Um... corporate finance? Taking a course..

[Python49]

So uh... I thought that since I was interested in learning how to invest my money I should major in financing. I had decided to be a business major a while ago and needed this corporate finance class anyway so it wasnt some decision made by poker. Long story short, i'm in the class... don't understand alot of the stuff being taught and i'm pretty sure I failed the first test. I'm at this school on academic scholarship so I did think I was smart... but everyone in the class failed too. I didn't find out until the day before the test when going to the library that this class is notoriously known for having a hard first test... the whole class could be found in the library. Not because they all met there to study but because everyone had gotten into study groups on their own or by themselves to study for this test. Everyone I talked to had the same uncertanties that I did. But anyway, I don't like to compare myself to others but my confidence has been rattled and I am now worried that maybe finance my not be my cup of tea even though it relates closely to what I want to do.

Anyone else taken a finance course and not done so hot at first but learned the stuff later? Do I even need to major in finance if I want to get into investing? I figure it was the most logical major to get the most out of my education. But after taking this course i'm worried that this major would be too much work and too difficult... so i'm not even sure what I want to do. I studied for probably 12 hours straight before the test along with friends and we all are pretty sure we failed. Weed out course or something? For the first time I felt incredibly stupid (not just because I failed but because I really was trying to learn and studying hard and still failed). And if you're going to flame, at least be witty, thanks.

[squiffy]

First, everyone who wants to be a successful investor should strongly consider taking some classes in basic economics, math, and finance -- to develop their quantitative skills.

But to a large extent successful stock picking is a question of qualitative analysis. And for that, studing cause and effect is important.

Peter Lynch in One Up on Wall Street on page 49 says flat out that history and philophophy (which teach logical qualitative thought about cause and effect) are better preparation for successful stock picking than advanced math. All the math you need in the stock market you get in fourth grade.

You should read this book.

People who are out of school, but who have never studied Finance, Economics, etc. should take an evening class or audit a class in undergrad. These subjects are important.


Second, you don't need to major in Finance to become a successful investor.

Third, you should first try to identify professions you may enjoy, then pick a major which will give you the training you need to succeed in that career path. But when you are young, it's pretty damn hard to figure out what you want to do for the rest of your life, whether you will be good at it, and whether you will enjoy it. So it's kind of a catch 22. How do you know what to study unless you know what career you want. And how can you know either unless you live 10,000 years and have time to explore 50 different career paths.

How do you know,when you are born, what kind of ice cream flavors you will like? I guess you just sample different flavors until you find a few you like.

Another problem is that just because you enjoy a particular class in school, does not mean that you would enjoy a particular profession related to that class.

I loved history in high school. And tons of history majors become lawyers. Well I loved law school but hated the day to day practice of law in law firms. Some people love it. I hated it.

Fourth, what career path do most Finance majors take? Do they become accountants? Middle managers in business?

Fifth, I would also consider history or economics as a major. History is fun. Economics is interesting. Though colleges differ in their course requirements. So telling me you are a Finance major really doesn't tell me what your course requirements are.

But personally, for myself, I would prefer to study history and sample only a few basic finance courses.

Sixth, feel free to post concepts and math problems related to finance and discuss them here. Everyone can learn.

I went to Stanford Law School and my best grade there was not in any law class, but in Finance Theory, taught jointly as a law and business school class, by Myron Scholes. He invented some algorithm to value options and won a Nobel Prize. Though he was later involved in a large hedge fund that went belly up. A perfect illustration of Lynch's point
that a pure math Geek won't necessarily pick better stocks than a history or philosophy major. Read the book When Genius Failed. Even very smart people can make very stupid mistakes and their arrogance can be their downfall. And Greed affects everyone, whether smart or not so smart, and clouds their judgment.

Seventh, in the long run, what really matters is whether you learn something from the course. You could end up with an F, but still learn enough principles of Finance, so that you end up earning tons of money on the stock market.

So I would worry more about whether you can learn something important from the course, not about chicken [censored] things like whether you like the professor, whether his exams are easy, or whether you can get a good grade in the class.

If you want to succeed in school and career, you have to do lots of things you don't necessarily want to do or enjoy doing.

I enjoy watching tv and scratching myself. But if I spent all day doing that I wouldn't have any money to live on.

What text book are you using.

If you end up taking the class, just post thoughts on various concepts.

Remember, even if you do not get an A in the class and are not the best student there from a math perspective. So what. You will still be introduced to the concepts. And you will be forced to struggle with and try to understand them.

I can tell you many of the concepts in Finance Theory were boring. I didn't like the concepts and didn't study that hard. But in hindsight they were very useful. It's like taking a course in how to fix a toilet. It's not inherently interesting. But if you need to fix a toilet, it can come in handy.

