Marshall School of Business Fall 2007
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FBE 421: Financial Analysis & Valuation
Section: Date/Time: Location
15324R
15325R
15327R
Tuesday & Thursday
8:00am-9:50am
10:00am-11:50am
12:00noon-1:50pm
JKP110
Julia Plotts
Assistant Professor of Clinical Finance & Business Economics
USC Office: Accounting 301J, Office Telephone: (213) 821-6798
Email: plotts@marshall. usc.edu
Course website: on Blackboard http://blackboard.usc.edu
Fall 2007 Office Hours:
Wednesdays 1:30pm-3:30pm and by appointment. Office hours are reserved for questions related to FBE
421 material. I will announce additional office hours in the weeks of midterms. Appointments are
recommended even during office hours as meeting schedules may conflict with office hours. E-mail is a
dependable and efficient way to communicate with me.
Rules of the House:
• Attend class rested or loaded up on caffeine. Sleeping in class will not be tolerated.
• Please be considerate and respectful to Instructor, TAs, Guest Speakers and classmates.
• You must attend the section you are registered for. If you are registered in 8am and
accidentally sleep late or hit traffic, it is your loss. I will allow students to attend other
sections under special circumstances (must be approved via email 24 hours in advance).
• No cell phone, blackberry, PDA, text messages or laptops are to be used during class.
• Do your readings and be prepared for class discussion. "I didn't read" is not a valid
excuse, if this is your response in class, participation points will be deducted from your
grade. Do not hesitate to ask (and answer) questions. There are no "stupid" questions.
However, questions that steer the class "off-topic" may be deferred to office hours.
Course Objectives & Description:
This course develops and uses tools of financial analysis to evaluate the performance and
assess the value of individual companies in an industry context. The course covers various
valuation approaches and financial analysis needed for enterprise valuation. You will learn to
assess a firm's business and competitive strategy and whether it is creating value for
shareholders. This will involve applying tools of financial analysis and several valuation
methodologies to evaluate a company's strategic and competitive positioning, financial
performance, and strategic alternatives. An important aspect of this course will be to bridge
financial theory and practice with valuation, capital structure analysis, and corporate strategy in
the context of real world implications.
This course will be most useful for those who plan to make (or continue) a career in corporate
finance and/or corporate strategy and development - whether at corporations, consulting firms, or
investment banks. The course will also be valuable for future portfolio managers and equity or
fixed income research Analysts.
Marshall School of Business Fall 2007
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Prerequisite Knowledge:
This course assumes that the background knowledge of students include basic finance (BUAD
306) and accounting. It will be assumed that students are comfortable with the topics of standard
corporate finance texts such as Ross, Westerfield and Jaffe or Brealey & Myers. Note: You are
responsible for reviewing your basic finance and accounting concepts ASAP. The pace and
schedule of topics covered in this class does not allow for review of these concepts, so please be
prepared.
Learning Objectives:
Following completion of the course students will be capable of:
• Financial Statement Analysis: Reviewing and assessing a firm's financial statements
utilizing performance ratios, historical analysis, strategic analysis and overall market
assessment of a firm. This includes evaluating the degree to which a firm's financial
statements capture the underlying business reality. Recognizing accounting distortions
and/or earnings manipulation and restating financials for purposes of analysis.
• Assessing Long Term Earnings and/or Cash Flow Potential: Forecasting a firm's
financial projections using multiple scenario analysis. This includes evaluating current
and past performance of the firm and assessing its future earning potential and financial
health (assessing growth, value drivers and risks). The analysis also includes calculating
sustainable operating income or "unlevered" pure value of the firm and adjusting
financial statements for "off-balance sheet" assets and liabilities; and nonrecurring or
unusual items within the income statement.
• Using Valuation for Decision Making:
• 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. Applications and
transactions covered include:
o Estimating a Firm's Equity and Enterprise Value for investment and change of
control analysis.
