USC Marshall School of Business
Master of Business for Veterans
Spring 2015
FINANCIAL STRATEGY
Instructor: Professor Julia Plotts
Mobile:
(310) 528-6291
Email:
plotts@marshall.usc.edu
Textbook (Same as Financial Management):
Analysis for Financial Management, Robert C. Higgins, McGraw Hill, 10th edition
Cases/Readings:
Corporate Valuation and Market Multiples by Timothy A. Luehrman, HBS 206039
McKinsey Quarterly “What is value-based management?”
An excerpt from Valuation: Measuring and Managing the Value of Companies, August
1994, Timothy Koller. http://tinyurl.com/pc4f4ln
Fundamental Enterprise Valuation: Return on Invested Capital (ROIC) Carliss Y.
Baldwin HBS #801125, August 2000. A technical note that defines return on invested
capital (ROIC).
Spyder Active Sports – 2004 HBS 9-206-027
Introduction:
The financial strategy sessions will involve applying tools of financial analysis and
valuation methodologies to evaluate a competitive positioning, financial performance,
and strategic alternatives.
Discounted Cash Flow (DCF) analysis is a key building block for valuation. During our
financial strategy sessions we will review time value of money fundamentals from
financial management and will discuss enterprise (firm) valuation.
Learning Objectives:
• Understand and apply risk analysis tools.
• Calculate and apply cost of capital.
• Utilizing and interpreting financial data and applying valuation techniques to
make decisions about courses of action for a firm. Valuing companies using
various valuation models and assessing a firm’s business and competitive
strategy and whether it is creating value for shareholders.
• Discuss strategies for value creation including mergers and acquisitions.
• Discuss valuation considerations for private companies.
1
Financial Strategy
January 23, 2015 8:00am – 12:00pm
Review Notes from Financial Management, Read Chapter 8 Risk Analysis
Financial Management Review and Application of Key Concepts – Review topics
from the financial management sessions (Prof. Callahan) including time value of money
concepts and decision criteria used to determine project and investment acceptance.
Risk Models and Cost of Capital - Discuss the risk and return tradeoff, and its
implications to corporate finance and the opportunity cost of capital for corporations.
Learning Objectives:
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To develop an understanding of how to measure a company’s cost of capital.
Much of this session will focus on how to measure risk and how to incorporate
that measurement into the cost of capital.
Understand the definition of risk in finance.
Understand the concept of diversification and the difference between systematic
and unsystematic risk. Which type of risk matters to investors?
Introduce the concept of the weighted average cost of capital (WACC) and
understand how it can be used along with discounted cash flow to value both an
entire enterprise as well as individual projects.
2
Financial Strategy
February 7, 2015 8:00am – 12:00pm
Read online book excerpt from McKinsey Quarterly, “What is value-based
management?” An excerpt from Valuation: Measuring and Managing the Value of
Companies, August 1994, Timothy Koller. http://tinyurl.com/pc4f4ln
The thinking behind VBM is simple. The value of a company is determined by its
discounted future cash flows. Value is created only when companies invest capital at
returns that exceed the cost of that capital. VBM extends these concepts by focusing on
how companies and organizations use them to make both major strategic and everyday
operating decisions. Properly executed, it is an approach to management that aligns a
company's overall aspirations, analytical techniques, and management processes to
focus management decision-making on the key drivers of value.
Read Fundamental Enterprise Valuation: Return on Invested Capital
(ROIC) Carliss Y. Baldwin HBS #801125, August 2000.
This reading is defines return on invested capital (ROIC).
Read Corporate Valuation and Market Multiples by Timothy A. Luehrman, HBS
206039
This reading provides a basic introduction to the use of market multiples for business
valuation.
Learning Objectives: During the session we will discuss the approach of applying
Discounted Cash Flow (DCF) analysis and Market Approach (comps) for company/firm
valuation.
Discussion Questions:
• Which key assumptions have the most impact on firm valuation: free cash flow
forecast, continuing value (terminal value), discount rate (WACC)? What, if
anything, might be done to mitigate the risk or uncertainty in valuation?
• Discuss the challenges in identifying “comparable” publicly traded companies
and past merger and acquisition transactions for determining implied value of a
company.
3
Financial Strategy
February 21, 2015 8:00am – 12:00pm
Quiz: There will be a short comprehensive multiple choice/short answer quiz on the
financial management and financial strategy sessions.
Read the case: Spyder Active Sports 2004
David Jacobs founded a high-end ski apparel company in 1978. He successfully built
and grew the company, establishing a major international brand that appealed to ski
racers and other active skiers. In 1995, he sought external financing to support further
growth of the company and structured a financial deal with CHB Capital Partners, a
private equity firm in Denver. By 2004, Jacobs was ready to consider alternative types
of equity transactions that would provide a source of liquidity to him and his family,
including sale of Spyder to another apparel company and sale of a large block of stock
to a private equity firm.
Learning Objectives:
• Consider an expansion/high-growth phase company’s strategic alternatives and
an owner’s consideration of timing of “exit” options.
• Discuss valuation issues of a privately owned company and market timing.
Discussion Questions:
• Identify the different “exit” options that are feasible for Spyder in 2004, and
analyze the benefits and costs of each alternative. Is this a good time to sell the
business? Consider the interests and needs of the owner(s), the current state
and future prospects of the company, and the current state of the financial
markets.
• Perform a valuation of Spyder utilizing the discounted free cash flow method and
other value metrics such as the market approach/comps method. Spyder is not
publicly-traded on a stock exchange, but we can still apply the market approach
to estimate the company’s implied value. Evaluate the financial data provided for
Spyder and also the comparable publicly-traded company price multiples and
comparable past merger and acquisition price multiples.
• Compare the alternative transactions described on the last page of the case.
Which one would you choose if you were: 1) David Jacobs; 2) a general partner
in CHB; 3) Shimokubo?
4