syllabus · 2019-07-03 · department of finance 4219 sp2018 papadakis syllabus page 2 note -...

Department of Finance

4219 SP2018 Papadakis Syllabus page 2 note - Shaded cases indicate assignment 1

Syllabus 4219 - Advanced Corporate Finance Spring Semester of 2018 Instructor: Kennia Papadakis – Senior Lecturer in Finance [email protected] 234 Fisher Hall

Office hours: Monday-Wednesday-Friday, 10 AM to 11 AM, or by appointment. Students are required

to notify via email if planning to attend office hours or if a different day and time needed.

The content of this document applies to all the following sections:

Course Description & Scope

This course is a capstone undergraduate elective in the area of Corporate Finance. The course helps students to bridge the gap between the theory of finance and the reality of decision-making as a financial manager through the use of real world case studies. Students learn to analyze issues, challenges and opportunities faced by the corporation, and to provide recommendations for a best course of action to the management team. This is a full semester course and case study-based. We build upon financial principles and valuation tools covered in Corporate Finance and extend those to the application on topics like capital budgeting, new program / new product opportunity valuation, enterprise valuation, capital structure and the financing decision – debt versus equity; IPO pricing and process, as well as aspects of mergers and acquisitions like analysis of strategic fit and synergies case valuation.

Pre requisites are BUSFIN 4201, 4211, 4221, and 4250.

Considering this is an advanced course in corporate finance, students enrolled in this class are expected to be proficient in financial statement analysis, time value of money, basic investment decision rules as net present value, IRR, payback, and weighted average cost of capital (WACC).

If needed, please take some time to review the recommended reading material available online on

Canvas. To reach this content go to the class Canvas>Modules>Fundamentals. This content will

be available for reference throughout the semester.

Similar content may also be found in the reference textbook: Fundamentals of Corporate Finance,

3rd edition, Berk | DeMarzo | Harford. Please refer to the following chapters as you see fit:

o Chapter 3 – Time Value of Money: An Introduction

o Chapter 4 – Time Value of Money: Valuing Cash Flow Streams

o Chapter 5 – Interest Rates

Section Meets Monday / Wednesday / Friday Room

4700 11:30 AM – 12:25 PM Schoenbaum 305

34200 12:40 PM – 01:35 PM Schoenbaum 305

4702 01:50 PM – 2:45 PM Schoenbaum 305

4701 03:00 PM – 03:55 PM Schoenbaum 220

mailto:[email protected]



Course Material There are no required textbooks for this class, however, the following are highly recommended as reference:

1) Corporate Finance, by Jonathan Berk and Peter DeMarzo, 4th edition, Pearson Series in Finance, 2017 (earlier editions are also acceptable). There is also a 4th edition just released (if used for another course this semester this edition is also acceptable)

2) Damodaran on Valuation, second edition. By Aswath Damodaran, Wiley Finance.

There is a Required Case Course pack available via Harvard Business Publishing that contain business cases and technical notes that will be used through the semester. The course pack can be purchased online at https://cb.hbsp.harvard.edu

Following are the cases and articles included in the course package:

Count

Cases

Item #

1 Diamond Chemicals PKC (A): The Merseyside Project UV2493 2 Nike, Inc.: Cost of Capital UV0010 3 Hansson Private Label: Evaluating an Investment in Expansion 4021

4 The New Heritage Doll Company 4212

5 Target Corporation UV1057 6 Winfield Refuse Management, Inc. 913530

7 Hill Country Snack Foods Co. 913517

8 Facebook W12453 9 JetBlue Airways IPO Valuation UV2512

10 Valuation of Air Thread Connections 4263

11 Mercury Athletic: Valuing the Opportunity 4050

12 The Timken Company UV0519 13 Stanley Black & Decker 211067

14 Melon Financial and the Bank of New York 208129

Count Articles / Background or Technical Note Item # 1 Article: A Refresher on Cost of Capital H02110 2 Article: Do you know your cost of capital? R1207L 3 Note: Theory of Optimal Capital Structure 9279069 4 Note: Capital Structure Theory – A Current Perspective UV0105 5 Note: Capital Structure and Value UV3929 6 HBR Article: To Sink or Swim When Floating Stock IIRO76 7 HBR Article: If Snap Strategy is Building New Products.. H03HE0 8 HBR Article: What’s It Worth?: A General Manager’s guide to Valuation 97305 9 HBS Background Note: Valuation Methods and Discount Rate Issues 205116

