Thursday, November 18, 2004

Free practice GMAT, GRE, MCAT, LSAT etc.

If you are thinking of attending Grad school, you will almost assuredly have to take the a standardized test for admission. Now through the magic of television (ok, so it has nothing to do with TV, but I have always wanted to say that), you can take a FREE practice test for many of these standardized tests.

So why not take a practice test over break?

You can also take practice LSAT, GREs, and MCATs.

CollegeJournal | On the Job

Students at smaller schools (like SBU) often feel they are at a disadvantage in the job market. The WSJ helps to refute that view.
CollegeJournal | On the Job: "Research suggests that attending a prestigious school doesn't make a person more likely to be successful professionally "

My take on this is simple: yes it may be harder getting the first job coming from a small school: you may have to knock on a few more doors and send out a few more resumes, but after that, it is performance that matters!

BTW I have said before and will say again, the quality of education you get at Bonaventure really is top notch. I have friends at many of the top ranked schools around the world and the material we cover in class is identical in many cases and often we are ahead of them! So be confident when you hit the job market!

BTW this comes from the CollegeJournal a part of

Tuesday, November 16, 2004

Extended lab hours

Given our test on Thursday (6pm) lab hours will be extended this week. I think they are going from 6 to 9 on Wed.

If you have any questions, contact either Adam or Chris

from Adam:

For all of you that are in Advanced Corporate Finance, Chris Zimmer and I will be down in the SIMM conference room in the basement of Reilly (room 29) from 7-9 tonight. We will be available to answer questions and help study.
Thank You,
Adam Babcock

Monday, November 15, 2004

Updates to Finance 401 and MBA 610 pages

I just made quite a few updates to the mainpages for class. More notes etc.

For instance, capital budgeting notes, what is a stock index, more on the pecking order etc.

I am sure you are all THRILLED beyond words :)

Just to keep you all in the loop, I have started making the test. I gave up on the Bills and decided I could make test questions and watch New England score at the same time. What an ugly game!

Friday, November 12, 2004

Capital Budgeting

Capital Budgeting

Overview: Capital budgeting is the process of deciding what projects to do. As such it is just a means of doing cost-benefit analysis.
There are many capital budgeting techniques that firms can use. These techniques do not always lead to the same accept-reject decision, so it is necessary to decide what a good capital budgeting technique looks like.
NPV is the best. It is the standard against which all methods are judged. Properly applied and understood, NPV is almost everything in finance!

  • An ideal Capital Budget technique should:
    use cash flows and not earnings
    consider ALL relevant cash flows.
    account for the time value of money
    be able to correctly select among mutually exclusive projects.
    be have a consistent and easy to apply decision rule.
    if properly applied lead to higher shareholder value.
    be additive
    be relatively easy to explain

    Net Present Value (NPV)
    NPV is the best! It satisfies all of our criterion above. It is easy to use and will lead to increased shareholder wealth.

    NPV = PV benefits - PV Costs
    = Initial cost + PV(expected future cash flows)

    Internal Rate of Return (IRR)
    The discount rate that makes NPV equal to zero.
    See table 6.3 of Ross Westerfield and Jaffe
    If cash flows are not "normal" than problems: different IRR for every sign change.
    For investing :
    For "normal" cash flows: Accept the project if IRR > cost of capital on the project. Why? IRR> r is the same as NPV > 0.
    For financing:
    If cash inflow, followed by all negative, accept if IRR <>
  • Modified IRR
    Way around the multiple IRR problem is to combine the cash flows until only one sign change exists. (i.e. take present values and add positive and negative together.
  • Way around scales differences is to use incremental IRR. This involves finding the difference between the size of the two cash flows.

  • Profitability Index
    for normal cash flows PI = PV benefits / initial cost
    (that is PV of cash flows after the first cash flow)/ initial cost
    Some firms also use NPV/Initial cost.

    Benefit: good is rationing
    Disadvantage: still have scale problems--solution: use incremental cash flows
  • Payback:
    How many years it takes get the investment back.
    Example: project costs 1000, pays back 300 per year
    Payback = 3.33 years
    Problems: arbitrary cut-off, ignores all cash flows after payback, ignores time value of money, leads to short-term thinking
    Advantage: Easy!!! Managers like it.

  • Discounted Payback
    same as Payback period, but use discounted cash flows in stead of regular cash flows.

    Average Accounting rate of return---possibly my least favorite method!
    Example: accept a project is average Return on Assets is greater than some hurdle rate.
    Does not use cash flows, does not consider time value of money, has arbitrary decision rule.
    Only good things, is that it uses data that is already available and often times pay of middle managers is tied to ROI or ROA.

Wednesday, November 10, 2004

So what is on the 401 test?

I have had a couple of people ask what is on the 401 exam.

