STEPHEN M. ROSS SCHOOL OF BUSINESS UNIVERSITY OF MICHIGAN ANN ARBOR, MI 48109-1234 CORPORATE FINANCIAL ANALYSIS: PROJECT RISK ASSESSMENT COURSE GOALS This course is an introduction to project risk assessment. Although introductory, it will enable learners to assess the risk of any project using modern financial frameworks. An understanding of project risk, combined with the course on Project Selection & Evaluation, will enable you to understand the core principles and practices that are used to select among alternative projects available to companies. BACKGROUND This course is part of an XSeries titled Corporate Financial Analysis that is based on the faculty team s numerous years of teaching in courses and programs from undergraduate to the PhD level. The faculty team has also had deep experience in creating courses in the digital domain, including offering one of the most successful MOOCs in business. COURSE DESCRIPTION This course is a logical follow on to the first course in this XSeries titled Financial Decision Rules for Project Selection, and will directly deal with the fact that virtually any project involves risks. The course will begin by exposing learners to our attitude toward risk, which is a critical building block to understanding the crucial role of diversification in the relatively recent discovery of a powerful and unique definition of risk. We will follow this with a detailed exposure to statistical modelling and data analytics to measure the different drivers of value creation and appreciate how companies should make decisions in the real world. While no theory is perfect, this course will provide time-tested foundational aspects of risk important to understanding the value of projects and companies. We will wrap up the course by revisiting the valuation of projects using both their profitability and risk characteristics. This course is the second in a sequence of four courses that comprise an XSeries titled Corporate Financial Analysis that is aimed at managers working in corporations or institutions and individuals planning to pursue graduate education in business (MBA). This course can be taken by itself or as part of the XSeries. The first two courses form the content covered in most introductory finance courses in top business schools.
COURSE PEDAGOGY: THE IMPORTANCE OF PROBLEM SOLVING This is a demanding course that will require a lot of hard work, from both you and the faculty team. This XSeries has been deliberately pitched at a relatively high level with an emphasis on deep understanding of what finance is all about and with a focus on practical applications. This course is therefore focused on problem solving and we make a conscious attempt to introduce each topic with real-life examples. We strongly encourage you to attempt every problem in the videos before we do it together. You will also be required to submit assignments that involve multiple problem-solving exercises. Some of these problems by design are more complex than the examples we will do in class (the videos) because class time needs to be devoted to understanding the issues and concepts. We will move at a fairly brisk pace and introduce you to several tools, which you will learn to apply within carefully constructed (but realistic) situations presented to you in number-crunching oriented assignments. COURSE STRUCTURE This course is five weeks long and self-contained. It comprises four modules of content (videos, readings, and assignments) with one week of assimilation time. The assimilation time helps learners think through what they have learned, finish the assignments and take the final exam. The structure of this course is based on our estimate of the time needed (40-50 hours) by a typical learner. Since this is a self-paced learning opportunity, you may finish the course faster than others enrolled in it. PREREQUISITES This course requires you to have been exposed to the content covered in the first course of the four-course XSeries titled Corporate Financial Analysis. You could of course have acquired the knowledge contained in this course by other means (including taking courses elsewhere or working on your own), but to obtain a certificate for the entire XSeries you need to obtain Verified Certificates in all four courses. It will also be useful if you have been exposed to statistics, though we will try and cover all the concepts needed for our purposes. Peter Clarke has been great in putting together a set of optional resources on statistics outside of this course that may also be of help for some of you who want to do additional study. Finally, we have also created several ungraded assignments to help as well (see below). 2
COURSE MATERIALS VIDEOS One of the main resources provided for this XSeries are the videos, organized into four modules. The length of each module depends on the topic, but can vary between 100 and 160 minutes, and is broken up into bite size pieces. We have worked with professionals to edit the videos, but we encourage you to pace yourself according to your style and background. Most importantly, there are numerous examples/problems in all the videos, and I strongly encourage you to try and take every opportunity to attempt an exercise before you see me analyze it. We have tried to create breaks wherever possible to facilitate this process, but we do not want the videos to become like TV advertisements. It is important for you to know that we will provide minimal notes to accompany the videos because we want you to create your own notes as you watch and listen to the presentations. The best part about digital education is that you can pause, rewind or fast forward the videos at will. You can play any video at faster speeds whenever needed. We