UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN
College of Business
Department of Finance
COURSE SYLLABUS
Finance 580 CF
CORPORATE FINANCE AND VALUATION
Summer 2008
SECTION CF1: M – F, 8:30AM – 9:50AM, ROOM 240 WOHLERS HALL
SECTION CF2: M – F, 10:00AM – 11:20PAM, ROOM 240 WOHLERS HALL
Instructor Information
Prof. George Pinteris
Office: 304E David Kinley Hall
Office Hours: see section below
Office Phone: 244-0350
Email: gpinteri@illinois.edu
Teaching Assistant: Eric Micheels
Office: 404 Mumford Hall
Office Hours: Wednesdays 1-3pm
Email: micheels@illinois.edu
Course Description
Corporate finance is at the core of financial analysis. This course, one of four required
courses in the MSF program, introduces students to fundamental techniques for financial
analysis. These techniques are widely used by finance professionals in various areas
such as corporate financial management, investment banking, financial consulting, and
securities analysis. The course focuses on a narrow set of techniques. These include
financial statement analysis, estimation of cost of capital, project analysis, and valuation
methods.
This course is the first of a two-course sequence in corporate finance. Advanced
Corporate Finance (Fin 521), taught by Professor Scott Weisbenner in the fall semester,
will cover additional topics such as capital structure and firm financing decisions, payout
policy, initial public offerings, and corporate governance. Those of you interested in
pursuing a career in corporate finance, investment banking or securities analysis should
plan to take this course. In addition, courses in Accountancy, such as Accy 500
(Accounting Measurement, Reporting, and Control) and Accy 517 (Financial Statement
Analysis), will enhance your understanding of the use of accounting information for
financial analysis and equity and firm valuation.
Pedagogy
Course material will be delivered through a mixture of lectures, in-class software
applications, case discussions, and additional practice in tutorial sessions. Emphasis will
be given in applications of techniques through the use of real company data. Practice
with sources of financial data, such as Mergent Online, OneSource, Bloomberg, and
Datamonitor, is an integral part of the learning experience. Students are expected to
work in groups on three assignments and a term project. The purpose of employing this
variety in teaching methods is to enhance students’ understanding of how finance
professionals apply a core set of techniques.
Course Prerequisites
I assume that you have working knowledge of the material covered in the
Finance/Accounting Preparatory Workshop. Feedback on this material and suggestions
for additional preparation can be given by the teaching assistant, Eric Micheels. It is my
intention to teach a self-contained course, meaning that I will provide brief reviews of
background concepts when needed.
Textbooks and Course Materials
This course does not rely on one specific textbook. I have assigned several textbooks,
two of which are required and the rest are recommended. In this course, I will cover
portions of the material presented in each of these textbooks. The required textbooks will
be particularly useful throughout the course. One of the recommended textbooks, by
Brealey-Myers-Allen, will also be assigned in Fin 521 (Advanced Corporate Finance) this
fall. One of the required textbooks (Equity Asset Valuation) is part of the CFA curriculum
for Level I and II examinations.
The required textbooks are:
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Valuation: The Art & Science of Corporate Investment Decisions, by Sheridan
Titman and John D. Martin, Pearson, 2007
Equity Asset Valuation, by John D. Stowe, Thomas R. Robinson, Jerald E. Pinto,
and Dennis W. McLeavey, CFA Institute, John Wiley, 2007 (the CFA textbook on
equity valuation; very good reference on the practice of equity valuation)
The recommended textbooks are:
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Analysis of Financial Statements, by Pamela P. Peterson and Frank J. Fabozzi,
2nd edition, John Wiley, 2006
Principles of Corporate Finance, by Richard A. Brealey, Stewart C. Myers, and
Franklin Allen, 9th edition, McGraw-Hill, 2008
Excel Modeling in Corporate Finance, by Craig W. Holden, 2nd edition, Pearson
Prentice Hall, 2005
Lecture notes, assignments, as well as supplemental readings and handouts will be
posted on the course web page. The course web page is available through Illinois
Compass: https://icprodportal01.cites.uiuc.edu/content/login.html I strongly recommend
that you check the course web page regularly since it will be the main way for me to
communicate information to you.
