Rotman Q3 Exams - Prefaced by Canada vs USA

The Canada / US Men's Hockey is on the TV in the atrium and if you aren't watching it here, chances are you are probably watching it somewhere anyways.

However, exam week for Q3 will be starting next week with Econ on Monday, Strategy (a monster 5 hour exam) on Tuesday and Finance on Thursday. Also, the final leadership paper will be due on Friday at midnight.

March break will be the week after and already people have made plans to visit exotic warm locations like Cuba or Cancun or have decided to go for skiing: Tremblant, Tahoe.

Rotman Open House

Yesterday, Rotman hosted an open house for potential students. The Rotman Ambassadors as well as faculty and staff were out in force to talk to students and answer their questions about the Rotman MBA program.

I started the day in the International Programs session with Laura Wood and other students who had been on International Study Tours. There were plenty of questions about Study Tours and Exchange programs. It's good to see that our potential incoming classmates have an international interest which they would like to incorporate into their MBA program.

There was also a mix and mingle between current and potential students. It's surprising what a small world it is. Two potential Rotman students were colleagues of a friend of mine from McMaster Engineering who is currently enrolled at Rotman (a close pal in my year). Another potential Rotman student was a friend of mine from the Canadian Federation of Engineering Students from back in the day.

It's good to see such strong interest from potential incoming students and reaffirming that they are asking the right questions when thinking about what MBA program to select based on their goals and fit.

Tax Implications of Bankruptcy

One thing that I've always been fascinated with (and need to look into more) is mergers and acquisitions. However, in this environment of post-financial crisis recovery, the M&A environment is very different that what it was previously. Particularly, there was a good window recently of purchasing companies at a 50% off sale with equity prices so low if only you had the cash to do it.

One thing we discussed in financial modeling courses I've taken looks at modeling Tax Loss Carry Forwards (TLCF, Canadian) and Net Operating Loss (NOL, American).

As a financial acquirer (rather than a strategic acquirer), I wonder if there are any vulture funds which specialize in purchasing bankrupt companies if only to get their hands on their TLCF / NOLs. Obviously, there are some concerns, including the laws, regulations and transfer rules for obtaining these credits as well as what the capital structure of the acquiring company looks like. I'd imagine that the equity would be worthless (or trading like an option) and the debt would be trading for pennies on the dollar.

Especially with so many failed entrepreneurial ventures, there must be a sea of dead companies which should at least be as valuable as their potential tax credits. This could also potentially reduce the exit cost of early stage companies (for early investors to at least recoup the cost of the tax credits for all losses taken).

Having said that, would it be a potentially good idea to go out looking for strong companies to purchase distressed companies if only to utilize their tax credits? That is to say to purchase these companies only for their deferred tax assets. Or some other metric like break up value or price to book.

MarkStrat - Lesson's Learned

Today, Industry "Charlie" teams presented this morning and we were Team E. It was an interesting exercise and we learned quite a bit. Teams seemed to have the same message for subsequent periods (or for people planning on playing this game in the future):

1. Get it right the first time - Hit a target market, don't hedge your bets. While hedging works in early stages, as teams compete in later stages everyone moves right on top of their products
2. Leverage your base products to create products for other groups (branching from Singles to High-Earners).
3. Price undercutting doesn't work (especially for premium products). You hit the sweet spot or you don't.

This had a particular way of manifesting for our team as we tried a very aggressive strategy.

We were selling 200+KU per period and selling out for two periods in a row. We wanted to push our boundaries so we looked at the market.

The Market Size was a total of 600KU and MarkStrat adjusts your projections up or down by 20%. Therefore, we targeted 500KU (a dramatic and highly aggresive target) where +20% (600KU) would raise the ceiling on our production to capture the entire market and -20% (400KU) would result in creating at most two years worth of product (and after selling 1 year's worth, would leave us holding 1 year's inventory) - our worst case scenario.

Unfortunately, our focus on the price using conjoint analysis was misguided. Conjoint analysis, by it's incomplete nature, only provides a few points of reference and it is possible to project at least two potential sweet spots. We weren't sure which was correct, but we hoped that by progressing towards the lower one, our drop in price would be offset by higher volumes (hoping to aggressively capture the market at a lower price).