want you to be active listeners and encourage you to make your own notes as you go along. Supplement the notes with material from other books and resources from the web. TEXTBOOKS In addition, we provide below references of several alternative textbooks that are all high quality. To help you with your reading, we have also provided you chapters from two books as examples of references. Please note that the videos do not follow any specific book and the book chapters are only references; they do not perfectly match the material we cover and may sometimes contain material that we will not cover. Our goal is to expose you to the fundamentals of finance, not to every detail in every textbook. You are not required to purchase any of these books, but recognize that one of them is available to read for free on the web. You must follow the guidelines provided by the author for use of the online material. If you do choose to buy a book, a relatively recent edition will do, and look for used and/or paperback versions. (1) Corporate Finance, 3 rd Edition, by Ivo Welch. This book can be found at http://book.ivo-welch.info/home/. Although reading the text and these chapters is free on this website, and you can also download a PDF version for your personal academic use, the material is copyrighted and is not permitted to be distributed further or posted elsewhere. I have referenced chapters of this book as suggested readings in the detailed class schedule. This book is referenced as IV. Ivo also provides a guide that maps his chapters to other widely used books listed below. 3
(2) Corporate Finance, 9 th Edition, by Ross, Westerfield & Jaffee. I have also referenced chapters of this book as suggested readings in the detailed class schedule. The book is referenced as RWJ. (3) Corporate Finance, 2 nd Edition, by Berk & DeMarzo. (4) Principles of Corporate Finance, 10 th Edition, by Brealey, Myers & Allen. Finally, since many of you may have had limited exposure to finance, it is important to read institutional material at your own convenience. Please read business and financial news regularly. Cruise the web as often as possible not only to uncover the wealth of information at your disposal, but to also learn how things work. A good web site to begin your search is http://finance.yahoo.com. It is important to read the Economist or a similar publication, which provides some analysis of events rather than just news, as often as you can; it has some thoughtful pieces. You need to develop the habit of reading material critically. SPREADSHEETS An ability to execute an analysis has a lot of practical value. While setting up a problem requires analytical skills and clarity of thought, an ability to use spreadsheets will greatly enhance your execution skills. We will introduce you to some of the functions built into spreadsheets, but you are ultimately responsible for learning how to use them. The assignments are a great way to do so as virtually all questions will require you to do analyze data to enable decision-making. MORE ON STATISTICS We will use statistics in this course and we will spend a fair amount of time covering some basics concepts and using both designed data sets and real data to understand and apply what we learn. We have also uploaded a note on Review of Statistics; please review it carefully, including recognizing the differences between the structures of data. In addition, Peter Clarke has kindly put together some basic resources for us. 1. Basic Data Descriptors, Statistical Distributions, and Application to Business Decisions, Rice University MOOC https://www.coursera.org/learn/descriptive-statistics-statistical-distributions-businessapplication This is Course 2 of a 5 course Coursera MOOC on Business Statistics and Analysis. Course 1 is a general introduction to Excel and some of it may be useful for Excel novices. However, several 4
lessons in Course 2 tie directly to the concepts in our Introduction to Statistics and contain worked excel examples (see below). You can get what you need by auditing the course free of charge, although you can obviously choose to pay for a certificate as well if you want. Week 1 lessons 1-3 (Mean, Standard Deviation), 21 minutes of video. Other lessons are useful but less important for our course Week 2 Lessons 1-2 (Covariance, Correlation), Lesson 5 (Statistical Distributions), 22 minutes of video. The other videos in this week are useful but less important 2. Downloadable Textbook This Open Source book may be found at https://www.openintro.org/stat/textbook.php?stat_book=aps For our course, Chapters 1-3 provide useful introductions to mean, standard deviation, etc. For example, the video lectures contain two approaches to calculate standard deviation/variance. We describe the general case that provides probabilities and another popular one where all outcomes are considered equally likely (1/N). These are covered in Section 3.5 and Section 2.2, respectively. Chapter 8 provides a more detailed discussion of Linear Regression and Correlation, which is helpful in estimating and understanding risk measures. Each chapter has worked examples as well as End of Chapter Exercises. Answers to some of these exercises are provided in Appendix A at the end of the book. ASSIGNMENTS AND EXAMINATIONS The assignments for this course are quite intense. Since Statistics is important and used extensively in finance, we will have both graded and ungraded assignments. All assignments are crafted to help reinforce the learning of concepts and problems covered in class. By design, a few problems are more difficult than those presented in class. We believe you will better understand the concepts by thinking through the issues involved in solving the assignment problems and you will learn Excel in the process. Since the first two weeks/modules of the course require learning some new concepts and applications of Statistics, we will have only one graded assignment in the first two weeks. We will however have some ungraded work in the first three weeks. You are strongly encouraged to review both concepts and applications of statistics using resources we provide and others you may know about. Also, doing the ungraded assignments will help you understand and internalize concepts of both finance and statistics. In terms of the overall course, there will be three graded assignments and a final exam to evaluate your understanding of the content. The best preparation for the final is to understand all the problems done in class and in the assignments. 5
