Department of Finance 4219 SP19 Papadakis Syllabus 1 Syllabus 4219 - Advanced Corporate Finance Spring Semester of 2019 Instructor: Kennia Papadakis – Senior Lecturer in Finance [email protected]234 Fisher Hall Office hours: 10:00 AM to 11:00 AM, Monday, Wednesday and Friday (or by appointment) 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 4211 and 4221. 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, 3 rd 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 4162 11:30 AM – 12:25 PM All sections meet at Schoenbaum 305 4322 12:40 PM – 01:35 PM 4164 01:50 PM – 02:45 PM
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Syllabus9 JetBlue Airways IPO Valuation (HW2) UV2512 10 Tesla Motors (A): Financing Growth 218033 11 Mercury Athletic: Valuing the Opportunity 4050 12 Valuation of Air Thread Connections
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Department of Finance
4219 SP19 Papadakis Syllabus 1
Syllabus 4219 - Advanced Corporate Finance Spring Semester of 2019 Instructor: Kennia Papadakis – Senior Lecturer in Finance [email protected] 234 Fisher Hall
Office hours: 10:00 AM to 11:00 AM, Monday, Wednesday and Friday (or by appointment)
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 4211 and 4221.
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
4162 11:30 AM – 12:25 PM All sections meet at Schoenbaum 305 4322 12:40 PM – 01:35 PM
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 cab be purchased online at https://cb.hbsp.harvard.edu
Following are the cases and articles included in the course package:
Count
Cases
Item #
1 Victoria Chemicals PKC (A): The Merseyside Project UV1192 2 Nike, Inc.: Cost of Capital UV0010 3 Sneaker 2013 BAB166
4 Hansson Private Label: Evaluating an Investment in Expansion (HW1) 4021
5 Target Corporation UV1057 6 Winfield Refuse Management, Inc. 913530 7 Hill Country Snack Foods Co. 913517 8 LinkedIn Corporation 112006
9 JetBlue Airways IPO Valuation (HW2) UV2512
10 Tesla Motors (A): Financing Growth 218033 11 Mercury Athletic: Valuing the Opportunity 4050 12 Valuation of Air Thread Connections 4263 13 Melon Financial and the Bank of New York 208129
14 Pacific Grove Spice Company (Final Case) 4366
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: What’s It Worth? A General Manager’s guide to Valuation 97305 8 HBS Background Note: Valuation Methods and Discount Rate Issues 205116 9 7 Ways Microsoft Can Make LinkedIn Worth $26B H02YAG
All students are required to purchase the package using the unique link below:
https://hbsp.harvard.edu/import/588720
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.
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.
Lastly, 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.
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4219 SP19 Papadakis Syllabus 4
Grading
Description Points each Total Percentage
Homework 1 & 2 50 100 40%
Final Case 100 100 40%
Class participation 50 50 20%
250 100%
Homework 1 & 2
Each individual assignment gives students the opportunity to practice the concepts discussed
during lecture 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 10 AM, no exceptions. Any submission posted on the drop box after 10 AM is
considered late and it is subject to a 25% grade discount.
Final Case
Final case questions will be distributed to students on Monday, April 08th electronically via
Canvas. Students are required to submit a 2-page memo and up to five pages of original
exhibits with their answers to the final case questions by Monday, April 15th at 10 AM. A
Canvas drop box is set up for students to submit their memos.
No collaboration is allowed for either homework assignments or final case.
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:
1 points: student simply states / quotes facts and figures from case studies
2 points: student uses facts and figures from case studies and links them to relevant
issues discussed
3 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 is discussed even if the case has not been
designated as homework.
- Maximum 3 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 month.
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4219 SP19 Papadakis Syllabus 5
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 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.
In Class Group Activities
On certain case discussion dates students will have the opportunity to work together is small
groups to discuss topics specified by the instructor, reflecting on application of tools from the
cases and share their thought process and insights with the class. These activities will occur
organically and students will be communicated in advance. Participation points are also granted
during these activities.
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
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
50% or bellow, he or she would have a hard time achieving 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
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4219 SP19 Papadakis Syllabus 6
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.
