Northwestern University

Kellogg School of Management Certificate Program for Undergraduates

FE-316-0: Topics in Financial Economics: Accounting and Financial Decisions

Spring 2015
Tuesday/Thursday, 2:00 pm – 3:20 pm
Review sessions on Wednesdays, 3:30 pm – 4:50 pm

Professor Mark Finn

6247 Jacobs Center
847-467-1635
m-finn@kellogg.northwestern.edu

Professor Michael Fishman

417 Jacobs Center
847-491-8332
m-fishman@kellogg.northwestern.edu

Financial professionals need a solid understanding of accounting because accounting systems

provide the primary data for financial decision-making. The first half of this course will
provide a detailed introduction to accounting performance metrics and the principles
underlying their construction. It is designed for students who have not taken a prior
accounting class. However, because our focus will be on decision-making applications using
actual financial statements, it will also be a valuable overview for students who have already
learned some accounting in another setting. Deliverables for the first half of the class will
be four online assignments and an in-class midterm.

The second half of this course applies the concepts covered in the earlier finance courses to
case studies with the goal of enhancing students’ understanding of practical managerial
financial decision making. Topics include short-term financing, capital structure and
dividend decisions, cost of capital, evaluating investment opportunities, firm valuation, and
initial public offerings. The course emphasizes the basic principles of corporate finance and
is sufficiently general to be of interest to all CPU students. The deliverables for this half of
the course will be case study analyses completed in groups (there are no exams).
Accounting Decisions – First five weeks: Prof. Finn

Required resources
Lecture notes and supplementary materials posted to Canvas.

Background Reference
Financial Accounting by Joe Ben Hoyle and C.J. Skender. (This is a free textbook available online
from the University of Minnesota’s Open Textbook Library.)

Office Hours
Mondays 1- 4pm or by appointment. You may use these office hours to review material from class,
seek help on the weekly assignments, or on April 27th, ask last minute questions before the midterm.

Weekly Assignments and Assignment Groups

You will be required to submit four online Canvas assignments. These will constitute 17.5% of your
overall class grade. The first three assignments will be due by 1:30pm on the second, third, and
fourth Tuesdays of the quarter. (See the detailed course schedule below.) The fourth assignment will
be due by 11:59pm, Sunday, April 26.

You will be assigned into groups of approximately five students at the beginning of the quarter. You
may collaborate on the weekly assignments with others in your assigned group. It is an honor code
violation to share information about a given assignment with anyone outside your assignment group
prior to the assignment’s due date.

Midterm Examination
An in-class midterm examination will be held on April 28th during regular class hours. Exam
questions will be derived from weekly assignment questions; the exam will thus be closed book,
closed notes. The midterm score will count 20% to your overall class grade.

Class Participation
I will evaluate individual participation on the basis of both quantity and quality. Giving it a shot
when you are not certain of an answer is encouraged but talking for the sake of talking is not.
Another factor in evaluating your participation is attendance, as you can't participate if you aren't
there. Students are expected to attend every class and inform me in advance (via email) when
unable to do so. Your class participation score in the Accounting Decisions module will count
5% to your overall grade.

Attendance at the Wednesday discussion sessions is not mandatory.

Classroom Etiquette
During the accounting module of the class, you will not need your laptop or internet connectivity.
Thus, we will adhere to a strict no laptop-tablet-cellphone policy.

Schedule for Accounting Decisions

March 31: Introduction to financial reporting and the balance sheet

• Introduction to the financial reporting responsibilities of organizations
• Tour of the SEC’s Form 10-K
• Major classes of assets and liabilities
• Balance sheet structure and classification

April 2: Asset and liability recognition and measurement

• Balance sheet construction example
• Acquisition costs vs. fair values
• Intangible assets
• Executory contracts

April 7: Measuring performance with the income statement

• First online assignment is due from each student by 1:45pm
• Revenues, expenses, and retained earnings
• Operating vs. non-operating items
• Accrual vs. cash accounting

