STEPHEN

M. ROSS SCHOOL OF BUSINESS

UNIVERSITY OF MICHIGAN
ANN ARBOR, MI 48109-1234


INTRODUCTION TO FINANCE: VALUATION & INVESTING


SPECIALIZATION GOALS

This specialization is a rigorous introduction to Valuation pitched at motivated individuals
across the entire spectrum of working professionals interested in understanding and
applying valuation skills to their jobs. The modular nature of the specialization, with an
increasing level of rigor, makes it appealing and useful to a wide audience, ranging from
motivated college students to working professionals trying to develop analytical skills and
financial acumen to individuals preparing for an advanced degree (for example, an MBA,
Master in Management, Master in Finance, Applied Economics, Decision Sciences degrees)
at an elite institution.

This specialization will serve useful to anyone in understanding and critically evaluating
project and company analyses conducted by experts. It will also help individuals seeking to
analyze companies either for personal investment purposes or as part of their job in the
consulting and financial industries.

FACULTY TEAM

Professors Gautam Kaul and Qin Lei have teamed up to offer this specialization. Dedicated
professionals at the University of Michigan Office of Digital Education & Innovation and at
Coursera support the faculty team. The specialization is based on numerous years of
teaching experience in programs ranging from undergraduate to PhD, and to audiences
ranging from college students to senior executives. It has been motivated in large part by
the enriching experience offering several MOOCs to more than a million students
worldwide over the past five years.

SPECIALIZATION DESCRIPTION

This specialization has been developed with the express purpose of enabling the learner to
understand and apply the principles of valuation to any type of project or business. The
process involved in understanding valuation of assets will also lay a foundation for you to
understand the principles of investing. After successful completion of the program,
participants will be equipped to make thoughtful decisions based on a framework built
using multiple advances in modern financial theory over the past several decades. The
most important features of this specialization are: (a) it is an integrated set of courses with
a focus on valuation; and (b) it is applied in nature.

The specialization is a sequence of four courses, with the last course being “capstone-like”
in nature, culminating in a Capstone Project that involves the valuation of a real-world
company using a lot of data. All concepts in the courses will be introduced using real world
examples, and richly designed assessments/quizzes will enable the learner to test her
knowledge and enhance the learning experience. The nature of the assessments will change
over the course of the specialization from many different types of focused problems to
fewer but broader applications, culminating in the capstone project that will evaluate the
learner’s understanding and mastery of the four closely integrated courses.

The courses comprising the specialization are each expected to take about six weeks of
effort. This estimate is based on a learner with no formal background in finance, but who
can spend between five to ten hours a week, depending on her background. The strength of
finance is that it takes a very structured approach to decision making, with two key
building blocks underlying all decisions. The program will therefore begin with two self-
contained courses, each focused on one of the building blocks, followed by a more
advanced course on valuation methods and then culminating in a course with rich
applications of the methodologies to both projects and companies.

Course 1: We will introduce the time value of money (TVM) framework in a carefully
structured way, using relatively simple applications at first and quickly moving to more
advance ones. We will then spend some time on developing an understanding of alternative
decision criteria (NPV, IRR, Profitability, etc.) that are commonly used in the real world.
We will wrap up the course with an exposure to the determination of cash flows using
accounting principles. The focus in this building block will be on individual/personal
decisions because of two reasons: (a) we learn when we see value to us as individuals and
(b) the beauty of finance is that the building blocks of finance are applicable to any
decision, personal or corporate. The course will last six weeks with time included for
assimilation and a final exam.

Course 2: The follow-on course will last six weeks and will focus on the second main
building block of financial analysis and valuation: risk. The notion of risk and statistics are
intimately related and we will spend a fair amount of time on the development of some
statistical concepts and tools, namely distribution theory and regression analysis. This time
will be well spent because these concepts and tools are also commonly used in many
applications in the real world. The foundational idea of diversification will then be used to
develop a framework for evaluating risk and establishing a relationship between risk and
return. Apart from developing a keen appreciation of risk for making thoughtful decisions
in an institutional context, this course will contain a lot of material and examples that will
enable the learner to make smart personal investing decisions. The course will again have
time included for assimilation and a final exam.