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4219 SP19 Papadakis Syllabus 7
Summary Class Calendar Module I – Capital Budgeting
Date Description Readings & Assignments
We
ek
1
Intr
o
(1) Monday, January 7 Introductions, syllabus overview & In class problems
Syllabus (Canvas) Disney’s Frozen (Canvas)
(2) Wednesday, January 9 Project valuation refresh, single opportunity - practice case
Case 1: Victoria Chemicals PLC (A): The Merseyside Project (UV1192)
(3) Friday, January 11
We
ek
2
Wa
rm-u
ps
(4) Monday, January 14 Cost of Capital refresh Case 2: Nike Cost of Capital (UV0010) Articles:
A Refresher on Cost of Capital (H02110)
Do you know your cost of capital? (R1207L) (5) Wednesday, January 16
(6) Friday, January 18
We
ek
3
(7) Monday, January 21 No class – MLK Day
(8) Wednesday, January 23 Project valuation refresh, multiple opportunities
Case 3: Sneaker 2013 (BAB166) Article: What’s It Worth? A General Manager’s guide to Valuation (97305)
(9) Friday, January 25
We
ek
4
(10) Monday, January 28 Capital budgeting – forecasting earnings – from revenues to Free Cash Flows
Case 4: Hansson Private Label: Evaluating an Investment in Expansion (#4021) Homework 1 – Due Monday, January 28 at 10 AM via Canvas drop box (11) Wednesday, January 30
(12) Friday, February 1
We
ek
5
(13) Monday, February 4 Capital Budgeting and Corporate Strategy
Case 5: Target Corporation (UV1057) 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
Summary Class Calendar (continues) Module II – Capital Structure and the Financing Decision
Date Description Readings & Assignments
We
ek
6
(16) Monday, February 11 Selecting between debt and equity financing.
Case 6: Winfield Refuse Management (913530) Articles:
Theory of Optimal Capital Structure (9279069)
Capital Structure Theory – A Current Perspective (UV0105)
(17) Wednesday, February 13
(18) Friday, February 15
We
ek
7
(19) Monday. February 18 Debt financing – targeted capital structure (D/E ratio)
Case 7: Hill Country Snack Foods Co. (913517) Article: Capital Structure and Value (UV3929)
(20) Wednesday, February 20
(21) Friday, February 22
We
ek
8
(22) Monday. February 25 Valuation, equity financing and IPO – new economy
Case 8: LinkedIn Corporation (112006) Web Article: 7 Ways Microsoft Can Make LinkedIn Worth $26B (H02YAG) (23) Wednesday, February 27
(24) Friday, March 1
We
ek
9
(25) Monday. March 4 Valuation, equity financing and IPO – mature industry
Case 9: JetBlue Airways IPO Valuation (UV2512) Article: To Sink or Swim When Floating Stock (IIRO76) Homework 2 – due Monday, March 4 at 10 AM via Canvas drop box (26) Wednesday, March 6
(27) Friday, March 8
We
ek
10 (28) Monday. March 11 Spring Break – No Class
(29) Wednesday, March 13
(30) Friday, March 15
We
ek
11
(31) Monday, March 18 Financing growth – seasoned equity.
Case 10: Tesla Motors (A): Financing Growth (218033)
(32) Wednesday, March 20
(33) Friday, March 22
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4219 SP19 Papadakis Syllabus 9
Summary Class Calendar (continues) Module III – Enterprise Valuation and M&A
Date Description Readings & Assignments
We
ek
12
(34) Monday, March 25 Introduction to synergies valuation
Case 11: Mercury Athletics – Valuing the Opportunity (4050)
(35) Wednesday, March 27
(36) Friday, March 29
We
ek
13
(37) Monday. April 1 Valuation of synergies (continue), M&A and Debt Financing, Adjusted Present Value method.
Case 12: Valuation of Air Thread Connections (4263) Article: Valuation Methods and Discount Rate Issues (205116) (38) Wednesday, April 3
(39) Friday, April 5
We
ek
14
(40) Monday. April 8 M&A – Equity Consideration Case 13: Melon Financial & The Bank of New York (208129) Articles:
Evaluating M&A Deals – Accretion vs. dilution of EPS (208059)
(41) Wednesday, April 10
(42) Friday, April 12
We
ek
15
(43) Monday. April 15 Case 14: Pacific Grove Spice Company (4366) Final Case Due on Monday, April 15 at 10 AM
(44) Wednesday, April 17
(45) Friday, April 19
We
ek
16 (46) Monday. April 22 Last day of semester
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4219 SP19 Papadakis Syllabus 10
Syllabus Appendix Detailed Weekly Schedule
Module I (weeks 1 through 5) – Capital Budgeting: The
Investment Decision After completion of this module students become proficient on the following:
1. Evaluation of capital projects within complex industry environments, including the identification of relevant cost and
benefits, analysis of strenuous cash flows, application of the Discounted Cash Flows method (DCF) based on Weighted
Average Cost of Capital (WACC) for single and multiple projects, interpretation of financial decision rules.
