The Ohio State University Fisher College of Business Department of Finance

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1 The Ohio State University Fisher College of Business Department of Finance Course Syllabus Business Finance 4219 Advanced Corporate Finance Autumn Semester 2016 Section Meets Monday / Wednesday / Friday Room :30 AM to 12:25 PM Schoenbaum Hall :40 PM to 1:35 PM Schoenbaum Hall 205 Instructor: Kennia Papadakis papadakis.8@osu.edu Office: 234 Fisher Hall Phone number: Office hours: Tuesdays & Thursdays 12:30 PM to 2 PM, or by appointment. I am open for appointments also on Friday mornings. Please send all requests via adding the and section number as well as student (s) name and the topic(s) you wish to discuss. Course Description & Scope This course is capstone undergraduate elective in the area of Corporate Finance. The course helps students bridge the gap between the theory of finance covered in other courses, and the reality of decision-making as a financial manager through the use of real world case studies. Students learn to analyze real-world problems and provide recommendations to a best course of action. This is a full semester course and business case-based. Some of the topics covered include capital planning. project selection and execution, new product / new service decision, IPO, and M&A. Pre requisites are BUSFIN 4211, 4221, 4201 and Course Material There are no required textbooks for this class, however, the following are highly recommended as reference: 1) Damodaran on Valuation, second edition. By Aswath Damodaran, Wiley Finance. 2) Corporate Finance, by Jonathan Berk and Peter DeMarzo, 3 RD edition, Pearson Series in Finance, 2013 (earlier editions are also acceptable. There is also a 4 th edition just released and if used for another course this fall semester is also acceptable) There is a Required Case Course pack available via Harvard Business Publishing: The following cases are included in the course pack. The case number corresponds to the sequence in the class calendar. 1 P a g e P a p a d a k i s - S P

2 Case # Case Item # Individual Cases 1 Nike, Inc.: Cost of Capital UV Diamond Chemicals PLC (A): The Merseyside Project UV The Boeing 7E7 UV Hansson Private Label: Evaluating an Investment in Expansion Mercury Athletic: Valuing the Opportunity The New Heritage Doll Company JetBlue Airways IPO Valuation UV2512 Group Cases 8 Target Corporation UV The Timken Company UV This Bud s for who? The Battle for Anheuser-Bush UV Dow s Bid for Rohm and Haas Valuation of Air Thread Connections Monmouth, Inc Kohler Co.(A) LinkedIn Corporation Flash Memory Inc Students must use the following unique link to purchase the course pack: Each and every student in the class is required to purchase a case course pack. You have the option to purchase electronic files or printed copies. Whichever option you chose, the cost to the students is $68. You will notice that most cases will have supplemental spread sheets that you can use to build up financials; these are at no extra cost. Other newer cases will offer an alternative audio version for additional $1/case. You are not required to purchase them, they are optional. Course Lecture Notes: Lecture notes are a summary of the cases discussed during class, a wrap-up which highlights key takeaway and application of learning objectives. Lecture notes are posted on Carmen>Content after every session, by the end of the day. Grading Students performance in this class will be measured by both group and individual work load. Please read the detailed guidelines carefully before the introductory class. Individual Grading Components 1. Attendance & class particiation 50 points 2. One Individual Case Analysis (assigned) Two Case Overviews (assigned) 40 (20 points each) Sub totoal 150 points 2 P a g e P a p a d a k i s - S P

