GBC Leadership Conference

Yesterday was the GBC's inaugural NSITE Leadership conference, hosting such fantastic speakers as Michael Lee Chin, Don Morrison from RIM (my old boss), Robert Deluce from Porter Airlines and a host of other tremendous speakers. Topics ranged from entrepreneurship to social responsibility.

Each speaker had their own individual flair and unique experiences for how they got to be where they are now. They talked about the challenges they faced, the frameworks they relied on and how there is a constant struggle against complacency caused by success.

The event was hosted at the Hyatt on King in Downtown Toronto as the event was too large for our Fleck Atrium. I believe that there were over 300 people in attendance.

Many of the students had a great time and several members of our class were excited and already planning ideas for how they could build on the work done by this year's founding team.

Rotman Ambassador - Recruitment Info Session

Today, I was asked to be one of two students acting as Rotman Ambassadors at an evening info session for about 50 prospective students. Jeff Trapp was giving a presentation and the recruitment team asked me to represent first year students.

It was interesting as we were doing the info session in my classroom, and the notes from our earlier lecture on bonds in finance were still on the board. There were some good questions asked by applicants about what to look for in MBA programs, what life is like at Rotman, and how to put together applications.

It was great to pitch the benefits of the Rotman program to a very intelligent crowd and I would hope that my comments have driven them to take a closer look to see if Rotman is a fit for them.

Spot Rates and Bonds - Supply and Demand of Investment Vehicles

We were discussing Treasury strips for CI (Coupon Interest) and NP (Note Principle) bonds. We discussed ideas such as reconstituting bonds, arbitrage opportunities and pricing.

I had wondered before if when investment vehicles get "abstracted" (either with a derivative, in some form of aggregation etc), if it was possible to get supply and demand curves which differ from the original underlying asset.

Prof. Womack showed us the example of two otherwise identical treasury strips, both maturing in 2 years with the same $100 Face Value, but trading at nearly the same (but marginally different) prices. One was a CI strip with the ask yield at 5.78% with an ask price at $89/08 and the other was an NP strip with an ask yield at 5.79% with an ask price of $89/07.

Although these two investment vehicles have identical risk profiles, payment schedules etc. (for all intents and purposes, they are identical) they are trading at different prices. Prof. Womack described the different as being differences in supply and demand for investors who are interested in reconstituting bonds (for example). However, at the same time, since they are so related, they should trade at near identical values.

Financial Accounting II - Understanding the Story Behind Accounts

In our Financial Accounting class today (we have a new professor, Francesco Bova) and although Franco Wong (no relation) was a great professor, the material in Financial Accounting II is more "practical" building on the foundations in Fin Acc I (where we were learning mechanics of accounting).

We began by discussing cash cycle as composed of days [inventory, receivables, payables]. However, Francesco posed an interesting question: "Is it possible to have a negative cash conversion cycle?" (in the same way I had asked Prof. Franco Wong if it is possible to have a negative LIFO reserve). The answer is 'yes', but with special conditions:

Recall:

Cash Conversion Cycle = Days Inventory + Days Receivables - Days Payables

So for Cash Conversion Cycle to be negative:

• Days Inventory should be smaller
• Days Receivables should be smaller
• Days Payable should be higher

When is this the case? Look at Dell computers:

• JIT Inventory - Extremely low Days Inventory (inventory only used as needed / ordered)
• Visa and cash payments - Extremely low Days Receivable (is paid fairly immediately to Dell. It's A/R for Visa)
• Days Payable - Standard terms to suppliers

Because of these unique relationships, (which also exists in construction where revenue and cash is often recognised earlier and then placed in a treasury bond to gain interest) and is known as stretching payables. This is the act of investing cash which is dormant in a negative cash conversion cycle to make some interest income.

Finance - TVM

So we had our first finance class today where we covered the idea of TVM, PV, FV, NPV and discounting. This is the foundation of all finance concepts and, as our Professor Kent Womack described, aims to answer the question of: "How much is this worth?"

Our class is mildly disadvantaged because of this week because of the GBC Leadership conference happening on Friday which has compressed the week such that we have a finance assignment due less than 24 hours between classes. There are also group presentations every day on market updates and I feel bad for the group that has to present tomorrow: they have less than 24 hours to do their homework (allocated 2-3 hours) plus their presentation (also allocated another 2-3ish hours). It would be nice if they could eat, sleep and (more importantly) do work for other courses.