2. Application of strategic analysis within the capital budgeting framework.
3. Documenting and providing a recommendation to the C-Suite and Board of Directors of a firm, using the data obtained
through financial and strategic analysis.
Week 1
Monday, Jan 7
Introductions and Syllabus Overview Reading:
- Course Syllabus
- In class exercise: Disney’s Frozen (Canvas)
Topics: Personal introductions, ice breakers Class content, course calendar, expectations and rules of engagement. Introduction to capital budgeting, the investment decision.
1. What is the Net Present Value of Disney’s Frozen attraction? 2. Do you see any issues with the given assumptions regarding revenues? Any
issues with cost assumptions? Any other? 3. What changes to the forecast – if any – would you recommend? 4. What are the major risks associated with this investment? 5. Would you recommend Disney’s management to move forward with the
Frozen attraction? Why? Why not?
Wednesday, Jan 9 – Friday, Jan 11
Case 1: Victoria Chemicals PLC (A): The Merseyside Project (UV1192)
Topics: Capital budgeting, project valuation refresh, single opportunity, practice case.
Case 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?
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4219 SP19 Papadakis Syllabus 11
Weeks 2
Monday, Jan 14 through Friday, Jan 18
Case 2: Nike Cost of Capital (UV0010) Articles:
A Refresher on Cost of Capital (H02110)
Do you know your cost of capital? (R1207L)
Topics: Cost of Capital refresh
Case Questions:
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 are the advantages and disadvantages of each method?
5) What are the sources of risk to Nike’s cash flows?
Monday, January 21 – MLK Day, no class
Weeks 3
Wednesday, Jan 23 – Friday, Jan 25
Case 3: Sneaker 2013 (BAB166) Article: What’s It Worth? A General Manager’s guide to Valuation (97305)
Topics: Project valuation – selecting among multiple opportunities
Case Questions:
1. For both Sneakers 2013 and Persistence - Which cash flows should be incorporated into the project’s forecast? Why or why not?
2. Using the data provided, develop a cash flows forecast and provide the projects NPVs, IRR’s, Payback Period and Profitability Index.
3. Based on calculated financial indicators for each project, which of these two projects look better for New Balance shareholders?
4. Which project do you think is more risky? Please explain any sources of risk you have identified.
5. Should Rodriguez be more or less critical of cash flows forecast for Persistence than of cash flows forecast for Sneaker 2013? Why?
6. What is your final recommendation to Rodriguez?
Department of Finance
4219 SP19 Papadakis Syllabus 12
Weeks 4
Monday, Jan 28 – Friday, Feb 6
Case 4: Hansson Private Label: Evaluating an Investment in Expansion (#4021) Homework 1 – Due Monday, January 28 at 10 AM via Canvas drop box
Topics: Capital budgeting, forecasting earnings, from revenues to free cash flows to the firm’s operations.
Case Preparatory Questions:
1. How would you describe the dynamics of the private label personal care
products industry?
2. How would you describe the power of buyers and channels in this industry?
3. How would you describe the competitive landscape in this industry?
4. What is the role of branded manufacturers?
5. What is the role of private label manufacturers?
6. Referencing HPL’s past performance, calculate key financial ratios that would
help you understand HPL’s financial performance and its position in the
industry as a competitor in the private label personal care products segment.
Where does HPL rank relative to competitors?
Homework Questions & Submission Guidelines Homework 1: Evaluation of an investment in expansion – Case 4: Hansson Private Label
1. Using assumptions from Executive VP of Manufacturing, Robert Gates, estimate the project’s
Free Cash Flows.
a. What is the Net Present Value of the expansion opportunity based on a 10-year forecast?