However, this didn't work (see lesson 3) above. Instead we got killed. Our price was too low and our product was intercepted by Team U who placed their product between us and our target market capturing our market share and dropping our unit sales to 159KU.

In following periods, our group learned a lot quite fast. Our group became much better at predicting where our markets would be and landing right on top. Our stock price bounced back considerably in the aftermath of our recovery from our previous plummet.

Equity Near Bankruptcy (or NPV = 0) Behaving as Call Options

This might be one of the most brilliant finance things I've ever seen taught a few days ago by our finance prof. I've always been interested in options thinking about how they behave and how to value them (and with the current financial crisis, have been taking more looks at bankruptcy).

First consider an oil company which can extract oil out of the ground for $70 per barrel with 1M barrels in the ground. The current cost of oil is $60. It costs more to get the oil out of the ground than it does to sell it on the open market, so the project is negative NPV right?

Well what happens if the oil prices rise to $80 a year from now? Then with a return of 10% (assume that it takes a year to get the oil out), you can make $10 per barrel on 1M barrels. The NPV works out to be about $9.1M.

But there is some inherent risk in this position which relies on the price of oil moving up. Sound familiar? It is the exact same behaviour as a call option.If the value of oil drops, the land is worth nothing, but if the value of oil appreciates, the value of oil appreciates accordingly also. The analogy holds up if you replace Exercise Price with Extraction Cost.

Here is another example of option like behaviour: Companies near bankruptcy.

Scenario 1: Healthy
Net Debt = $5M
Enterprise Value = 11M (Enterprise value calculated based on DCF)
Market Cap = 6M

Scenario 2: Near Bankruptcy / Highly leveraged:
Net Debt = 5M
EV = 6M
Market Cap =1M

Scenario 3: Bankruptcy
Net Debt = 5M
EV = 4M
Market Cap = 0

Because of the nature of capital at risk for corporations, the equity cannot fall below zero. A company in this position might also take on excessive risk (deliberately stir volatility on extremely risky projects) because there is nothing to lose.

However, in the absence of that, a company's equity at or near bankruptcy will be have much like a call option. Because of this relationship, a vulture fund might use the Black-Scholes model could potentially apply as an appropriate valuation metric to value the time value of the equity.

Money and GDP Multipliers

I love geometric series. It describes so many natural phenomena especially as it relates to finance and economics. For example:

GDP mutiplier and Marginal Propensity to Consume (Save)
Marginal Propensity to Consume (MPC) is for every additional dollar of income, how much will people spend. Marginal Propensity to Save (MPS) is the opposite: for every additional dollar of after tax income how much will people save. By definition:

$1 = MPC + MPS

Different cultures will have different MPC and MPS. Americans are notorious for having high MPC (bordering on higher than $1, using financial instruments like credit cards and lines of credit to boost short term liquidity). Japanese are stereotypically savers in contrast.

However, let's assume a culture with MPC of 40%.

1. A spends $100 on B.
2. B receives $100 and spends $40 (40% of $100) on C.
3. C receives $40 and spends $16 on D.
4. D spends $6.40 on E etc. and the process continues.

Look familiar? It should. This pattern can be described as an infinite geometric series (the same formula which is used to described a perpetuity for DCF evaluation).

For a GDP multiplier, the initial amount is $1 by definition. The "discount rate" or rate of decay is related to the MPC. Recall (Using the same math trick for geometric series):

GDP Multiplier = $1 + $1 x MPC + $1 x MPC^2 + ...
MPC x GDP Multiplier = $1 x MPC + $1 x MPC^2 +...
(1 - MPC) GDP Multiplier = $1
GDP Multiplier = $1 / (1 - MPC)

But recall: $1 = MPC + MPS
MPS = $1 - MPC

Therefore:
GDP Multiplier = $1 / MPS

Money Supply Multiplier and Reserve (Lending) Ratios

This is EXACTLY the same case for Money Supply and Bank Reserves. A bank (by policy or regulation) has a reserve ratio (RR). That is, for every additional $1 in deposits, it keeps a given percentage and lends out the rest. Let's also define lending ratio (LR) as the complement and by definition:

$1 = Reserve Ratio + Lending Ratio

Imagine "the bank" (representing all banks in the economy) has a reserve ratio of 20%.