April 9: Revenue and expense recognition

• Revenue recognition principles
• Expenses and matching
• Depreciation
• Capitalizing vs. expensing

April 14: Measuring performance with the statement of cash flows

• Second online assignment is due from each student by 1:45pm
• Taxonomy of the statement of cash flows
• The direct vs. indirect method
• Non-GAAP performance metrics

April 16: Financial Statement Analysis

• The DuPont model and its components
• Understanding working capital: receivables, payables, and inventory
• Discussion of how business strategies show up in financial statement metrics

April 21: Advanced asset measurement topics

• Third online assignment is due from each student by 1:45pm
• Allowances and estimates, including allowances for doubtful receivables
• Fair value mechanics and comprehensive income
April 23: Complex liabilities
• Present values in financial statements
• Capital leases
• Overview of taxes

April 26: Fourth online assignment is due from each student by 11:59pm. This due date provides
students with a short window to review their results before the midterm examination.

April 28: In-class midterm examination covering Accounting Decisions

• Closed notes, closed book
• Calculators permitted; no cell phones or laptops
• Based on the four weekly assignments
Financial Decisions – Second five weeks: Prof. Fishman

Cases
The course pack contains cases for the course. Data from the cases is available in Excel spreadsheets
through Canvas.

Recommended References
Corporate Finance by Jonathan Berk and Peter DeMarzo, Pearson.

Valuation: Measuring and Managing the Value of Companies, by Tim Koller, Marc Goedhart and
David Wessels, John Wiley.

Office Hours
Please call or send me an e-mail to make an appointment at a mutually convenient time.

Groups and Seating

All course work is done in groups. Students should sit in the same seats each class, and groups
should sit together. This will allow group members to confer with each other during class. Please
display your nameplate.

Case Write-ups
Case write-ups are group assignments consisting of a maximum of 2 pages of text (typed and double-
spaced) plus a maximum of 3 pages of exhibits necessary to support the conclusions. One hard copy
of each case write-up is due at the beginning of the class in which the case is discussed. In addition,
the spreadsheet associated with each case write-up should be e-mailed to me prior to the beginning of
class. Each group submits a single case write-up.

In preparing the write-ups, state the relevant facts of the case. Those facts that are not obvious from
the case itself should be supported by a calculation. Clearly state any assumptions. Provide any
necessary justification for your assumptions. Clearly state all conclusions.

Class Participation
I will evaluate individual participation on the basis of both quantity and quality. Giving it a shot
when you are not certain of an answer is encouraged but talking for the sake of talking is not.
Another factor in evaluating your participation is attendance as you can't participate if you aren't
there. Students are expected to attend every class and inform me in advance (via email) when
unable to do so.

Attendance at the Wednesday discussion sessions is not mandatory. These sessions are intended
for review and question/answer. And while there is no plan to introduce new material at these
sessions, depending on the discussion, new material may be introduced.
Honor Code
You may discuss the cases with classmates, including those in other groups. This promotes learning.
The work you hand in, however, must reflect your group’s thinking and interpretation. There is an
important difference between discussing a problem or various assumptions (something to be
encouraged) and copying another group's analysis in whole or in part. Materials such as case write-
ups of other groups in this class, or other classes, or from any other sources are not to be consulted.
You may not consult with me on the basic arguments, analysis, or logic of your work prior to the
class discussion. If you have any questions regarding the honor code, please ask me for clarification.

Classroom Etiquette
Many people will find it useful to use their laptop during our discussions of the cases. However, the
use of laptops to surf the web, check e-mail, instant message, play games, order merchandise, or
similar activities is inappropriate and unacceptable.
Schedule for Financial Decisions

April 30
• Read Jones Electrical Distribution

May 5
• Jones Electrical Distribution case write-up due
o Do you agree with Mr. Jones that a $350,000 line of credit is sufficient for 2007?
Estimate the line of credit needed.

