Welcome to Econ 134 A Instructor Jaime Ramirez

Welcome to Econ 134 A Instructor: Jaime Ramirez. Cuellar Information to crashers Why study corporate finance? What will we study?

Today n n n We will go through administrative issues We will ask why we should study finance What will we study in this class?

Information to crashers n n The department has declared a hard upper limit of 80 students per class, and I have no control over this Most adds to the class are now done online Only students on the waitlist will be added as space permits I will try to get all of the following students access, as space permits n n n Graduating seniors Students with conflicts with all lectures except this one Extension students who cannot sign up through GOLD NOTE: “Graduating senior” means that you are graduating before this class is offered next

Class website n The class website will be accessed from Gaucho. Space soon n n Everyone will be responsible for checking Gaucho. Space weekly and read any new information posted If you need access to Gaucho. Space and meet one of the criteria on the bottom of the previous slide, please do one of the following n n In lecture, leave me your full name, perm or ID number, and your e-mail that you use through Gaucho. Space Send this information to my e-mail

The Strategic Business Program (SBP) n n n The UCSB Economics department & UCSB Extension run this program that may be of interest to many of you Many classes will be hands-on or have guest speakers Here are two reasons you may want to enroll in the SBP n n n You are trying to fulfill CPA certification requirements You want to enhance your degree with a business specific certificate More information can be acquired in Career Connection

Barron’s Magazine n If you want to apply your knowledge of this class to real-life applications, you may want to get a subscription to Barron’s n Discount subscriptions are often available to students

Important information n This class is heavily math-based n n Regular attendance is important for most students to receive a good grade Chapter 4 is probably the most important chapter in the course n You need to understand these concepts to apply to some of the later chapters Textbook n n Ross, Westerfield, and Jaffe Corporate Finance 11 th edition n Buyer beware for earlier editions The solutions manual is available on Gaucho. Space for this edition only Expected reading n Up to 50 pages per week and 300 pages for the quarter

Prerequisites n n n Econ 100 B or Econ 104 B Econ 140 A If you have any questions about prerequisites for this class, you should contact the Econ undergraduate office n I cannot allow you into this class without university administration clearing you first

Diverse backgrounds in this class n n n n Economics and Accounting Economics Actuarial Science Economics and Mathematics Financial Math and Statistics Others? n n n This class is designed to address the needs of all of these groups Some material may be familiar (you can spend less time on these topics) You may have never seen some of the material before n n Make sure to come to these lectures Come to office hours also if needed

Three ways to learn n n Lectures Lecture slides posted on Gaucho. Space Textbook Most people probably need all three of these tools to achieve the best grade possible

Office hours n n n Office hours will be posted on the syllabus, which is available on Gaucho. Space For general questions on course content, you can go to any of the Econ 134 A TA or instructor office hours A small number of appointments (usually 15 minutes or less) will be available for those unable to attend office hours for all instructors and TAs

E-mail questions n One TA is assigned to take questions by e-mail related to course material n n Molly Schwarz: mcschwarz@u Please include exact question n n Realize that some questions will be referred to office hours due to the complexity of the questions Administrative questions should come to me

Which office hours should I go to? n My office hours are the only times I can deal with administrative issues n n n During busy office hour time, I will prioritize administrative issues TA office hours will often be the best way to get one-on-one help Additional office hours and/or review sessions will be scheduled before each test

Tests n Three tests n n See syllabus for schedule See syllabus if you will have a conflict n n Some problems on tests will be similar to what we cover in lecture or discussion section Some questions will require you to learn the material and think your way through Grades for tests will not be sent by e-mail n n n All tests must be taken in the same lecture group You need to go to your assigned section Grades are typically posted on Gaucho. Space also You will need a basic scientific calculator for each test n See syllabus for more details

Grading n n Two midterms Final exam Gaucho. Space assignments A student missing a test can move the weight of up to one midterm to the final n n Once a student starts a test, the score will count as part of her/his grade See syllabus for more details

Tests n n Tests are meant to be challenging Average scores are often below 75% n n I aim for an average of about 70% This rewards students that study and understand the material better I will reward the class if everyone does well Since the tests are challenging, I will not implement a reverse curve n If everybody does well in the class, everybody will get a good grade

Where to sit during lecture? n n Some text will be this small If this text is too small for you to see, you should sit closer to the front n In lecture and sections, if there are more students than chairs, enrolled students get priority

Motivation n Before many lectures, I will present some material that you may find interesting and motivating for the day’s lecture n n I may start some of this material before class time You are not responsible for any material presented before class time

Will there be section this week? n YES! n n More important information on the next slide Potential crashers can attend one section over the next week if space is available n n Enrolled students get priority for desks If you want to switch sections, please attend your regularly enrolled section until you are switched (subject to availability)

Some logistical issues n n Keeping up in this class Studying for tests Getting help Will there be section this week? n Yes

Keeping up in this class n n n Much in this class is cumulative Assigned reading should be done before lecture Occasionally, I will be done with lecture early enough for you to ask questions n I can also take questions during each lecture n I LIKE QUESTIONS BEING ASKED!

