Advance Financial Management

Graduate Business Administration 645

CRN: 12099
Building 163 Room 2027
Winter Quarter 2015
Monday: 6:00-8:50

Paul Sarmas

www.csupomona.edu/~psarmas
CATALOG DESCRIPTION:
A seminar course in finance utilizing comprehensive cases to simulate the role of the financial manager.
3 seminar-discussion. Prerequisite: GBA 546, all required 500-level courses, and microcomputer
proficiency. Concurrent enrollment in GBA 646. Unconditional standing requirement.

EXPANDED DESCRIPTION OF THE COURSE AND INSTRUCTIONAL METHODS:

A.

Expanded Description of the Course:

This course reinforces the basic concepts of financial management. The course provides an indepth discussion of key topics that are critical to financial management: (1) the goals of the
firms, (2) financial statement analysis, planning, and forecasting, (3) working capital policy and
management, (4) capital budgeting techniques without and with risk, (5) capital structure theory
and application, (5) the cost of capital estimation, and (6) long-term financing decisions. In
addition, the course examines issues such as lease financing, merger and acquisition, and
international financial management.

B.

Instructional Methods:
The delivery system throughout this course will be a combination of class discussion and case
analysis. The case analysis will be both in a written format and oral presentation. The amount of
lecture will be limited to detailed coverage of concepts pertaining to each individual case.

REQUIRED BACKGROUND OR EXPERIENCE:

A.

B.

C.

Prerequisites:
Fundamental of Financial Management (GBA 546), all required 500-level courses, and
microcomputer proficiency. If a basic finance course was taken more than three years ago,
students are strongly urged to retake GBA 546 again. Conditional, unclassified , or open
university students are not eligible to take this class.
Prerequisites Justification:
This course is primarily a case analysis course and the lectures will be focused on the assigned
case and, thus, students are expected to have fundamental knowledge of financial management
and economics. All case-problem assignments in this course would require the use of computers
(i.e., word processing and spreadsheet).
General Education Contribution:
Students are expected to communicate both orally and in writing. Students also are expected to
possess analytical skills at an intermediate level.

EXPECTED OUTCOMES:
Students would have full understanding of financial management and corporate finance decision making.
They should be able (1) to measure a firm's cost of capital, (2) to create a working capital policy and
management strategy, (3) to utilize different capital budgeting techniques and determine optimal capital
budget, and (4) to evaluate and estimate a firm's optimal capital structure. Graduates would have
sharpened their skills of identifying financial problems, design solutions, and implement the necessary
financial tools.

TEXT AND REFERENCES:

Required texts: Selected Cases from Harvard Business School Publishing
Purchase the cases on-line by going to the following web site:

https://cb.hbsp.harvard.edu/cbmp/access/31598762
Recommended Text: Corporate Finance
Ross, Westerfield and Jaffe
Ninth Edition
Irwin- McGraw Hill, 2008

METHODS OF EVALUATING OUTCOMES:

Grades are determined in the following format:
Presentation ....... 15 percent
Case Study ......... 50 percent
Final
............. 35 percent
Course grade is based on the following scale:
93
90
86

... A
... A... B+

83
80
76

... B
... B... C+

73
70
66

... C
... C... D+

63
60
0

... D
... D... F

ACADEMIC INTEGRITY
Violation of academic integrity include, but are not limited to, the following: cheating on an
examination, test or quiz; plagiarism on any paper or report; falsifying data, research or report;
representation of forged documents; misrepresentation of information in oral or written form. Such
violations will be dealt with severely by the instructor, the associate dean and the standard committee."
COURSE ASSISTANCE:

Office Information
Location:
Telephone:
Fax:
E-Mail:

Building 164-2053
(909) 869 2405
(909) 869 2124
psarmas@cpp.edu

Office Hours
Monday:
Tuesday:
Thursday:
Others:

3:50 p.m. 5:50 p.m.

9:30 a.m. 10:30 a.m.
9:30 a.m. 10:30 a.m.
By appointment

COURSE REQUIREMENTS
It is very important for students to meet following requirements:
(1) Recently completed the prerequisite courses.
(2) Understanding of essential concepts of finance.
(2) Knowledge of Excel or other types of spreadsheet.
Discussions related to a case are presented before the case is assigned.
Solution should include both quantitative and subjective analysis.
Students will be divided into groups.
Each group is expected to present an assigned case.
Members of each group may wish to evaluate each other.
Prepare presentation material: handouts, transparency, etc.
If computer is needed for presentation, a two-week advanced notice is needed.
Each Group must prepare one written case per week.