I took AP Calculus in high school and received a C from the instructor. But I got a 5 out of 5 on the exam, the highest rating possible. So the instructor had higher standards for the class than the national exam had set for kids taking the exam.

This was because he was teaching at a private school and the top kids were going to Harvard, Stanford, Cal Tech, MIT, etc. So he had to make the class challenging. Some of my classmates were top students in math, engineering, medicine at some of the best colleges in the nation, so keeping up with them in Calculus was pretty tough. I was at the middle or bottom of the class. But so [censored] what. I was learning even though I got a shitty grade.

If this guy is a hard ass and gives you a C or D, that does not mean you won't learn a lot. He may be a better teacher than one who gives everyone an easy A.

Just take the class. Don't worry about what grade you get. Just try hard to learn the concepts. It's very possible that your math background is so weak, and this guy is such a hard-ass that you will fail the class. So it's up to you.

If you do take the class, I will try to help you with the concepts.

Finally, also remember that oftentimes professors make exams difficult by putting you under time pressure and by presenting mathematically difficult problems to identify the strongest students from the weakest for grading purposes.

Well, given enough time, which you will have plenty of when doing your own investing, you will be able to solve the simple Finance problems that arise. So again, getting a C or D in this class, should give you more than enough info to solve the problems you will face in actual investing.

Also, by taking the class you may get some information. If you absolutely hate Finance Theory. You may decide that you don't want to do into any profession for which a Finance Theory major is required and where all the top professionals loved Finance Theory. So even if you hate the course, you can actually learn something from it and learn something about yourself.

If you avoid hard things. And if you only do things that are fun and easy, and require no work, you will limit yourself and limit your potential for success in the future.

But that's what many people do. They don't go to class because they would rather stay up late dancing and drinking. They don't do their homework because it's hard to understand. THey don't go to lecture because the professor is boring.

So you have a simple choice. If you take this class, you may learn something about Finance Theory that may help you become a better investor for the rest of your life. But your life will probably suck for a semester or a year. You may even fail the class.

If you don't take the class, what are the chances that you will pick up a Finance Theory book and read and study it. Pretty slim. So if you don't take the class, you probably won't learn the basics of Finance Theory.

[midas]

Python -

1. What school do you attend? What grade?
2. What does the class summary say about the course? Some corporate finance classes have nothing to do with investing.
3. I'm not a big fan of droppings classes, I once mistakenly signed up for pre-med physics instead of physics for poets but I sucked it up and took on the challenge and got a B.
4. You don't need to major in Finance to get into investing but eventually you will have to learn these concepts somewhere to be a good investor.

Squiffy, I really like your post. You pointed out many things that the poster should consider. I'm not a funnymentals guy, but here's my view anyway.

To the original poster:

You said this a corporate finance course. You do realize that corporate finance and investing pretty much have nothing to do with each other. So, no, I wouldn't worry about the course if your long-term goal is to have a career in investing. Also, you don't need to be a business major for this.

First, you should ask yourself what it is about investing that interests you. Do you like researching small cap companies and learning about different industries and then doing some excel monkey stuff to find relative valuations? Do you enjoy reading the WSJ, developing ideas about potential growth industries, applying some quant analysis(not complex, but say, CANSLIM type filtering), and watching your picks grow? Do you just enjoy the idea of picking winners and making big bucks? Are you interested in "investing" or "trading" or somewhere in between? Etc.

Next, I think you should ask yourself what your career goals are. Do you want(or think you want) to get a job at a firm like Goldman, Morgan, Citadel, etc? Basically, any top tier buyside or sellside firm is going to want top tier credentials. They like to recruit mainly from the ivies(although not exclusively) and you'll want to have a good GPA, internships, and all the rest to put on your resume. Note: Even if you are able to get a job at one of these firms, success is not guaranteed.

Or, do you just intend to make a living doing something else and/or attempt to trade/invest your own account?

Please post the answers to questions like these and we will go from there.

[midas]

Do you actually think this dude knows what CANSLIM is or what type of firm Citadel is?

[Sniper]

Python...

Post the test!

[edtost]

speaking as a current college student applying to the "top tier firms" you listed among others, wtf is CANSLIM type filtering? a quick google search brought up results that appear to be preying on investors who have no idea what they're being pitched. perhaps the picks being given by canslim come from something quantitative (a modification of kalman filtering perhaps?), but there's no way to know this from the results i was able to find.

[midas]

Depending on his school more like post the case studies.

Read William O'Neil's "How to Make Money in Stocks." This details his CANSLIM approach. Basically it's an acronym whereby each letter represents something he looks for when stock picking. Not any overly complex quant stuff.