10 HBS Background Note: Evaluating M&A Deals – Equity Consideration 208077 11 HBS Background Note: Evaluating M&A Deals – Intro to deal NPV 208060 12 HBS Background Note: Evaluating M&A Deals – Accretion vs dilution of EPS 208059

https://cb.hbsp.harvard.edu/



All students are required to purchase the package using the unique link below:

http://cb.hbsp.harvard.edu/cbmp/access/72440051

Each and every student in the class is required to purchase a case course pack. You have the option to purchase electronic files or printed copies. Whichever option you chose, the cost to the students is $110.50. You will notice that most cases will have supplemental spread sheets; these are at no extra cost. Other – newer cases will offer an alternative audio version for additional $1/case. You are not required to purchase them, they are optional.

Why Case Studies?

We use the case method to enhance your understanding of course material. Cases present real-

world, complex problems faced by financial managers and general managers that require analysis

and use of judgment to reach important business decisions. Cases are used extensively in most

graduate business courses.

The use of case studies is a very effective learning method because it emphasizes student self-

learning rather than a passive absorption of knowledge. Students learn to develop their critical

thinking and use their judgment to make decisions. Case studies do not always lead to a right or one

course of action for the decision maker. Rather, decisions are justified based on sound financial

assumptions and through analysis of the situation at hand. Therefore, the analysis and discussion of

cases is very useful because it teaches the students how to use the principles of finance to define

and analyze problems, and make recommendations for the best course of action.

For each case study preparatory questions are included in the appendix of this syllabus. These

questions are intended to help students dissect the case and prepare for class discussion.

Preparatory questions may differ from homework assignment questions. Students are not required to

write and submit any reports answering the preparatory questions. However, it is strongly

recommended to use these questions as guide to prepare discussion notes to bring to class.

Please note that according to standard case discussion practice the instructor is not allowed

to discuss the case with student’s prior the scheduled class discussion. However, students

are more than welcome to ask questions and clarifications related to case assignments.

Preparing Case Studies

Most case studies in this class are short in content, some of them referred to as “brief cases”. To

properly prepare for a case study discussion, students must 1) read the case in its entirety, 2) take

notes related important financial facts and make sure to review all financial statements or exhibits

provided; 3) read the preparatory questions and 4) take notes with answers / summary related to the

preparatory questions. On average, a brief case requires at least four hours of preparation

time. Students who aim for a maximum grade in class participation should follow these

preparation guidelines.

Students should take the perspective of an external agent or consultant, providing feedback or

recommendations to the firm’s Treasurer, CFO, CEO or Board of Directors.

http://cb.hbsp.harvard.edu/cbmp/access/72440051



Lastly, a significant amount of analysis and excel work will be done during certain sessions.

However, THIS IS NOT AN EXCEL CLASS. For example, we will not spent any time explaining how

to apply formulas to use the financial data provided. We will however, use the data provided to

structure the financial analysis. This is an advanced class, proficiency in excel is required.

Grading

Description Points each Total Percentage

Homework 1 to 4 50 200 40%

Class participation 50 50 20%

250 100%

Notice that 100% of this class’s grade comes from individual components.

Homework 1 to 4

Each individual assignment gives students the opportunity to practice the concepts discussed

while applying financial tools to real-live issues. Assignments are mainly quantitative, all based

on case studies discussed throughout the semester. Students must prepare to discuss findings

and recommendations during class, and ready to support his/her assumptions.

Assignment guidelines are included in Appendix of this syllabus. Regardless of the section you

are enrolled in, all assignments are due on the date specified in the class calendar by 8 AM, no

exceptions. Any submission posted on the drop box after 8 AM is considered late and it is

subject to a 25% grade discount.

Lastly, Assignment rubrics will be available after the homework due dates to give students a

guide to their grade.

Class Participation

Students may accumulate up to 50 participation points. Points are awarded based on the quality

of contribution during class discussion and recorded every week, using the following:

2 points: student simply states / quotes facts and figures from case studies

3 points: student uses facts and figures from case studies and links them to relevant

issues discussed.

