University of Puget Sound
School of Business and Leadership
BUS 434 Advanced Corporate Finance
Professor Alva Wright Butcher
Tues-Thurs 11:00-12:20 McIntyre 107
Spring Semester 2012
Office: McIntyre 111 I
Phone: 253-879-3349
FAX: 253-879-3156
Office Hours:
T-Th: 1:00-1:50
Wed: 9:30-10:30
And by appointment
Note that I am always willing to schedule additional office hours by appointment. I check email
frequently, so that is also a good way to communicate. Do not hesitate to call me at home. If you
cannot reach me, please leave a number so that I can get back to you.
Email: butcher@pugetsound.edu
Home: 206-285-3990 or 360-779-4706
Required Course Materials:
1. Brigham and Daves, Intermediate Financial Management, 10th Edition, SouthWestern, Cengage Learning, 2010
2. Cases from Harvard Business School, the University of Virginia Darden School,
and the Stanford Graduate School of Business
The URL is http://cb.hbsp.harvard.edu/cb/access/11776381. This allows
you to purchase these cases online at a student discount.
 Spyder Active Sports 2004 (Valuation of a family controlled firm)
 Wood-Tech Inc. (Valuation of a privately held firm. This is not a
Harvard Case. I will provide you with a copy of this case.)
 New Heritage Doll Company: Capital Budgeting
 Dividend Policy at FPL Group Inc
 Investment Banking in 2008(A): Rise and Fall of the Bear
 Ben & Jerry’s Homemade (Evaluation of competing takeover offers)
 Volkswagen and Porsche: One Family, Two Car Companies, & a Battle
for Corporate Control (This is not a Harvard Case. I will provide you a
copy of this case)
 How Venture Capitalists Evaluate Potential Venture Opportunities
 Juniper Networks (The quest for external financing.)
 RJR Nabisco (Evaluation of the Leveraged Buyout)
3. During the semester we will be reading several relevant articles. One is noted
below. Others will be assigned later in the semester. These can be downloaded
from the library’s online data base, Business Source Premier.
 “Using APV: A Better Tool for Valuing Operations,” Timothy
Luehrman, Harvard Business Review, May-June, 1997, Vol. 75, Issue 3,
p145-154.
BUS 434
Spring 2012
Professor Alva Butcher
1
4. A financial calculator. The calculator must have functions for bond valuation, net
present valuation (NPV), internal rate of return (IRR), present value (PV), and future
value (FV). One suitable calculator is the HP10-B. It is available in the bookstore
for around $30.
Recommended:
Subscription to the Wall Street Journal or the Financial Times
We will be working with the Wall Street Journal during several class sessions. As a
business student, you should read this publication regularly.
References and Support Materials:
1. Please contact me for other sources that deal with this material. Some excellent
references are:
Brealey and Myers, Principles of Corporate Finance
Copeland and Weston, Financial Theory and Corporate Policy
Higgins, Analysis for Financial Management
2. Self-Test Questions are available in each chapter of the text.
3. Intermediate steps and final answers to selected end-of-chapter problems can be found
in Appendix B of the text.
4. The website for this text provides a range of support materials. These include:
o Key terms for each chapter
o Build a model spreadsheet templates. Selected chapters end with an integrative
spreadsheet problem that allows you to apply concepts in the chapter. These
spreadsheet templates provide the data given in the problem and facilitate the
development of the spreadsheet model.
o Downloadable Mini-Cases
o Web extensions – additional discussion or examples pertaining to the material in
the text.
To access this material go to www.cengage.com/us/
Enter the title and choose higher education catalogue. Click on access to free student
content.
Course Objectives: Valuation will be discussed as a unifying theme in this course. This
includes such issues as how to value a firm that is not publicly traded, how to value a potential
merger, how to value an investment project. We will examine the use of debt in a firm’s financial
structure and ask if that has an impact on the value of the firm. If a firm pays dividends, does that
increase the firm’s value?
