Volume 32 CONTENTS Fall 2006
#1 - Developing an Assessment Plan for Finance Majors
Cynthia Benzing, Roberta Schini and Philip DeMoss
This paper discusses the process involved in developing an assessment plan to measure the student learning of undergraduate finance majors. To begin the process, the Finance faculty at a regional state-owned University articulated the mission and objectives of their program. Faculty developed skill objectives and knowledge objectives related to 50 finance concepts, principles, and theories that all Finance majors should know before they graduate. To measure success in the objectives, two types of assessment instruments were developed and used. The skill objectives were developed and measured using authentic assessment techniques based on projects. The knowledge objectives were assessed using a departmentally designed 50 question multiple-choice test. This paper describes the learning objectives, project descriptions, and steps taken to develop the senior test. It also describes the feedback loop and the changes resulting from the first round of assessment.
#2 - Distance Education and MBA Student Performance in Finance Classes
Mark Bertus, Daniel M. Gropper and Christoph Hinkelmann
This paper examines the performance of traditional and distance education MBA students in several graduate finance classes. Some faculty, administrators and students might be concerned that finance courses would be less suitable for distance delivery methods than other, less quantitative and perhaps less challenging courses, since those courses may not require as much personal interaction with the professor. In contrast to the majority of previous empirical studies, we find a significant difference in performance between the two groups of students. Controlling for a variety of student characteristics that have been documented to affect graduate academic achievement, distance students earn higher grades than traditional on-campus students. Several design elements of this program are suggested as possible explanations for the superior performance of the distance students in these finance classes.
#3 - Implied Binomial Trees in Excel without VBA
Tom Arnold, Timothy Falcon Crack and Adam Schwartz
We implement a Rubinstein-type (1994) implied binomial tree using an Excel spreadsheet, but without using VBA (Visual Basic Application). We demonstrate both the optimization needed to generate implied ending risk-neutral probabilities from a set of actual option prices and the backwards recursion needed to solve for the entire implied tree. By using only standard Excel spreadsheet functions, and not resorting to VBA, this complicated option pricing technique is now immediately transparent to academics, students, and practitioners alike. The intuition gained from our simple spreadsheet can be applied directly to the estimation of more complicated implied trees using more advanced software. Our spreadsheet-based implementation can be used in the classroom at the advanced undergraduate level with minimal preparation.
#4 - Modeling-building in Excel as Pedagogy for the Fundamentals of Corporate Finance
Shelley L. MacDougall and Scott B. Follows
A spreadsheet can be a classroom ‘whiteboard’ with considerable depth. Latent in the spreadsheet is the capability to improve teaching, learning, analytical thinking, and decision-making. Such potential can be harnessed in university finance courses by having students build a template that models course content. This study describes a spreadsheet template-building pedagogy and evaluates its effectiveness in terms of learning benefits perceived by students. Students of the template pedagogy felt they developed additional skills and believed, overall, the methods of instruction in finance were more effective and useful than did non-template-building students.
#5 - Show Them the Money: Using Mind Mapping in the Introductory Finance Course
Ernest N. Biktimirov and Linda B. Nilson
In this paper, we offer an innovative teaching tool for finance instruction, mind mapping, which visually depicts concepts and their interrelationships in a non-linear way. We review the considerable literature on the pedagogical benefits of graphics, describe how to design a mind map, recommend how to introduce students to mind mapping, and present examples of mind maps for introductory finance. The appendix provides information on commercial mind mapping software.
#6 - Exploring the Black Scholes Call Option Pricing Model
This paper describes five spreadsheet based class assignments that provides an active-learning approach to call option pricing beginning with the binomial model and concluding with computing the stock’s volatility implied by the Black Scholes model. Excel’s Visual Basic for Applications environment is also introduced through the construction of a function that returns the Black Scholes call price. The assignments are part of a course that can serve as a capstone course for Finance majors as well as a hands-on introduction to some of the more powerful features of the Excel spreadsheet.
#7 - The Benefits of Holding Leveraged Loans as Part of a Diversified Portfolio
Karen Hogan, Richard Kish and Elaine Webster
Leveraged loans are bank loans that are made to non-investment grade companies and frequently sold to banks, mutual funds, hedge funds, and other institutional investors. Most investors hold these assets as part of a diversified portfolio. Thus, it is important to analyze their risk and return characteristics compared to other potential assets for inclusion in a portfolio. Of particular interest would be the risk and return characteristics of leveraged loans to that of high yield bonds, since both are sources of debt for non-investment grade companies. The results of such analysis show that including leveraged loans as part of a diversified portfolio is beneficial in reducing the portfolio’s overall risk without sacrificing return. The correlations between leveraged loans and other asset classes are shown to be very low and in some cases negative, thus increasing the importance of leveraged loans as a viable asset class for such investors to hold.
#9 - Our Toys: A Case in Small Business Simulation
Bert J. Smoluk and Raymond P. Neveu
This case involves the valuation of a small business using techniques taught in most corporate finance courses. The business is Our Toys, a real-world local retail toy store located in a mountainous resort town in New England. This case provides a window into real-world valuation issues such as incomplete accounting data, the impact of a recession, and the disentanglement of cash flows from continuing/discontinuing operations. Discounted cash flow valuation techniques are stressed with involved discussions on cash flow estimation and discount rates taking center stage. Students working on this case will come to appreciate the usefulness of accounting data, the subjective nature of business valuation, and the power of a business education to carry out a comprehensive review of a business strategy for valuation purposes.