4 points: student provides insights helping resolve the issues and questions from the

case studies.

Guidelines:

- Participation is recorded during case study discussion dates, regardless of

assignment dates. This means students have the opportunity to accumulate

points every time a case study (or an article / technical note) is discussed even if

the case has not been designated as homework.

- Maximum 4 points per session when case studies are discussed and maximum of 50

points per semester. Points are awarded at the instructor’s discretion.



- Cumulative participation scores are posted on Canvas at the end of every module.

I understand not all students are used to participating during class and perhaps feel shy or

uncomfortable doing so. At the same time, I insist on grading class participation as a way to

expose students to the realities of corporate culture in the controlled environment or our

classroom.

In addition, financial analysis and decision-making require voicing ideas, issues and

recommendations, and discussing those during cross-functional meetings, many times in the

boardroom. I hope students see class participation as an opportunity to practice and acquire a

very useful skill, and not as a threat.

I encourage those who have issues with this part of the class structure to come see me during

office hours AT THE BEGINNING OF THE SMESTER so we can work together to ensure

students take full advantage of class participation opportunities.

Lastly, to ensure dynamic and consistent class participation, I will cold call.

Sitting Chart and Name Cards

For the purposes of facilitating the monitoring of participation, students should select a spot in

the classroom they wish to keep for the remaining of the semester and sit on that spot during

every session. The use of name cards is highly encouraged.

Attendance

The class will start promptly at the established time. If for any reason you are late, please make

sure to enter the classroom avoiding disruption of class discussion.

Attendance is recorded for every session, however it is not graded. Students are not penalized

for missing sessions but could benefit from having perfect attendance. At the instructor’s

discretion, attendance record will be considered for those students whose final grade is close to

the next letter grade (rounding up benefit).

In addition, attendance is linked to participation scores. If a student has an attendance record of

75% or bellow, he or she cannot possibly have a perfect participation score. (You can’t

participate if you are not present). Please come see me if you have any questions or concerns

regarding this topic (for example, if you have a series of job interviews that may be interfering

with class attendance).

Fairness in Grading We will do everything we can to grade fairly according to the quality of work produced in student

assignments. If you carefully review your assignment and become convinced that a particular

grade should be reviewed, you may submit a written justification for the reevaluation of the

assignment with two copies of all supporting materials. Your appeal will not be successful

unless you provide an extensive and well-crafted argument detailing the request. If your request

is justified, and if we determine that the points at stake are large enough that it could lead to a



letter grade change we will review your assignment at the end of the semester. No re-grading

will occur before the end of the semester (besides obvious administrative errors).

Disability Policy

Students with disabilities or requiring special accommodations must notify the section leader of

such needs at the beginning of the quarter. You should work directly with The Ohio State

University Office of Disability Services (ODS). ODS is expert at working with individual students

to provide the appropriate assistance. Should you require special instruction for the course,

please provide a written request from the ODS.

Academic Integrity

Fisher Student Standards of Conduct

According to the Standards of Conduct of the Fisher College of Business, students are expected to:

Represent themselves truthfully in all situations;

Conduct themselves in a manner that does not seek to gain an unfair advantage over other members of the Fisher community;

Demonstrate respect for all property that does not belong to them;

Be personally accountable for one’s own actions.

Students are expected to become acquainted with the Standards, to adhere to the letter and spirit of

the Standards, and to take action when witnessing a breach of the Standards. In this course, a

violation of these standards includes but is not necessarily limited to (it is your responsibility to seek

clarification of any “gray” areas):

Discussing, reviewing, or receiving notes/papers on any assignment or quiz with students who have taken the class previously (either in another section or in a prior year).

Submitting papers that do not exclusively include individual or group work, respectively.

Using any assignment in this course in fulfillment of an assignment in another course without prior written consent of both professors.