And a 3-year forecast?
b. Based on a 10-year forecast, how sensitive is the NPV given changes on key
assumptions as Cost of Capital and long-term growth rate?
c. What issues – if any – do you see with this investment?
2. Using CFO Sheila Dowling’s projected WACC schedule, what discount rate would you choose?
a. What Cost of Capital do you consider appropriate to discount the cash flows associated
with the expansion? Why?
b. How does your answer in 2(a) compares to a cost of capital calculated based on market
comps?
3. Would you recommend that Tucker Hansson proceed with the investment?
Homework 1 Questions:
Submit a 2-page memo directed to Tucker Hansson answering the questions above.
Singles-spaced with 1.5 spaces between paragraphs. Arial 10.5 font size. In addition to
the two-page memo, students are required to submit up to five exhibits, which may
include any calculations or financial analysis conduced. Original exhibits only.
Department of Finance
4219 SP19 Papadakis Syllabus 13
Weeks 5
Monday, Feb 4through Friday, Feb 8
Case 5: Target Corporation (UV1057) 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 corporate strategy
Case Preparatory Questions:
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
Module II (weeks 7 through 11) – Capital Structure & the
Financing Decision After completion of this module students become proficient on the following:
1. Evaluation of capital structure decisions considering sources, tangible cost and agency cost of financing. Three financing
scenarios are explored 1) Debt – corporate bonds, 2) Equity – seasoned equity offering, 3) Equity – initial public offering.
2. Analysis of the capital structure decision within the context of a variety of industries and growth scenarios.
3. Documenting and providing a recommendation to the C-Suite and Board of Directors of a firm, using the data obtained
through financial and strategic analysis.
Weeks 6
Monday, Feb 11 through Friday, Feb 15
Case 6: Winfield Refuse Management (913530) Articles:
Theory of Optimal Capital Structure (9279069)
Capital Structure Theory – A Current Perspective (UV0105)
Topics: Capital Structure Theory, Debt versus Equity Financing Effect of capital structure and increase of dent in value creation. Earnings Per Share (EPS) and Total Return (ROC) analysis. Agency costs of debt and equity.
Case Preparatory Questions:
1) What are the annual cash outlays associated with the bond issue? 2) What are the annual cash outlays associated with the common stock
issue? 3) How would you respond to each director’s assessment (or concerns)
regarding each financing alternative? 4) How should the acquisition of MPIS be financed, taking into account the
issues of control, flexibility, income, and risk?
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4219 SP19 Papadakis Syllabus 15
Week 7
Monday, Feb 18 through Friday, Feb 22
Case 7: Hill Country Snack Foods Co. (913517) Article: Capital Structure and Value (UV3929)
Topics: Debt financing – targeted capital structure (D/E)
Case Preparatory Questions:
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?
Week 8
Monday, Feb 25 through Friday, Mar 1
Case 8: LinkedIn Corporation (112006) Web Article: 7 Ways Microsoft Can Make LinkedIn Worth $26B (H02YAG)
Topics: Valuation, equity financing and IPO – new economy
Case Preparatory Questions:
1) What do you think LinkedIn’s intrinsic value is? What are the issues with valuing LinkedIn’s
equity based on forecasted cash flows?
2) What if you use comps, what companies and metrics do you choose? Be ready to support your
conclusions. 3) If you wanted to buy LinkedIn’s stock, would you be willing to pay more than the value you
derived in question (2)? Why? Why not?
4) What other factors may be contributing to LinkedIn’s market valuation? 5) What are the key drivers of LinkedIn’s value? What are the key risks in implementing its
strategy? 6) What set of assumptions underlie the $9 billion market valuation for LinkedIn as of the end of
July 7, 2011. 7) What is your assessment of those assumptions? Note that, based on the first seven weeks of
trading for LinkedIn’s stock; its estimated beta is 1.5.
Department of Finance
4219 SP19 Papadakis Syllabus 16
Week 9 Monday, Mar 4 through Friday, Mar 8
Case 9: JetBlue Airways IPO Valuation (UV2512) Article: To Sink or Swim When Floating Stock (IIRO76) Homework 2 – due Monday, March 4 at 10 AM via Canvas drop box
Topics: Equity Financing – The Initial Public Offering (IPO) Application: issuing unseasoned equity, the IPO process and pricing, raise equity capital for a young firm in a competitive industry. Long term growth and value creation and the financing decision.
