Lundquist College of Business
University of Oregon
Financial Analysis and Valuation
Finance 473
Spring 2008
Office hours: MW 10:45-11:45, or by appointment
Professor W. Mikkelson
382 Lillis
346-3390
E-mail: wmikkels@uoregon.edu
The course website is on Blackboard.
There will be no class session on Wednesday, April 2nd. There will be an extra class session
from 10:15 to 12:05 on Friday, April 25th. See the course calendar on Blackboard for details.
Course Description
The principal goals of the course are to enhance understanding of the basic principles of financial
management and to develop skills in applying these principles to important problems. At the end
of the course, you should be able to:
1. Perform a NPV analysis of a proposed investment project or an acquisition. This
involves deriving the free cash flow generated by the project, specifying the required
rate of return, and considering the option characteristics of the project;
2. Value a business or acquisition opportunity; and
3. Qualitatively and quantitatively assess the appropriateness of a firm's financing
policy, including both capital structure and dividend payout.
Readings and Course Materials
The required text is the fifth edition of Fundamentals of Corporate Finance, by R. Brealey, S.
Myers, and A. Marcus, McGraw-Hill, Inc., 2007. This textbook is used in many sections of
Finance 316. If you have a copy of the fourth edition, much of the material is very similar.
Simply read the chapters with the same titles as those given in the course outline below.
An assigned book for the term is The New Financial Capitalists: Kohlberg Kravis Roberts and
the Creation of Corporate Value, George Baker and George Smith, published by Cambridge
University Press. Reading and homework assignments for the book will be posted on the course
calendar. The book is available at the University Bookstore.
There are two packets at the University Bookstore. One contains cases and the other contains
required readings. Specific assignments for each class period will be listed in the course
calendar, available on Blackboard.
Prerequisites
Finance 316 and Finance 380 are prerequisites for Finance 473. You are expected to have
mastered the material covered these courses. In particular, you should be comfortable with
discounted cash flow analysis, simple statistics, portfolio theory and the CAPM, the basic
intuition of option pricing, and a computer spreadsheet program such as Excel.
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Grading
Your course grade will be computed as follows:
Exams and quizzes
Group assignments
Homework and class participation
50%
30%
20%
There will be three or more quizzes. The final exam is comprehensive and will be given on
Friday, June 13th at 10:15 am.
At the end of the term, your overall score on the exams and quizzes will be computed two ways.
One way is to place 50% weight on the quiz scores and 50% on the final exam score. The second
way is to place 35% weight on the quiz scores and 65% on final exam score. Whichever
weighted average is higher will be used in computing your final grade. This procedure rewards
both consistency throughout the term and improvement.
Tutoring
The Braddock Tutoring Center, 203 Peterson, offers tutoring to undergraduate business students
on a drop-in basis from 10:00am to 5:00 pm, Monday through Thursday.
Phone: 346-3321
Website: http://lcb.uoregon.edu/undergrad/best/
Group assignments
Group assignments will be case reports. Groups must consist of two or three students.
Case reports
There are at least three cases assigned as group projects: Empirical Chemicals (A), Calaveras
Vineyards, and Clarkson Lumber. (A fourth case may be added later in the term.) Each group is
required to submit written analyses and recommendations. Specific instructions for each case are
in the course calendar. Case reports can be no more than three pages in length, and must be
presented in a professional manner. This means
1. Begin with a short statement of the problem and a summary of your
recommendations. Develop your arguments in clear, concise, and complete
sentences. Do not use bullet points.
2. Summarize your exhibits in the text. Do not describe every calculation in detail.
Label your exhibits so that assumptions are clearly specified and numbers are clearly
defined.
3. Edit and proofread your work. Points will be deducted for grammatical errors and
misspelled words.
4. Use a word processing program and a spreadsheet program to produce your report.
Cases are due at the beginning of class. Please bring two copies, one to turn in and another to
refer to during the class discussion. Late assignments will not be accepted.
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Homework and class participation
All homework assignments are due at the beginning of class. Solutions will be checked off but
will not be graded. Nor will they be returned to you. Bring an extra copy of your solutions to use
in class. You may complete and turn in these assignments as a group of two or three students.
Do not spend more than three hours on a homework assignment.
At the end of the term you will receive a score for your contributions to the class sessions. The
score will be based on class attendance, on-time arrival for class, contributions to class
discussions, and helpful suggestions outside of class. Scores for contribution to class discussion
reflect the quality of comments and questions rather than the quantity.
Classroom rules
Arrive on time.
No consumption of food in the classroom and beverages are restricted to those in a container with
a screw-on top.
Inform me in advance if you will miss a class session.
Requests for re-grading must be made within one week of a quiz or due date.