Summary Class Calendar Module I – Capital Budgeting

Date Description Readings & Assignments

Wee

k 1

Intr

o

Monday, 1/8 Introductions, syllabus overview, expectations

Syllabus

Wednesday, 1/10 An introduction to Advanced Corporate Finance

Lecture Notes In class exercise: Disney’s Frozen (Canvas)

Friday, 1/12 Project Valuation (intro to case method and recap of basic concepts)

Case 1: Diamond Chemicals PLC (A): The Merseyside Project (UV2493)

Wek

2

Warm

-up

s

Monday, 1/15 No class – MLK Jr. Day

Wednesday, 1/17 Cost of Capital (recap) Articles:

A Refresher on Cost of Capital (H02110)

Do you know your cost of capital? (R1207L)

Friday, 1/19 Cost of Capital (applied) Case 2: Nike (UV0010)

Wek

3

Monday, 1/22

Wednesday, 1/24 Capital budgeting – forecasting earnings – from revenues to Free Cash Flows

Case 3: Hansson Private Label – Evaluating an Investment in Expansion (4021) Friday, 1/26

Wee

k 4

Monday, 1/29 Capital Budgeting – choosing between alternatives

Case 4: The New Heritage Doll Co. (4212) Homework 1 due Monday, 1/29 at 8 AM (Canvas drop box) Wednesday, 1/31

Friday, 2/2

Wee

k 5

Monday, 2/5 Back to the top: Capital budgeting and strategy

Case 5: Target Corporation (UV1057)

Wednesday, 2/7



Summary Class Calendar (continues) Module II – Capital Structure and the Financing Decision


Wee

k 5

co

nti

nu

es

Friday, 2/9 Debt versus Equity Financing

Articles discussion:

Theory of Optimal Capital Structure (9279069)

Capital Structure Theory – A Current Perspective

(UV0105)

Wee

k 6

Monday, 2/12 Debt versus Equity financing application

Case 6: Winfield Refuse Management (913530)

Wednesday, 2/14

Friday, 2/16 Debt versus Equity Financing continues

Article discussion: Capital Structure and Value (UV3929)

Wee

k 7

Monday. 2/19 Capital Structure Decision application

Case 7: Hill Country Snacks Foods (913517) Homework 2 due Monday, 2/19 at 8 AM via Canvas drop box.

Wednesday, 2/21

Friday, 2/23

Wee

k 8

Monday. 2/26 Equity Financing – The IPO

Article discussion:

To Sink or Swim (IIR076)

If Snap‘s Strategy is building new product (H03HE0)

Wednesday, 2/28 IPO application Case 8: Facebook (W12453)

Friday, 3/2

Wee

k 9

Monday. 3/5 IPO application continues

Case 9: JetBlue (UV2512)

Wednesday, 3/7

Friday, 3/9

Wee

k

10

Monday 3/12 through Friday 3/16

Spring Break – no classes

Monday, 3/19 No class



Summary Class Calendar (continues) Module III – Enterprise Valuation and M&A


Wee

k 1

1

Wednesday, 3/21 Valuation methods and issues

Article discussion:

What’s It Worth?: A General Manager’s Guide to Valuation (97305)

HBS Background Note: Valuation Methods and Discount Rate Issues (205116)

Friday, 3/23 WACC based and The Adjusted Present Value

Case 10: AirThread Connections (4263)

Wee

k 1

2

Monday, 3/26

Wednesday, 3/28

Friday, 3/30 WACC-based and market multiples

Case 11: Mercury Athletic: Valuing the Opportunity (4050) Homework 3 due on Friday, 3/30 at 8 AM via Canvas drop box.

Wee

k 1

3

Monday, 4/2

Wednesday, 4/4

Friday. 4/6 Growth and Value Creation

Background notes on Evaluating M&A deals:

Equity Consideration (208077)

Introduction to Deal NPV (208080)

Accretion vs Dilution of EPS (208959)

Wee

k 1

4

Monday, 4/9 M&A - cash deal Case 12: The Timken Company (UV0519)

Wednesday, 4/11

Friday, 4/13 M&A equity consideration and deal value

Case 13: Stanley Black & Decker, Inc (211067)

Wee

k 1

5

Monday. 4/16

Wednesday, 4/18 Final Case Case 14: Melon Financial & the Bank of New York (208129) Homework 4 due on Wednesday, 4/18 at 8 AM via Canvas drop box. April 23 – last class – case warp up and last day for participation; class survey.

Friday, 4/20

Wee

k 1

6 Monday. 4/23



Appendix

Detailed Weekly Schedule

Week 1 – Introductions

Monday, January 8 2018

Introductions and Syllabus Overview Reading: Course Syllabus and lecture notes Source: Canvas files

Topics: Personal introductions, ice breakers Class content, course calendar, expectations and rules of engagement.