May 7
• Read Bed Bath & Beyond: The Capital Structure Decision

May 12
• Bed Bath & Beyond: The Capital Structure Decision case write-up due
o Bed Bath & Beyond can reduce its corporate tax by levering up and paying out cash
to shareholders. Estimate the present value of these tax savings for the 40% debt to
total capital proposal illustrated in Exhibit 8.
o Suppose Bed Bath & Beyond were to announce that they were proceeding with this
proposal. Estimate the stock price response to this announcement (assuming that it is
a total surprise, not anticipated by the stock market).

May 14
• Midland Energy Resources, Inc.: Cost of Capital case write-up due
o Estimate Midland’s weighted average cost of capital (WACC). Use the capital asset
pricing model (CAPM).
o Estimate a separate WACC for each of the Exploration & Production and Refining &
Marketing divisions.
o How might one compute a WACC for the Petrochemical division? An explanation in
words is sufficient, no calculations necessary.

May 19
• Valuation Lecture

May 21
• Energy Gel case write-up due
o In assessing the value of the Energy Gel Project, does Wickler have to consider
costs for mixing machine usage?
o Should Wickler include potential cannibalization in his estimates?
o What cost of capital should we use to value the Energy Gel Project?
o Using the data provided in the case, forecast 10 years of cash flows plus a
liquidation value in 10 years for the Energy Gel Project.
o What is the net present value of the Energy Gel Project? Should HPC invest in the
Energy Gel Project?
May 26
• PlanetTran case write-up due
o Assume that both Seth and the VC agree that currently it only makes sense to
expand to one of the cities, if any.
o Exhibit 6 presents Seth's forecasted cash flows for 2009 for the three potential
expansion city strategies: Denver, Chicago, or New York, as well as an organic
growth (i.e., no external funding) strategy. Seth projects a growth rate of sales of
10% per year following 2009 for each strategy, until the end of 2018, followed by
5% thereafter in perpetuity. He assumes all line items will grow at their historical
proportions with sales. Assume Seth has a discount rate of 25%, and owns 100%
of the company. From his perspective, which single strategy is best for the
company?
o Exhibit 5 presents the VC's forecasted cash flows for 2009 for the three potential
expansion city strategies: Denver, Chicago, or New York, as well as an organic
growth (i.e., no external funding) strategy. The VC projects a growth rate of sales
of 5% per year following 2009 for each strategy, in perpetuity. The VC assumes
all line items grow at their historical proportions with sales. Assume the VC has a
discount rate of 20%. From the VC’s perspective, which single strategy is best for
the company?
o Which strategy do you think PlanetTran will adopt?
o Assume the role of the venture capitalist. Prepare an offer for the founder. An
offer consists of the following. For each of the three expansion strategies (Denver,
Chicago and New York), what fraction of the equity are you – the VC – willing to
accept in exchange for the required investment? Note that you don’t have to
specify how much cash you will invest – the VC puts in just the investment
required for the chosen strategy. Fill out the next page and bring two copies to
class.
o In class, each group will assume the role of founder. Each group will receive
offers from two VCs (from two of the other groups). You will choose whether to
(i) accept one of the VC offers and adopt one of the expansion strategies; or (ii)
reject both VC offers and adopt the organic growth strategy (which requires no
external financing).
PlanetTran (continued)

Group # _____________

Expansion Strategy Fraction of equity VC will accept

Denver ____________________________

Chicago ____________________________

New York ____________________________

May 28

• Rosetta Stone: Pricing the 2009 IPO case write-up due

o Using a discounted cash flow approach and using the data provided in the case,
estimate the value of a share of Rosetta Stone for the IPO.
o Suppose Rosetta Stone proceeds with an IPO at a price of $18/share. Net of
underwriting fees of $1/share, this comes to $17/share. Using your estimate from the
question above, estimate the share price at the end of the first day of trading
following the IPO.
Overall grading for the course

Accounting Decisions weekly Canvas assignments 17.5%

Accounting Decisions midterm 20.0%
Accounting Decisions class participation 5.0%
6 Financial Decisions case write-ups 37.5%
Financial Decisions class participation 5.0%
Study group peer evaluation 15.0%
100.0%