Our homework assignment is related to bond pricing and although a "different" concept for many people, it is still fairly heavily quant, requires Excel or a financial calculator and our tutorial session will be after the assignment is due, therefore a few of us will be sticking around after classes in the evening so that we can bounce ideas off each other to make sure our numbers add up the way they are supposed to.

Fundamentals of Strategic Management - SBUX

Today we hit Q2 running and had a new class, Fundamentals of Strategic Management with Anita McGahan. Her reputation certainly proceeds her, as she has been described as a protegé of Micheal Porter. You can tell with in minutes of meeting her that she's intense. Many students are intimidated by her, but in our class she was absolutely brilliant. Even some students who weren't considering consulting before are certainly considering it now.

She dived right into describing ROA and benchmarking companies versus the industries they were in versus the economy at large.She showed how a company might "out perform" the general economy, but still be "under performing" their industry. This is an idea which I had recently discussed as an extension of Nick Kerhoulas' idea for CEO compensation, but using derivatives (long / short positions) to mathematically come to the same result for bonuses (compensate CEOs and other top managers based on alpha less beta).

Also, I've previously mentioned that DuPont Analysis is one of my favourite financial frameworks because it is intuitive and Anita cut into it in more detail, specifying (as I had previously) that:

ROE = ROA x FLA

But she emphasized that FLA is a financial strategy whereas ROA is an operational strategy (I got called on this question when I was describing it in my post, but obviously Prof. McGahan described it much better. I made the mistake of saying that Total Asset Turnover, TAT, was "how much you could sell". Anita described it better as "Operational Strategy"). She even confirmed my hunch that FLA = 1 + D/E.

Also, her description of Porter's Five Force's was brilliantly (no surprise) insightful as she explained how three of the forces:

1. Buyer Power
2. Supplier Power
3. Threat of Substitution

were all measures of Value Creation (what value can be yielded by this industry - directly related to Industry Structure in the previous graphic and more specifically by the graphic below).(Also note the graphic immediately above can be recursively applied to describe an entire Value Added chain)

However, the last two of Porter's Five Forces:

1. Rivalry
2. Threat of Entry

were directly related to Value Capture (or more generically, Competitive Position as described in the first graphic above).

When it came to applying the material to the Starbucks case, she used the framework to describe where the most interesting stories were in the case, used math to describe the costs of achieving SBUX's growth goals and showed that against the balance sheet that additional fund raising was necessary to fuel growth. She dipped briefly into finance to describe EPS dilution caused by the payback periods required to cover store openings.

Even in building a potential solution, she lead the class in a discussion which critiqued possibilities such as franchising: why firms in the industry, the majority framed as operating as a sole proprietorship, would under report earnings and be disinterested in becoming a franchise.

Besides being a very technical and framework heavy course, it was certainly enjoyable. I know it sounds weird, but she kept our class in absolute stitches with her jokes about strategy and doing business (as I type this, I am aware of how awkward this appears).

To put it lightly, this promises to be an interesting class. This felt exactly like a case interview for consulting.

International Study Tour - Latin America

Upon returning from my last exam, I checked my Blackberry and found an email from the PSO relating to the Latin America International Study Tour. It was the same procedure as before: Go to the office of the Director of International Programs, Laura Wood, and see if we were selected for the tour.

Well, I am very excited to say that I've also been selected for the Latin America tour where we will be visiting Brazil and Argentina. I had originally thought that my application for the Middle East tour was weak, and as a result made doubly sure that my application for the Latin America did not have the same weaknesses.

I'd be remiss if I didn't acknowledge the help of Jenny Mila, a fellow student in my class who had lived in Argentina. She was patient enough to answer some of my questions and dispel my ignorance about that part of the world. She was helpful in providing guidance so I could look in the right places to find out more about Argentina.

I am using Rotman for as much travel as possible it seems, with my Middle East tour in January and the Latin America tour (visiting Brazil and Argentina) in May.

The India tour (also happening in May) has also just released it's candidates and I'm happy to say a few of my friends are also going to be going for that tour. We are certainly going to swap photos and stories as we embark on our adventurous excursions.