FINANCIAL MANAGEMENT AND POLICIES 2009

COURSE DESCRIPTION

First-Year Financial Management and Policies (FMP) reflects three important features of the
Darden MBA Program: (1) it is a general management program; (2) the program, through its
frequent use of the case method of instruction, has a practical, pragmatic bias and a decision-
orientation; and (3) the first-year program provides the basic training on which students can
build in the second-year. Consistent with the first-year program, FMP aims to provide:

1. An Introduction. The course provides the basic framework necessary to pursue further
study in finance in the second-year of the MBA program and on his or her own thereafter.
This framework is an orientation towards valuation.

2. Basic Mastery. The course emphasizes essentials, the tools and concepts that every general
manager, entrepreneur, or manager in other functional fields should know.

3. A Corporate Perspective. Because we seek to understand the problems of general

managers, this is a corporate finance course, rather than a course in investments, banking, or
personal finance. While elements of these related subjects must be brought to bear, our
ultimate focus is corporate policy and tactics.

4. An Underpinning for Addressing Broad and Challenging Questions. Key themes running
throughout the course are: (a) How can the firm create and sustain value for its investors? (b)
How do managers communicate with investors? And vice versa? (c) How should value be
allocated among the firm’s stakeholders? (d) How does the firm's competitive position affect
its policy decisions? and (e) What is "excellence"?

Students who possess some experience in finance will find this course an opportunity to
broaden their understanding of the field to include a general management perspective.
Students who are new to the field are urged to look beyond the mastery of terms, tools and
techniques toward the managerial insights that an understanding of finance can help develop.

COURSE PLAN
The 30 classes in First-Year FMP are organized into five modules, each of which is intended
to address certain aspects of finance. First-Year FMP is actually comprised of two distinct
but related halves.

a) The first half focuses on the problems of creating value for investors. The most important
way managers create value is through wise investment decisions. Throughout, we will build a
conceptual and practical understanding of value creation and wise investing. This mini-
course will consist of 15 class sessions which concludes in December.

b) The second half focuses on the problems of allocating value among all the stakeholders in
the firm. Although value can be allocated in many ways, some of the most important are
through the choice of financial policies, particularly dividend and debt policies and the
choice of major investment strategies, for instance, mergers and acquisitions. In this second
half, the course will focus on how those policies are formulated and then executed. This
mini-course will start in January and consists of 15 class sessions.

The individual modules of First Year Finance are as follows:

The Fall Term (Q2)

I. Financial Analysis and Planning

Module I covers the basic tools of financial analysis and planning. We cover
performance assessment, forecasting, and the estimation of funding needs. The
module draws upon the student's training in accounting to evaluate how well a
company has performed and why it has performed as it has. Past performance is then
forecast into future expected performance as a means of estimating the funds needed
to support the company. This module introduces the idea that investors’ value returns
from their investments and more specifically that a "return" is a flow of cash to
investors. Furthermore, it establishes clearly that firm’s have an important
relationship with capital markets, largely as providers of necessary capital.

II. Capital Markets and the Cost of Capital

Module II focuses on the concept of opportunity cost and its role in value creation.
We start by acknowledging that since firms need capital from capital markets, they
must respond to the expectations and needs of those capital providers. In fact,
virtually every major decision in corporate finance hinges on some assumption about
what investors want or expect. This module sets the stage for understanding the role
of investor expectations by developing the foundations of capital market efficiency
and investor rationality. In this module we extend the present value mathematics
introduced in the decision analysis curriculum to applications covering corporate
bonds and equity securities. We seek to develop an understanding of the individual
costs of debt and equity capital as inputs to the firm’s overall cost of capital. One way
investors express their requirements is through the price they charge the firm for the

2
 use of their capital. The firm’s cost of capital thus reflects a weighted average of the
individual opportunity costs for debt and equity. The cost of capital is one of the most
important guides that senior managers have at their disposal in forging corporate
policy and in setting corporate targets for performance. In addition, this module
considers the practical problems involved in actually estimating this cost.