1. "The Bank" receives a $100 deposit and lends out $80.
2. The $80 it lends out to "the Economy" (representing all depositors and borrowers) takes the $80 and "uses" it and it is redeposited into the Bank.
3. With the new $80 deposit, the Bank lends out $64.
4. The borrower uses it and it is redepositied into the bank.
5. The bank receives $64 and lends out $51.20 etc and the process continues.

Again, this is a pattern described by the same concept and the same formulas apply:

Money Supply Multiplier (MSM) = $1 + $1 x LR + $1 x LR^2 + ...
LR x MSM = $1 x LR + $1 x LR^2 +...
(1 - LR) MSM = $1
MSM = $1 / (1 - LR)

But recall: $1 = RR + LS
RR = $1 - LR

Therefore:
MSM = $1 / RR

Notes:

Some key points about this formula, notice that the multiplier effect is always greater than the initial amount ASSUMING that the reserve (saving) amount is less than the total amount (you don't reserve or save all of it). So when a dollar is spend in the economy (or lent out) the effect on the supply is greater than one.

Also note that for odd values of reserves and saving (aka, American's spending more than a $1 by borrowing), you get a negative MPS and therefore a negative mutliplier which is a non-sense result (in a similar manner as my contest question that Chad got right). Whenever you see non-sense numbers (numbers which tell "stories" that don't make sense) it should always act as a red flag to reinvestigate the initial assumptions of the model.

Jim De Wilde - Venture Capital

I recently signed up for a Venture Capital competition. I've been trying to find more opportunities to work with classmates. The PSO has made a good effort to mix up the groups we work in, Q1,2 Teams, Q3&4 Teams, 24h case comp and MarkStrat (to date). However, I was looking for more opportunities. I'm also doing the CIBC IB Comp and the Investment Challenge with different teammates. I came into this competition hoping to find an opportunity to work with some friends on something interesting.

It turns out this VC competition is a big deal, forcing you to "compete" for a spot in the competition before you can even participate by sending in an essay with all the profiles of your team members. Quite a few teams got cut also as the interest seems to be quite high. Our team was lucky enough to snag a spot and I turns out there are some ROCKSTAR teams in the competition.

Right now we are listening to a prep talk from a venture capitalist, Jim de Wilde. He comments that venture capital is not just capital applied to starting a profitable bowling alley. Jim de Wilde has a very specific definition of what constitutes a true definition: "Looking to create new value."

He took a look at Silicon Valley and how it is a prime example of how VC in Canada differs from VC in the US and is giving us the foundation for what perspective to take and how to think about the competition we are about to participate in.

Managing Customer Value, One Stage at a Time

Today, our MCV professor, Dilip Soman, gave a talk about his new book, Managing Customer Value - One Stage at a Time.

He spoke about the new changes happening in the marketing industry and how his work has been looking at the relevant trends, primarily the effect of:

• The internet
• Data collection and advances in computing
• Blurring between verticals
• Growth in services
• Diversity of people

Sara N-Marandi, his colleague - Rotman '08 and Monitor consulting, further delved into the book's focuses:

• Transformation
• Value creation
• Efficient Allocation of Marketing Efforts
• Portfolio of Assets: Marketing Math
• Marketing Capabilities

I must admit, their framework gives me much hope and respect for the field and thought leadership in marketing. Particularly, I appreciated their use of math and financial concepts to quantify value of customers as a portfolio of assets and the process for evaluation.

It was clear in the presentation of Dilip and Sara that there are some exciting new and valuable insights in their book which I look forward to reading.

Integrative Thinking: Dutch Auction - Tender Offer

What an interesting concept. We had briefly touched the idea of Dutch Auctions in microeconomics way back in Q1 which is a bidding strategy whose mechanics are based in the math of economics. Today, we applied this strategy towards share buy-backs in finance.