The key objective of this course is to build on the foundation of your introductory course in
financial concepts and to apply more advanced concepts in corporate finance in a decision
making context. Since computer literacy is essential to the application of finance theory, the
course will incorporate a number of opportunities for the use of computer tools in a problem
solving environment.
After you have successfully completed this course, you will be able to:
Apply value based management to guide valuation of a firm and valuation of a capital
budget project.
Be aware of the underlying factors that impact the value of a financial option.
BUS 434
Spring 2012
Professor Alva Butcher
2
Understand the basic features of options contracts and how they are priced.
Have an understanding of the use and misuse of derivatives.
Understand how the firm’s mixture of debt and equity, the capital structure, can impact
the value of the firm.
Be able to apply the arbitrage proof to the Modigliani and Miller model of capital
structure.
Explain the theories that have been advanced as to whether investors in the aggregate
tend to favor high or low dividend payout ratios.
Understand the basic criteria behind investment by a venture capitalist.
Understand the role of mergers and acquisitions in the growth of a firm and the impact of
these deals on the shareholders of both the acquiring and acquired firms.
Be aware of the role of derivatives in risk management, in particular-futures and options
contracts.
Have an appreciation of the differences in corporate governance between Germany and
the United States.
Class Preparation and Participation: Preparation for class is extremely important. Prior to
class, you are expected to have read the assigned reading material. You are also expected to have
analyzed any assigned discussion problems and to be prepared to participate in the class
discussion. That does not imply that you must be able to totally answer a question. But you must
be prepared to contribute to the analysis. If for some reason you are not prepared to participate in
the discussion please let me know prior to class.
Your presence and contribution to class discussion are important. There are three categories:
present, absent with leave, and AWOL.
Homework: Homework assignments are listed on the course outline and are due at the
beginning of class on the date indicated on the outline. These assignments are designed to
reinforce your familiarity with the material, to train you in the use of your financial calculator and
computer spreadsheets, to identify areas in which you may be having difficulty, and to serve as a
basis for classroom discussion.
The end of each chapter includes Questions, Problems, and Spreadsheet Problems. The course
outline notes two categories of homework: discussion and written. Written homework
assignments will be collected at the beginning of class, and a subset of these problems will be
selected on a random basis for grading.
Homework assignments are due at the beginning of the class period. To receive
credit, you must show the logic behind your solution.
Late homework assignments will not receive full credit.
BUS 434
Spring 2012
Professor Alva Butcher
3
Case Analyses: Case analyses are an important component of this course. These are utilized to
enable you to: 1) practice effective communication techniques, both written and oral; 2) engage in
an active learning situation; 3) perform data interpretation and analysis; 4) gain experience in
decision making under uncertainty. They are also designed to give you an opportunity to use an
essential tool in real world business finance - the application of computer models in financial
analyses.
Some of the cases will require a written report and/or an Excel spreadsheet. Some of these
reports will be short memos; others will require more lengthy exposition. Reports must be typed,
with exhibits inserted in the narrative where appropriate, or at the end of the report. If the case
requires an Excel spreadsheet please submit a printed copy of your spreadsheet at the beginning
of class. An online version of your Excel spreadsheet must be submitted to Moodle prior to the
beginning of the class period.
All cases will be discussed in detail during a regular class session. It is very important that you
are prepared to contribute to the discussion and analysis of the cases.
Grades for both written reports and class discussions will be based on content, exposition, and
clarity.
Late written reports and Excel spreadsheets will not be accepted. These are due at the beginning
of the class period. Please make an extra copy for your use during the class discussion.
Moodle We will use Moodle as a vehicle for communication. The link is
http://moodle.pugetsound.edu
You are automatically enrolled on the Moodle site for this course. The syllabus is posted under
the News Forum in the weekly outline on Moodle. Since it will be utilized throughout the
semester, it is not included in the weekly boxes. Moodle will be used to post assignment
instructions, other course documents, articles, etc. for the relevant week. At times I may need to
modify assignments as listed on the syllabus in order to reflect the pace at which we are covering
the material. If so those changes will be posted on Moodle for the relevant weeks. Please check
Moodle frequently.