Wednesday, January 10, 2018

Introduction to Advanced Corporate Finance Reading: Lecture Notes In class exercise: Disney’s Frozen (Canvas)

Topics: Introduction to capital budgeting, the investment decision; refresh of strenuous cost and benefit analysis

Friday, January 12, 2018

Project valuation Case: Diamond Chemicals PLC (A): The Merseyside Project (UV2493)

Topics: Refresh on project valuation and industry analysis. Introduction to the case method with a case that covers basic concepts related to benefit and cost analysis, and industry and competitive analysis.

Case preparatory questions:

1) How attractive is the Merseyside project? By what criteria?

2) What changes, if any, should Lucy Morris ask Frank Greystock to make in his

discounted cash flow (DCF) analysis? Why?

3) What should Morris be prepared to say to the Transportation Division, the

Director of Sales, her Assistant Plant Manager, and the Analyst from the

Treasury staff?

4) Should Morris continue to promote the project for funding?



Week 2 – Module I: Capital Budgeting (warm-ups)

Monday, January, 15 2018

MLK Jr. Day – No Class

Wednesday, January 17, 2017

Sources and cost of capital. Reading (Articles):

A Refresher on Cost of Capital (H02110)

Do you know your cost of capital? (R1207L)

Topics: Estimating the firm’s cost of capital and its application in the investment and financing decision. Cost of debt and cost of equity. WACC and the Capital Asset Pricing Model

Friday, January 19, 2018

Case: Nike Cost of Capital (UV0010)

Topics: Cost of Capital applied


1) Do you agree with Joanna Cohen’s WACC Calculations? Why or why not?

2) Using the data provided in the case exhibits, calculate the cost of equity using

a) the Capital Assets Pricing Model (CAPM), b) the Dividend Discount Model,

and c) the Earnings Capitalization ratio.

3) If you do not agree with Joanna, calculate your own WACC and compare.

4) What is the implied stock price of Nike based on both Joanna’s assumptions

and your own?

5) What are the advantages and disadvantages of each method?

6) What are the sources of risk to Nike’s cash flows?



Week 3 – Module I: Capital Budgeting (warm-ups)

Monday, January 22, 2018

Case 2: Nike Cost of Capital (UV0010) – Continues Case wrap-up

Topics: Wrap-up cost of capital and compare WACC and Nike valuations among students


1) Do you agree with Joanna Cohen’s WACC Calculations? Why or why not?

2) Using the data provided in the case exhibits, calculate the cost of equity using

a) the Capital Assets Pricing Model (CAPM), b) the Dividend Discount Model,

and c) the Earnings Capitalization ratio.

3) If you do not agree with Joanna, calculate your own WACC and compare.

4) What is the implied stock price of Nike based on both Joanna’s assumptions

and your own?

5) What are the advantages and disadvantages of each method?

6) What are the sources of risk to Nike’s cash flows?

Wednesday January 24 through Friday Jan 26, 2018

Case 3: Hansson Private Label – Evaluating an Investment in Expansion (4021)

Topics: Expansion and risk. Forecasting earnings and issues associated with forecasting. Capital planning process. Hansson Private Label’s owner and CEO are considering and investment in unprecedented expansion based on a proposal from an important customer in a very competitive industry.


1) How would you describe Hansson Private Label (HPL) and its position within

the private label personal care industry?

2) Estimate the project’s NPV. Based on the NPV, would you recommend that

Tucker Hansson proceed with the investment?

3) What issues – if any – do you see with this investment?

4) Are management’s projections realistic? Why / why not?

5) Using assumptions from Executive VP of Manufacturing, Robert Gates,

estimate the project’s Free Cash Flows.

6) What changes – if any – would you incorporate to Gate’s assumptions?

7) Using CFO Sheila Dowling’s projected WACC schedule, what discount rate

would you choose?



Week 4 – Module I: Capital Budgeting

Monday Jan 29 through Friday Feb 2, 2018

Case 4: The New Heritage Doll Co. (4212) Homework 1 DUE on Monday 1/29 at 8 AM via Canvas file upload.

Topics: Choosing between alternatives. Evaluating two opportunities and recommending one to the firm’s capital committee.