But, don't worry about this if your hopes are going to a Merrill or Citigroup. They won't care about that. Instead, be an expert programming and excel monkey. Just be humble, hard-working, and interested in doing the job.

If you really want to learn how to invest or trade though, try to get in on the buyside not sellside. And even on the buyside, make sure you will really learn something. Otherwise, do it on your own and in your spare time.

[Sniper]

[ QUOTE ]
Depending on his school more like post the case studies.

[/ QUOTE ]

Well he did say it was a test... the only way to determine if this was a case of the prof giving a really hard first test or Phython not getting the material, is to see the test.

Since he mentioned that the whole class did poorly, it is most likely the first case.

[Python49]

Well squiffy, I think my main problem was thinking this was another one of those courses I could just get a B or A in without actually putting the time in to study the course. Just by attempting to study this material I can tell that it's stuff that will help me long term but our teacher is pretty bad at teaching so everyone is pretty much resigned to learning from the book. Everyone ended up failing the first test so he's offering a make up test worth all bonus points... (probably to cover his own ass so everyone doesnt fail). I just finished trying to study but came to the realization i'm not going to understand this stuff on my own or by reading this book. Thing is, this is actually the stuff i'd like to learn about but i'm not learning it very much.

[ QUOTE ]
First, you should ask yourself what it is about investing that interests you. Do you like researching small cap companies and learning about different industries and then doing some excel monkey stuff to find relative valuations? Do you enjoy reading the WSJ, developing ideas about potential growth industries, applying some quant analysis(not complex, but say, CANSLIM type filtering), and watching your picks grow? Do you just enjoy the idea of picking winners and making big bucks? Are you interested in "investing" or "trading" or somewhere in between? Etc.

Next, I think you should ask yourself what your career goals are. Do you want(or think you want) to get a job at a firm like Goldman, Morgan, Citadel, etc? Basically, any top tier buyside or sellside firm is going to want top tier credentials. They like to recruit mainly from the ivies(although not exclusively) and you'll want to have a good GPA, internships, and all the rest to put on your resume. Note: Even if you are able to get a job at one of these firms, success is not guaranteed.

Or, do you just intend to make a living doing something else and/or attempt to trade/invest your own account?

[/ QUOTE ]
I absolutely do not want to work for a firm. I want to invest on my own. What interests me is being able to invest in things and have my money work for itself without me actually having to go punch a clock into work and leave at 5pm every day. I believe i'd be motivated by being my own boss and knowing the harder I work and put effort into it, the more money I make. Similar to poker I suppose.

[ QUOTE ]
1. What school do you attend? What grade?
2. What does the class summary say about the course? Some corporate finance classes have nothing to do with investing.
3. I'm not a big fan of droppings classes, I once mistakenly signed up for pre-med physics instead of physics for poets but I sucked it up and took on the challenge and got a B.
4. You don't need to major in Finance to get into investing but eventually you will have to learn these concepts somewhere to be a good investor.

[/ QUOTE ]
1. School you've never heard of, i'm sure. Frostburg State University.
2. Taken right off my syllabus: "): Principles of financial management within business enterprises. Basics of stocks and bonds valuation, financial analysis, capital budgeting, dividend policy, and both short-term financing and long-term capital structure decisions."
3. Too late to drop now; he's offering make up quiz so that everyone doesn't fail.
4. If this is the case I might be screwed or may need some personal 1 on 1 training.

[ QUOTE ]
Since he mentioned that the whole class did poorly, it is most likely the first case.

[/ QUOTE ]
Or the average intelligence at my school is just not very high. I'm here on academic scholarship and my GPA/SAT was not INCREDIBLY high in high school. 3.5 /1270. :/

Also since everyone is asking to see the types of questions on this test, I will post them, they pretty much were the same questions as from our study guide.

First and foremost, here's what the notes look like for one of the chapters I had to learn for this test. *Copy and pasting right off site*

"C. Some Special Cases

1. Zero growth—implies the same dividend each period forever (D1 = D2 = D3 = D = constant).

Since the cash flow is always the same, use the perpetuity formula C/R, or: P0 = D/R. [Eq. 7-2]

Ex: At a 10% required return, a stock expected to pay a $2 dividend forever would be worth:
P =$2/0.10 = $20.

2. Constant growth—Dividends grow g% per period forever.

D1 = D0 (1 + g);
D2 = D1 (1 + g); …, Dn = D0 (1 + g)n

An amount that grows at a constant rate forever is called a growing perpetuity. In this case the expression for the value of a stock now becomes:
[Eq. 7-3]

In general, the price of the stock as of time t is shown in [Equation 7.4 ]

[Eq. 7-4]

Ex: Suppose a firm just paid $2.30 per share dividend and the financial manager expect its dividend to grow 5% a year indefinitely. If your required rate of return is 13%, how much are you willing to pay now for this stock? What is the expected price in year 5?