You will be uploading Excel files to Moodle for several of your cases. Sometimes students
submit an assignment and then wish to submit a revised assignment. This will be allowed on
Moodle as long as it is submitted before the deadline. After that, Moodle will not allow a
submission.
Exams: There will be two midterm exams and a comprehensive final. Exams will be problem
oriented, but will also include short essay questions. Exams are closed book, but you may use
one side of an 8 by 11 paper for notes and formulae.
As a general policy, makeup exams will not be given.
Academic Honesty
Please carefully read the University policy on academic honesty in The Logger. The following is
a quote from The Logger.
“The University of Puget Sound is a community of faculty, students, and
staff engaged in the exchange of ideas contributing to intellectual growth
and development. Essential to the mission of the academic community is a
shared commitment to scholarly values, intellectual integrity, and respect
for the ideas and work of others. At Puget Sound, we share an assumption
BUS 434
Spring 2012
Professor Alva Butcher
4
of academic integrity at all levels. Violations of academic integrity are a
serious matter because they threaten the atmosphere of trust, fairness,
and respect essential to learning and the dissemination of knowledge.”
An interactive online tutorial on Academic Integrity@ Puget Sound is also
available on the Collins Library webpage.
Classroom Emergency Response Guidance
Please review university emergency preparedness and response procedures posted at
www.pugetsound.edu/emergency/. There is a link on the university home page. Familiarize
yourself with hall exit doors and the designated gathering area for your class and laboratory
buildings.
If building evacuation becomes necessary (e.g. earthquake), meet your instructor at the
designated gathering area so she/he can account for your presence. Then wait for further
instructions. Do not return to the building or classroom until advised by a university emergency
response representative.
If confronted by an act of violence, be prepared to make quick decisions to protect your safety.
Flee the area by running away from the source of danger if you can safely do so. If this is not
possible, shelter in place by securing classroom or lab doors and windows, closing blinds, and
turning off room lights. Stay low, away from doors and windows, and as close to the interior
hallway walls as possible. Wait for further instructions.
Extra Credit Quizzes: During the term, there will be unannounced pop quizzes. These will
consist of a few multiple choice or true false questions, and will cover material presented in the
prior one or two class sessions. As with homework problems, these are designed to reinforce the
material, and to identify problem areas. By keeping current with the material, these quizzes also
provide you with a means of earning extra credit points.
Grades:
Grades will be based on the following weights:
Two Midterm Exams
40%
Comprehensive Final Exam
20%
(As scheduled by the University)
Case Analyses and Homework
Case Discussion
Written Reports and/Excel Analysis
Written Homework
Class Discussion
40%
Total
100%
Extra Credit Quizzes
5%
BUS 434
Spring 2012
Professor Alva Butcher
5
COURSE OUTLINE
I. BOOT CAMP REVIEW
Tues 1/17 and Thurs 1/19
Boot Camp During the first week of class we will be reviewing fundamental
concepts of the time value of money and risk and return. I would suggest that
you work together in study groups. By the end of this review period you should
be comfortable with the concepts in the following questions and problems.
Chapter 29: Basic Financial Tools: A Review
This chapter is available on Moodle, and I have also emailed it to you as an
attachment. I would suggest that you print the chapter so that you have it
available as a reference throughout the semester.
Discussion
Questions: 29.2, 29.3, 29.4
Problems: 29.1(a), 29.2(a), 29.3(c,d), 29.8, 29.9, 29.10,29.12, 29.13,
29.14 (a,b), 29.17, 29.21
Thurs
1/19
Boot Camp Quiz during the last 30 minutes of class.
II. DERIVATIVES
Tues 1/24 Chapter 24: Derivatives and Risk Management
Selected readings: Background on Derivatives, pp 834-845,
Corporate Risk Management, pp 850-862.
A derivative is a contract or security the value of which depends on
the price of an underlying asset or on the level of an index or interest
rate. Figures from the Bank for International Settlements suggest
that the end of June 2011 the total notational amount of financial
derivatives outstanding worldwide was over $700 trillion, with the
amount at risk totaling over $19 trillion.