While it might be easy to pick up shares at the current market price, large orders by corporations to buy-back their shares is much more difficult because the market can't immediately absorb the change in liquidity from the huge jump in temporary demand.

So what to do? What mechanism will work where the company can get the best (a "fair") price for buying back its shares and shareholders can get the best (a "fair") price. The mechanism to use is a Dutch Auction.

Everyone announces their lowest acceptable price and number of shares for sale. The buyer (the company in the case of a buy-back) slowly adds up all the numbers of shares from lowest price to highest price until it accumulates all the stock it wants. It pays out all the share holders at the highest price of the group. This ensures that sellers get AT LEAST their minimum required amount and the buyer (the company) gets all the shares they need at the LOWEST possible price.

This actually happened in practice with Morgan Stanley's Dutch Auction system used for Google's IPO. They used a similar Dutch auction system which neutralized the effect of large companies purchasing stock and allowed smaller investors to also pick up shares.

Also, another lesson from class (something I was wondering about previously) Dividend policies don't really matter. Perhaps, like our capital structure lecture, this only occurs in "perfect" capital markets, but it is something to think about.

In summary: If a company gives out cash, it's beta goes up (because it's mix of "risky" assets has gone up, and it has given out cash which is a "safe" asset). However, on a net position your total holdings is the same. The risk gained / lost by giving out cash doesn't change your total net position.

Advice for Getting the Job in Finance

Rotman students are still in the heat of trying to find a summer job and have been asking around for advice for what to do. Specifically, there were a lot of questions about how to get into finance, so I thought I would pass along advice that I've gotten from colleagues and friends.


Before you even start looking for jobs (when you first start school: undergrad or MBA etc):

1. Clubs and competitions. Join clubs relevant to your interests and gain any relevant experience you can get and to apply theory and academic skills in class in a practical environment.


2. Networking. This is especially important for career switchers, as it helps give us insight into how to design our recruitment materials and to understand if this job we are looking at is really what we want. It also doesn't hurt to show genuine interest and make an effort to learn more about different career paths.


3. CSC. It's easy and a good primer if you have no finance background. The Canadian Securities Course is also a required designation for anyone hoping to sell securities in Canada.


4. CFA. If you can afford the time (possibly before you start the MBA) doing the Chartered Financial Analyst (even just the level I) designation gives you a tremendous financial foundation for taking classes and working in the industry. Toronto is also notorious for being the "CFA Capital of the world", having the highest per capita CFA population of any city in the world. This goes doubly for people applying for buy-side jobs (Mutual funds, Hedge funds, Equity Research, PE etc).

The first is to understand the recruitment process for jobs:

1. Application Materials (Cover Letter / Resume) - Have someone look them over, preferably someone in the industry who can A. Give you relevant advice and B. Can pass it on to people they know are recruiting if they like what they see.


2. Interviews - READ THE VAULT GUIDE. It won't get you a job, but if you don't read it, it will help you lose it. It has all the fundamental background for jobs in finance so you have an idea of what you are getting into. Also, do extensive mock interviews to feel comfortable with the technical as well as behavioural questions. Be ready to talk about the markets, pitch a stock and otherwise show that you are genuinely interested in finance.

I'm looking to get more advice from people who know more than myself so I can do a specific post for people, such as MM, who are currently looking at getting into Asset Management.

Chinese New Year @ Rotman

Some of you may know that it was Chinese New Year this weekend. Along with Valentine’s Day and the Opening of the Olympics in Vancouver, it’s been a very auspicious weekend.

Just as a bit of a surprise treat, I’ve left one red pocket at each seat in our class room. Chinese associate red with prosperity (My friend, Jiang Zhang, was showing me his trading window and the board was all red. Apparently, in the Chinese Stock Market red means profits and green means losses he tells me).

The Chinese custom for Chinese New Year is for married couples with children to give red packets filled with money to single “children” who greet them with “Gong Xi Fa Chai” (Mandarin for “Congratulations and be prosperous”). Unfortunately, because I can’t actually afford it, I’ve decided to give everyone candy instead of money.