Course 3: This course will integrate the building blocks of finance developed in the first two
courses, and add important features of the real world to expose the learner to advanced
methods of valuation. We will first introduce a simple company valuation approach
2
highlighting the effects of leverage, again using an example. We will follow this by
developing a framework to understand and internalize the main drivers of valuation. We
will then introduce the effects of taxes and the treatment of leverage to highlight their
effects on valuation. An introduction to the more advanced frameworks of valuation
necessitated by the complexities of life, though our focus will be the tax code and the
implications of potential bankruptcy, will follow this. The main purpose of this course is to
equip the learner to be able to conduct rigorous project and company-wide valuation. This
six-week course will have the requisite time for assimilation and a final exam built in.

Course 4: This course is an application of the rich and rigorous framework of valuation to
value companies. The focus of this course is to value companies, where a company is
essentially a complex collection of “projects.” One of the main purposes of this rich and
complex applied course is to enable the learner to apply the knowledge gained in the
specialization to conduct a deep analysis in the Capstone Project that is a major component
of the course. This course is also six weeks long with more time for assimilation and
completion of richer assignments, a final exam and the Capstone Project.

In addition to serving as a capstone experience for all participants, this course will help
individuals seeking to analyze companies either for personal investment purposes or as
part of their job in the consulting and financial industries.

Capstone Project: The Capstone Project is designed with the specific purpose of showcasing
both the science and the art of financial analysis. It is the natural end to a Specialization
that begins with the building blocks of finance, is followed by a modification of the
framework to incorporate the complexity of regulations and the tax code, and ends with a
capstone-like experience in the last course with rich applications to complex projects and
companies. The Capstone Project is therefore a natural end to the Specialization and will
involve a detailed valuation analysis of a real company.

Each course is self-contained and comes with a detailed syllabus.

PEDAGOGY: THE IMPORTANCE OF PROBLEM SOLVING

This is a demanding specialization that will require a lot of hard work, from both you and
me. I have deliberately pitched it at a relatively high level with an emphasis on deep
understanding of what finance is all about, yet with a focus on practical applications. To
achieve these dual objectives, this course is focused on problem solving and consequently,
I will make a conscious attempt to introduce each topic with real-life examples. I strongly
encourage you to attempt every problem in the videos before we do it together. You will
also be required to submit several assignments in each course that will involve multiple
problem-solving exercises. Some of these problems are more complex by design than the
examples we will do in “class” (the videos) because class time needs to be devoted to
understanding the issues and concepts. In my view, doing problems soon after the relevant
material is covered in class is the best way to learn.
3

We have carefully coordinated both the content and the pace of the specialization. The
examples and assignments in the first two courses will be specific and focused to enable
you to learn the basic tools and techniques without being distracted with a lot of real world
issues. As the content becomes both more advanced and applied, the nature of examples
and assignments will become richer, with a focus on depth of analysis of fewer complex
situations. The ultimate reflection of this progression in complexity and richness will be the
capstone project in the last course.

PREREQUISITES

This is a tough issue. I do not believe in prerequisites, except for a sense of curiosity and an
attitude. Having said that, exposure to accounting (the language of business), and/or
algebra and statistics (we all need it) will clearly help. It is important to take the courses in
sequence as they build on each other. I always try and cover everything starting with
fundamentals and will highlight when there is a need for you to do some further work in
specific areas. In fact, I hope the class will motivate you to learn more. I believe that
learning usually happens when you are motivated by a curiosity to understand something.

COURSE MATERIALS

VIDEOS

The main resources provided by me for this online specialization are the videos, organized
into four courses, each with multiple modules. The length of each module depends on the
course and the topic, but will vary between 100 and 160 minutes, and will be broken up
into bite size pieces. I have worked with professionals to edit the videos, but I encourage
you to pace yourself according to your style and background. Most importantly, there are
numerous examples/problems in all the videos, and please try and take every opportunity
to attempt an exercise before you see me analyze it. We have tried to create breaks
wherever possible to facilitate this process, but I do not want the videos to become like TV
advertisements: short and exciting but with no real content.