É Estimating a Firm's Cost of Capital
É Valuing Firms With a Changing Capital Structure & Adjusted Present
Value Method of Enterprise Valuation (APV)
o Relative Valuation using Market Comparables
o Valuation in Practice & Corporate Control
É Mergers and Acquisitions
É Equity Capital Raising Transactions, Initial Public Offerings
É Leveraged Buyouts (LBOs)/Management Buyouts
É Valuation in Private Equity Setting & Venture Capital
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Course Materials:
Required Textbook:
Equity Asset Valuation (Hardcover) The CFA Institute Series by John D., CFA Stowe,
Thomas R., CFA Robinson, Jerald E., CFA Pinto, Dennis W., CFA McLeavey
Approx cost: used $39.37, new: Amazon $59.85, USC bookstore $?
Publisher: Wiley (January 22, 2007) ISBN-10: 0470052821; ISBN-13: 978-0470052822
Required Course Reader:
Students may purchase the Course Reader at the USC Bookstore. It includes instructor
handouts, articles and readings (note: it changes each semester).
Other: Slides, handouts and supplemental readings/articles will be posted on Blackboard.
Financial calculator capable of performing discounted cash flows, IRR and other financial
calculations. Examples: HP 12-C or 10BII or TI-BA II Plus. Please bring to every class.
Recommended: The Wall Street Journal , The Economist , Barron's , Forbes (available
through Factiva accessed through http://mymarshall.usc.edu or Crocker Business Library)
and other financial news and/or market analysis websites.
Grading Criteria: final grades for this course will be based on the following criteria:
Fall 2007 FBE 421 Grading:
Bed Bath & Beyond Group Case Analysis: due 9/18
10%
Midterm 1: 9/20
25%
Spyder Active Sports Group Case Analysis: due 10/23
10%
Midterm 2: 11/1
25%
Final Group Valuation Assignment: due 12/6
20%
Peer Evaluation: complete in class 12/6
5%
Class Participation
5%
Total
100%
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Midterm Examinations:
Midterm 1: Thursday, September 20th closed book/closed notes (25%)
Midterm 2: Thursday, November 1st closed book/closed notes (25%)
Questions will include both qualitative and quantitative questions from material covered in class,
and presented in the readings (Stowe textbook, course reader, examples posted, class discussion).
Exam Policies:
• You must bring your own scantron sheets to the exams. You will need 2 scantron sheets
for this class (2 midterms). The correct scantron sheet is F-288-PAR-L.
• If you have pre-arranged trips on the day of exams, please drop the course. There will be
no make-up exams. This includes any recruiting/job search events.
• No talking during an exam. You are required to follow all instructions given on the cover
sheet of each test. Failure to do so may result in not receiving credit for correct answers.
• It is your responsibility to check your exam to ensure that no pages are omitted. You are
responsible for checking the number and sequence of the pages on each quiz or exam. If
your test is missing a page, ask the proctor/instructor for a new test. Requests for regrades
because pages are claimed to have been missing from a test will not be honored.
• Lap Tops, PDAs and wireless handhelds and cell phones may not be used in any exam.
You should bring a #2 pencil and a financial calculator to perform calculations.
Sunglasses and hats may not be worn during exams (except for verifiable medical
reasons).
• If you change your answer on the scantron sheet, it is your responsibility to properly
erase other answers you had previously selected. Scantrons that are misgraded because
of poor erasure marks will not be re-graded. No partial credit will be awarded on any
multiple choice questions.
No Final Exam
There will be no final exam this semester. Final course grades will be posted to Blackboard no
later than December 19th; students may pick up their graded group projects on this date in Plotts'
mailbox in the FBE department.
Class Participation (5%)
You are expected to participate in class discussions and with guest speakers. You will receive
and additional instructor assessment of your participation, also on a scale of 0-5. This grade will
reflect my assessment of periodic homework assignments, the quantity and quality of an
individual's contribution to the classroom learning environment, and other issues discussed in
class, as well as attendance.