I hope my classmates enjoy this little treat to pick them up after the long weekend returning to school!

The 4 C's of Credit

I have some friends who are looking at trying to gain positions in Fixed Income so I thought I would have a quick review of the 4 C's of Credit. They are:

1. Character - The management team's record, strategy and internal controls
2. Capacity - Ability to meet debt obligations
3. Collateral - Assets pledged to back the loan
4. Covenants - Restrictions on activities as well as maintenance

Recall that in bankruptcy, there is a hierarchy to how remaining capital, collateral and other assets are distributed relative to tranches. However, in restructuring "everyone gets a haircut".

Also, when building credit ratings, there are various ratios that are looked at, particularly:

• Profitiability Ratios
• Liquidity Ratios (Short Term Solvency)
• Capitalization (Leverage) Ratios (Solvency)

[Operating] Working Capital - What's the Difference?

I was working with a buddy on a financial model recently and this came up as an issue. It's very confusing because Working Capital is defined by operating assets and liabilities (short term or current assets and liabilities) and it *seems* synonymous with Operating Working Capital, which it is not. First, the definitions:

Working Capital is defined as:
WC = CA - CL
CA - Current Assets
CL - Current Liabilities

However, when doing M&A or LBO's we aren't concerned with Working Capital as much as we are with Operating Working Capital. Why?

Cash and Short Term debt instruments are actually financing components and aren't actually included in Operating Working Capital (OWC). In an acquisition, the target firms capital structure is usually zeroed out (unless there is a debt roll over clause) and the capital structure used to purchase the company is plugged in (including good will, recognisable intangible assets etc).

So Operating Working capital has some adjustments:
OWC = CA - CL - Cash + Short Term Debt

It's the same idea as excess cash rather than cash in Enterprise Value.

Commitment - Restrictions for Improved Reward

Wow. What an oxymoron. We had briefly heard about this in game theory in Economics way back in Q1 and now it's coming up again in Q3 in finance.

First in game theory and dominant strategies. Look at the following example of the prisoner's dilemma:

So in the typical fashion, the dominant strategies for both players show that they will end up in the lower right corner with a return of 3 each. This is unfortunate, as there is a potential to get 5 each if they could only credibly commit to Strategy A each. But because of the conditions of the prisoner's dilemma, it's impossible.

To change the parameters of the game, what if it was possible for Player 1 and 2 to commit to impairing their own return matrix? For instance, what if Players 1 and 2 could reduce their returns in the cells AB and BA to 4 instead of 7 (as shown below)? Suddenly, the dominant strategy changes and the end game to a return of 5 each rather than 3.
We achieve a counter intuitive result. By placing restrictions on their own returns, both players can achieve a higher return.

In our finance class today, we talked about a different scenario with similar characteristics. First, an overly simplified example. Because equity holders are only liable for capital at risk (what money they put in), with the effects of leverage, they can increase their upside with a bottom of bankruptcy. This will encourage them to take on projects even if they have a stand-alone negative NPV (but a positive NPV with regards to the equity holder's return and relationship in bankruptcy - equity holders don't lose more money then they put in).

However, the debt holders will require a larger return on their debt to compensate them (make them whole) and offset the risk. This in turn can make projects unattractive and become prohibitive.
However, shareholders can introduce debt covenants in order to restrict the their own flexibility (preventing them from taking on too much risk and inflating their upside) to secure financing and ensure debt holders that they won't have to bear the dead weight loss of projects which fail.
Again, a counter intuitive result: You can do better by restricting your choices.

Looking at BCG's (In)Famous 2x2 Matrix with HHI

Today, we were talking about BCG's 2x2 Matrix (shown above) in our marketing class and our professor proposed to specifically define market share using a benchmark of the industry leader (or if the company was the market leader, the second place leader) as the line between High and Low Market Share. He acknowledged the primary shortcoming that using this definition, there can only be (by definition) one cash cow in the industry. He then introduced the idea of Coke and Pepsi with 52% and 48% relative marketshare (a slight exaggeration to prove a point) where they are both cash cows generating regular cash flows, but failing the definition: Pepsi would then be "dropped" as a project because of poor systematic definition. Or even if you use a given number (say x%) it doesn't account for the number of firms or size of firms.

