Valuation and Analysis
FINA 6211
Fall 2010
Prof. Jeffrey Allen
214-768-2627, 118F
jwallen@cox.smu.edu
In FINA 6211, we examine tools and applications in the valuation of assets and securities. The material is
relevant for individuals in investment management, investment banking, securities analysis, financial
consulting, M&A, and corporate finance. The primary areas covered in the course are performance
analysis, cost of capital estimation, capital investment analysis, and foundational concepts in asset and
corporate valuation.
Learning objectives for the course are:
1)
2)
3)
4)
Understand how to analyze and critique cash flow projections,
Gain a working knowledge of commonly-used valuation methods,
Understand the circumstances under which each method is appropriately used, and
Execute the chosen valuation techniques in the correct way.
Required Textbooks (use Brealey, et al or Berk et al from your FINA 6205 class)
 Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of
Companies, (5th ed.) McKinsey & Company, 2010.
 Richard Brealey, Stewart Myers and Franklin Allen, Principles of Corporate Finance, (8th ed.) Irwin
McGraw-Hill, 2007.
OR
 Jonathan Berk and Peter DeMarzo, Corporate Finance, (1st ed.) Pearson / Addison Wesley, 2007.
 Course packet available at www.study.net (registration required to receive a grade)
Recommended Texts (not required)
 Robert Higgins, Analysis for Financial Management, (9th ed.) Irwin McGraw-Hill, 2008.
 Craig W. Holden, Excel Modeling and Estimation in Corporate Finance, (3rd ed.) Prentice Hall,
2008.
Grading:
Your final grade will be calculated as follows:
20%
80%
+/-
Company financial analysis report (due 9/10)
Final examination
Possible adjustment to final grade up or down a notch (e.g. B+ to A-) for
exceptional class participation
The university grading scale (A: 93.0+, A-: 90.0-92.99, B+: 87.0-89.99, etc) is used as the basis for assigning
grades. Additional assignments or work for extra credit purposes will not be offered.
Final exam: You will have five contiguous hours to complete the take-home exam prior to the due date
given in class.
Course Prerequisite: FINA 6205
Participation: My expectation is that every student will thoroughly analyze each case and be prepared to
discuss their insights in class. The format of the class is an open discussion of the case studies. I often call
on those who don’t voluntarily participate. In the past I’ve found a positive correlation between class
participation and exam performance.
Case preparation: A common complaint about cases is that they do not contain enough relevant
information to “solve” the case and obtain the “right answer”. This is exactly why cases studies offer a rich
learning environment. In comparing case studies to the actual decision situations you will encounter in
your career, cases are extremely well defined and rich in available information. Most practical decisions
hinge on several assumptions made by individuals and often must be based on incomplete information.
Part of the financial decision-making process is generating appropriate forecasts and being able to defend
your choices. Case analyses should sharpen your abilities in generating key assumptions, insights and
conclusions.
Case analysis can be a painful process, especially in the early stages. Arriving at one or more solutions
requires intensive study of the case followed by group discussion and further analysis. This process is very
similar to decision processes of any significance in business. You should set aside 5-7 hours per case for
review, group discussion and analysis work. Suggested study questions for each case are listed in this
document. An important objective of the case method is for you identify important issues that may not be
obvious in the case handout.
**You must prepare and understand the case studies in detail in order to pass the final exam**
Honor Code: The honor code of the university and the Cox School strictly applies to this course. Case
assignments are generally prepared in learning groups where free collaboration is encouraged.
Collaboration between groups, however, should not occur. Electronic transmission of case solutions
between students across study groups is a violation of the honor code.
The use of material directly related to a particular case from previous classes at Cox, classes at other
schools, or posted on the internet is a violation of the Honor Code. Your performance on the final
exam will be greatly enhanced if you work through the details of the cases rather than consult case
solutions.
Religious Observance: Religiously observant students wishing to be absent on holidays that require
missing class should notify their professors in writing at the beginning of the semester, and should
discuss with them, in advance, acceptable ways of making up any work missed because of the absence.
(See University Policy No. 1.9.)
Disabilities: Students who need academic accommodations for a disability must first contact Ms. Rebecca
Marin, Coordinator, Services for Students with Disabilities (214-768-4557) to verify the disability and
establish eligibility for accommodations. These students should then schedule an appointment with the
professor to make appropriate arrangements (See University Policy No. 2.4.).
Extracurricular Activities: Students participating in an officially sanctioned, scheduled University
extracurricular activity should be given the opportunity to make up class assignments or other graded
assignments missed as a result of their participation. It is the responsibility of the student to make
arrangements with the instructor prior to any missed scheduled examination or other missed assignment
for making up the work.
Attendance Policy: Students are expected to attend every class. In cases where the class must be missed,
students should independently prepare the cases studies, if any, and obtain the class notes. You will be
responsible for all material presented in the class sessions. Grading is not directly based on attendance in
my class, but it will affect your performance on graded assignments, projects or examinations.
Electronic Distractions: Unless you enjoy being called upon to answer difficult questions, please refrain
from browsing the Internet or e-mail during class.