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Group Case Analysis & Final Valuation Project: Please work in a group of your choice (4-6
students) to analyze the 2 assigned cases and the final valuation project. You are permitted to
work with students from other class sections. The cover sheet of each written assignment should
contain the first and last names of the students submitting the assignment arranged alphabetically.
All of the names of the members in the group must appear at the top of the memo to receive
credit. Each group member should retain a copy of the memorandum and supporting materials
for class discussion. Grading will not only be based on your effort, ideas and content, but will
also include presentation (be concise, answer the questions without fluff, spelling and grammar)
and formatting (order, organization and format in your written analysis and Excel spreadsheet
work). Please organize your case memoranda for ease of reading - use bullets and provide white
space.
Case Analysis (20%): Students will be asked to prepare case study analysis on (2) HBS cases
this semester. A written case analysis should consist of a 2-4 page executive summary addressing
the case questions with supporting computations and tables in a separate appendix (if relevant).
The cover sheet of each written assignment should contain the names of the students submitting
the assignment arranged alphabetically. Please organize these executive summaries for ease of
reading - use bullets and provide white space. All case assignments are due on their respective
due dates at the beginning of class. No late work will be accepted, nor will cases sent via e-
mail/fax.
You should treat these assignments as if you are working within a team at an investment bank or
consulting firm and you have been hired by a client to evaluate the problem/situation presented in
the case. Please be prepared to present an overview of your case analysis in our class discussion.
To learn financial analysis and valuation students will analyze real companies and work through
problems by analyzing different scenarios and courses of action. Valuation is more than an
exercise in number crunching. There is a great deal of room for innovation and creative problem-
solving, which will be encouraged throughout the course both in class discussion and project
work. Keep this in mind when you are working in your groups. Be innovative and think
strategically in your case work.
Case 1 Bed Bath & Beyond due 9/18: Perform financial statement analysis and a strategic
analysis of Bed Bath & Beyond. Assess the company's business, operating, and expansion
strategies. What, if any, changes would you make to this strategy?
Assess the company's performance. Calculate and comment on growth and margins and evaluate
BBBY's performance relative to its peers. Is the Company's growth strategy sustainable?
Evaluate the Balance Sheet and Statement of Cash Flows. Identify and adjust for any "off-
balance sheet" financing impacts. What are the major sources and uses of cash within the
company? In your opinion, is BBBY capable of financing its growth and expansion program for
the remainder of 1994 and on into fiscal 1995?
If you had to prepare a forecast for the company, what are the "drivers" of future earnings and
cash flows? Does BBBY have any sustainable competitive advantages?
It is late August 1994. You are an up and coming Equity Research Analyst at a bulge bracket
investment banking firm and are preparing your "Initiation of Coverage" report on BBBY. You
are aware of Leslie Norton's statements that appeared in Barron's on 8/8/94 (page 1 of the case),
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and the recent stock performance of BBBY (before and just after the Barron's article). The only
other materials you have are those presented in the case. You have evaluated the financial
statements and other supporting materials in the case, and it is time to make a decision on a rating
to assign to BBBY stock. What is your rating? Provide your justification and any other
observations.
Case 2 Spyder Active Sports due 10/231 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.
How, if at all, does the value of Spyder depend upon its ownership structure? What are the
(other) primary determinants of value?
Prepare estimates of value based on a Discounted Cash Flow (DCF) analysis and the Comps -
both the trading and merger and acquisition transaction multiples presented in the case. How well
do these estimates reflect the considerations you believe to be most pertinent? In your valuation
analysis you should consider control premiums and/or minority discount (selling controlling stake
vs. minority interest), the company's potential lack of marketability and accounting for synergies
(strategic vs. financial buyer). Please footnote, justify and explain your assumptions. Prepare a
valuation "football field" chart/diagram that summarizes your valuation summary.