In thinking about this, I also started to think about how we might be able to use the Herfindahl-Hirschman Index (HHI)to help correct for this problem. The current problem in the above standard proposed model is the definition of "market share" doesn't include competitiveness of the market (or lack thereof) when defining a cash cow. However, by definition the HHI looks at both the market share of the leaders as well as the effect on competitiveness from their relative size to each other.

Having said that, I would change "Market Share" in the horizontal axis to "Competitive Market Share" or mathematically:

Competitive Market Share = Competitive Market Capture / HHI

Where,

Competitive Market Capture = [% Market Share * 100]^2

Using this formula, we can tell that in the extremes, it works. For instance in a monopoly, Competitive Market Capture = HHI, so Competitive Market Share = 1.0 or 100%

In "perfect" competition (infinite number of firms with infinitesimal or marginal / trivial /zero market share), Competitive Market Capture = 0, Competitive Market Share = 0.0 or 0%.(Actually, to try to use "layman's" calculus terms, the Competitive Market Capture would be by definition a "smaller" zero than the HHI).

Also, because of the effect of squaring the market share (as is the case in HHI) we account for the effect of size in terms of competitiveness.

Having said that, the finance perspective is different then the marketing perspective. The only thing that really matters: Positive NPV.

Past Behaviour Predicting Future Performance

Often we've heard the phrase "Past behaviour is [not] a good predictor of future performance".

The above sentence includes the word [not] in finance, but excludes the word [not] when dealing with people (I think most psychologists would suggest). In short, history predicts people, but not companies or markets.

It kind of bothers me when I see maxims which are essentially identical in one case (individuals), but don't apply en mass (for groups). However, it reminds me of an interesting result I noticed relating to random motion.

If you have a dot in space, and you define it's movement as being "random", over time, the dot will essentially remain in the same spot (the expected value of random movement for one dot is zero change over time).

However, if you have multiple dots on a page, each who's movement is individually defined as "random", over time, you will actually experience diffusion. This is a bit counter intuitive as you would expect that since each individual's dot is random and because of the above result (where individual dots with random movement are expected not to stray to far from their original position) that individual dots won't move. If I'm not mistaken, the diffusion should actually take a normal distribution.

Latin America International Study Tour (LAIST) - Class Begins

Today, we had our first class for the Latin America International Study Tour (LAIST) with our professor Anil Verma. His style is certainly different from Walid, but you can tell straight away that it will be a unique experience of a different flavour (given we are also going to Latin America versus the Middle East). It suddenly occurs to me that the feel of the tour will greatly influenced by the professor who is running the tour (I'll have to confirm this hunch with people going on other tours: China, India and Europe).

We have four assignments to accomplish and I've taken advantage of my previous "experience" and have already found a partner to work with and a room mate.

Our first class was a good warm up getting us familiar with the major exports, businesses, history and cultural aspects in Brazil. We'll have plenty more work to do shortly as we will have a similar task as in the Middle East tour of researching the companies we will be going to visit.

We'll be having classes almost every week between now and when we leave. We are all excited already and talking about events and places we want to see.

Role Playing in Leadership

Yesterday, we were in our leadership discussing a case about an aggressive investment banker, "Rob Parson", who was being abbrasive but accomplishing the job by increasing the firms revenue and market share. However, the issue was his attitude and fit into the culture of his firm, Morgan Stanley.

Our professor asked two of us to role play, one to be the manager and one to be the banker. She asked the class: "Who can channel Rob Parson?" and there was a humming of my name in the class. A friend sitting next to me kept poking me to raise my hand up so I finally did. The professor looked over to me and asked me if I wanted to play the role of Rob, the investment banker, as long as I didn't use "inappropriate language" (even though that is what happened in the actual case).

