University of Washington

Graduate School of Busines s Administration

EMBA 504 - Financial Management

Spring 1996

Professor Jonat ha n M. Karpoff phone: 685- 4954

208 Mackenzie Hall email:
karpoff@u.washington.edu

Teaching assista nt: Michael Schill phone: 543- 4988

22 Balmer Hall email: mjschill@u.washingt on.e du

#1: “Finance. Eat your spinach. Finance is at the core of so many successful com pa nies that
no CEO aspirant can afford to avoid schooling in it. . . This will help you underst a nd, among
other things, how your compa ny raises and allocates capital. It will also make clear why that
new produc t your team has designe d might not be launched, despite its sensa tional showing
in test markets: The numbe rs indicate that most likely the returns on the item will never
clear the hurdle rate that will cover the cost of capital it requires and deliver a profit as well.”

-- Really important
things you need to know (to advance your career today),
Fortune magazine, January 15, 1996, p. 36.

Course description

EMBA 504 encompa ss e s what I believe every general manager shoul d know about
finance. Its purpose is to give you a thorough introduc tion to financial manage me nt that blends
relevant theory with practical application. If we jointly are successful, this course will equip you
to participate fully and creatively in the resolution of many financial issues facing your
organization. Most of you will not be ready to replace the chief financial officer or treasurer
after this class, but you should be able to work productively with such individuals and to assess
the financial implications of your own decisions.

The course is divided into five sections. The first covers the use of financial statem ent s
to glean informa tion about the firm, its performa nce, and financing needs. Financial state ment s
are like tea leaves. By the end of the reside ncy week you shoul d have some skill in reading them.
The next three sections deal with the meat - and- potatoe s issues of financial manage m ent:
raising and allocating capital. Raising capital issues include whet her the firm should rely on
equity or debt financing, and what to distribute to owners in the form of dividends or share
repurcha se s. Allocating capital issues include techniques to evaluate invest me nt opport unities
and the rates of return the firm’s projects must earn to be profitable. Our fifth and final section
integrates much of the preceding material to examine the motives and sources of gains behind
corporate takeovers and financial restruct urings.

Required materials
 1. Introduction to Financial Manage m e nt by Lawrence D. Schall and Charles W. Haley,
sixth edition.
2. Analysis for Financial Manage m e nt , by Robert C. Higgins, fourth edition.
2. Packet of cases and readings.
Grading

Your grade will be based in equal parts on homework assignme nt s, class participation,
and a final examination. There are five homework assignm ent s, which are included in the class
reading packet. Due date s for each assignme nt are listed on the course outline below. I
encourage you to work on these assignme nt s in groups. I object, however, to any kind of
specialization or free - riding in preparing your homework answers. That is, you must
understa n d and be responsible for your homework answers, and hand in your own answers.

Your class participa tion grade will be based on your prese nce (it is difficult to contribute
to class learning when you are not there) and my assess m e nt s of: the extent to which you
helped to make the class a productive learning experience, the effort you made to underst a nd
the material, and the dept h of your understa n di ng of the material presente d. If you miss any
classe s during the term, you can partially atone for your absence by submitting a two or three
page analysis of the readings and cases you missed. The final examination will be
compre he nsive and open book, and will be designed for two hours.

Many stude nt s are anxious about their grades and the grading process. I see grades as
serving three main functions. They provide: (i) an incentive to prepare; (ii) a way to recognize
superior perform a nce; and (iii) inform ation about how well you are progressi ng. I hope you
delight in the accomplishm e nt of a good grade, and respond to a poor grade by working to
improve your learning procedure s. If grade anxiety becomes a problem, however, somet hing is
wrong and we should talk.

There is tremend ous variation in the financial sophistication of the stude nt s in this class.
If you do not have the backgroun d of the treasurers and comm ercial bankers around you, that’s
ok. You may struggle harder to master financial topics, and may end up with a lower grade. But
you may have climbed further up the financial learning curve than someone who had starte d
ahead of you. If, in contrast, you have a background in the issues we discus s, tremendou s!
Please do not hesitate to add your knowledge to the class discussion. (For detailed digressions
and specialized interests, however, I frequently will defer our discussion until after class.)

How to prepare for class

The majority of our class time will be devote d to discussion of assigned cases. To
prepare, read the assigned material and case thoroughly. Identify the principal issues raised in
the case, and atte mp t to analyze these issues. Most cases are designe d to highlight a particular
set of financial tools (which are presente d in the assigned reading). Use these tools to the best
of your ability, and tem per your analysis with common sense. For each case I will provide a set
of preparation questions. The questions for the first several cases are in the reading packet, and
those for subse que nt cases will be distribut ed in class. These questions should help focus your
analysis, but feel free to explore other issues as well.

If you find yourself hitting a roadblock, try to write down what your problem is.
Articulating your roadblock is the first step toward overcoming it. I also find that writing my
thought s down - - in and of itself - - is an importa nt step in the learning process.
 OUTLINE OF CLASS SESSIONS AND ASSIGNMENTS

Section I: Financial statement analysi s, short- term financial planning, and bank financing

1. Sunday, March 31

(a) Financial stateme nt analysis

Read: Higgins, chapters 1 - 2

(The material also is discusse d by Schall and Haley in chapter 15)
Prepare: Assessing a
Compa ny’s Future Financial Health (Harvard case #9- 292- 019)
(Answer the questions in the case.)