Since the specialization starts with building blocks of finance and is then increasingly
focused on very rich and complex applications that use the buildings blocks in different
ways, the videos become longer and fewer in number per module. This is the same pattern
that will be witnessed in the problems and examples, starting with many focused problems
in the first two courses and then graduating to fewer but richer ones in the third and fourth
courses. The capstone project will involve an in-depth analysis of one real world company.

It is important for you to know that I will not provide any notes to accompany the videos
because I want you to create your own notes as you watch and listen to the presentation.
The best part about this online class is that you can pause, rewind, and fast-forward the
videos at will. You can play it at faster speeds whenever needed. But it is also very easy for
4
you to become a passive participant. I want you to be active listeners and I encourage you
to make your own notes as you go along. This will help you to understand and learn the
material well, assuming of course that you find me engaging. If you do that, you will only
need textbooks or other materials for additional, more in-depth information. I encourage
you to go beyond the course content, as you get further along in the specialization.

ADDITIONAL RESOURCES

We will provide you with several additional resources. First, we have prepared some brief
notes that cover some basic content. Most importantly, we have constructed several
assignments/assessments that will be critical to the learning process.

TEXTBOOKS

In addition, I provide below references of several alternative textbooks that are all very
high quality. To help you with your reading, we will provide you chapters from two books
as examples of references in each module of each of the four courses. Please note that the
videos do not follow any specific book and the book chapters are only references; they do
not perfectly match the material we cover and may sometimes contain material that we
will not cover. My goal is to expose you to the fundamentals of finance, investing and
valuation, not every detail in every textbook.

The list of textbooks is provided below. You are not required to purchase any of these
books, but recognize that one of them is available to read for free on the web. You must
follow the guidelines provided by the author for use of the online material. If you do
choose to buy a book, a relatively recent edition will do, and look for used and/or
paperback versions.

(1) Corporate Finance, 4th Edition, by Ivo Welch.

A PDF version of the book can be downloaded without charge at http://book.ivo-
welch.info/home/. You can also purchase a paperback version at the site. The
material is copyrighted, however, and you are not permitted to distribute or posted
it elsewhere. If this URL malfunctions, you can access the site by searching Ivo
Welch on the web.

This book is referenced as IV in the detailed schedule. If you cannot access the above
URL, just search the web using the author’s name.

This book is referenced as IV in the detailed schedule. If you cannot access the above
URL, just search the web using the author’s name.



5
 (2) Corporate Finance, 9th Edition, by Ross, Westerfield & Jaffee.

I have also referenced chapters of this book as suggested readings in the detailed
class schedule. The book is referenced as RWJ.

A couple of other excellent textbooks are:

(3) Corporate Finance, 2nd Edition, by Berk & DeMarzo.

(4) Principles of Corporate Finance, 10th Edition, by Brealey, Myers & Allen.

There are several other books on finance and valuation and I encourage you to browse a
few before settling on one or two as references.

Finally, since many of you may have had limited exposure to Finance, it is important to read
institutional material at your own convenience. Please read business and financial news
regularly. Cruise the web as often as possible not only to uncover the wealth of information
at your disposal, but to also learn how things work. A good web site to begin your search is
http://finance.yahoo.com. Read the Economist as often as you can; it has some thoughtful
pieces. However, recognize that you need to develop the habit of reading material critically;
just because something is published in a reputable outlet does not mean that the author
knows what he/she is talking about. I guarantee you that there is no one out there who
really understands what our current financial crisis, or even the crisis in the 1930s, were all
about.

SPREADSHEETS

The purpose of this specialization is to introduce you to frameworks that are also very
applicable. In every course, I will encourage you to first focus on the setting up of problems,
rather than the calculations. When you get laying out all the information and to the
calculations, you will find that technology just helps you do so much faster and more
reliably. But, you will also realize that spreadsheets and calculators simply calculate stuff
after you tell them what to do; they are a means and not the end! If you set up a problem
incorrectly, you will get an incorrect answer.

I assume that you have access to a computer and the Internet and, therefore, to
spreadsheets. I will use Excel at various points in the videos and provide a note on
spreadsheets. You are responsible for learning how to use spreadsheets. The assignments
are a great way to do so as virtually all questions will require you to do calculations using
either a spreadsheet or an alternative method.