1) Discuss the Toy Doll Industry and New Heritage’s position within.

2) To succeed in the long run, New Heritage must have a solid strategy for

Branded Goods. Do you believe these two projects may be the answer? Why

or why not?

3) What other alternatives could New Heritage explore? (Hint: these two projects

are mutually exclusive. New Heritage can only pick one)

Assignment questions:

1) Two projects are presented in the case, each with somewhat different means

to improve growth and profitability of the branded goods category for New

Heritage. Evaluate these two projects and provide a recommendation on

which one to invest. Be prepared to discuss your selection and the

assumptions supporting your analysis.

Guidelines:

Submit one excel file with the answers to the assignment questions,

calculations and clearly list your assumptions.

Show your work. Hard coded answers are not sufficient for proper

grading.

All submissions are electronic, via Canvas drop box



Week 5 – Module I: Capital Budgeting

Monday Feb 5 through Wed Feb 7, 2018

Case: Target Corporation (UV1057) Reading & Videos: Article: Target is slipping |Bloomberg Business Week June 26, 2017 - PDF available on Canvas Watch video | https://www.cnbc.com/video/2017/02/28/target-ceo-were-confident-in-our-new-direction.html Headlines: video | https://www.youtube.com/watch?v=ClM9_LmBRWQ

Topics: Capital budgeting and long term corporate strategy. Balance between financial performance indicators and long-term strategic implications. Case study and fast-forward look at Target® and challenges faced today.


1) Describe and critique Target’s capital-budgeting system. Give specific

consideration to the role of the real state managers and the makeup of the

CEC.

2) Which of the CPRs should Dough Scovanner accept?

3) From the following evaluation criteria, which ones would you consider

critical for your selection:

a. NPV and IRR and Size of the project

b. Cannibalization of other store’s sales

c. Store sensitivities

d. Variance to prototype

e. Customer demographics

f. Brand awareness impact

g. Fit with long-term strategy

4) Based on your analysis, select the top three projects you recommend

Target to pursue. Prepare to support your selection during class.

Friday, Feb 9, 2018

Articles discussion: Theory of Optimal Capital Structure (9279069) Capital Structure Theory – A Current Perspective (UV0105)

Topics: Capital structure theory

https://www.cnbc.com/video/2017/02/28/target-ceo-were-confident-in-our-new-direction.html

https://www.cnbc.com/video/2017/02/28/target-ceo-were-confident-in-our-new-direction.html

https://www.youtube.com/watch?v=ClM9_LmBRWQ



Week 6 – Module II: Capital Structure & the Financing Decision

Monday, Feb 12 through Wed Feb 14, 2018

Case 6: Winfield Refuse Management (913530)

Topics: Selecting between debt and equity financing. Issues, advantages and disadvantages. Financial considerations, ownership and the board of directors.


1) What are the annual cash outlays associated with the bond issue? 2) What are the annual cash outlays associated the common stock issue? 3) How would you respond to each director’s assessment of the financing

decision?

4) How should the acquisition of MPIS be financed, taking into account: a. The issues of control b. Flexibility c. Income, d. Risk

Friday, Feb 16, 2017

Article discussion: Capital Structure and Value (UV3929)

Topics: Capital structure theory Excel work during class.




Monday, Feb 19 through Friday, Feb 23, 2018

Case 7: Hill Country Snacks Foods (913517) Homework 2 due Monday, Feb 19 at 8 AM via Canvas

Topics: Capital Structure.


1) How much business risk does Hill Country face? How much financial risk would the company face at each of the three alternative debt-to-capital ratios presented in case Exhibit 4?

2) How much value could Hill Country create for its shareholders at each of the three alternative debt levels?

3) How would the financial markets react if the company increased its financial leverage?

4) Considering Hill Country’s corporate culture, what arguments could you use to persuade CEO Keener or his successor to adopt and implement your recommendation?


1. Based on your analysis, what debt-to-capital structure would you recommend as optimal for Hill Country Snack Foods? Support your assumptions.

2. What are the advantages of adding debt to the capital structure? Financially and otherwise?

3. How would issuing debt impact the company’s taxes and expected costs of financial distress?

Guidelines:




grading.