Bank for International Settlement, Table 19:Amounts outstanding of overthe-counter derivatives.
www.bis.org/statistics/derstats.htm
Working with the Wall Street Journal
I will provide copies of information on derivatives as reported in the
Wall Street Journal
Thurs 1/26
Chapter 24: continued
Discussion: Problems 24-2 and 24-3
Discussion: Work on the Excel worksheet, Marking a Futures Contract to the
Market. It is posted on Moodle. We will discuss this in class.
Tues.
Video: Rogue Trader
The movie is based on the true story of a young futures trader in Singapore who
brought down one of Britain’s oldest and most successful financial institutions,
Barings Bank.
Written: Problem 24.5
1/31
BUS 434
Spring 2012
Professor Alva Butcher
6
Thurs. 2/2
Chapter 6: Financial Options
Discussion Questions 6-1, 6-2, and 6-3
Written: Reflections on the video
How was the trader able to do this? How was he able to hide his losses? What
were some of the problems at Barings Bank that led to this situation?
Prepare a one-page typed memo that addresses the above questions. Also do a
little detective work and briefly describe the activities of a more recent rogue
trader. Hint: Just recently there was one in England and one in France.
Tues
2/7
Chapter 6: Financial Options continued
Discussion: Problem 6.4
Discussion: Handout on options
Written: Problem 6.2
III. VALUATION OF A CORPORATION AND PROJECT VALUATION
Thur. 2/9
Chapter 7: Accounting for Financial Management
Use a firm’s financial statements in order to estimate Free Cash Flow, FCF
Review Sections 7.1-7.6:Income Statement, Balance Sheet, Statement of Cash
Flows, etc..
Focus on Section 7.7: Modifying Accounting Data for Managerial Decisions
Discussion We will be using Problem 7.5 and the Mini Case (Pages 250-253) as
a basis to develop the concepts in Chapter 7. Please focus on questions a,b,c,d,e,
and f of the mini case.
Tues.
2/14
Chapter 7: continued
Chapter 11: Corporate Value and Value Based Management, Skip pages 385-399
Use FCF to estimate the value of a firm and the value of its equity.
Note: If you need a review of financial ratios, please read Chapter 8: Analysis of
Financial Statements
Discussion:
Problem 11.6: Given FCF, Calculate the horizon value and the value of
operations
Problem 11.8: Given the value of operations, calculate the value of the firm and
the value of equity.
Problem 11.10 (the whole banana): Calculate the free cash, the horizon value, the
value of operations, the value of the firm, and the value of equity.
Written Problem 7-12
Thurs. 2/16
Chapter 11: Corporate Value and Value-Based Management continued
Chapter 5: Section 5.9, Market Multiple Analysis
Use trading multiples and transaction multiples to value a firm.
Harvard Business School Case: Spyder Active Sports- 2004 Please read the
Spyder Active Sports – 2004 case and bring your copy of the case to class.
BUS 434
Spring 2012
Professor Alva Butcher
7
Discussion Access www.valuepro.net.. Use this obtain ValuePro’s estimate of
the intrinsic stock value for Microsoft (MSFT). Please bring a copy of
ValuePro’s underlying assumptions for Microsoft ( i.e. growth rate, Net Op Profit
margin, etc.) Also please bring a copy of the General Pro Forma Screen detailing
the calculations for the intrinsic value of MSFT. See if you can verify the
numbers and calculations on the General Pro Forma Screen. We will discuss this
in class.
Written: Problems 11.1 and 11.7
Tues 2/21
Case Analysis: Spyder Active Sports 2004
Prepare an analysis of the Spyder Active Sports-2004 case. Present your findings
in a report to David Jacobs, not to exceed two double spaced typed pages, plus
relevant exhibits. The report should not be in question and answer format, but it
should address the following questions. Include a brief introduction, analysis,
and summary/conclusion.
1. What is the ownership structure of Spyder? Why does each party want to
sell? What do they want out of the sale, and what are their concerns?