6
NATURE OF ASSIGNMENTS, FINAL EXAM AND CAPSTONE PROJECTS

Each course will have multiple assignments and final examinations. Since all grading will be
conducted using technology, all questions will take a True/False, fill in the blank, or
multiple-choice form. The questions will almost always be word problems, like the ones
covered in the videos, but there will be one specific answer to each question. We have set
up the grading process so that you get feedback, regardless of whether you get the answer
right or wrong, that is supposed to make you think in the right way about the issues. We
are constantly working on enriching the grading process to provide you feedback,
hopefully eventually directed at each learner.

VERIFIED CERTIFICATE FOR SPECIALIZATION

Your performance in each course will be evaluated using a pass/fail grade. The philosophy
behind our grading is to make sure you gain adequate competency to be granted a
certificate. Each course will have its own evaluation scheme, based typically on your
performance on the assignments, the final exams and a Capstone Project in the last course.
To receive a specialization certificate, you will need to get a certificate in each course.

You may of course attend any course, or all four courses, regardless of your performance
on assignments or the final, but a passing grade is necessary to receive any certificate.

TEACHING ASSISTANCE

Peter Clarke has graciously agreed to serve as the course advocate for the Specialization
and will monitor the forums. He has taken all courses I have offered, performed
exceptionally well, and has served admirably in facilitating past offerings. He has an
exceptional grasp of the entire Specialization. Individual courses will also have course
advocates. Professor Qin Lei and I are also helped by a team of graduates from University of
Michigan. And Lauren Atkins Budde and Stephanie Haley help us manage the delivery of all
the courses.

There is a team of dedicated Coursera professionals helping us with all technical aspects of
the course and specialization. All technical issues will be addressed by them.

This Specialization has now launched on the on demand, always on, platform. It will
be very difficult for the course advocates to monitor the forums all the time and
respond quickly.

Consistent with our philosophy that you will learn from each other, our hope is that you
will resolve most/all issues on your own by reviewing the videos, doing problems, reading
chapters, and discussing among yourselves. But we will monitor the forums and post
comments if there is an error, especially in an assignment/final or in the evaluation of the
assignment/final.
7
Contact with TA and Course Advocates

Given the large number of students in the class, the course advocates or instructors should
not be contacted directly with any questions. While we love all of you, responding to
questions will be virtually impossible. But course advocates will monitor the forums and
keep the instructors informed on a regular basis. This has worked quite well for the past
three years and I am sure we will do fine in this course as well.

IMPORTANT ISSUES TO CONSIDER

Assignments

The assignments are meant to be challenging, though we have tried hard to increase the
difficulty level gradually within each assignment. More importantly, the assignments reflect
my belief about learning. No one can really make you learn; you must be willing to work
hard and struggle. The teacher’s role is to expose us to the fundamental building blocks,
and we need to learn by applying them to challenging problems. The reason I love finance
is its applicability to all types of real world situations.

Solutions to Assignments

This is a seemingly reasonable request but very difficult to accommodate. Creating
questions for the videos and the assignments has been, and continues to be, the most
challenging part of high quality digital education. It has taken us several months, with the
help of advanced graduate students, to create assessments, test them, and then modify
them to fit the grading structure imposed by technology. We believe our assignments are
well thought out and reflect a good balance of conceptual and applied stuff. Due to
copyright issues, we cannot simply give you questions from existing books, and I would not
want to do that anyway. It will therefore be very difficult for us to offer this class multiple
times if we must keep preparing new sets of questions with multiple versions to allow you
to attempt each one more than once. Handing out answers will force us to do that. We have
instead chosen to provide a lot of hints about the main issue in each question and you can
always revisit the videos, go back to the questions, work in teams, etc., to learn the content.
Over time, we hope to create richer ways of grading and providing feedback depending on
the type of errors that you may make. Professor Qin Lei and I spend a significant amount
of our time on creating and improving assessments.

Honor Code

While learning from each other is very important, we all recognize the difference between
collaboration and simply copying and pasting work done by others. I strongly encourage
you to work collaboratively using proper judgment. Similarly, please respect all copyright
rules of all materials, including books, articles, etc.

8