Please use the edx course portal to access and submit assignments and the final examination. You will have two attempts at each assignment and the final exam. Since all grading will be conducted using technology, all questions will take a True/False, fill in the blank, or multiple-choice form. The questions will almost always be word problems, like the ones covered in class, but there will be one specific answer to each question. We have set up the grading process so that you get feedback that is supposed to make you think in the right way about the issues. We are constantly working on enriching the grading process to provide you feedback, eventually directed at each learner. Due to the nature of the class and the high enrollments, all assignments and the final exam will be graded electronically. The technology used is ideally suited for grading and assessing performance and you will get instant feedback. Please read instructions for the questions/problems very carefully before you attempt to answer them. Given that we use to technology to assess all your submissions it is important to follow all conventions. COURSE GRADING AND CERTIFICATE Your performance will be evaluated using a pass/fail grade. The philosophy behind our grading is to make sure you demonstrate adequate competency to be granted a certificate. You will therefore get two attempts on each of the graded assignments and the final but, due to technical constraints, your latest attempt will be used to determine your grade. The answers to the questions will be revealed after your second attempt if you click on the show answer button. To make sure that you do not get penalized for rounding answers, we have provided a range as correct answers to the computer s algorithm for evaluating your submissions. I strongly encourage you to therefore do both attempts unless you get a score of 100% in your first one. Be careful in saving your first attempt so that you do not need to redo the questions you answered correctly and can simply enter the correct answers when you redo the assignment and focus on the ones you were unable to do correctly. To get a grade of pass, you will need to obtain a score of at least 70% in the course, where: Each of the three assignments has a weight of 20% and the final has a weight of 40%. All questions in an assignment or a final have equal weights. You may of course attend the whole course and choose to submit assignments and/or the final. But a passing grade is necessary to receive a certificate. The assignments and the final can be finished at any time and you can take as long as you want to complete them. 6
TEACHING ASSISTANCE Students from University of Michigan and past students from our digital offerings have graciously agreed to help us with this XSeries. Lauren Atkins Budde helps us manage the delivery of all the courses. All the individuals managing the XSeries are very dedicated and knowledgeable people and we are grateful for their help. Their task is challenging because they are expected to navigate the forums but intervene or help only when it is really needed. This Syllabus contains a lot of information about the class; when in doubt, refer to it. And, again, use each other as resources to clarify issues ranging from how to use a browser to what is life really all about. IMPORTANT ISSUES TO CONSIDER Assignments The assignments are meant to be challenging, though we have tried hard to increase the difficulty level gradually in each of them. No one can really make you learn; you have to be willing to work hard and struggle. The teacher s role is to expose us to the fundamental concepts, and we need to learn by applying them to problems. Honor Code While learning from each other is very important, we all recognize the difference between collaboration and simply copying and pasting work done by others. We encourage you to work collaboratively but using good judgment. Similarly, please respect all copyright rules of all materials, including books, articles, etc. While we ultimately cannot control everything, edx and our team will monitor the forums for any activity that violates such codes of conduct and basic civility to each other. Contact with TA and Instructors Given the large number of students in this course, the teaching assistants or instructors should not be contacted directly with any questions. While we love all of you, responding to questions is virtually impossible. Teaching assistants will monitor the forums and keep the faculty team informed on a regular basis. 7
CLASS SCHEDULE: TOPICS AND READINGS MODULE TOPIC VIDEO CHAPTERS BOOK CHAPTERS NOTES Module 1 Risk & Statistics 1 IV(6,7,8) RWJ(10) Background Note: Review of Statistics Module 2 Risk & Statistics: Applications 2 IV(6,7,8) RWJ(10) Background Note: Review of Statistics Excel Data Base Module 3 Risk & Return 3 IV(9) RWJ(11) Module 4 Valuation: A First Look 4 IV(16) RWJ(16) Module 5 Assimilation & Final Exam 8