III. Capital Allocation and Project Valuation

Module III focuses on the methods firms use to evaluate investment proposals. Our
discussions are focused on assessing the degree to which a given investment
opportunity generates value relative to the investment opportunities available in the
market as a whole. We evaluate individual projects as well as the situations involving
many competing projects. The possible sources of positive net present values are
repeatedly considered, thereby fostering greater recognition of the circumstances in
which value is created. The value additivity concept is introduced here in viewing the
firm as an aggregation of projects. In many ways, this module is a capstone for the
first half of the course, knitting together all previous modules in FMP, plus important
aspects of Decision Analysis, Accounting, Global Markets & Economics, and other
courses.

The Spring Term (Q3)

IV. Financial Policies and Tactics

This module addresses the general topic of how firms raise capital to meet their
operating and strategic objectives. One important question is how much debt a firm
should have in its capital structure. The cases in this module emphasize the basic
determinants of corporate debt policy: tax shields, financial distress, agency costs,
and the need for financial flexibility. We also consider how the development of
international markets has affected firm’s fund raising opportunities and how a
company manages its currency exposure. Also in this module, we consider how
managers set policies about dividends, share repurchases and equity issues.
Underlying our examination of financial policy is the important question of to what
extent financial policy decisions can affect the value of the firm and how firms
choose to manage certain risks.

V. Firm Valuation: Mergers and Acquisitions

The final module illustrates how investment and financing policies can interact by
overlaying large investment decisions (mergers and acquisitions) with the decision of
how to finance the transaction. This module also serves to review and integrate the
entire course by drawing on forecasting, financing and investment skills. By the end
of the year, you will be able to determine the value of a corporate enterprise. We will
examine a variety of valuation methods and make heavy use of sensitivity analysis.
Our emphasis will be on developing a keen instinct for the key issues that affect
corporate value and the levers at management’s disposal to enhance value.

3
The course will end with a final exam that covers the concepts and techniques presented over
the entire year.

First-Year FMP will develop many skills, insights and judgments helpful in achieving your
professional interests, whatever they may be. Our aim should be to forge a strong foundation
in the essential skills of finance and management from which, we believe, many exciting
opportunities will unfold. We look forward to working with you this year.

COURSE MATERIALS

The only absolutely required materials for this class are the cases and technical notes
included in the student course packet. However, it is highly recommended that students have
access to a textbook to supplement their studies. To facilitate use of a supplemental text, the
faculty have selected one text and included references in the syllabus to specific parts of the
textbook that would be useful. The chosen textbook is Principles of Corporate Finance, by
Brealey, Myers and Allen. This book is one of the most commonly used textbooks in MBA
programs and considered a standard reference. This book will also serve as a basic reference
book for most of the second-year finance electives. Note that earlier editions of Principles of
Corporate Finance would be just fine, but the references in this syllabus may not quite match
the textbook.

a. Referenced Supplemental Textbook

Richard Brealey, Stewart Myers, and Franklin Allen Principles of Corporate

Finance, Irwin-McGraw Hill, ninth edition.

Given the range of backgrounds in the class, from time to time you may find it useful to
consult some of the other supplemental materials listed below. Copies of the supplemental
textbooks and the Finance Interactive CD-ROM tutorial are available through library reserve.
These are not required, but many students find additional sources helpful. For these
textbooks, we omit edition and year references, as any of the texts would be just equally
useful for a supplement.

b. Supplemental Textbooks and Materials

Finance Interactive is a CD-ROM based tutorial of pre-MBA financial skills.

The product is designed by Darden faculty in conjunction with the Graduate
Management Admission Council to help prepare students without a strong
background in accounting and finance for their MBA classes. The tutorial
contains practice problems and programmed learning examples related to
many of the concepts discussed in First-Year Finance.

Robert Higgins, Analysis for Financial Management, Irwin-McGraw Hill.

This is a shorter book that focuses on the basics in a clear and concise manner.
A student favorite.

4
 Jonathan Berk and Peter DeMarzo, Corporate Finance, Addison Wesley. This
was a referenced textbook in the past and is commonly used in many MBA
programs. The approach is more integrated and theoretical.

Tom Copeland, Tim Koller and Jack Murrin, Valuation: Measuring and
Managing The Value of Companies, John Wiley & Sons. This is written by
three McKinsey consultants and provides good coverage of all aspects of
discounted cash flow analysis. A ‘must’ for students with summer job
aspirations as finance professionals.