3 Group Grading Components 1. Group Case Analysis & Presentation (assigned) 60 points 2. Final Group Case analysis & memo (entire class) peer evaluation 30 Sub total 150 points Total 300 points Grading Detail Individual 1. Attendance & Class Participation: class attendance will be taken at the beginning of each session and records will be kept on Carmen. At the end of the semester, each student s final attendance percentage over the total number of sessions is applied to the 25-point maximum score. In addition, a class comments sign-up sheet is available at the end of each session. Students who actively participated during class discussion - any given class - are entitled to signin their name on the sheet. Participation % is applied to the remaining 25 points. (Note: The sing-up sheet is an honor system! However, I will check the list every week and follow up if I see any name that I don t recognize.) 2. One Individual Case Analysis (assigned): students will be assigned one case and are required to provide full case analysis answering all the case questions in a two-page executive brief along with the respective excel work book to support any financial analysis executed to answer any of the case questions. All submissions are via drop and due before the class session when the case is first discuss. No late submissions are accepted, no excuses. 3. Two Case Overviews (assigned, 20 points each): each student is assigned two, two-page case overviews. A class roster with case overview assignments is posted on Carmen. Case overviews are drop box submissions due before class. The drop box is open the entire semester. The overviews are simple, to the point and students are required to answer the following: a. What is the case background? In which industry? b. What parties are involved? c. What are the issues or problems to be addressed? Strategic? Financial? d. What financial information is provided to help address the issues? What data is missing? Grading Detail Group 1. Group Case Analysis & Team Presentation (assigned) groups are assigned one lead business case for which they are responsible to execute an in depth analysis answering all the case questions, prepare a 2-page executive brief and present their analysis and recommendations during class. 2. Final Group Case (all groups) the final group case is the class wrap up and it is done in place of a final exam. Groups are required to answer all case questions, prepare a 2-page executive brief and their financial analysis in a separate excel book via drop box on the due date set in the class calendar. 3 P a g e P a p a d a k i s - S P

4 peer Evaluation during the last session, each student will have the opportunity to evaluate all team mates using a 360-like survey. Team mates that are consistently recommended by peers earn the full credit for this grading item. I suggest that any issues that arise early in the semester are deal with as soon as possible, so that no issues are left to the end. The intention of this group grading item is to protect hard and smart workers and prevent free riders. Class Calendar Week Class Date Lecture / Case Topics Readings & Assignments 1 1 W 8/24 Class Introduction Syllabus overview Class syllabus 2 F 8/26 How to conduct and business case analysis Case analysis and class discussion expectations 2 3 M 8/29 Introduction to Valuation WACC, CAPM, Discounted Cash Flow model (DCF) Lecture notes Lecture notes 4 W 8/31 Introduction to Valuation (cont.) WACC, CAPM and DCF cont. Lecture notes 5 F 9/2 Case 1: Nike Case 3 6 M 9/5 Labor Day No class 7 W 9/7 Fisher Fall Career Fair at the Student Union No Class 8 F 9/9 Case 1: Nike Case wrap up Case & lecture notes 4 9 M 9/12 Valuation Continues Enterprise valuation and Free Lecture notes Cash Flows of the Firm 10 W 9/14 Case Case 2: Diamond Chemicals 11 F 9/16 Case wrap up Case & lecture notes 5 12 M 9/19 Valuation Continues Adjusted Present Value 13 W 9/21 Case 14 F 9/23 Case 3: The Boeing 7E7 Case wrap up Case & lecture notes 6 15 M 9/26 Valuation Continues Relatives Valuation 16 W 9/28 Case 17 F 9/30 Case 4: Hansson Private Label Case wrap up Case & lecture notes 7 18 M 10/3 Concepts Summary Midterm summary session Lecture notes 19 W 10/5 Case 20 F 10/7 Case 5: Mercury Athletic Case wrap up Case & lecture notes 8 21 M 10/10 Case 6: The New Heritage Doll Case & lecture notes 22 W 10/12 Case 7: JetBlue IPO Case & lecture notes 23 F 10/14 Fall Break No class 9 24 M 10/17 Planning day No class 4 P a g e P a p a d a k i s - S P