Each case must have: 1.

2.
3.
4.
5.

Cover page includes students names and case title.

Written analysis of all the assigned cases must be typed.
Each report must have an introduction including background information.
Each report must have a summary & conclusion section.
Each report must have a reference section.

Each student is expected to participate in discussion of the assigned case in a coherent manner and be
able to show all the necessary work (computations) during the presentation.

Your written analysis will be evaluated based on the following criteria:

* Organization and format of the report (10%)
* Comprehension of the main issues of the case (15%)
* Analytical analysis of the issues (40%)
* Logic and clarity of assumptions made in the analysis (15%)
* Alternative solution(s) to the problem (10%)
* Consistency of recommended course(s) of action and conclusion with the analysis (10%).
Cases are DUE ON Monday of each week and at the beginning of the class.
NO MAKE-UP EXAMINATION!
NO LATE CASE-REPORT!

LECTURE SCHEDULE
January 5, 2015
Group Assignment
GBA 646 Paper Assignments
Discussion: Financial Statement Analysis

January 12, 2015

Discussion: Financial Planning and Control
Submit a list of five companies ranked by order of preference.

January 19, 2015

Academic Holiday
January 26, 2015
Discussion: Project Cash Flow Analysis
Case Due: Lowes Companies, Inc.

February 2, 2015
Discussion: Cost of Capital
Case Due: Clarkson Lumber Company

February 9, 2015
Discussion: Capital Structure Theory and Practice
Case Due: International Paper: Longwood Woodyard Plant

February 16, 2015

Discussion: Dividend Policy
Case Due: Cost of Capital at Ameritrade

February 23, 2015

Discussion: Lease Valuation
GBA 646 Project Due

March 2, 2015
Discussion: Dividend Policy
Case Due: Debt Policy at UST, Inc.

March 9, 2015
Discussion: Merger & Acquisition
Case Due: Riverbend Telephone Company

Final Examination
Monday
March 16, 2015
6:00 8:00 p.m.

Case Profiles
Lowes Companies, Inc.
Lowes, headquartered in the United States, was a major home improvement retailer and currently
undergoing an expansion into the Canadian market. You have just received the companys annual
reports with the last three years financial results. You want to assess the retailers past financial
performance, including the risk and opportunities associated with the industry, and the retailers
corporate strategy. Based on your analysis, you would decide whether to invest in Lowes. Please
answer all the questions in the case (if any) and the following questions:
1. Assess the home renovation retail industry. What risks and opportunities exist?
2. Analyze Lowes current strategy.
3. Interpret Lowes statement of cash flows for fiscal 2010-2011 and 2009-2010.
4. Calculate Lowes financial ratios for 2009 through 2011. Compare these ratios with the industry
ratios. What implications can be drawn?
5. Would you invest in Lowes?

International Paper: Longwood Woodyard Plant

This case is designed to show how to formulate a discounted cash flow analysis for a capital investment
decision. The primary challenge is to determine relevant cash flows, paying particular attention to the
treatment of accelerated depreciation, inflation, and taxes. Analysts may have to consider sensitivity of
their NPV estimates with respect to inflation, the annual savings figures, and the number of years over
which the savings are received. The case also afford the opportunity to explore a variety of issues
related to capital investment, including manager-owner agency problems; risk adjustment for discount
rate; design of a capital budgeting system; challenges of a cyclical capital intensive industry; and capital
structure management. Please answer all the questions in the case (if any) and the following
questions:
1. Why is International Paper considering replacing the shortwood system at the Redding Mill with a
longwood system?
2. Using the financial data in case Exhibit 5 and assuming 15% as the appropriate risk-adjusted
discount rate, what is the NPV, IRR, and PI of the decision to add the longwood-processing system
to Redding?
3. What is International Papers weighted average cost of capital (WACC) in January 1996? Based on
you estimate of WACC, how much of a risk premium is embedded in the 15% discount rate? Are
you comfortable with this risk premium? How much does the risk premium affect your NPV
estimate?
4. Based on your analysis so far, what is your recommendation about the proposed investment? How
sensitive is your recommendation to (1) your assumption regarding inflation, (2) the value of the
cash flows after 10 years, and (3) the amount of annual savings?