So, as near as I can figure: Chapters 5,6,7,8,9, 13, 17,18,19

which seems like more than I thought we had done...but looking at the material I think that is what we have covered.

Oh and of course the Anthony Annuziado's lecture and anything else we covered (and yes the blog is considered coverage. :)

Pictures from NYC

Ok, a little less serious!

Here are some pictures from the Finance Club's trip to NYC.

Pictures are coutesy of Rich Miller. THanks!

Job Opportunity with Met Life

On Monday November 15, 2004 Eric Bach (a former SBU finance student (graduated in 2002)) will be back on campus talking about his job. He works for Metlife as a Business to Business Employee Benefits Sales Representative.

Do not let the title sales representative scare you away. Many small businesses can not afford to have corporate benefits departments. They thus outsource this task. Eric is their contact with Metlife.

His presentation is at 6:00 in the RC (career services is handling the details).

He works out of Rochester but they are hiring for many regions.
His email is
Send him your resume or just email him to ask about the job.

He asked me to pass the following along.

Business to Business Employee Benefits Sales Representative
Small Market Sales Division Description:
MetLife’s Small Market Sales is a division dedicated to serving the employee benefit needs of businesses with fewer than 500 employees – a rapidly growing segment of the market. MetLife SBC provides a range of quality products and services through insurance brokers and MetLife agents. A Small Market Sales Representative develops and maintains relationships with these producers, and helps them deliver MetLife products and services that meet the needs of their small business clients. This involves meeting with insurance brokers and MetLife agents to promote our products and services and create interest in having them propose offers of coverage(s) to their small business clients.

Position Requirements:
MetLife recognizes that sales and marketing abilities are unique talents. We are looking for energetic, self-motivated and outgoing graduates with a record of achievement in school or business who wish to develop their sales and marketing skills in a challenging and fast-paced environment. All majors with a BA or BS are welcome. Each sales representative will be expected to obtain their respective State Life & Health License, Series 6 & 63 and complete a Health Insurance Association of America (HIAA) program consisting of 2 exams, after they have started employment.

What MetLife has to offer:
MetLife's goal is to have 100 million customers by 2010. We'll get there by relying on the power of relationships, by expanding our already wide array of products and services, and by making the most of an enormously diverse and talented workforce to meet the challenges of an ever-changing marketplace. This means an array of career opportunities for you.

We understand that ever present is the quest for the balance between what you do for a living...and living itself. We understand that there is life beyond MetLife - have you met life today?

The position offers a base salary during the first year. After the first year, an incentive-based compensation formula is used. The Employee Benefits Sales Representative is compensated with a competitive bonus plan and expense accounts. In addition, the company provides a full range of benefits including life, medical, dental, disability, 401(k) and retirement plans.

Dedication and motivation, together with the numerous resources MetLife offers, are a perfect combination for rapid growth and advancement within MetLife’s Institutional Sales organization.

Sales Development Training/Planning Program
The Sales Development Training/Planning Program is an intensive 12 month training program that focuses on gaining MetLife Core Product Knowledge. Through a mix of both classroom and on-the-job training that you will experience in a sales office, you will learn a wide-range of products and services offered by the Institutional sales division. Participants will concentrate on learning the Group Insurance Industry, including Dental, Individual Disability, 401k, Short and Long Term Disability as well as various other products and sales processes. This dynamic program is full of interactive exercises including product training, Professional Selling Skills, role-plays - live and videotaped, enrollment meeting presentations, and participation in “one-on-one” classroom and Broker discussions.

The Sales Representative will also participate in a mentor program for 12-24 months, following training. This program will be a great support that will provide targeted, individualized training and coaching.

MetLife is an equal opportunity employer.

Looking for a job? Have something your employer wants!

As Chris Kinslow told us in the Deutsche Bank information session, the best way to get a job is to have something that your employer wants. One thing that many employers may soon be wanting is expertise in coping with the changes that may come about with Social Security Reform.

McKinsey Quarterly has an interesting article on what the changes will likely mean to financial institutions. (The article is a bit dated in the sense it was written a few years ago, but since the discussion on social security reform effectively stopped on 9-11-2001, the material is still relevant!)

I would highly recommend reading it if you work (or are going to be working) at a financial institution.

Tuesday, November 09, 2004

Fama paper

I'll put this on the class page (I thought it was there), but just to let you know, here is the Fama reading on who issues stock

enjoy!!!! :)

Friday, November 05, 2004

Class code for those of you in my MBA 610 H-III class

The relevant info for the "clickers" will have to register at

Class Name: MBA610fall2004
Your Class Key: P5458Q316

Yahoo! News - Feds: Obesity Raising Airline Fuel Costs

Yahoo! News - Feds: Obesity Raising Airline Fuel Costs

As if the airline industry did not have enough problems:

"America's growing waistlines are hurting the bottom lines of airline companies as the extra pounds on passengers are causing a drag on planes. Heavier fliers have created heftier fuel costs, according to the government study."