Compare the alternative transactions described on the last page of the case. Which one would you
choose if you were David Jacobs? Which one would you choose if you were a general partner in
CHB Capital Partners? Who else is affected by this choice and how?
Final Valuation Group Assignment due 12/6 (20%):
Please work in a group of your choice (4-6 students) on the final valuation group assignment.
The details will be posted in the "Assignments" section on Blackboard no later than 11/1/07.
This assignment will be due on our last class meeting 12/6/07. No late work will be accepted, nor
will e-mailed or faxed cases. Groups should be prepared for a 5-10 minute class presentation of
their analysis.
Peer Evaluation (5%):
In order to provide an incentive for all students to make maximum contributions to the study
group, on 12/6 (last day of class) students will be asked to grade each team member's
contributions on a 0 to 5 point scale.
1
Note: Spyder excel spreadsheet supplements will be posted to the Assignments section of Blackboard. This case was
not included in the course reader and will need to be purchased through a link provided on Blackboard to the Harvard
Business School Publishing website. The case can be downloaded electronically for approximately $4
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Authorized Absences:
Students who will be absent from a scheduled class meeting or examination because of an official
University activity may be granted an official excuse in advance of the events by the dean or
department chairman responsible for FBE 421. It is the responsibility of the activity sponsor to
provide lists of eligible students in time for the administrator to give approval. These students will
then be given an opportunity to complete any missed assignments or examinations.
Student Disability:
Any student requesting academic accommodations based on a disability is required to register
with Disability Services and Programs (DSP) each semester. A letter of verification for approved
accommodations can be obtained from DSP. Please be sure the letter is delivered to me as early
in the semester as possible and at least 2 weeks prior to any scheduled examinations. DSP is
located in STU 301 and is open 8:30 a.m. to 5:00 p.m., Monday through Friday. The phone
number for DSP is (213) 740-0776.
Code of Ethics & Academic Integrity:
Most case materials in this course use real data from actual companies. You may use publicly
available information about these firms in your analysis. You are prohibited from using old
notes, handouts, or solutions to the cases from previous or other sections of this course for your
written reports and/or for class discussions.
The use of unauthorized material, communication with fellow students during an examination,
attempting to benefit from the work of another student, and similar behavior that defeats the
intent of an examination, or other class work is unacceptable to the University. It is often
difficult to distinguish between a culpable act and inadvertent behavior resulting from the nervous
tensions accompanying examinations. Where a clear violation has occurred, however, the
instructor may disqualify the student's work as unacceptable and assign a failing mark on the
paper.
All students at the University of Southern California have an inherent responsibility to uphold the
principles of academic integrity and to support each other and the faculty in maintaining a
classroom atmosphere that is conducive to orderly and honest conduct. Students must understand
and uphold the rules printed in the Student Conduct Code in the USC SCampus handbook,
regarding examination behavior, fabrication, plagiarism, and other types of academic dishonesty.
Violations will result in a failing course grade and referral to the University's judicial system.
Drops/Adds:
Students will be added by the order of the waitlist. A student who does not attend the first two
classes and who did not contact me in advance regarding their absence, will be dropped the
afternoon of August 30th. Roll call will be taken the first few weeks to identify drop/add
availability. If you miss a class in the first few weeks I will assume you are no longer interested
in taking the course and you risk being dropped from the class. The class size is determined by
classroom capacity. In JKP this is not to exceed 77, there are no exceptions.
Unclaimed Paperwork:
Returned paperwork unclaimed by a student will be discarded after 4 weeks and will not be
available for a grade appeal following students' receipt of course grades.