Monday, Feb 26, 2018

Article discussion:

To Sink or Swim (IIR076)

If Snap‘s Strategy is building new product. (H03HE0)

Topics: The IPO decision

Wednesday, Feb 28 through Friday March 2, 2018

Case 8: Facebook (W12453)

Topics: The IPO decision, process, issues, competitive environment and investors’ expectations. Valuation of unseasoned firms in a high growth, dynamic industry.

-Case preparatory questions:

1) How does Facebook make money? What are the value drivers of its

business? What is its competitive advantage relative to other social

networking companies?

2) Why is Facebook going public? What is the planned use of proceeds from the

offering?

3) What was going on in the U.S IPO markets prior to Facebook’s offering?

What has been the performance of recent IPOs?

4) What is the intrinsic value of a Facebook share? How does this valuation

compare to the price talk from the underwriters?

5) What issues or challenges would bring up to Facebook’s top management

regarding the IPO pricing? Short term? Long term?




Monday, Mar 3 through Friday Mar 9, 2017

Case 9: JetBlue (UV2512)

Topics: The IPO decision. Valuation of unseasoned firm in a low growth, highly competitive industry. Long-term growth, value creation and the financing decision.


1) What are the major drivers in the airline industry? 2) Specifically for JetBlue, what are the disadvantages of going public? What

are the advantages?

3) What different approaches can be used to value JetBlue’s shares?

4) How is JetBlue planning to use the proceeds from the IPO? 5) What other alternatives – if any – does JetBlue have in place of raising

equity to finance its expected growth? 6) You are in the position to consult JetBlue’s management in its pricing

process – however, you are an independent analysis (not a banker). At

what price would you recommend that JetBlue offer its shares? 7) What observations can you make of JetBlue’s growth projections? (list at

least three observations) 8) What are the potential risks facing JetBlue’s future cash flows? (list at

least three)



Week 10 – 3/12 – 3/16 Spring break – no class. Monday 3/19, no class.

Weeks 11 & 12 – Module III: Enterprise Valuation & M&A

Wednesday, Mar 21, 2018

Articles discussion:

What’s It Worth?: A General Manager’s Guide to Valuation (97305)

HBS Background Note: Valuation Methods and Discount Rate Issues

Topics: Valuation methods and issues.

Friday, Mar 23 through Monday, Mar 28, 2018

Case 10: AirThread Connections (4263)

Topics: WACC and The Adjusted Present Value


1) In valuing Air Thread, should Ms. Zhang use WACC, APV, or some

combination of thereof?

2) How should the cash flows be valued for 2008 to 2012? How should the

terminal value (or ongoing concern) be estimated?

3) How should the non-operating investments in equity affiliates be accounted

for in the valuation?

4) What discount rate should Ms. Zhang use for the un-levered FCF for 2008 to

2012? Is this the same discount rate that should be used to value the terminal

value? Why or why not?

5) Develop an estimate of the long-term growth rate that should be used to estimate AirThread’s terminal value. Using your estimate of long-term growth, what is the present value of the AirThread’s going concern?

6) What is the total value of AirThread before considering any synergies? What is the value of AirThread assuming Ms. Zhang’s estimates for synergies are correct?




Friday, Mar 30 through Wednesday Apr 4, 2018

Case 11: Mercury Athletic: Valuing the Opportunity (4050) Homework 3 due on Friday, 3/30 at 8 AM via Canvas drop box.

Topics: Enterprise valuation, WACC-based and market multiples applied to the valuation of Mercury Athletics.


1. Is Mercury an appropriate target for AGI? Why or why not?

2. Review the projections formulated by Liedtke. Are they appropriate?

3. How would you recommend modifying them?


1. Estimate the value of Mercury using the DCF method and Liedtke’s base

case projections. Be prepared to defend additional assumptions you make,

2. Do you regard the value you obtained as conservative or aggressive? Why?

3. How would you analyze possible synergies or other sources of value not

reflected in Liedtke’s base case assumptions?

Guidelines:




grading.





Friday, Apr 6, 2018 Background notes on Evaluating M&A deals:

Equity Consideration (208077)

Introduction to Deal NPV (208080)

Accretion vs Dilution of EPS (208959)

Topics: Equity consideration, deal structure, Deal NPV and EPS effect

Monday, Apr 9 through Wednesday, Apr 11, 2018

Case 12: The Timken Company (UV0519)

Topics: Enterprise valuation within an acquisition’s background. Balancing act - acquisition meeting strategic investments and financing objectives of the firm.