Not sure how we can include this, but I had to share it. I guess under forecasting? If you are on the staff that is forecasting the fuel needs of the airline, you also have to include whether the plane is full of heavy people.

Thursday, November 04, 2004

Class notes from Anthony Annunziato's lecture

For those of you who missed the presentation of Anthony Annuziado, here are some of my notes on the presentation.

NOTE: they are my notes, and not in absolute order or in his exact words, but the meaning of his comments are the close to his as I could make them.

Todd Palmer introduced Anthony Annunziato as a 1971 Bonaventure graduate and a successful energy trader.

Anthony said that the key to trading is understanding Supply and Demand and the flow of capital.

People often do not understand economics. For instance in the late 1970s people thought oil would be over $100 a barrel. However, this would have forced people to give up eating had their oil consumption remained the same. Of course, high oil prices led to lower Quantity demanded and more supply.

On Corporate America:

Large firms are not creating jobs—on net (when you consider their takeovers of firms and subsequent layoffs of employees, it may be better to look for jobs in small and medium sized firms.

CEOs and management in general have an egotistical view of themselves; they do NOT add as much value as they think they do.

One definition of management: Management is there to protect the firm from a few.

He feels that this definition is all too often correct and has many implications. For instance: Many do not reward good ideas and hard work. Want you do not shake things up. This bureaucratic mentality leads to inefficiency and no growth.

To too many people, risk management is risk avoidance. Risk and return goes hand in hand. Especially problematic when lawyers get involved.

On Competition, the job market and other things:

We now live in a global world. Competition has increased. Must consider how do we add value?

America was build on risk taking and entrepreneurial spirit. We still are way ahead in this area. Not so much in other areas. We do have best college system and finance system, but acquiring intellectual capital is relatively cheap.

Competition for jobs will keep hourly wages down. Outsourcing etc is here to stay.

Saving and investing grows in importance as hourly wage drops. Let money work for you!

To paraphrase: a rising tide raises all ships, but when the tide is not rising, you have to take risks and paddle for yourself.

On Enron

Bad ethics and much pandering to Wall Street.

On the supposed deregulation of utilities

Deregulation is overstated. No one has real incentive to end regulation. For instance, regulators do not want to deregulate themselves out a job. Most utilities do not want to have to compete. In fact probably cannot compete…See airline industry. New carriers know business and compete, older carriers can not.

Consequently, we see in the press that there is deregulation, but in reality there is not as much as we may be led to believe.

California "Energy Crisis" caused by several factors. California refused to build new electric generating facilities. Demand increased. Prices charged were capped, but prices paid by utilities were not. When they needed energy and had to go into the market to buy it, prices were high (they had not hedged). This buy high, sell low problem led to many utilities rescinding on agreed upon contracts with government's blessing. This has led some firms to vow not to do business in California.

On Energy supply and alternative energies

Right now demand = supply. Problem many feel demand wil continue to grow at a rate that is faster than production can increase. Hence price rise. Which will slow demand.

currently no alternative fuel is economically efficient. Maybe 15-20 years down the road, but right now no Alternative fuel will have to be brought forward by entrepreneurs.

On Investing

People just out of college should try derivatives. Yes you may lose money since you do not know what you are doing, but you do not have that much to lose.

On taxes and government

Government's job is to keep people safe. Other than that smaller government is better.

Taxes in NYS are much higher than elsewhere. This is one reason why firms are leaving (have left).

People can spent their money better than governments. Government bureaucrats do not understand business, customer service, etc. Yet think they know how to put money to best use.

On Jobs

Always better to work on the revenue side than the expense side of a business because better job security.

"Find a job you love and you will never have to work a day in your life."

He loves trading. It is a like a game. Objective score keeping and near instant gratification.

You can not be ruled based. Must continually grow. If doing the same thing, the same way as five years ago, you are in big trouble.

What is a Good day?

Dr. Palmer asked what a "good day or a bad day" was. TO this the answer was that he had made or lost $5 million in a day. But then went on to say a good day is most every day. A year ago he was paralyzed. Spent 17 weeks in the hospital. The experience of learning to move again makes him (and I think everyone present) appreciate what gifts simple things are (such as moving your arm or fingers or walking) and how awful they would be to lose. THese are things we often overlook until they are gone. Moral: take time to appreciate them now.

He concluded with the idea of being the best you can be. (without saying the exact words)

Pick something you like, and are good at, and have fun. To do otherwise is to waste and to waste is wrong an economic sin.

Life is too short to take advantage of people. Treat people fairly , help others, and reward others and we will all be fine.

Class ended at 12:42 to applause as we all thanked Mr. Annunziato for his time.