My classmate, Sid, played the role of the manager and was sitting a few seats to my left. The chalk board was covered with notes from our discussion and we immediately began to draw down arguements in defending our positions:

"You don't fit into our culture, we want you to be more like us to work better with us."
"If you want me to be more like you, then you want a market share of 2%!"
"You don't treat people well and they don't want to work with you! I can't promote you!"
"The industry has expectations and we need to move faster! You need to decide if you want an investment banking division!"

By the end, our discussion got really heated and we lost ourselves in the moment as we really had at each other. The teacher halted the conversation and took over to show us what actually happened in the case: Rob walked out of the room.

Our classmates were generous with their applause, but it was an intense exercise. Sid and I shook hands over a great debating challenge where tempers rose and it was a lot of fun.

Strategy II Case - Ben and Jerry's

This morning we completed our Strategy II Case, Ben and Jerry's Ice Cream. Previously (last Thursday), our class began the discussion and during the break, a few of my friends (Monika and Uzair) recommended that we should have ice cream at the class to lead into the discussion. That was all the motivation I needed.

We had a "good night" yesterday at the Super Bowl, but there were certain priorities that had to be looked after. This morning, the Metro just beyond Spadina and Bloor is probably out of Ben and Jerry's. I picked up a couple pints of ice cream (only 5 different flavours). There were some flavours that came up in our previous discussion (Chunky Monkey, Half Baked, and Chocolate Therapy), however I was only able to find the first two of the three.

Prof. Silverman was a good sport, allowing us a few moments before the discussion to help ourselves to some ice cream. Proceeds collected in the tip cup will be donated to the Haiti relief fund.

Our class had a discussion about the "current" (1995) state of Ben and Jerry's, what challenges they were facing, and what strategy we would recommend moving forward based on the positioning of their product along several dimensions of value. It was interesting to talk about what people value in the product and brand, their image as being socially responsible and how they decided to proceed.

Inter MBA Social - Haiti Relief - Cheval Nightclub

Last night was a great night out. Several MBA schools: DeGroote (McMaster) invited Rotman, Ryerson, Schulich, and Laurier down to Cheval Night club for an Inter MBA Social with ticket proceeds going to benefit Haiti.

Strange night, I saw a good friend of mine from McMaster Engineering who is now apparently a manager at TD as well as my old roommate from UCC who I haven't seen in 10+ years. It's a small world.

Rotman was out celebrating in force. The major banks had just released their offers and I'm proud to say that Rotman has swept almost all of the IB jobs on the street. This is a testiment to the support we received. To celebrate, we polished off a few bottles and had a great time.

Financial Modeling with Ian Schnoor

On Wednesday, Rotman hosted Ian Schnoor to do a free course through PACE, Financial Modeling 1 - Building a Financial Model.

He's style was very organized and structured, with an emphasis for presenting the model in physical printed paper format as well as on Excel on a computer. Before I had come to Rotman, I was recommended by a friend to take his course. He offers his course with his company, the Marquee Group, is also offered through the CFA (which is much more expensive than at Rotman).

There is a lot of interest generated for his next related course: Financial Modeling 2 - Valuation Analysis. I'd recommend a financial modeling course for anyone who is serious about getting into finance.

CFA Level II - Study Begins

I was studying for the CFA Level II on Sunday and I noticed that some of the topics covered in the Equity Analysis portion were items that I was pondering earlier including: alternate method of including the value of risk in DCF, inflation as a reasonable proxy for long term sustainable growth in a GGM or DDM, the constant relationship between ROE, k, PE, Dividend payout / retention, growth rate etc.

I'm very excited to be starting my study for the CFA Level II. Already, I'm learning a lot and getting confirmation and validations on some of the ideas I had pondered earlier as well as correction on some misconceptions.

So far, I'm particularly impressed with the integration of macro economic factors on valuations and approximating growth rates and factor variables in valuations via economic indicators (GDP growth, inflation, CPI etc). I am absolutely fascinated at the interplay and relationships for how different disciplines of study interact and how the mechanics of economics and strategy affect the mechanics of finance. Also, I think that the topics covered are pragmatic and absolutely brilliant in terms of applying theory in practice.

