Market risk or Beta. 4. Risk measurement and WACC adjustment. 5. Scenario analysis. 6. Net present value for mutually exclusive

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Exercises Relevant cash flow estimation Scenario Analysis

Participation Seatwork Post-discussion Quiz Recitation

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projects that have unequal lives.

projects that do not have the same lives. Replacement Chain Analysis. Equivalent Annual Annuity Approach.

WEEK 14 (2nd Session) and 15 (1st Session) = 3 hours REAL OPTIONS AND OTHER TOPICS IN CAPITAL BUDGETING In the process of learning about the topic, students should be able to: 1. Explain what real options are and why they are valuable. 2. Explain how real options influence capital budgeting and how they can be analyzed. 3. Discuss how projects NPV are affected by the size of the firms total capital budget and how to deal with this situation. 4. Use real option analysis to evaluate projects 5. Recognize the inevitability of capital rationing when resources are scarce. 6. Determine which projects should be accepted when resources are scarce. 7. Describe post-audit and discuss its relevance in capital budgeting decisions when real options are involved.

1. Relevance of real options in capital budgeting. 2. Effect of project NPV and overall WACC due to capital budget size. 3. Incorporating real options into capital budgeting analysis (specifically the net present value method): Options to Delay Options to Expand Options to Contract Options to Extend Options to Switch Options to Abandon 4. Capital rationing when resources are scarce and related problems. 5. Incorporating real options into postaudit analysis.

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Exercises NPV calculations when real options are present Capital Rationing Analysis

Participation Seatwork Post-discussion Quiz Recitation

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WEEK 14 : FOUNDATION WEEK WEEK 15 (2nd Session) and 16 = 4.5 hours UNIT III: WORKING CAPITAL MANAGEMENT WORKING CAPITAL MANAGEMENT In the process of learning about the topic, students should be able to: 1. Explain what working capital is and why this is needed by firms to sustain their operations. 2. Explain how different amounts of current assets and current liabilities affect firms profitability and thus their stock prices. 3. Describe, compare, and contrast the current asset investment and financing policies. 4. Discuss how the cash conversion cycle is determined and how it is used in working capital management. 5. Compute for the inventory conversion period, average collection period, payables deferral period, and cash conversion cycle; 6. Prepare a cash budget and explain its relevance in working capital management. 7. Explain how companies decide on the amount of each current asset to hold. 8. Discuss how companies set credit policies and explain its effect on sales and profits. 9. Describe how the costs of trade credit, bank loans, and commercial paper are determined

1. Effect of net working capital on firms profitability and stock prices. 2. Working Capital Investment Policies: Relaxed Policy Restricted Policy Moderate Policy 3. Current Asset Financing Policies: Maturity Matching or SelfLiquidating Approach Aggressive Approach Conservative Approach 4. Cash Conversion Cycle and related computations: Inventory Conversion Period Inventory Collection Period Payables Deferral Period 5. Preparation of Cash Budget. 6. Procedures in working capital investment policies. 7. Policies affecting the firms sales and

Lecture-discussion Interaction Powerpoint presentation Illustrative examples Exercises Cash conversion cycle computations Cash budget preparation

Participation Seatwork Post-discussion Quiz Recitation

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and how that these impact decisions for financing working capital. 10. Compute for the cost of trade credit, specifically free trade credit and costly trade credit. 11. Explain how companies use security to lower their costs of short-term credit. WEEK 17 (1st session) = 1.5 hours Long Exam on Cash Flow Estimation and Risk Analysis, Real Options and Other Topics in Capital Budgeting, and Working Capital Management. Having assigned three topics to study, students should be ready to: 1. Take the last long exam for AC 513.

profitability. 8. Computation of cost of trade credit, (free trade credit and costly trade credit), bank loans, and commercial paper. 9. Secured Loan versus Unsecured Loan.

Theory and Problem Solving Test Questions from the following topics: 1. Cash Flow Estimation and Risk Analysis. 2. Real Options and Other Topics in Capital Budgeting. 3. Working Capital Management.

Long Exam

WEEK 17 (2nd session) = 1.5 hours Discussion of answers for the previous exam Learning Objectives In the process of self-assessment, students should be able to: 1. Verify the correctness of their answers for the 1. Dictation of answers. long exam previously taken. 2. Corrections of errors in checking, if 2. Make clarifications in case of doubts regarding any. the answers for the long exam previously taken. 3. Discussion of answers.