Other useful textbooks are:
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Damodaran on Valuation: Security Analysis for Investment and Corporate
Finance, by Aswath Damodaran, 2nd edition, John Wiley, 2006 (one of the most
comprehensive professional books on valuation techniques)
Applied Risk Analysis, by Johnathan Mun, John Wiley, 2004 (a good reference
on applications of Crystal Ball)
Applied Equity Analysis, by James English, McGraw-Hill, 2001 (a practicioner’s
guide to equity analysis)
Valuation: Measuring and Managing the Value of Companies, by Tim Koller,
Marc Goedhart, and David Wessels, McKinsey & Company, 4th edition, John
Wiley, 2005 (a classic textbook on valuation; excellent guide to corporate
valuation)
Financial Modeling, by Simon Benninga, 3rd edition, MIT Press, 2008 (thorough
coverage of financial applications with Excel)
Case Discussions
To enhance your understanding of course material, we will discuss several cases in
class. Cases present real-world, complex problems faced by financial managers that
require analysis and use of judgment to reach important business decisions. Many MSF
courses use cases extensively.
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 the “right” or “one” course of action for the decision maker. Rather,
decisions are justified based upon sound financial assumptions and a thorough analysis
of the situation at hand. Therefore, the analysis and discussion of cases is very useful
because it teaches students how to use the principles of finance to define and analyze
problems, work as a member of a team, and make recommendations for the best course
of action.
You are expected to purchase the following cases available as a course packet from the
Illini Union Bookstore or other campus bookstores:
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Teletech Corporation, 2005
Diamond Chemicals (A): The Merseyside Project
Diamond Chemicals (B): Merseyside and Rotterdam Projects
Oracle Systems Corporation
The Financial Detective, 2005
Yeats Valves & Controls
Each team is expected to submit (ONLY FOR CERTAIN CASES ACCORDING TO
COURSE SCHEDULE) a MAXIMUM of 2-page brief of their analysis on the day of
the case discussion. Case briefs should include the following: a) statement of main
issue(s) in the case; b) financial analysis of main issues; c) recommendations to upper
management. You MUST use 12-point font, double-spaced paragraphs, and default
Microsoft Word margins. There is no limit on the number of attached exhibits.
Software Applications
Any financial analyst must be familiar with financial modeling in Excel. Excel is a very
powerful tool for financial analysis. You will be asked to use Excel for applications
throughout the course. In addition, you will use Crystal Ball, an Excel add-in, to enhance
your analysis by applying Monte Carlo simulation techniques. A copy of Crystal Ball
Premium Edition will be provided to you by the MSF program.
Tutorial Classes
Additional tutorial classes will be offered on a weekly basis. These sessions will be held
on Tuesdays, 4:30-7:30pm in room 241 Wohlers Hall. PLEASE SEE MSF SUMMER
SCHEDULE FOR EXACT DATES. Tutorials will provide a mixture of additional
applications and review of material covered in lectures. Moreover, these sessions will
cover applications of Excel modeling and Crystal Ball. Tutorials will be conducted by Eric
Micheels. You MUST attend the tutorial sessions according to the following schedule:
Section CF1: Tuesdays, 4:30-5:50pm
Section CF2: Tuesdays, 6:00-7:20pm
Adopt a Company
Each team will adopt a public company. The team will be named after that company.
This exercise will enable each team to develop a good understanding of that company’s
history, financial performance, main competitors, and forces that shape the company’s
industry. Each team must adopt a company by THURSDAY, JUNE 12. The selected
company must meet the guidelines for the valuation project presented on the last page.
Notify me of your selection by email. Companies will be assigned to teams on a firstcome-first-served basis.
Two assignments and THE FIRM VALUATION PROJECT will use financial
information from your adopted company. Guidelines on the firm valuation project
are provided at the end of the syllabus.
Teamwork
A major aspect of any graduate business program is to provide students opportunities to
develop leadership, teamwork, and presentation skills. These so-called soft skills are
crucial for an effective job search and a successful career in the financial world. You will
be assigned to teams of 4-5 students with diverse ethnic, educational, and professional
backgrounds. This environment will challenge you as you learn to become an effective
leader and a productive team member.
All course assignments, case briefs, and the final firm valuation project, including the
class presentation, will be team projects. Each team member is responsible for his/her
performance. I strongly advise you to read the suggestions for effective team
performance provided in the end of the syllabus.
Each student will be asked toward the end of the course to evaluate the
performance of his/her teammates. A student’s performance evaluation by his/her
peers will be taken into consideration for the final grade. You should be fair and
honest in your evaluation of your peers’ performance. Each team member should
exhibit enough effort throughout the course. This will be your ONLY opportunity
to evaluate your teammates. A team that fails to submit evaluations from all team
members will receive ZERO POINTS on the firm valuation project.