1. How does Torrington fit with the Timken Company? What are the expected

synergies?

2. What is your stand-alone valuation of Torrington? Be prepared to explain and

justify all the major assumptions used in your estimate.

3. What is your with-synergies valuation of Torrington? Be prepared to explain

and justify all the major assumptions used in your estimate.

4. Should Timken be concerned about losing its investment-grade rating? How

do Timken's financial ratios compare with those of other industrial firms in

2002? How would those ratios change if Timken borrows $800 million to buy

Torrington?

5. If Timken decides to go forward with the acquisition, how should Timken offer

to structure the deal? Is Ingersoll-Rand likely to want a cash deal or a stock-

for-stock deal?




Friday, Apr 13 through Monday, Apr 16, 2018

Case 13: Stanley Black & Decker, Inc (211067)

Topics: Growth and value creation. Value of cost synergies in a merger transaction. Shareholders value, corporate governance.


1) What is the incremental value to shareholders of the cost savings (synergies) projected in this merger? How will the value of the synergies be shared in the proposed transaction?

2) After failing to complete a merger following the three prior attempts noted in the case, why should the proposed transaction be successful this time?

3) How much of the incremental value created in this transaction will go to the CEO’s of the two firms involved?

4) How do you think the leadership team at Black & Decker (other than the CEO) will view this transaction? How about the governor of Maryland (Black & Decker’s headquarters state)?

5) What issues of corporate governance and social policy does the Stanley Black & Decker merger raise?

6) If you were a shareholder of Stanley would you vote in favor of this transaction? Would you vote in favor of the compensation arrangements? Would you vote to re-elect the directors at the next annual meeting?




Wednesday, Apr 18 through Monday, Apr 23, 2017

Case 14: Melon Financial & the Bank of New York (208129) Homework 4 due on Wednesday, 4/18 at 8 AM via Canvas drop box.

Topics: Growth and value creation, allocation of value among shareholders and management. Merger transaction in the banking industry. Value of synergies, exchange ratios. Impact on EPS.


For the purposes of the analysis, assume the following:

- The combined company will have a tax rate of 38%;

- Deposits, Short-Term Borrowings, Long Term Debt and Equity are part of a bank’s capital

structure: “Other Liabilities” are not;

- An aggregate debt beta of 0.1 is a reasonable estimate of the (average) beta of the debt that

supports the assets that give rise to the merger’s synergies;

- The equity betas reported in Exhibit 2 may be used as estimates for the betas of the equity that

supports the assets that give rise to the synergies; and

- The market risk premium is 6.2%.

- “Legacy” shareholders are the former shareholders of BNY or Mellon, after they become

shareholders of the new company.)

1) How much confidence do you have in your estimate of synergies? 2) Will synergy cash flows allow the banks to increase their debt? 3) Based on the last closing stock prices, and assuming no synergies, what

exchange ratio would leave the per-share values of Mellon and BNY stock the same? How does the actual exchange ratio differ from this number? Who benefits from the difference?

4) In the absence of synergies, what exchange ratio would keep the earnings attributed to each legacy share in Q4 2007 equal before and after the merger?

5) How do synergies impact accretion/dilution analysis?

Group Assignment Questions:

1) What is the value of the cost savings synergies created by the deal? 2) Under the terms of the proposed deal, what fraction of the synergies Mellon

legacy shareholders will capture? By BNY legacy shareholders? 3) In the absence of synergies, is the proposed deal accretive or dilutive for

Mellon shareholders? For BNY shareholders?

Guidelines:

Submit two files: 1) one excel file with your calculations and 2) one two-

page, word document or executive brief answering the assignment questions

and listing all assumptions (outside the ones provided in the preparatory

questions).



END OF SYLLABUS

Changes to this syllabus are at the instructor discretion. All changes are communicated to

students promptly after they are effective via email and/or Canvas announcement. Students are

responsible for proactively follow up with Canvas announcements and encouraged to visit the

class Canvas page at least once a day.

syllabus · 2019-07-03 · department of finance 4219 sp2018 papadakis syllabus page 2 note -...

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