Advanced Topics in Finance FIN 647 P.V. Viswanath Comments for beginning of class Fall 2003

P.V. Viswanath2 Issues from Sept. 16  Lease capitalization – we will go over it  How to come up with the financial analyst type of balance sheet – we are only going to do parts of it, such as capitalizing R&D  More discussion on Financial Ratios – Agree in principle; I am choosing a few topics, for lack of time – particularly things that you don’t see that much elsewhere.  Difficult to see projection screen. – Where are you sitting? Can we reduce the intensity of the lighting?  Where does the Statement of Cash Flows enter the picture? – The information to compute FCF can be obtained from the Statement of Cash Flows; approximately, FCFF = Operating Cash Flow – Net Cap Spending – Change in Net WC.

P.V. Viswanath3 Issues from Sept. 16  How am I going to do all this in practice? – You’ll only find out when you try. This is why you have an assignment.  Tell us what we’re doing next class – Good point; however, you should also check the schedule on our class website.  Have all the calculations on one slide – this is difficult; however, you can print out the slides, so that all of the information is visible to you simultaneously.  Would a company with higher leverage be more likely to go bankrupt? Yes.  Spend less time on simple topics – agree; problem is that it’s not always clear what’s simple, what’s difficult. Speak up in class – that would help me.

P.V. Viswanath4 What will we do Sept. 30  Continue with Valuation  Start Risk and Return

P.V. Viswanath5 Issues from Sept. 30  Review previous class at beginning of next class  Do problems from chapter in class  Reading material for treatment of leases  EAR vs. APR  Don’t rush in the last 10 minutes  Do not ask students randomly  More problems

P.V. Viswanath6 What we will do Oct. 7  Continue with Risk and Return  Proceed with computing cost of capital

P.V. Viswanath7 Issues from Oct. 7  Beta!  Use a dark pen on board  What’s the covariance formula?  Notes or textbook?  How to calculate beta  More information regarding quizzes  More practice problems  Easier quizzes

P.V. Viswanath8 What we will do Oct. 14  Go over issues from Oct. 7  Go over slides for Chapter 7  Provide information on Oct. 21 quiz

P.V. Viswanath9 What we will do Oct. 21  Brief quiz on Chapters 6 and 7  This quiz will be like quiz 1; only definitions and brief questions. Examples of these questions can be found on the web from the Practice link in the Course Outline. However, this time, the questions will not be restricted to the ones on the web.  We will continue with chapter 7 and hopefully get to some problems.

P.V. Viswanath10 Issues from Oct. 14  More about beta  What’s the meaning of a negative beta?  Uncertainty of reinvestment  Implied equity premiums  Regression model  Newspaper articles  Too much material

P.V. Viswanath11 Issues from Oct. 14  Don’t embarrass students, when you ask questions in class  Finish early  Slow down  Strobe lights!  Class averages Assignment 1 – 8.93 Assignment 2 – 8.68 Quiz 1 – Quiz 2 – 30.46

P.V. Viswanath12 What we will do Oct. 21  Quiz 3  Continue with implied historical premium  Beta estimation using regression  Interpreting the regression output

P.V. Viswanath13 What we will do Oct. 28  Analyze a newspaper article – bring in your own, as well/ them to me.  Continue with Chapter 7  Estimating the cost of debt  Computing the hurdle rate

P.V. Viswanath14 Issues from Oct. 21  WACC  Bottom-up beta; Leveraged and unleveraged beta; Beta estimation  Do we need to know all that statistics?  Eliminate the break and leave at 8  T-statistic from Excel  Continue doing problems!  Relevance of Jensen’s alpha  Volatility  How to compute indexes  Use existing example, rather than new numbers

P.V. Viswanath15 What we will do on Nov. 4  Mid-term Media Article Definitions from Chapters 2-7 Short questions from Chapters 2-7 similar to the practice ones, but not limited to those. Problems similar to end-of-chapter problems from Present Value (Chapters 3/5) Leveraged/Unleveraged betas (Chapter 7) Bottom up betas (Chapter 7) CAPM expected return/beta problems (Chapter 7)  Read up on Chapter 16

P.V. Viswanath16 Issues from Nov. 11  Bankruptcy Costs  Modigliani Miller  Practice Questions  Dissatisfaction with media question on exam  Grade Distribution  Optimal Financial Structure  Exam Review  Balance Sheet in M&M Theorem?  Review everything  Stay on course and examples  What other leakages?  Mergers and Acquisitions as a source of leakage

P.V. Viswanath17 Grade Distribution