BAFI503 CAPITAL BUDGETING
Instructor:
Kai Li
HA-853
kai.li@sauder.ubc.ca
Office Hours: by appointment
Teaching Assistant:
Charles Gaa
HA-873D
charles.gaa@sauder.ubc.ca
Office Hours: Tuesday/Thursday 16:00-17:00
Syllabus
Course Objective:
The objective of the course is for you to learn the basic financial tools needed to make good business
decisions. This course is intended to broaden and deepen your understanding of issues related to valuing
long-term investment projects. After reviewing some of the basic concepts from BAFI 500, we will
introduce Weighted Average Cost of Capital (WACC) and Adjusted Net Present Value (APV) as
alternative methods for evaluating long-term investments. Differences between WACC and APV as well
as the strengths and weaknesses of each method will be discussed. The second part of the course focuses
on advanced firm and project valuation with applications in the area of leveraged buyouts. Business cases
and real world applications are used extensively throughout the course. This course will be useful to
students considering careers in corporate finance, investment banking, commercial banking and
consulting.
Teaching methods: I will present the basic insights of corporate finance theory, but emphasize the
application of theory to real business decisions. Each session will involve class discussion. In some
instances, discussion will be centered on lectures; in others it will be centered on a business case. Your
participation is critical to the success of the course. You are expected to read all cases, come to class, and
participate in class discussion. I welcome comments from you to improve the course.
Prerequisites: BAFI500 Corporate Finance and BAFI511 Investments. It will also help if you know
some basic economics and accounting.
Readings/Books:
• R. Brealey, S.C. Myers, and F. Allen, Principles of Corporate Finance, 2006, 8th ed., Irvin, McGrawHill (BMA)
• R.C. Higgins, Analysis for Financial Management, 2006, 8th ed., Irvin, McGraw-Hill
• Course package: Contains the case studies, and some supplementary readings for the course. Get it
from the Duplication Services Center in the basement of the Henry Angus building.
• Additional reading material will be distributed in class and posted on the WebCT.
Requirements/Grading:
• Case Write-ups: 85 %
- Students should form teams of 4 to 5, and hand in a single write-up per team.
- Both hardcopy and email-version of the write-ups are due on the day that the case is
discussed in the beginning of the class (make copies to refer to during the class). Please hand
in the hardcopies in class, and email the same write-ups to Charles.gaa@sauder.ubc.ca.
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All cases require handing in write-ups.
Each team presents two out of five cases in class. Each presentation should last between 1520 minutes and use around 15 PPT slides, brief questions during presentation are allowed.
Please email Charles your choices of cases, and email the instructor your presentation slides
before the class or bring a flash memory device to the class.
Class Participation: 15 %
Team formation:
Teams will be 4-5 students each. The first case write-up is due at the beginning of the second class. You
should email your team information (member names and IDs) to the teaching assistant of the course
before the second class.
Further details:
Each group is required to submit ONE two-page memorandum on the cases.
The memorandums should be typed. They should be written as if your were presenting it to your business
colleagues. The two-page limit is for text only. You may attach as many numerical calculations as you
wish. Memorandums will not be accepted after the class has met.
Class attendance and participation in case discussions is critical to the learning process. While the
Brealey-Myers-Allen textbook is required, this book will often only provide a background for us. We will
cover material that is not actually in the book.
My teaching assistant is Charles Gaa. His main responsibility will be grading case write-ups and
answering questions during office hours.
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Course Outline
Objective: The aim of the course is to study and develop tools to evaluate real investment opportunities, such as
building a new plant or acquiring another company. We develop a framework of analysis and confront it to business
cases.
1 – Lecture: Valuation of Free Cash Flows
• Readings:
- BMA, ch. 5: “Why NPV Leads to Better Investment Decisions Than Other Criteria”
- BMA, ch. 6: “Making Investment Decisions with the Net Present Value Rule”
2 – Lecture: WACC and APV
• Readings:
- BMA, ch. 9: “Capital Budgeting and Risk”
- BMA, ch. 19: “Financing and Valuation”
- HBS Note on Free Cash Flow Valuation Models
- HBS Note on Adjusted Present Value
- Booth, “Finding Value Where None Exists: Pitfalls in Using Adjusted Present Value”
• Background readings:
- BMA, ch. 11: “Strategy and The Capital Investment Decision”
- Higgins, ch. 7: “Discounted Cash Flow Techniques”
- Higgins, ch. 8: “Risk Analysis in Investment Decisions”
3 – Case Study: Dixon Corporation
4 – Case Study: Diamond Chemicals (A)
5 – Lecture: Valuing a Company
• Readings:
- BMA, ch. 32: “Mergers”
- Higgins, ch. 9: “Business Valuation and Corporate Restructuring”
- Harris, “Terminal Values, Multiples, and Competitive Advantage”
6 – Case Study: The Southland Corporation (A)
• Readings:
- BMA, ch. 33.1: “Leverage Buyouts”
- Tuck Note on Leveraged Buyouts
7 – Lecture: Buyout Fund Valuation Methods – Capital Cash Flows and Equity Cash Flows
• Readings:
- Note on Valuing Capital Cash Flows
- Note on Valuing Equity Cash Flows
• Background readings:
- Rogers, “The Private Equity Industry”
8 – Case Study: USG Corporation
9 – Case Study: Acova Radiateurs
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