International Exchange Program - London Business School

On Monday, students at Rotman heard news as to the status of their international exchange program applications. There was a bit of chatter as we heard which students would be going to which schools. Some of my good friends will be going to National University Singapore (NUS), Melborne Australia, Capetown South Africa, and a variety of schools all over the world.


Personally, I was very lucky to learn that I was accepted to attend LBS in the spring (second half) of my second year in the MBA program.


There are many considerations students must make when applying, including finding a school that meets their career goals, geographic preference and how they will represent Rotman when away. Specifically, students consider what jobs they want "out of the gate", what electives they want to take and what part of the world they want to live in.

It was a friend of mine (Rotman '08) who was attending NUS and visiting me in Malaysia who convinced me to go to Rotman to do my MBA and I am forever grateful for the conversation.

I'm looking forward to continuing my blog when I'm over there for Spring of my second year (Jan to Apr 2011) and I'm hoping to have plenty of visitors (in the same manner as my trip to NYC) during my stay.

The Growing Potential of Islamic Finance in Western Economies

On Friday of last week, our professor, Walid Hejazi, was acting as host to a panel of speakers discussing "The Diversification of Global Finance and Opportunity: The Growing Potential of Islamic Finance in Western Economies".

Panelists included: Michael Ainley, Head of Wholesale Banks and Investment Firms Dept., UK Financial Services Authority (London, UK), Dany Assaf, Partner, Bennett Jones LLP, David Dodge, Senior Advisor, Bennett Jones LLP and former Governor, Bank of Canada, Mohammad Fadel, Assistant Professor of Law, University of Toronto Faculty of Law.

One of the interesting take aways came in the form of a question at the end of the session. The background was that one of the common lessons we had learned in the Middle East study tour is that Islamic finance is not exempt from the mechanics of finance (requiring a reasonable rate of return proportional to the risk of the investment - the foundation of finance).

As a result, there are many Islamic financial transactions which mirror or replicate similar instruments in "conventional" finance. While there are some issues which arise: UK law requires that deposits are guaranteed and insured, however Islamic finance doesn't not permit the guarantee of loans (provisions against default penalities) there are some unique solutions which arise: Depositors can waive their right to guaranteed deposits.

This raises an interesting question: Is Islamic Finance only for Muslims? And the answer is unequivocally: "No". The principles of Islamic Finance, while rooted in teachings from the Koran, are only intended to drive the moral thought process behind why the instruments are so structured. However, there is no reason why someone from a "western" culture wouldn't be interested in buying "stable, asset backed securities which happen to be Sharia compliant". It's like humus. It's a tasty, healthy and convenient snack which people buy without concern for the fact that it also happens to be Halal.

In fact, based solely on their merits as financial instruments, greater demand for Islamic products through improved due diligence and stable, equity and asset based transactions would improve their marketability by providing another high quality asset class in the market.

Legacy: The Million Dollar Question

I look at my classmates, what rock stars they will be in the future and I ask them: "What do you want your legacy to be? 10 years from now, when you make heaps of money and your tax accountant suggests you need to make a million dollar contribution to a charity, where will you put your money? Would you want your name on a junior highschool? A cancer ward in a hospital? A park bench?"

I used to ask my friends at McMaster Engineering to remember McMaster in their donations (Mac Lab Endowment comes to mine) in a half joking attempt to "keep DeGroote out of McMaster" (Micheal DeGroote has been buying up parts of McMaster including the business school and life sciences department... We've been wondering when they'd rename the school DeGroote University).

Joking aside, the question is intended to provoke introspection. Most people will give to something they feel is a worthy cause or something which helped define them as a person. When presented with the prospect of where to make a significant contribution (the amount itself is trivial, whether people feel their ambition would be better accomplished with 10k or a billion dollars is not important - increasing the fictitious sum of money is an easy enough task) people think a little harder about what's important to them and you get some surprisingly personal answers. I'd also like to think that people learn a little bit more about themselves when confronted with the altruistic challenge.