Washington University in St. Louis
John M. Olin School of Business
Prof. Todd Milbourn
F500I: Advanced Corporate Finance III – Frontiers of Valuation
Contact Information:
Room 210 – Simon Hall
Tel: 935-6392 Fax: 935-6359
E-mail: milbourn@olin.wustl.edu
Website: http://www.olin.wustl.edu/faculty/milbourn/
Introduction
This 2nd year course builds on the sequence of corporate finance courses (F500F and F500G) in two important ways.
First, it will extend the theoretical underpinnings of valuation developed in ACF I and ACF II. Hence, the course
title of “Frontiers of Valuation”. As an example, we will extend the corporate finance valuation framework for both
projects and firms to include Monte Carlo simulations. Second, the course will seek to apply these skills to a wide
variety of corporate finance applications not currently covered in other finance electives.
In particular, the course will cover the following topics:
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Designing an optimal resource allocation system
Measuring financial performance within a firm,
Implementing a shareholder-based performance and compensation system,
Using Monte Carlo simulations in both project appraisal and firm valuation,
Obtaining, interpreting, and using financial data for valuation
Leveraged Buyouts (reconciling APV and WACC-based valuations),
The restructuring of financially-distressed firms, and
Cross-border investments in emerging markets
As with the two preceding ACF courses, this course is designed to be “hands-on”, and we will heavily focus on
direct applications of the theory and the development of spreadsheet modeling skills. Ultimately, a student who
successfully completes the course sequence of Advanced Corporate Finance I, II and III should possess the set of
cutting-edge skills necessary for a highly successful career in Investment Banking or Corporate Financial
Management.
Prerequisites
The strict prerequisites for this course are Finance 5200, Fin 500F, and Fin 500G. Students are also strongly
encouraged to take MEC 500M: Decision Analysis and Modeling.
Textbook and Materials
The textbook for this course is The Value Sphere (Boquist, Milbourn and Thakor, Value Integration Associates,
2000, 2nd edition). This is the same book used in ACF I and we will use it primarily as a reference. There is also a
packet of notes, cases and various readings.
Homework Assignments
There will be five group assignments given during the course. Case assignments are always due at the beginning of
the class in which we discuss the case. Assignments can be done in groups of 4-5 students. There will also be a
take-home final examination (final project). Grading weights will be announced by the first day of class and will be
posted at Prometheus. Guidelines for these deliverables (length restrictions, etc.) will be posted at Prometheus. Any
amendments to the number of assignments and their weights relative to the final will be decided by our first class.
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Detailed Course Schedule (both sections meet in Room 112)
For each session, we have listed:
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chapters in our textbook that should be read in advance of the class meeting
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case assignment that is due (where applicable)
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topic(s) to be covered in class that day
NOTE 1: Come to class prepared, and you will get a lot more out of the course!
NOTE 2: By the time we meet (or even in the middle of the term), I may amend the schedule based on quality and
duration of various case discussions. Moreover, I’ve included two extra cases which I will try to work into the
schedule as time is available.
Class 1 (1/20)
Class 2 (1/22)
Read Chapters 10 and 13 in The Value Sphere
Read and prepare (not to be turned in) the PanEuropa Foods S.A. Case
Topics:
Read Chapter 16 in The Value Sphere
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Resource Allocation Systems
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Using EVA to measure performance
Topics:
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Practical problems in resource allocation
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Delineating the effects of capital rationing
Class 3 (1/27)
Class 4 (1/29)
Prepare the Valmont Industries Case
Read two technical notes on using Crystal Ball
HW 1 Due: Valmont Industries Case
Read Chapters 7 and 15 in The Value Sphere
Topics:
Topics:
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Measuring performance with EVA
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Adopting an EVA-based incentive plan
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An introduction to financial modeling
using Monte Carlo simulations
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Obtaining, interpreting, and using
financial data for valuation
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See the following link:
http://pages.stern.nyu.edu/~adamodar/
and go to “Updated Data”. This website
contains massive amounts of historical
financial data.
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Class 5 (2/3)
Class 6 (2/5)
Prepare the Revco Case
HW 2 Due: Revco D.S., Inc.: Assessing Capital
Adequacy Case
Topics:
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Topic:
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Conclude discussion of Revco
Discuss case
Valuing a business
Evaluating the use of high leverage
Using simulations to create probabilistic
estimates of value and default
Class 7 (2/10)
Prepare the Medimedia Case
Class 8 (2/12)
HW 3 Due: Medimedia Case
Read Franks & Torous, Gertner & Scharfstein,
Franks, Nyborg, & Torous, and Beranek, et al
articles
Topics:
Topics:
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Reconciling APV and WACC-based
models of valuation
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What are the players’ incentives in
reorganizing firms in financial distress
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Further evaluating leverage buyouts
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Empirical evidence surrounding Chapter
11 reorganizations
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International comparisons of
reorganization procedures
Class 9 (2/17)
Class 10 (2/19)
Prepare Caledonian Newspapers Case
Read two articles by Erb, Harvey, and Viskanta
HW 4 Due: Caledonian Newspapers Case
Topics:
Topic:
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Discuss reorganization process for firms
in financial distress via the case
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Estimating costs of capital for crossborder investments
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Estimating costs of capital for
investments in emerging markets
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Class 11 (2/24)
Final Exam
Prepare Paginas Amarelas Case
HW 5 Due: Paginas Amarelas Case
Topic:
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Estimating political risks, and the premia
(if any) attached to them
Identify and interpret variations in equity
market volatility across countries
Our Take-Home Final Examination will be
due by 5pm, Wednesday, March 3, 2004. A
hard copy should be delivered to Simon 220
where there will be a box to put them in
with my name on it.
Course Grading: Please be advised that an individual can earn any grade along the entire Olin grading spectrum
(the existing grade range is {NP, LP, P, HP}). Moreover, such that there is no misunderstanding, please note that
late assignments or exams will not be accepted. Late assignments receive a zero score. Lastly, please note that
course grades are final. There will be no additional projects or assignments offered to improve a grade at any level.
That said, if you feel I’ve graded one of the course requirements incorrectly, please bring it to my attention
immediately. I certainly want everyone to receive the grades they have earned. Thanks for your understanding in
this matter.
Please Note: All students in this course must abide by the Olin School Code of Conduct.
In closing, I’m really looking forward to a very interesting class, and hope that you will all enjoy it. I’ve selected
nearly all new cases (new to me that is), and I look forward to working through them with you as I believe they will
allow us to apply some pretty high-tech corporate finance tools in a meaningful manner.
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