Grading Procedures and Policies
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Course Grade: The course grade will be based on three assignments, case
briefs, an in-class individual midterm examination, a firm valuation project and a
presentation. Information on the firm valuation project is provided below. The
final grade composition is as follows:
Group Assignments
Midterm examination
Case Briefs
Firm Valuation Project
Project Presentation
25%
30%
5%
25%
15%
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Midterm Examination: The midterm examination is scheduled for July 7. The
examination will take place in ROOM 141 WOHLERS, 6-9PM. There will be no
conflict examination.
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Assignments: Course assignments will be posted on the course web page
according to the course schedule and will be due approximately one week later.
They are mostly intended for practice of techniques with real financial data
through the use of software packages. More information on these assignments
will be provided during the first day of classes. The due dates of the assignments
are listed on the course schedule in the last two pages.
Assignments will be collected at the beginning of class on the due date. If you
cannot attend class on that day, please drop your assignment in my mailbox in
340 Wohlers Hall before the beginning of class to receive any credit. No late
assignments will be accepted for any reason.
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Office Hours: I will have weekly office hours on Mondays, 4:30-6pm, in room
(TBA). These hours are especially for the benefit of students in this course. I will
be holding office hours in a classroom so that everyone can benefit from other
student questions. If you would like to discuss any personal issue related to your
course performance, please sign up for an appointment during my regular MSF
advising hours. I also encourage you to visit my office during academic advising
hours with any comments or suggestions that you might have about the course.
Additional office hours will be held by Eric Micheels. His weekly hours are:
Wednesdays, 1-3pm in room 404 Mumford Hall.
Academic Integrity
From the University statement on your obligation to maintain academic integrity:
“If you engage in an act of academic dishonesty, you become liable to
severe disciplinary action. Such acts include cheating; falsification or
invention of any information or citation in an academic endeavor; helping
or attempting to help others commit academic infractions; plagiarism;
offering bribes, favors or threats; academic interference; computer-related
infractions; and failure to comply with such regulations”
Rule 33 of the Code of Policies and Regulations Applying to All Students gives complete
details of rules governing academic integrity for all students. Students are responsible
for knowing and abiding by these rules.
Disability Accommodation
To ensure that disability-related concerns are properly addressed from the beginning,
students with disabilities who require reasonable accommodations to participate in this
class are asked to see me as soon as possible.
Suggestions for Effective Team Performance
The following suggestions (taken from Robert Bruner’s cases textbook) are necessary,
but not sufficient, conditions for effective team performance. A major factor in a team’s
success is each member’s effort and dedication to the success of the team. It is crucial
that you develop a good working relationship with your teammates. Each member
should hold every other member accountable for their contribution to the team’s
performance.
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Members commit to the success of the team.
The team plans ahead, leaving time for contingencies.
The team meets regularly.
Members show up for meetings and are prepared to contribute.
There may or may not be a formal leader, but the assignments are clear. Team
members meet their assigned obligations.
COURSE SCHEDULE
(This is a tentative course schedule subject to slight modifications as the semester advances.
Assigned readings are from the following texts: Peterson & Fabozzi (PF); Titman & Martin (TM);
Brealey, Myers, & Allen (BMA); Stowe, Robinson, et. al. (SR); Holden (H); Mun (M))
DATE
CLASS TOPIC
ASSIGNED
READINGS
June 9
Course Introduction
June 10
Risk and Return
CAPM and Market Efficiency
BMA Chapter 9
June 10
Tutorial Class:
Review of CAPM, Levered/Unlevered betas
TM Chapter 4
BMA Chapter 10
June 11
Cost of Capital I: WACC and the
Firm’s Cost of Capital
TM Chapter 4
BMA Chapter 10
June 12
Cost of Capital II: Hurdle Rates for Projects
LAST DAY TO NOTIFY ME OF
YOUR COMPANY SELECTION
TM Chapter 5
June 13
Case Discussion:
Teletech Corporation, 2005 (CASE BRIEF)
Assigned
Questions
June 16
Project Analysis I: Identifying Project Cash Flows
TM Chapter 2
BMA Chapter 7
June 17
Project Analysis II: Investment Decision Rules
Assignment #1 distributed
TM Chapter 2
BMA Chapter 6
June 18
Project Analysis III: Project Interactions