Krishnan, Study Guide for use with Principles of Corporate Finance, Irwin-
McGraw Hill. This has detailed examples with solutions.

c. Computer-based Tutorial

The Rate of Return Tutorial will be assigned as part of the Cost of Capital
module. The tutorial is an online product which requires a high speed DSL
connection or direct connection to the Internet at Darden. The Internet address
is http://it.darden.virginia.edu/intranet/case/rror/ .

GRADING

At the end of the first half of the course, your Q2 grade will be determined as 35 percent
class participation and 65 percent exam. At the end of the second half of the course, your Q3
grade will be determined in the same manner. Your final course grade will be determined
using an equally weighted average of the Q2 and Q3 grades. Because the material is
cumulative in nature, we will subjectively adjust your final grade according to significant
improvements or declines in your performance during the course.

LAPTOPS

Using laptops can be a great benefit to the student... except when it isn’t. Among other
benefits, students bring analyses to class in a convenient form without wasting paper, can
make real time adjustments to analyses, and can take notes easily. However, the focus on
making adjustments, taking notes, and relying on the analysis often takes attention away
from the conversation in the class and can, at times, lead to less active engagement. Students,
for the most part, must find the right balance. The finance faculty encourages you to use your
laptops as little as possible and focus your attention on class discussion. Of course, only class
relevant materials should be on the laptop and use of internet would generally be
inappropriate.

5
 Financial Management and Policies Fall Term

Class Materials Case # Topic

Module I: Financial Analysis and Forecasting

FedEX vs UPS: Who Will Value Creation and Firm

1
Deliver Returns from China UVA-F-1601 Operating Performance
Financial Forecasting: Asset
2 Monsanto
UVA-F-1597 Side and Sales Basis
Financial Forecasting: Assets
3 Alliance Concrete
UVA-F-1527 and Liabilities

Module II: Capital Markets and Hurdle Rates

Discount Rates and Market

4 Market Math Exercises
Values
5 WorldCom, Inc. UVA-F-1237 Credit Markets and Bond Math
Structured Analysis: Portfolio Equity Markets: Portfolios and
6 Selection and the Capital Asset the Capital Asset Pricing
Pricing Model UVA-F-1604 Model
Mutual Fund Performance and
7 Pittinos Financial
UVA-F-1599 Market Efficiency
8 Nike UVA-F-1353 Cost of Capital
9 Teletech Corporation, 2005 UVA-F-1485 Divisional Hurdle Rates

Module III: Capital Allocation and Project Valuation

Project Valuation: Focus on

10 World Wide Paper Company
UVA-F-1372 Free Cash Flow
Project Valuation: Focus on
11 Victoria Chemicals, PLC (A)
UVA-F-1351 Incremental Costs
Project Valuation: Cost of
12 TBD
Capital and Cash Flows
13 Target Corporation UVA-F-1563 Capital Allocation
14 TBD Comprehensive Case
15 TBD Comprehensive Case

Module IV: Financial Policies and Value

1 EMI, PLC UVA-F-1552 Dividend Policy

Capital Structure: Mechanics
2 Debt Policy and Value
UVA-F-0811 and models
 Capital Structure: Logic of
3 California Pizza Kitchen
UVA-F-1553 levered betas
4 MCI Communications UVA-F-1175 Capital Structure: Cost of debt

Module V: Risk Management

5 Carrefour S.A. UVA-F-1470 International Borrowing

6 Baker Adhesives UVA-F-1516 Hedging Currency Risk
7 J&L Railroad UVA-F-1053 Payoff Diagrams

Module VI: Enterprise Valuation and Transformation

Enterprise Valuation:
8 Hope Enterprises, Part 1
UVA-F-1219 Valuation Approaches
Enterprise Valuation: Long
9 Hope Enterprises, Part 2
UVA-F-1219 term growth and synergies
Jet Blue Airways: IPO Initial Public Offering: Focus
10
Valuation UVA-F-1415 on multiples
11 Hershey Foods Corporation UVA-F-1409 Enterprise Valuation
12/13 BP/Amoco Merger Simulation Mergers
14 TBD Comprehensive Case
15 TBD Comprehensive Case