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

[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.