TM Chapter 2
BMA Chapter
6, 7
June 19
Excel Application: Modeling Revenue Project
H Chapter 10
TM Chapter 3
June 19
Tutorial Class:
Review and Examples of Project Analysis
June 20
Excel Application: Modeling Cost Saving Project
H Chapter 11
June 23
Crystal Ball Application: Project Analysis
Assignment #1 due
M Chapter 4, 5
June 24
Case Discussion:
Diamond Chemicals, Part A (CASE BRIEF)
Assignment #2 distributed
Assigned
Questions
June 24
Tutorial Class:
Review of Crystal Ball
June 25
Case Discussion:
Diamond Chemicals, Part B
Assigned
Questions
June 26
Financial Ratios
PF Chapter 4
BMA Chapter 29
June 27
Financial Statement Analysis: Boeing, Amazon
PF Chapter 4
June 30
Case Discussion:
Oracle Corporation (CASE BRIEF)
Assigned
Questions
July 1
Case Discussion:
The Financial Detective, 2005
Assigned
Questions
July 1
Tutorial Class:
Common-size Financial Statements
Financial Statement Analysis: Home Depot
July 2
Excel Application: Modeling Pro Forma
Financial Statements
Assignment #2 due
H Chapter 14
July 3
Introduction to Valuation Approaches
SR Chapter 1
TM Chapter 1
July 4
Independence Day Holiday
July 7
Midterm Examination
July 8
Discounted Cash Flow Valuation I: Firm Valuation
Assignment #3 distributed
July 8
Tutorial Class:
Deriving Free Cash Flows: Home Depot
July 9
Discounted Cash Flow Valuation II: Equity Valuation
SR Chapter 2, 3
July 14
Excel Application: Modeling DCF Firm Valuation
H Chapter 7
July 15
Relative Valuation
Assignment #3 due
TM Chapter 6
SR Chapter 4
July 15
Tutorial Class:
Relative Valuation: Home Depot
July 16
Crystal Ball Application: Modeling Firm Valuation
M Chapter 4, 5
July 17
Case Discussion:
Yeats, Valves and Controls (CASE BRIEF)
Assigned
Questions
July 18
Adjusted Present Value Approach
TM Chapter 7
July 21
Company Valuation Presentations
Company Valuation Project due
July 22
Company Valuation Presentations
July 23
Company Valuation Presentations
TM Chapter 7
COMPANY VALUATION PROJECT GUIDELINES
(Follow these guidelines closely as you work on this project;
failure to do so will result in lost points)
The purpose of this project is to introduce you to the type of stock (firm) valuation
analysis performed by financial analysts. You will work as a team to value your adopted
company. The company that you adopt must be a publicly-traded US company (I
suggest that you select a company in the S&P 500 index). THE SELECTED COMPANY
SHOULD NOT BE IN THE UTILITIES OR FINANCIAL SERVICES INDUSTRIES. The
choice is up to you (BUT SHOULD NOT BE ONE OF THE COMPANIES LISTED ON
THE NEXT PAGE). You must select a company that has been in continuous operation
for the past SEVEN years (meaning no recent merger or acquisition that resulted in a
major company transformation (name change, etc.); this does not include acquisitions by
your company that do not result in a change in the company’s name; see available data
in Mergent Online). The company should not have been in bankruptcy proceedings
either. (LIST OF S&P 500 FIRMS: http://nyjobsource.com/sandp1.html )
Throughout the course, you will collect financial information on your adopted company
that will be used in the valuation project. Your report will conclude with an estimated
value per share. All reports are due at the beginning of class on July 21 regardless
of when you are scheduled to present your report to class.
The report should meet the following guidelines:
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The report (text) should not exceed 10 pages. You must use 12-point font,
double-spaced paragraphs, and default Microsoft Word margins. There is no limit
on attached exhibits (charts, tables, etc.).
You must include a cover page followed by a half-page executive summary.
The report should include the following sections:
o Company overview (nature of business, industry structure and main
competitors)
o Historical financial analysis (financial ratio analysis for the company itself
and vis-à-vis its competitors)
o Discussion of valuation estimation results (results from DCF, relative
valuation, sensitivity analysis, Monte Carlo simulations)
o Conclusions and recommendations to senior management
You must report your estimated value per share and the actual market price
per share at the close on Friday, July 18 as reported by the Wall Street Journal.
Your report must include several valuation techniques.
Your report must include explanations of the differences in value per share
between the various valuation techniques as well as a triangulation of those
estimates.
Your presentation must meet the following guidelines:
o Use a maximum of 20 minutes
o All team members must participate
o Use PowerPoint slides
o Present the main points of your report
LIST OF COMPANIES THAT CANNOT BE ADOPTED
1. Wal-Mart
2. Intel
3. Dell
4. Motorola
5. AMD
6. Cisco
7. Apple
8. IBM
9. Sun
10. Coca Cola
11. Caterpillar
12. Pepsico
13. Home Depot
14. Exxon
15. Colgate Palmolive
16. Kellogg
17. Qualcomm
18. Fedex
19. Procter & Gamble
20. Oracle
21. Southwest Airlines
22. Hewlett-Packard
23. Boeing
24. Chevron