As Promised, the visual Correlation coefficient

Correlation coefficient Sorry this is late, I forgot about it to be honest with you.

It is very cool and shws how the eye is actually horrible at finding correlations.

Also it is a very good description of why using the wrong stat can lead to the wrong conclusion.

Some observations on the Power industry

This is from a paper I did on the Springfield Power company. Depending on what is talked about tomorrow in class when we have Mr. Anthony Annunziato speak, this may or may not be useful.

However, even if it he does not speak on this, I think the recent history of the utility industry is really something everyone (and not just finance majors) should know about to uderstand some of the controversy about power shortages, outages, and regulation.

Sorry it is a bit long:


The electrical utility industry traditionally has been seen as a natural monopoly where high fixed costs serve as an economic barrier-to-entry that prevents more than one firm from being able to survive economically in any given market. Because monopolies have the ability to use their market power to earn abnormally high returns at the expense of their customers, utilities in many countries have been highly regulated. In the United States, this regulation was done on a state-by-state basis. Typically, it involved a regulatory board, which in consultation with the firm, users, and other citizen groups, set rates and approved large expenditures.
To avoid the restrictive, low-return environment of the regulated power business, many utility firms created unregulated subsidiaries through which the firm could run businesses outside the reach of state regulators. However, this type of organization occasionally proved problematic for shareholders. If the unregulated business did well, regulators might expect the earnings to be used in the regulated utility and thus reduce allowed rates in the regulated business. On the other hand, if the unregulated business did poorly, the regulators would not allow these costs to increase the utility rates. Thus, some analysts argued that shareholders were doomed to a “lose, lose” situation whenever regulated utilities diversified. Springfield Power was well acquainted with this cross subsidization problem. The firm had recently won a 3-2 decision whereby state regulators had ruled that the VirtualAmerica subsidiary was able to keep separate from the regulated SPU utility business the money it received from AT&T for allowing the use of its transmission towers.
To prevent this negative cross-subsidization problem, most utility industry officials favored ending regulation. In return for this concession, the utilities would end their monopolistic position and allow the free market to decide prices and dictate winners and losers. Starting in 1980, much of the global business world went through a U.S.-led deregulation wave that was built on the theory that allowing market forces to act would give market participants incentives to find better ways to lower costs and improve efficiency.
In the United States, utility deregulation was made possible by the Federal Energy Policy Act, a 1992 Federal law that forced utility companies to allow energy created by other firms to travel through each other’s distribution channels. This, in effect, created a national power grid that enabled the delivery of electrical energy across markets, and made possible the separation of energy creation and energy distribution. This separation ended the monopoly situation and, consequentially, the need for regulators to set prices. Once the infrastructure was in place, utility deregulation spread across the US.
While each state adopted its own rules governing deregulation, the general framework was that utility companies and state regulators would allow customers (first industrial customers and later retail customers) to shop around for power just as they did for long distance or other products or services. It was expected that this competition would improve incentives, lead to greater efficiencies, and lower costs. While many of the benefits of deregulation would take years to develop, a predictable short-run consequence of national deregulation would be more standardized prices. Additionally many environmental groups feared that price competition could lead to environmentally destructive behavior. As a result, consumer groups and environmental groups lined up to oppose the deregulation.
On the other hand, utility executives, large power users, and shareholders generally supported deregulation. The reasons varied, but each group felt that deregulation would improve its own position. For example, large users expected they would be able to negotiate better rates if there were multiple energy providers. Many executives reasoned that their importance would grow with the greater discretion that would come after deregulation. With this increased importance, managerial pay was expected to increase. Similarly, because of the increased flexibility, deregulation was seen as increasing firms’ cash flows and hence shareholder returns.
In 1997, the utility deregulation debate came to Springfield. Not surprisingly, SPU officials and large power users were the chief advocates while opposition consisted of grass-root groups who feared rising prices, environmental damages, possible employee job losses, and increased volatility of energy costs. After much last minute lobbying, Springfield’s pro-deregulation camp prevailed and the Electric Utility Customer Choice Act (Bill BS390) was pushed through both houses of the legislature in late April and signed by Governor Quimby in early May 1997. Under this new law, industry regulation would be phased out over the next 5 years with regulations on the residential market being the last to be dropped.

Is it the end of another anomaly?

It sounds like another anomaly is solved. SUre it has nothing to do with finance, but we talked about it in class the other day)...why did we talk about it? To suggest that anomalies are just things that we currently do not understand and that eventually today's anomlaies may well be solved.

"Gulf war syndrome may have been caused by exposure to the nerve gas sarin, according to reports.
The New Scientist journal has reported a leak of a US inquiry into the ill-health of veterans of the 1991 war.
The US Department of Veterans Affairs' Research Advisory Committee on Gulf War Veterans' Illnesses is due to publish its findings next week."