5 Class Calendar (continues) Week Class Date Lecture / Case Topics Readings & Assignments 25 W 10/19 Group Case Presentation 26 F 10/21 Case 8: Target Case wrap up M 10/24 Group Case Presentation Case 9: Timken 28 W 10/26 Case wrap up 29 F 10/28 Case 10: Anheuser-Bush Group Case Presentation M 10/31 Group Case Presentation Case 11: Dow s bid for R&H 31 W 11/2 Case wrap up 32 F 11/4 Group Case Presentation M 11/7 Case 12: Valuation of AirThread Connections Case wrap up 34 W 11/9 Case 13: Monmouth Inc Group Case Presentation 35 F 11/11 Veterans Day No class M 11/14 Case 13: Monmouth Inc Case wrap up 37 W 11/16 Group Case Presentation 38 F 11/18 Case 14: Kohler Co Case wrap up M 11/21 Case 15: LinkedIn Group Case Presentation 40 W 11/23 Thanksgiving No class 41 F 11/25 Columbus Day No class M 11/28 Final case work during class 43 W 11/30 Final case work during class 44 F 12/2 Final case work during class 360-peer evaluations due (in class) M 12/5 Final Case 16: Flash Memory Inc. Group memo & excel wokbooks due (drop box) 46 W 12/7 Last day of class Wrap up Fairness in Grading We will do everything we can to grade fairly according to the quality of work produced in student assignments. If you carefully review your assignment and become convinced that a particular grade should be reviewed, you may submit a written justification for the reevaluation of the assignment with two copies of all supporting materials. Your appeal will not be successful unless you provide an extensive and well-crafted argument detailing the request. If your request is justified, and if we determine that the points at stake are large enough that it could lead to a letter grade change we will review your assignment at the end of the semester. No re-grading will occur before the end of the semester (besides obvious administrative errors). 5 P a g e P a p a d a k i s - S P

6 Disability Policy Students with disabilities or requiring special accommodations must notify me and your discussion section leader of such needs at the beginning of the quarter. You should work directly with The Ohio State University Office of Disability Services (ODS). ODS is expert at working with individual students to provide the appropriate assistance. Should you require special instruction for the course, please provide a written request from the ODS. Academic Integrity Fisher Student Standards of Conduct According to the Standards of Conduct of the Fisher College of Business, students are expected to: Represent themselves truthfully in all situations; Conduct themselves in a manner that does not seek to gain an unfair advantage over other members of the Fisher community; Demonstrate respect for all property that does not belong to them; Be personally accountable for one s own actions. Students are expected to be acquainted with the Standards, to adhere to the letter and spirit of the Standards, and to take action when witnessing a breach of the Standards. In this course, a violation of these standards includes but is not necessarily limited to (it is your responsibility to seek clarification of any gray areas): Discussing, reviewing, or receiving notes/papers on any assignment or quiz with students who have taken the class previously (either in another section or in a prior year). Submitting papers that do not exclusively include individual or group work, respectively. Using any assignment in this course in fulfillment of an assignment in another course without prior written consent of both professors. 6 P a g e P a p a d a k i s - S P

7 Appendix: Case Preparatory Questions Individual Cases 1-Nike, Inc. Cost of Capital 1. Do you agree with Joanna Cohen s WACC Calculations? Why or why not? 2. If you do not agree with Joanna, calculate your own WACC for Nike and be prepared to justify your assumptions during class. 3. Calculate the cost of equity using the Capital Assets Pricing Model (CAPM), the Dividend Discount Model, and the Earnings Capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimmi Ford recommend regarding an investment in Nike? 2-Diamond Chemicals PLC (A): The Merseyside Project 1. What changes, if any, should Lucy Morris ask Frank Greystock to make in his discounted cash flow (DCF) analysis? Why? What should Morris be prepared to say to the Transportation Division, the Director of Sales, her Assistant Plant Manager, and the Analyst from the Treasury staff? 2. How attractive is the Merseyside project? By what criteria? 3. Should Morris continue to promote the project for funding? 3-The Boeing 7E7 1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? a. Please use the Capital Asset Pricing Model (CAPM) to estimate the cost of equity. At the date of the case, the 74-year equity market risk premium (EMRP) was estimated to be? Which Beta and Risk Free Rate did you use and why? b. Which capital structure weights did you use? Why? 2. Judged against your WACC, how attractive is the Boeing 7E7 project? a. Under what circumstances is the project economically attractive? b. What does sensitivity analysis (your own and/or what is shown in the case) reveal about the nature of Boeing s gamble on the 7E7? 3. Show the board of directors approve the 7E7? 7 P a g e P a p a d a k i s - S P