Case Preparatory Questions:
1) What are the advantages and disadvantages of going public? 2) What are the major drivers in the airline industry? 3) How is JetBlue planning to use the proceeds from the IPO?
4) At what price would you recommend that JetBlue offer its shares? 5) What observations can you make of JetBlue’s growth projections? What are
the potential risks facing JetBlue’s future cash flows?
1- Based on the application of Discounted Cash Flows method and provided management assumptions and projections, what is the Present Value of JetBlue’s enterprise?
2- What is the implied value per share given your answer to question #1?
3- What set of assumptions would drive the implied value per share from the
share price talk? Is the price talk a “fair” valuation of JetBlue’s equity?
4- Would you recommend JetBlue’s management to proceed with the IPO at
this moment in time? What major concerns do you have for JetBlue after
IPO?
Submit a 2-page memo directed to JetBlue’s CEO answering the questions above.
Singles-spaced with 1.5 spaces between paragraphs. Arial 10.5 font size. In addition to
the two-page memo, students are required to submit up to five exhibits, which may
include any calculations or financial analysis conduced. Original exhibits only.
Department of Finance
4219 SP19 Papadakis Syllabus 17
Week 10
March 11 through March 15
Spring Break, no class
Week 11
Monday, Mar 18 through Friday, Mar 22
Case 10: Tesla Motors (A): Financing Growth (218033)
Topics: Financing growth – seasoned equity
Case Preparatory Questions:
1. What are Tesla’s major sources of risk? How about benefits? Sources of
competitive advantage? 2. Based on various analysts’ valuations, what are your thoughts regarding
Tesla’s fair market value? Do you agree with any of the three valuation inputs?
3. Based on the financial information provided, develop a valuation for Tesla’s equity. How does your valuation compare with the ones provided?
4. How do you reconcile your valuation with the price of the new stock offer?
Department of Finance
4219 SP19 Papadakis Syllabus 18
Module III (weeks 12 through 16) – Enterprise Valuation
& M&A
Week 12
Monday, Mar 25 through Friday, Mar 29
Case 11: Mercury Athletics – Valuing the Opportunity (4050)
Topics: Enterprise value, introduction to synergies analysis and valuation
Case Preparatory Questions:
1. Is Mercury an appropriate target for AGI? Why or why not?
2. Review the projections formulated by Liedtke. Are they appropriate? How
would you recommend modifying them?
3. Estimate the value of Mercury using the DCF method and Liedtke’s base
case projections. Be prepared to defend additional assumptions you make,
4. Do you regard the value you obtained as conservative or aggressive? Why?
5. How would you analyze possible synergies or other sources of value not
reflected in Liedtke’s base case assumptions?
Department of Finance
4219 SP19 Papadakis Syllabus 19
Weeks 13
Monday, Apr 1 through Friday, Apr 5
Case 12: Valuation of Air Thread Connections (4263) Article: Valuation Methods and Discount Rate Issues (205116)
Topics: Valuation of synergies (continue), M&A and Debt Financing, Adjusted Present Value method.
Case Preparatory Questions:
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?
Department of Finance
4219 SP19 Papadakis Syllabus 20
Week 14
Monday, Apr 8 through Friday, Apr 12
Case 13: Melon Financial & The Bank of New York (208129) Articles:
Evaluating M&A Deals – Accretion vs. dilution of EPS (208059)
Topics: M&A – Equity Consideration 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.
Case Preparatory Questions:
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) What is the value of the cost savings synergies created by the deal? 3) Will synergy cash flows allow the banks to increase their debt? 4) 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?
5) Under the terms of the proposed deal, what fraction of the synergies Mellon legacy shareholders will capture? By BNY legacy shareholders?
6) 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? Is the proposed deal accretive or dilutive for Mellon shareholders?
7) How do synergies impact accretion/dilution analysis?
Department of Finance
4219 SP19 Papadakis Syllabus 21
Week 15
Monday, Apr 15 through Friday, Apr 19
Final Case Discussion - Pacific Grove Spice Company (4366)
Topics: Comprehensive
Case Preparatory Questions:
Case assignment questions will be provided to students on the date established by the instructor, communicated via Canvas.
April 22 – Last day of semester
Department of Finance
4219 SP19 Papadakis Syllabus 22
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