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Fall 2007 Tentative Course Outline & Assigned Readings
DayDateTopic & Chapter
Readings
T8/28 Course Overview
Syllabus, Stowe Chapter 1
Th
8/30 The Equity Valuation Process
Articles 1-6: Google
T9/4 Financial Statement Analysis & Valuation
Financial Statement Analysis (HBS) 9-195-177
Calculating and Interpreting Financial Ratios
FSA Handout: Analysis of Financial Statements & Review of Financial Ratios
FSA Handout: Financial Statement Analysis: Detailed Overview
Th
9/6 Financial Statement Analysis & Valuation
Article 7: Getting to the Bottom of a Company's Debt
Analyzing a Company's Credit Profile
Article 8: Quick Cash via Receivables Deals Can Leave a Blurry Fiscal Picture
FSA Handout: Home Depot example
Article 9: Debt? Who, Me?
T9/11 Financial Statement Analysis & Valuation
Solving the Puzzle of the Cash Flow Statement (HBS) BH103
The Most Important Financial Statement: Cash FlowStatements of Cash Flows: Three examples (HBS) 9-193-103
W
9/12Optional Event: Trojan Investing Society Investment Banking Employer Panel - Time and Place TBA (6pm tentative)
Th
9/13 Financial Statement Analysis & Valuation
Article 10: Fuzzy Numbers - Despite the reforms…
Earnings Manipulation
Article 11: Creative Accounting: How to Buff a Company
Earnings HO: Earnings Distortion & ManipulationArticle 12: Inside the WorldCom Numbers Factory
Earnings HO: Krispy Kreme Example
Article 13: How to Hide $3.8 Billion in Expenses
Adjusting for Non-recurring Items for ForecastingArticle 14: Learn to Play the Earnings Game…
Article 15: Accounting in Wonderland
Article 16: Missed Signals: Stock Gurus Write Off Most Big Write-Offs…
T9/18 Case 1 due: Bed, Bath & Beyond (HBS) 9-196-123
Th
9/20 Midterm 1
Closed-Book, Closed-Note
Schedule continued on the next page.
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Fall 2007 Tentative Course Outline & Assigned Readings
DayDateTopic & Chapter
Readings
T9/25 Discounted Cash Flow Valuation
Stowe Chapters 2-3
Cost of Capital: WACC Example on Pfizer
WACC HO: Weighted Average Cost of Capital (WACC) Review
Th
9/27
Forecasting Performance & Cash Flows, Home Corp
Article 17-20 Regarding EBITDA
T
10/2
Enterprise DCF/WACC Valuation
Th
10/4
XXX In Class Example - Enterprise DCF/WACC
T
10/9
Market-Based Valuation: Price Multiples
Stowe Chapter 4, Article 21 re: P/E Trap
Th
10/11Valuation for IPO using Market Comparables
Dicks Sporting Goods IPO Valuation Case Study
T
10/16 Mergers & Acquisitions
M&A HO: Mergers & Acquisitions (M&A)
example: Northrup/Grumman synergy
Th
10/18Guest Speaker (Tentative)
Guest Speaker Participation Assignment (Blackboard)
T
10/23 Case 2 due: Spyder Active Sports 2004 (HBS) 9-206-027
Th
10/25 Mergers & Acquisitions
T
10/30Midterm 2 Review Session
Th
11/1
Midterm 2
Closed-Book, Closed-Note
T
11/6
Final Valuation Case Introduction
Th
11/8
Valuation in Practice: Private Equity
T
11/13 Leveraged Buyouts (LBOs)
Article 23-27: Private Equity, Leverage, LBOs
Th
11/15"
"
No Class Scheduled for Thanksgiving Week 11/20, 11/22
T
11/27 Using APV for Enterprise Valuation
APV Examples (Blackboard)
Th
11/29 Valuation in Practice: Venture Capital
VC Method Examples (Blackboard)
T
12/4
Course Review
Th
12/6
Final Valuation Group Project Due - In Class Presentations, Pizza, Peer Evaluation
VALUATION The Art and Science of Corporate Investment
Decisions Chapter 7 (Blackboard)
VALUATION The Art and Science of Corporate Investment
Decisions Chapter 8 (Blackboard)