Riverbend Telephone Company

Warren Freeman, general manager of the Riverbend Telephone Company, is trying to decide whether to
buy or to lease new truck to be used in maintenance of the companys telephone system. Because of
recent expansion of the system, capital is limited and for this reason the alternative of leasing appears

attractive, provided it is a good financial decision. Please answer all the questions in the case (if any)
and the following questions:
1. What will be the cash cost of either: (a) buying the truck; or (b) leasing the truck this year and in
each year that the truck is in use in the maintenance fleet of Riverbend Telephone Company?
2. Identify and discuss the key drivers in your selection.

Clarkson Lumber Company

The Clarkson Lumber Company has been expanding rapidly for several years. Increases in working
capital requirements have outrun the capacity of the company to generate funds from internal sources.
An integral part of this case is financial forecasting to verify amount of funds needed. Please answer all
the questions in the case (if any) and the following questions:
1. Why does Clarkson Lumber borrowed increasing amounts despite its consistent profitability?
2. How has Mr. Clarkson met the financing needs of the company during the period 1993 through
1995? Has the financial strength of Clarkson Lumber improved or deteriorated?
3. How attractive is it to take the trade discount?
4. Do you agree with Mr. Clarksons estimate of the companys loan requirement? How much will he
need to finance the expected expansion in sales to $5.5 million in 1996 and to take all trade
discount?
5. A s Mr. Clarksons financial advisor, would you urge him to go ahead with, or to reconsider, his
anticipated expansion and his plans for additional debt financing? As the banker, would you approve
Mr. Butlers loan request, and if so, what conditions would you put on the loan?

Debt Policy at UST Inc.

UST Inc., the dominant producer of moist smokeless tobacco, is planning a major change in capital
structure via a debt-financed stock repurchase program. UST has been widely known for its
conservative debt policy and dividend payout. The proposed change in capital structure not only
reverses a long standing conservative financial policy, but also does so during a time period in which the
business environment has become increasingly uncertain due to recent litigation and legislation
developments. Please answer all the questions in the case (if any) and the following questions:
1. What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.?
Evaluate from the viewpoint of a bondholder.
2. Why is UST Inc. considering a leveraged recapitalization after such a long history of conservative
debt policy?
3. Should UST Inc. undertake the $1 billion recapitalization? Calculate the marginal (or incremental)
effect on USTs value, assuming that the entire recapitalization is implemented immediately (January
1, 1999).
a. Assume a 38% tax rate.
b. Prepare a pro-forma income statement to analyze whether UST will be able to make interest
payments.
c. For the basis analysis, assume the $1 billion in new debt is constant and perpetual. Should UST
alter the new debt via a different level or a change in the amount of debt through time?
4. UST Inc. has paid uninterrupted dividends since 1912. Will recapitalization hamper future dividend
payments?

Cost of Capital at Ameritrade

The Cost of Capital at Ameritrade case provides the opportunity for you to estimate the cost of capital.
The key objective is to develop an understanding of how capital market data and the Capital Asset
Pricing Model (CAPM) can be used to estimate the required rate of return for real investments. Please
answer all the questions in the case (if any) and the following questions:
1. What factors should Ameritrade management consider when evaluating the proposed advertising
program and technology upgrades? Why?
2. How can the Capital Asset Pricing Model be used to estimate the cost of capital for a real (not
financial) investment decision?
3. What is the estimate of the risk-free rate that should be employed in calculating the cost of capital for
Ameritrade?
4. What is the estimate of the market risk premium that should be employed in calculating the cost of
capital for Ameritrade?
5. In principle, what are the steps for computing the asset beta in the CAPM for purposes of calculating
the cost of capital for a project?
6. Ameritrade does not have a beta estimate as the firm has been publicly traded for only a short time
period. Exhibit 4 provides various choices of comparable firms. What comparable firms do you
recommend as the appropriate benchmarks for evaluating the risk of Ameritrades planned
advertising and technology investments?
7. Using the stock price and return data in Exhibits 4 and 5, and the capital structure information in
Exhibit 3, calculate the asset betas for comparable firms.
8. How should Joe Richetts, the CEO of Ameritrade, view the cost of capital estimate you have
calculated?

Directed Study in Advanced Financial Management

Graduate Business Administration 646
CRN: 21099
Building 163 Room 2027
Winter Quarter 2015
Monday: 9:00-9:50

Paul Sarmas

www.csupomona.edu/~psarmas
CATALOG DESCRIPTION:
Independent investigation of selected problems in Advanced Financial Management under the direction
of a faculty member. 1 supervision. Concurrent enrollment in GBA 645. Unconditional standing
requirement.