2. Consider the options that Spyder has:
a. David Jacobs would not sell now, but the minority interest of CHB
would be sold to a financial buyer.
b. David Jacobs and CHB would sell a controlling block to a strategic
buyer.
c. David Jacobs and CHB would sell a controlling interest to a financial
buyer.
Why might some owners prefer one alternative over the other?
3. Prepare estimates of the value of the firm based on the trading and
transaction multiples presented in the case. Use the Spyder Student
Spreadsheet provided on Moodle. Turn in a hard copy of your spreadsheet
after class. Turn in a digital copy of your spreadsheet on Moodle before
class.
Note: In class, we will go over the estimated value based on a Discounted Free
Cash Flow Analysis.
4. Considering the alternatives discussed in question (2), which one would you
choose if you were David Jacobs? Who else is affected by this choice and
how?
Thurs. 2/23
Chapter 12: Capital Budgeting: Decision Criteria, pp. 410-422.
Several sections of this chapter will be a review of topics covered in BUS 315.
We will focus on Net Present Value (NPV), Internal Rate of Return (IRR), and a
comparison of these two methods.
Chapter 13 Capital Budgeting: Estimating Cash Flows and Analyzing Risk
Read pp. 447-474. Most of this will be review.
Our discussion will focus on using Free Cash Flows to value a capital budgeting
project.
Discussion: Problems 12.1, 12.2, 12.5, 12.21(a,c,d,e)
Discussion: Spreadsheet Problem 13-11, pp.485-486. Note that this has been
posted on Moodle. Ignore Part 6 – Sensitivity Analysis.
BUS 434
Spring 2012
Professor Alva Butcher
8
Tues
2/28
Corporate Valuation Case
Wood-Tech Inc: Valuation of a Privately Held Firm
A wood products based company has been approached with an offer to purchase
the company. You have been asked to assess profit and operating performance
over the past several years. In addition, you must advise the owners on the sale
of the company. Should they sell, and if so, at what price.
Case Instructions are posted on Moodle. Note that Exhibit 5 in the case has been
posted on Moodle. This will allow you to calculate financial ratios without
having to input the data Excel.
Thurs. 3/1
Case Discussion: New Heritage Doll Company (Capital Budgeting)
Case Instructions are posted on Moodle. Note that a student spreadsheet for this
case has also been posted on Moodle.
Catch up and review
Tues. 3/6
Exam 1: Chapters 24, 6, 7, 11, 12, and 13
Thurs. 3/8
Video: Margin Call
This is an excellent new video on the financial crisis of 2008. Some questions
for you to consider as you watch the video questions will be posted on Moodle.
Please keep notes on these questions as we will refer to them later in the
semester.
SPRING RECESS
IV.STRATEGIC FINANCING DECISIONS
Tues.
3/20
Chapter 15 Capital Structure Decisions: Part 1
Does the use of debt financing impact the value of the firm?
Discussion: Problem 15-1, 15-2, and 15-9(a)
Thurs 3/22
Chapter 15: continued
Chapter 16 Capital Structure Decisions: Part 2
Written: Problem 15-7
Discussion: Problem 15-12
Discussion: Problems 16.1 and 16.2
Tues . 3/27
Chapter 16: continued
Discussion: Problem 16-5 and Problem 16-6
Thurs. 3/29
Chapter 17 Distributions to Shareholders: Dividends and Repurchases
Does the payment of dividends to shareholders impact the value of the firm?
Discussion: We will use Questions 17.1,17.2, 17.4 and 17.5 as a basis to discuss
dividend theory.
Discussion: Problems 17-3, 17-5, 17-10
BUS 434
Spring 2012
Professor Alva Butcher
9
Tues.
4/3
Chapter 17: Dividend Theory continued
Harvard Business School Case
Dividend Policy at FPL Group Inc.
Case instructions are posted on Moodle.