P0 = D1 / (R - g) = $2.415/(.13-0.05) = $30.19

P5 = D6 / (R - g) = $2.30(1.05)6/.08 = $38.53

3. Non-constant growth—usually a mix of "supernormal" growth early on and then a constant, "normal" growth rate later. Here we discount the individual "high" growth dividends and discount the dividend growth model stock value at the future, constant growth date.

Example (p. 200):
The next three dividends for Fudgit Co. are expected to be $1.00, $2.00, and $2.50. Then the dividends are expected to grow at a constant 5% forever. If the required return on Fudgit is 10%, what is P0?

P3 = [D3  (1 + g)]/(R - g) = $2.5(1.05)/(.10 - .05) = $1.575/.05 = $52.50





4. Super-normal Growth: Dividends grow at a super-growth rate (gs %) for n periods and, then, grow a normal growth rate. Use the present value of growing annuity formula for the valuation of the supernormal growth model.



Example 7.4 (p. 201): Supernormal Growth

Super-growth rate (gs) = 30%, N= 3 years, normal growth rate (g) = 10%, R = 20%, and current dividend (D0) = $5.00.

$87.58

Ex: Try N= 6 years, and other things are the same. Answer=: $128.98
"

Here go a few sample problems of the type of stuff being asked..... I feel like this stuff should be really easy if I just put in alot more time studying or had it explained better.

Example question 1:

8. Helen has just been offered a job for an annual salary of $30,000. Her salary would increase by 4% a year for the next 43 years until her retirement. She has also been accepted into a nationally known MBA program. It would take her TWO years to obtain her MBA degree at an annual cost of $30,000 (out-of-state tuition plus room and board, etc.) which will be paid at the beginning of each year. With the MBA degree, she would get a job that would pay $45,000 for the first year and annual salary would grow 6% a year. If her opportunity cost (i.e., discount rate) is 8%, which career path would be desirable? Why?

Example problem 2:

6. Suppose your current salary is $50,000 a year and it will grow 5% a year. If you save 6% of salary at the end of every year and earn 8% return a year, how much would you have in 40 years?

[hedgeyerbets]

Example question 1:

8. Helen has just been offered a job for an annual salary of $30,000. Her salary would increase by 4% a year for the next 43 years until her retirement. She has also been accepted into a nationally known MBA program. It would take her TWO years to obtain her MBA degree at an annual cost of $30,000 (out-of-state tuition plus room and board, etc.) which will be paid at the beginning of each year. With the MBA degree, she would get a job that would pay $45,000 for the first year and annual salary would grow 6% a year. If her opportunity cost (i.e., discount rate) is 8%, which career path would be desirable? Why?

PV of non mba = salary/(r - g) - (salary in 43 years)/(r-g)/(1+r)^43 = 30000/(.08 - .04)=30000*25 = 750,000
PV of mba = -30000 + -30000/(1+r) + (salary/(r - g))/(1+r)^2 - (salary in 43 years)/(r - g)/(1+r)^43

I'm too lazy to plug the numbers into my calculator/excel.

6. Suppose your current salary is $50,000 a year and it will grow 5% a year. If you save 6% of salary at the end of every year and earn 8% return a year, how much would you have in 40 years?

Think about it this way - your savings amount in the base year is .06*50000 = 3000. This amount grows by 5% a year. So you save a pv of 3000/(.08-.05) - ((3000*1.05^40)/(.08-.05))/1.08^40. The subtraction is to remove the pv of the cash flows the come in the period after the 40 years you're earning money in from the pv of a perpetuity. In 40 years, with growth of 8% a year (equivalent to the discount rate) this will be equal to the previosly calculated value multiplied by 1.08^40.

[Python49]

In other words I should have studied from day 1 and collectively our class is just not very intelligent.

Thanks for writing the answers out though, even though I still would not know how to do it myself.

[hedgeyerbets]

You probably just need to look at the formulas in a more general sense. It may say "dividend/(r - g)," but you can substitute any cash flow for dividend and the series will still converge to the same formula.

[DesertCat]

It's important to understand these concepts but you are unlikely to ever use them while investing.

Warren Buffett's partner claims that Warren has never done a discounted cash flow analysis. Warren says he estimates them in his head, because if a 2% lower discount rate is enough to make an unattractive investment attractive, it just means your standards are too low. "it's better to be approximately right than exactly wrong".

[midas]

Python - I'm going to adjust your short term goals don't worry about this Finance Class. You need to transfer out of Frostburg to a better school like U o MD.