Volume 30 CONTENTS Summer 2004
#1 - A Note on the Information Content of
by Companies to Reduce The Cost of Treasury Stock
In light of the recent accounting scandals, financial statement analysis becomes an increasingly important topic. As part of a thorough review of a company’s performance, analysts need to search for off- balance sheet liabilities. One such potential liability occurs when companies issue put warrants or options in connection with stock purchase programs. Put warrant programs, however, are also interesting due to the information content they may signal to investors. Dropping or discontinuing a put-writing program is an issue that merits study. This note, which focuses on two companies, McDonalds and Adobe Systems, begins that process. Also, this topic provides interesting discussion material for an upper level financial analysis class.
#2 - The Impact of Augmenting Traditional
with Technology-Based Experiential Exercise
David R. King and William W. Jennings
Traditional instruction, under an experiential learning model, is neither the sole nor a sufficient means of learning. Learning systems that engage students as contributors to learning offer opportunities for educators. The availability of technology to support experiential exercises represents one opportunity to augment traditional instruction. In a quasi-experiment, traditional-only instruction was compared with traditional instruction augmented with a technology-based, experiential exercise. The two instructional methods were evaluated based on student learning, intended behavior, and satisfaction. Our findings suggest that augmented instruction significantly increased student learning and satisfaction. The implications for students are clear. However, there are also noteworthy implications for faculty.
#3 - Use of Simulation to Enhance Undergraduate Financial Forecasting
Anne M. Drougas and Arvid C. Johnson
In this paper, a basic financial statement is enhanced through the use of a simulation model in an effort to generate sales and income forecasts that may, then, be used to assess the competitiveness of a firm. Designed as an undergraduate student learning tool, a simulation model of the income statement is constructed using Microsoft Excel to illustrate how the degree of uncertainty inherent in the forecast affects a company’s financial information. This model is, then, extended to the balance sheet in order to forecast free cash flow. By providing students with a primer for forecasting financial statements that integrates techniques presented in an introductory business statistics course, students gain a better understanding of how to apply elementary programming and simulation models to financial problems - especially those of complexity sufficient to make analytical solution difficult, if not impossible.
#4 - A Comprehensive Stock Analysis Project for the First Course in Investments
Rajiv Kalra and Marsha Weber
In their first course in investments, students have to deal with understanding, computing, and interpreting risk and return and stock valuation and analysis. Students learn and remember concepts better if they have "hands-on" experience in dealing with real investment scenarios. This paper describes a comprehensive project in which students (1) use real life information to analyze the investment performance of a stock, (2) apply the skills they learned in earlier courses, (3) use several spreadsheet applications, (4) recreate, in part, the data in one investment information publication, and (5) present their findings to their class in a systematic fashion.
#5 - An Introduction to Valuation with Corporate and Personal Taxes: A Teaching Note
Sheree A. Buchenroth and Eugene A. Pilotte
In this paper, we extend the usual textbook treatment of valuation to include personal as well as corporate taxes. We focus our discussion on calculating total firm value, but the methods that we demonstrate can be used to value any asset or combination of assets. We demonstrate the process of obtaining consistent values with three valuation approaches: 1) the adjusted discount rate method, 2) the adjusted present value method, and 3) the flows to equity method. We also discuss some practical issues related to implementing valuation in the presence of personal taxes and the potential sources of error if personal taxes are ignored.
#6 - A Classroom Exercise to Simulate Triangular and Covered Interest Arbitrage
Beverly B. Marshall
This paper describes a classroom-tested foreign exchange arbitrage simulation for teaching triangular and covered interest arbitrage. By involving students in this "hands on" simulation, they better understand how deviations from the state of equilibrium in foreign exchange markets provide arbitrage opportunities. The appeal of the simulation is the opportunity for the students to first identify the discrepancy in the foreign exchange market that provides an arbitrage opportunity and then figure out how to act on it. Students also gain additional exposure to the physical exchange of currency.
#7 - Case Study: Bank of China Hong Kong's Initial Public Offering
China’s entry into WTO set a deadline for opening financial services to foreign competition. The first bank in line for privatization was the Hong Kong commercial banking subsidiary of Bank of China (BOC), Bank of China Hong Kong (BOCHK), recently formed from the merged Hong Kong interests of BOC. Bankers were meeting in January 2002 with BOC and BOCHK to negotiate. But as the negotiations commenced, a scandal erupted. Students must take the role of bankers, reading bank financial statements, analyzing strategy and industry competition, determining capital adequacy and equity valuation and negotiating the conditions of the IPO.