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Finance 473
Course Outline
Evaluating investment opportunities using discounted cash flow analysis
Reading: Text, chapter 4 “The time value of money” (section 5 only), chapter 8 “Using
discounted cash flow analysis to make investment decisions”, chapter 10
“Introduction to risk, return, and the opportunity cost of capital” and chapter 12
(sections 1-6 only) “The weighted average cost of capital and company valuation”
Homework case: LEM, Inc. – on Blackboard
Assigned case: Empirical Chemicals (A) – in packet
Valuing a business
Reading: Text, chapter 12 ““The weighted average cost of capital and company
valuation” (section 7 only)
S. Kaplan and R. Ruback, “The Market Pricing of Cash Flow Forecasts: Discounted
Cash Flow vs. the Method of Comparables,” Journal of Applied Corporate
Finance, Vol. 8, No. 4 (Winter 1996), pp. 45-60 – in packet
Homework case: Wedbuk Manufacturing – on Blackboard
Assigned case: Harris Seafoods – in packet
Guest speaker: Jeff Tarbel, Senior Vice President, Houlihan Lokey Howard & Zukin
Forecasting financing requirements and analyzing performance
Reading: Text, chapters 17 “Financial statement analysis,” 18 “Long-term financial
planning” and 19 “Short-term financial planning” (sections 1-5 only)
Homework case: Toy World – in packet
Assigned case: Clarkson Lumber – in packet
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Evaluating financing policies
Reading: Text, chapter 15 “Debt Policy” and chapter 16 “Payout policy”
Ip, “The Rise and Fall of Intangible Assets Leads to Short Company Life Spans,” The
Wall Street Journal, April 4, 2002, page A1 – in packet
V. Mehrotra, W. Mikkelson, and M. Partch, “The Determinants of Capital Structure:
Evidence from Corporate Spinoffs,” Journal of Applied Corporate Finance, Vol.
17, no. 1 (Winter 2005), pp. 18-26 – in packet
D. Soter, E. Brigham and P. Evanson, “The Dividend Cut ‘Heard ‘Round the World’:
The Case of FPL,” Journal of Applied Corporate Finance, Vol. 9, No. 1 (Spring
1996), pp. 4-15 – in packet
Evaluating takeover opportunities and corporate governance
Reading: Text, chapter 22 “Mergers, Acquisitions, and Corporate Control”
B. Holmstrom and S. Kaplan, “The state of U.S. Corporate Governance: What’s
Right and What’s Wrong?” Journal of Applied Corporate Finance, Vol. 15, No.
3 (Spring 2003), pp. 8-20.
Assigned case: Calaveras Vineyards – in packet
Guest speaker: Greg Tansey, Riverlake Partners
Real options
Reading: Text, chapter 9 “Project analysis” (section 4 only) and chapter 23 “Options”
K. Hevert, “Real Options Primer: A Practical Synthesis of Concepts and Valuation
Approaches,” Journal of Applied Corporate Finance, Volume 14, Number 2
(Summer 2001), pages 25-40 – in packet
Homework case: Targhee Log Homes – on Blackboard
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Finance 473
Spring 2008
Contents of readings packet
K. Hevert, “Real Options Primer: A Practical Synthesis of Concepts and Valuation Approaches,”
Journal of Applied Corporate Finance, Volume 14, Number 2 (Summer 2001), pages 25-40.
S. Kaplan and R. Ruback, “The Market Pricing of Cash Flow Forecasts: Discounted Cash Flow
vs. the Method of Comparables,” Journal of Applied Corporate Finance, Vol. 8, No. 4 (Winter
1996), pp. 45-60.
G. Ip, “The Rise and Fall of Intangible Assets Leads to Short Company Life Spans,” The Wall
Street Journal, April 4, 2002, p. A1.
V. Mehrotra, W. Mikkelson, and M. Partch, “Do Managers Have Capital Structure Targets?
Evidence from Corporate Spinoffs,” Journal of Applied Corporate Finance, Vol. 17, No. 1
(Winter 2005), pp. 18-26.
B. Holmstrom and S. Kaplan, “The state of U.S. Corporate Governance: What’s Right and
What’s Wrong?” Journal of Applied Corporate Finance, Vol. 15, No. 3 (Spring 2003), pp. 8-20.
D. Soter, E. Brigham and P. Evanson, “The Dividend Cut ‘Heard ‘Round the World’: The Case
of FPL,” Journal of Applied Corporate Finance, Vol. 9, No. 1 (Spring 1996), pp. 4-15.
Contents of case packet
Harris Seafoods, Harvard Business School, 9-281-054
Empirical Chemicals LTD. (A), Darden School of Business, UVA-F-1020
Toy World, Harvard Business School, 295-073
Clarkson Lumber Company, Harvard Business School, 297-028
Calaveras Vineyards, Darden School of Business, UVA-F-1094