Valuation and Analysis
Fall 2010
Class Date
Topic
Cases
8/23
Introduction to Valuation and
Financial Analysis
Lecture
Note on Adjusted Present Value (HBS 9-293-092)
Free Cash Flow Valuation Methods (HBS 9-201-094)
8/30
Performance Analysis and
Forecasting
Advanced Technologies (HBS 9-299-042)
Cost of Capital Applications
PepsiCo., Inc. (Darden F-0981)
Marriott Corporation (HBS 9-289-047)
** Company Analysis Due **
9/13
Investment Analysis
Whirlpool Europe (HBS 9-202-017)
9/20
Basic Corporate Valuation
Mercury Athletic Footwear (HBS 4050)
White Hen Pantry (pdf on class website)
9/27
Valuation in the Capital Markets
Jet Blue IPO Valuation (Darden F-1415)
United Parcel Service IPO (HBS 9-103-015)
10/4
Valuation of Privately-Owned
Assets
Kohler Inc. (HBS 9-205-034)
Brinker Intl: Acquisition of NERCO Assets (distributed
during class session)
9/10
(Friday, 6:30
pm – note
change)
Exam Review & Distribution
Class 2
Topic:
Case:
Analysis of Financial Performance
Advanced Technologies (HBS 9-299-042)
Study Questions
Use the three study questions on page 1 of the case. What is ATI’s sustainable growth rate? Prepare a
“stress scenario” (a scenario that strains the balance sheet) in a spreadsheet model.
Assignment: Select a public company of your choice and conduct an analysis on the financial health
of the organization using the metrics presented in the first class session. From the available historical
information, estimate the values you would expect to see in the income statement and balance sheet in
the subsequent year.
Class 3
Topic:
Case:
Cost of Capital
PepsiCo., Inc. (UVA F-0981)
Study Questions
1. How has PepsiCo performed over the past 10 years? How did you measure performance to answer
this question? Has the company created value for its shareholders as claimed in the annual report?
2. What are the costs of capital for the individual business segments? What is the overall WACC for
PepsiCo?
3. Do your business segments add up to 11 percent as an overall cost of capital? Why or why not?
** Do not follow the recommendation to ignore asset betas given in the case **
Case:
Marriott Corporation (HBS 9-289-047)
Study Questions
1. How does Marriott use its cost of capital estimate?
2. What is your estimate of the WACC for Marriott Corporation? Assume a marginal tax rate of 34%
3. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its
lines of business, what would happen to the company over time?
4. Calculate the cost of capital for the lodging and restaurant divisions.
Class 4
Topic:
Case:
Capital Investment Analysis
Whirlpool Europe (HBS 9-202-017)
Study Questions
1. Do the benefits and costs of the ERP investment seem reasonable? What assumptions would you
question further?
2. What are the after-tax cash flows for the proposed ERP investment from 1999 through 2007?
What is the present value of those cash flows?
3. When valuing the proposed investment, should value be included for possible cash flows that occur
beyond 2007?
4. Would you recommend the ERP investment?
Class 5
Topic:
Case:
Basic Valuation Techniques
Mercury Athletic Footwear (HBS 4050)
Study Questions (spreadsheet available on class website):
1. Is Mercury an appropriate target for AGI?
2. Review the projections formulated by Liedtke for reasonableness. How would you recommend
modifying the forecast?
3. Estimate the value of Mercury using a discounted cash flow approach and Liedtke’s base case
projections. Conduct a sensitivity analysis on key assumptions in the valuation model. What is
your recommendation regarding Mercury’s equity value?
4. How would you analyze possible synergies or other sources of value not reflected in Liedtke’s base
case assumptions?
Case:
White Hen Pantry
Study Question
1. Use the adjusted present value technique to value WHP. How do differences in the underlying
assumptions between the management group and PruCapital affect the results? Assume the
unlevered required return is 20 percent, a marginal tax rate of 40 percent, that debt will be repaid as
scheduled, and that the $21mm revolver will not be paid down or retired.
Class 6
Topic:
Case:
Valuation in the Capital Markets
JetBlue IPO Valuation
Study Questions
1. What valuation approaches can be used to price JetBlue’s shares?
2. At what price would you recommend that JetBlue offer their shares?
3. What are the advantages and disadvantages of going public?
Case:
United Parcel Service IPO
Study Questions
1. Compare the financial performance of both UPS and FedEx. Are the current levels of performance
likely to be sustained? What are the key factors that will affect the value of UPS stock?
2. Why does FedEx have a lower debt rating than UPS? What is your estimate of the present value of
each company’s operating leases?
3. What are the pros and cons for UPS in deciding whether to carry out an IPO?
4. What is your estimate of the value of UPS stock? How do your valuation multiples compare to the
comparable companies in Exhibit 13?
Class 7
Topic:
Case:
Valuation of Privately-Owned Assets
Kohler Co. (HBS 9-205-034)
Study Questions (spreadsheet available on class website):
Using different valuation approaches and methods, what is your estimate of the per share value of
Kohler? What would you recommend as a settlement price?
Case: Brinker Intl.: Acquisition of NERCO Assets (distributed and discussed in class)
Background Reading
Brealey and Myers, chapter 21 on real options