Studying for tests n The last lecture that you are responsible is typically 4 -7 days before the test n n n You should consider studying in groups n n This gives you a long window to study for each test Due to the mathematical nature of this class, studying throughout the quarter is likely to lead to the best chance of success 3 -5 people per group is typically optimal Show all work on all quizzes/tests

Getting help n Use your teaching assistants frequently n Ask questions in your discussion section n n Go to office hours when something is not clear n n I like to try to keep as many sections as possible at 27 max I plan on posting office hours for all TA’s Good times to ask me questions n n n When I finish class early Before and after lecture, I will sometimes be available At least two weeks before any test during office hours

Another issue: The final slide n I will always try to be done by the class end time n n n I will often be done earlier In return, I expect your attention until the final slide If you must leave early: n n n Please leave at least 10 minutes early Sit near an exit Leave quickly and quietly Let’s move on…

A minute or two to address cheating n n n Cheating will not be tolerated at ANY time If you are suspected of cheating on any test, you should assume that it will be reported as a case of academic misconduct Some of you may take tests in another room so that you will be spread out more n n Details will be given in lecture and/or Gaucho. Space if there is more than one test room If you would like to report suspecting cheating, you can tell me or go to http: //econ. ucsb. edu/cheating/

Why study finance? n n n Many of you will help run large companies Some of you will likely run your company Even if your short-run plans do not involve maximizing profits for a firm, understanding these topics is important if you plan on having more responsibility in many companies

What are we after in Econ 134 A? n There are many possible answers about what is “best” for a firm n n n Maximizing profits? Minimizing risk? Something else?

Maximizing profits n Almost every firm could make more money n Example n n n Get an additional investor to invest $1 M Profit of firm goes up by $1, 000 Is this always good? n n No We will see why in this class

Minimizing risk n Many worthwhile endeavors in the world require risk n More than 100 years ago, reproduction was very risky for both mother and baby n n In some U. S. cities in 1900, up to 30% of infants died before their first birthday From 1900 -1920, the maternal mortality rate was about 1 per 130 live births We do not want to ask if risk is okay We want to ask what kinds of risks are acceptable (or in some cases, good) Mortality information from http: //www. cdc. gov/mmwr/preview/mmwrhtml/mm 4838 a 2. htm

What are we after in 134 A? n We are after stockholders’ interests n n We need tools to do this n n Maximizing current value per share of stock Present value and investment rules Decision making under uncertainty Relationship between risk and return More on stockholders’ interests in 8 -9 weeks

Risk n n Many people seem to be afraid of risk Possible reasons n n n Lack of full control Not fully understanding risk Being risk averse n Refer to relevant material in Econ 10 A

More on risk n n We will spend a lot of time talking about risk Should we be afraid of risk? n n Not necessarily As economists, how should we value risk? n We will address the issue this quarter

Applications n n From time to time in this class, we will apply our knowledge to real-life situations The first of these you may have experienced in recent months… n The role of risk in gambling

Risk and gambling n n How many of you are at least 21 years old? If you could go to a casino, what would your game of choice be? n n n Slots? Blackjack? Poker? Craps? Roulette? Some other table game?

(Almost) all are losers n Casino built-in edge n n n Exceptions: Poker, card counting This leads to a negative expected value Why play? n n Positive utility from playing Low stakes n n What stakes are necessary for risk-averse behavior? Irrational behavior: Problem gambling

Valuing risk n An example n If you had to choose a payment made to you today, would you choose… n n n $1, 000 with certainty $2, 000 with probability 50% Stand up right now if you would prefer $2, 000 with probability 50%

Valuing risk n Another example n If you had to choose a payment made to you today, would you choose… n n $1, 000 with certainty $3, 000 with probability 50% Stand up right now if you would prefer $3, 000 with probability 50% The difference in response starts to tell us that risk has a value to it

Another issue: Decreasing value of money n n $1 tomorrow is worth less than $1 today In theory, we want our currently available cash to be invested as long as possible to earn as much interest as possible n n Easier said than done Assets cannot always be immediately sold

Why is cash flow important? n n n Some firms grow very quickly Unhealthy cash flows (sometimes) if growth occurs too quickly More on cash flow later

How are we going to cover Corporate Finance? n n There are four “units” to this course Each unit will consist of about 2 weeks of lectures n n n Next lecture: Start Unit 1 The first three units consist of the core of Corporate Finance The final unit and 134 B cover other topics, or core topics in more detail

Reminders n n If you are trying to add this class, please stay seated for a few minutes and come find me after the lecture If you are leaving, please do so quickly or quietly

What are you after in 134 A?

If you want to add this class… n n n Please come talk to me when I am done about your individual situation Note that I can currently only allow students to add sections that are not full If you have any questions about the wait list, you should go to the Econ undergrad office