REQUIRED BACKGROUND OR EXPERIENCE:

A. Prerequisites:
Concurrent enrollment in GBA 645.
B. Prerequisites Justification:
This course is primarily an independent study of a select or assigned topic under the supervision of a
faculty. Concurrent enrollment in GBA 645 will enable student to meet with the supervising faculty
directly and on a regular basis. In addition, seminar topics in GBA 645 will provide students with
the necessary tools to investigate different areas of finance.
C. General Education Contribution:
Students are expected to communicate both orally and in writing. Students also are expected to
possess analytical skills at an intermediate level.

EXPECTED OUTCOMES:
Students would have full understanding of financial management and corporate finance decision making.
They should be able investigate different areas of financial management, including: (1) corporate
finance, (2) international financial management, (3) financial institutions and markets, and (4) security
evaluations. Graduates would have sharpened their skills of identifying financial problems, design
solutions, and implement the necessary financial tools.

EXPANDED DESCRIPTION OF THE COURSE AND INSTRUCTIONAL METHODS:

A. Expanded Description of the Course:
This course reinforces the basic concepts of financial management and corporate finance. The
course provides an in-depth investigation of key topics that are critical to financial management of
corporations and financial institutions. The area of the study can either be selected by students or
assigned by the supervising faculty.
B. Instructional Methods:
The delivery system throughout this course will be meeting with students on a regular basis and
monitor their progress in preparing a final report of their investigation.

METHODS OF EVALUATING OUTCOMES:

Students will be evaluated on the basis of a written report of their study.
Course grade is based on the following scale:
93
90
86

... A
... A... B+

83
80
76

... B
... B... C+

73
70
66

... C
... C... D+

63
60
0

... D
... D... F

COURSE ASSISTANCE:

Office Information
Location:
Telephone:
Fax:
E-Mail:

Building 164-2053
(909) 869 2405
(909) 869 2124
psarmas@cpp.edu

Office Hours
Monday:
Tuesday:
Thursday:
Others:

3:50 p.m. 5:50 p.m.

9:30 a.m. 10:30 a.m.
9:30 a.m. 10:30 a.m.
By appointment

ASSIGNMENT
The assignment is, for each student, to write a research paper based on the evaluation of a publicly
traded company. You are invited to follow your own format in preparing your paper. The following
instructions are provided to assist you in organizing your research and preparing your report.
The Research Paper should be clearly written and properly typed. Grammar, spelling, punctuation and
syntax errors will result in lower grades. All information should be properly referenced (cited) and the
source of date, tables, and figures should be clearly noted. All calculations must be shown for
verification. Please do not use any hard or plastic cover, just staple the pages.
Step 1: Select 5 publicly traded companies with three years of financial statements ending in 2013/2014.
Submit the list of five companies ranked by order of preference on January 12, 2015.
Step 2: Once your company is selected, prepare the following analysis (15%):
Economic analysis (limit to 1 page).
Industry analysis (limit to 1 page).
Description of the firms operation (Limit to 1 page).
Step 3: Conduct the financial statement analysis using most recent three years of financial data (20%):
Prepare Common Size statements and written analysis.
Calculate all the relevant ratios.
Prepare a trend and comparative (industry) written-analysis of ratios.
Industry ratios can be obtained from Reuter, Robert Morris Associates, or Dun & Bradstreet.
Step 4: Perform financial forecasting (balance sheet and income statement) for the next three years.
Assume the following in preparing your pro forma statements (20%):
full capacity operation;
constant estimate sales growth rate;
constant dividend payout ratio (if any); and
list all other assumptions.
Step 5: Calculate Addition Funds Needed (or Excess Funds Generated). Please explain your decisions
regarding the following items (10%):
Finance additional funds needed using debt or equity sources based on your ratios.
Excess funds generated will be used to retire debt or repurchase stock based on your ratios.
Step 6: Prepare a valuation model (25%):
Estimate future cash flows of the firm for the next three years.
Estimate the constant growth rate of the Terminal cash flows.
Calculate the weighted average cost of capital of the firm.
Calculate the present value of the future cash flow.
Step 7: Based on the value of the firm, calculate the stock price (10%).
Step 8: Submit the final report on February 23, 2015. Absolutely No Exception.