V. REFLECTIONS ON THE FINANCIAL CRISIS
Thurs. 4/5
Case Discussion
Investment Banking in 2008: Rise and Fall of the Bear, Kellogg School of
Management
The collapse of Bear Sterns and its subsequent bailout by the Federal Reserve
and JP Morgan sent shockwaves throughout the financial community. This case
provides some background material on the subprime crisis. You will assess Bear
Sterns actions.
Case instructions are posted on Moodle.
We will also discuss the video, Margin Call. Please bring your notes from that
video.
Catch up and review
Tues.
4/10
Exam 2: Chapters 15, 16, and 17
VI. CORPORATE RESTRUCTURING AND CORPORATE GOVERNANCE
Thurs. 4/12 Background Reading
Chapter 11: Corporate Governance and ESOPs, pp384-399
Chapter 26: Mergers, LBOs, Divestures (Skip sections 26.8, 26.13, 26.20.
Especially focus on the Adjusted Present Value approach, APV, 26.7, the
empirical evidence, 26.16, and leveraged buyouts, 26.18)
Case Discussion
Ben & Jerry’s Homemade, University of Virginia Darden School
This case examines issues of asset control for Ben & Jerry’s Homemade, Inc. in
light of outstanding takeover offers. You will take the role of an outside board
member. Ultimately you must take a position on whether the board should
defend the agenda of current management or accept one of the takeover offers.
Case instructions are posted on Moodle.
Tues.
4/17
Corporate Governance Case Discussion
Volkswagen and Porsche: One Family, Two Car Companies & a Battle for
Corporate Control
Case instructions are posted on Moodle.
Outside of class, you will also be discussing this case over the internet with a
team of European students at the University of Applied Sciences, Emden-Leer,
Germany. The time of this discussion needs to be determined.
BUS 434
Spring 2012
Professor Alva Butcher
10
Thurs. 4/19
Guest Speaker
Tues.
Adjusted Present Value
Background Reading
1.Chapter 26: Adjusted Present Value (APV), pp 905-908, 913-914, 916-918
2. “Using APV: A Better Tool for Valuing Operations,” Timothy Luehrman,
Harvard Business Review, May-June, 1997
Discussion: Problem 26-4, 26-6
Discussion: APV versus (NPV using WACC)
An Excel file with a summary of the APV example in the Harvard Business
Review article is available on Moodle. Please review this.
Discussion: What are some of the advantages of APV over NPV?
4/24
Note: As background material for your RJR Nabisco case, please view the
Video: Barbarians at the Gate. It is available as streaming video on Moodle.
Thurs. 4/26
Harvard Business School Case
How Venture Capitalists Evaluate Potential Venture Opportunities
Discussion Questions
 Even before reading the case, develop your own set of criteria for
evaluating a potential new venture.
 How do the VCs evaluate the prospective venture’s business model?
 How do the VCs evaluate the founding management team?
 How do the VCs evaluate whether the business opportunity meets their
criteria?
 How do they weigh risk and reward?
 How does the notion of a prospective exit route enter into the evaluation?
Stanford Business School Case Discussion
Juniper Networks
Case instructions are posted on Moodle.
Tues 5/1
Harvard Business School Case : RJR Nabisco
In 1988, Kohlberg Kravis Roberts and Co. (KKR) concluded the takeover of RJR
Nabisco Inc. (RJR). At that time, the $25 billion dollar deal to buy RJR was the
biggest takeover in history. The takeover battle was initiated by Ross Johnson,
the Chief Executive Officer of RJR and his management team. They proposed a
management buy-out in which they bid $75 per share for RJR stock. At the time
of the bid, the stock was trading at approximately $56 per share. A committee of
outside directors called this offer a “raider from the inside” and opened the
bidding to all comers. This led to a bidding war between the management team,
KKR, and First Boston. You will be involved in a live version of the takeover
battle.
The takeover raises interesting questions in many areas of finance, such as
agency theory, capital budgeting, tender offers, social responsibility, stock
valuation, and capital structure. Case instructions are posted on Moodle.
Comprehensive Final Exam: Thursday, May 10th, 12:00-2:00
BUS 434
Spring 2012
Professor Alva Butcher
11