(b) Financing decisions and forecasting

Read: Higgins, chapter 3

(Also discus se d in Schall and Haley, chapter 16)
Prepare: Butler Lumber Co.
(Harvard case #9- 292- 013)
(See the case questions in the reading packet.)

2. Monday, April 1

(a) Seasonal short - term financing needs

Prepare: Play Time Toy

Compa ny (Harvard case #9- 292 - 003)
(See the case questions in the reading packet.)

(b) Cyclical short - term financing needs

Prepare: Dynashears, Inc.

(Harvard case #9- 292- 017)
(See the case questions in the reading packet.)

3. Tuesday, April 2

(a) Trade credit strategy

Read: (Schall and Haley, chapter 17)

Prepare: O.M. Scott & Sons
Compa ny (Harvard case #9- 209 - 102)
(See the case questions in the reading packet.)

(b) Trade credit strategy, continued

Section II: Long- term financing, capital structure, and dividend policy

4. Wednes day, April 3

 (a) Present value analysis

Read: Schall and Haley, chapter 4

Prepare: Answers to questions
15 - 31 at the end of the chapter
(In preparing your answers, you may use the tables provided in Appendix A at
the end of the book, the formulas described in Appendix 4A at the end of
chapter 4, or your calculator’s financial functions. If you use your calculator’s
functions, be sure you know how to use the tables or form ulas.)

(b) Present value extensions

Read: Schall and Haley, chapter 5

Prepare: Answers to odd -
num bered questions at the end of the chapter

5. Saturday, April 13 - - *Homework #1 is due*

(a) Market efficiency

Read: “Cash is King”

Prepare: Peter Lynch and the
Fidelity Magellan Fund (UVA case #F- 0777)

(b) Debt or equity?

Read: “The Search for Optimal Capital Structure” by Stewart C. Myers

(Optional background material is in Schall and Haley, chapter 13 and in Higgins,
pp. 220 - 230: “The Financing
Decision and Firm Value”)
Prepare: American Home
Products (Harvard case #9- 283- 065)

6. Friday, April 19

(a) Capital struct ure decisions

Read: Optional reading: “Still Searching for Optimal Capital Structure,” by Stewart C.
Myers
Prepare: Hospital Corpora tion
of America (A) (Harvard case #9- 283- 053)

(b) Financing operations

Read: “Raising Capital: Theory and Evidence,” by Clifford W. Smith, Jr.

(Optional background material is in Schall and Haley, chapter 11)
Prepare: Hospital Corporation of America (B) (Harvard case #9 - 283 - 054)

7. Friday, April 26 - - *Homewor k #2 is due*

(a) Distribution policy

 Read: Corporate Finance, fourth edition by Stephen A. Ross, Randolph W. Westerfield,
and Jeffrey F. Jaffe, chapter 18 .
(Note that “NPV” in the reading means “net prese nt value.”)
Prepare: Napco Industries, Inc.
(A) (Harvard case #9- 283- 040)

(b) Distribution policy, continue d

Read: Underst anding Ex- Dividend Day Returns (Attem pt the questions at the end of
the reading.)

Section III. The cost of capital

8. Saturday, April 27

(a) Risk, diversification, and the capital asset pricing model

Read: Schall and Haley, chapter 6

Prepare: Beta Management
Compa ny (Harvard case #9- 292 - 122)

(b) Weighted average cost of capital

Read: Schall and Haley, chapter 7

Prepare: Pioneer Petroleum
Corporation (Harvard case #9- 292- 011)

9. Saturday, May 11 - - *Homework #3 is due*

(a) Divisional cost of capital

Prepare: Boeing 777 (UVA case

#F- 1017)

(b) Divisional cost of capital, continue d

IV. Investment decisions and capital budgeting

10. Saturday, May 18

(a) Capital budgeting

Read: Schall and Haley, chapter 8

Prepare: Empirical Chemicals,
Ltd. (A): The Merseyside Project (UVA case #F- 1020)

(b) Capital budgeting extensions

Read: Schall and Haley, chapter 9

Prepare: Empirical Chemicals,
Ltd. (B): Merseyside and Rotterda m Projects (UVA case #F- 1021)
11. Friday, May 24 - - *Homework #4 is due*

(a) Valuing a business

Read: Note: Valuing a Business Acquisition Opport uni ty (Harvard note #9- 289- 039)
Prepare: Phillip Morris A (UVA case #F- 478)

(b) Valuing a business, continue d

Section V: Integrative topics in corporate finance

12. Saturday, June 1

(a) Corporate takeovers

Read: “Shareholde r Gains from Takeovers and Restructurings Between 1981 and 1986:
$162 Billion is a Lot of Money,” by Bernard S. Black and Joseph A. Grundfest
(Although the article and its numbe rs are a bit date d, the article expresses ideas
that are still relevant for takeovers from 1987 to 1996.)
Prepare: Gulf Oil Corp. - Takeover (Harvard case #9- 285 - 053)

(b) Corpora te governance in the 1990’s

Read: “Raiders, Targets, and Politics: The History and Future of American Corporate
Control,” by John Pound
Prepare: The ANCSA Corpora tions (preparation questions are at the end of the case)

13. Friday, June 7 - - *Homewor k #5 is due*

(a) Leverage recapitalization

Read: “Leveraged Recaps and the Curbing of Corporate Overinvestm en t,” by David J.
Denis and Diane K. Denis
Prepare: Sealed Air Corp.’s
Leveraged Recapitalization (Harvard case #9 - 391 - 067)

(b) Catch- up and review