Discussion of correct answers and explanations on how to derive them by the professor. Discussion of correct answers and explanations on how to derive

Participation Question and Answer Submission of Reaction Paper

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them by the students. WEEK 18 FINAL EXAMINATIONS

TOTAL = 54 HOURS REFERENCES A. BOOKS Textbook: Brigham, E., Houston, J., Chiang, Y., Lee, H., Ariffin, B., Fundamentals of Financial Management. 12th ed., Cengage Learning.

References: Gitman, Lawrence J., Zutter, Chad J. Principles of Managerial Finance. 13th edition. Addison Wesley. Brigham, Eugene F, Houston, Joel F. Fundamentals of Financial Management. 10th ed., Thomson South-Western.

B. RESEARCHES Richard A. Bettis and Vijay Mahajan, Risk/Return Performance of Diversified Firms, Management Science Vol. 31 No. 7 (Jul., 1985) pp. 785-799 John Hughes, Jing Liu, and Jun Liu, On the relation between expected returns and implied cost of capital, Review of Accounting Studies Vol. 14, Numbers 2-3 (2009), pp. 246-259 William D. Cooper, Michael F. Cornick, and Alonzo Redmon, Capital Budgeting: A 1990 Study of Fortune 500 Practices, Journal of Applied Business Research Vol. 8 No. 3 (1992) H. Kent Baker, Shantanu Dutta, and Samir Saadi, Management views on Real Options in Capital Budgeting, (May 15, 2010), Journal of Applied Finance (Forthcoming) Jeng-Ren Chiou, Li Cheng, and Han-Wen Wu, The determinants of working capital management, 2010 International Conference on Financial Theory and Engineering

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Sonia Baos-Caballero, Pedro J. Garca-Teruel, and Pedro Martnez-Solano, Working capital management in SMEs, Wiley Online Library Accounting and Finance Vol. 50, Issue 3 (September 2010), pp. 511-527

C. WEBSITES www.cengageasia.com Textbook Website http://www.fma.org/ Financial Management Association www.investopedia.com Finance Terms http://finance-article.blogspot.com/ Relevant Finance Articles www.fitcibca.com Website of Fitch Ratings (international bond rating service) www.moodys.com Website of Moodys Investor Services www.standardandpoors.com Website of Standard and Poors (provider of investment information)

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Oral Recitation Rubric Attribute Points Earned

Attributes

Above Standard

At Standard

Attribute Still a Goal

(10-8) Outstanding communication skills; impressive and comprehensive knowledge of the subject matter; derives substantial relevant information from outside sources. (5-4) Answers with a high degree of conviction; poised and articulate and provides a convincing arguments

(7-5) Competent communication skills; knowledgeable about the subject matter, gives satisfactory answers and offers some information from outside relevant sources. (3-2) Informed when speaking about the material while referencing notes.

(4-0) Weak and insufficient communication skills; inability to offer a correct or satisfactory answer. (1-0) Unable to accurately discuss information related to topic or simply read information from paper.

Topic Discussion

/10

Confidence

/5

Total Oral Recitation Points Earned

22 | P a g e

Reaction Paper Rubric Attribute Points Earned

Attributes

Above Standard

At Standard

Attribute Still a Goal

(30-26) Reaction paper is highly perceptive and well expressed; outstanding balance between personal commentary and relevant outside sources; excellent use of finance terms. (10-8) Research and Other Supplementary Materials Careful choice and comprehensive survey of relevant sources; materials are logically researched; deep and thorough analysis of supplementary materials.

(25-15)

(14-0)

Content

Reaction paper provides interesting and relevant Reaction paper is not well expressed and insights; a good balance between personal shows limited understanding; haphazard commentary and relevant outside sources; competent inputs personal insights; little to no use of use of finance terms. finance terms. (7-5) (4-0)

/30

Satisfactory survey of relevant sources; sound and Little to no research done; poor analysis of acceptable research; appropriate analysis of materials. materials.

/10

23 | P a g e

(10-8) Structure and Grammar Reaction paper is clearly structured; excellent organization of material; high level of literacy and grammatical accuracy

(7-5)

(4-0)

Reaction paper is well organized and well structured; Reaction paper is poorly structured, good presentation; good level of literacy and inadequate presentation and grammatically grammatical accuracy weak.

/10

Total Reaction Paper Points Earned

24 | P a g e