8 4-Hansson Private Label 1. How would you describe Hansson Private Label (HPL) and its position within the private label personal care industry? 2. Using assumptions from Executive VP of Manufacturing, Robert Gates, estimate the project s Free Cash Flows. Are Gate s projections realistic? If not, what changes might you incorporate? 3. Using CFO Sheila Dowling s projected WACC schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate? 4. Estimate the project s NPV. Would you recommend that Tucker Hansson proceed with the investment? 5-Mercury Athletic: Valuing the Opportunity 1. Is Mercury an appropriate target for AGI? Why or why not? 2. Review the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them? 3. Estimate the value of Mercury using the DCF method and Liedtke s base case projections. Be prepared to defend additional assumptions you make, 4. Do you regard the value you obtained as conservative or aggressive? Why? 5. How would you analyze possible synergies or other sources of value not reflected in Liedtke s base case assumptions? 6-The New Heritage Doll Company 1. Discuss the Toy Doll Industry and New Heritage s position within. 2. Two projects are presented in the case, each with somewhat different means to improve growth and profitability of the branded goods category for New Heritage. Evaluate these two projects and provide a recommendation on which one to invest. 3. To succeed in the long run, New Heritage must have a solid strategy for Branded Goods. Do you believe these two projects may be the answer? Why or why not? What other alternatives could New Heritage explore? (Hint: these two projects are mutually exclusive. New Heritage can only pick one 7-JetBlue Airways IPO Valuation 1. In general, briefly comment on advantages and disadvantages of going public. 2. What are the different approaches that can be used to value JetBlue s shares? 3. At what price would you recommend that JetBlue offer it shares? 8 P a g e P a p a d a k i s - S P

9 Group Cases: 8-Target Corporation 1. Describe and critique Target s capital-budgeting system. Give specific consideration to the role of the real state managers and the makeup of the CEC. 2. Which of the CPRs should Dough Scovanner accept? Be prepared to explain how each of the considerations that follow influence your decision: a. NPV and IRR b. Size of the project c. Cannibalization of other store s sales d. Store sensitivities e. Variance to prototype f. Customer demographics g. Brand awareness impact 3. Why does Target use different hurdle rates for the store and the credit cards (9% and 4% respectively)? 4. As a member of the CEC, would you continue to approve CPRs if it meant Target would have to fund the requests with external funds, either debt or equity? 9-The Timken Company 1. How does Torrington fit with the Timken Company? What are the expected synergies? 2. What is your stand-alone valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate. 3. What is your with-synergies valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate. 4. Should Timken be concerned about loosing its investment-grade rating? How do Timken's financial ratios compare with those of other industrial firms in 2002? How would those ratios change if Timken borrows $800 million to buy Torrington? 5. If Timken decides to go forward with the acquisition, how should Timken offer to structure the deal? Is Ingersoll-Rand likely to want a cash deal or a stock-for-stock deal? 10-This Bud s for who? The Battle for Anheuser-Bush 1. Does the merger between Anheuser-Bush and InBev make sense from a strategic stand point f view? If so, how is value being created? 2. How much should InBev be willing to pay to acquire all of Anheuser-Bush s shares? As a base case, please use the projections in case Exhibit How much should InBev be willing to pay if it were to expect extra revenue synergies of EUR3,000 in 2008, which were expected to grow at 6%? 9 P a g e P a p a d a k i s - S P

10 4. Perform a sensitivity analysis and identify the key factors affecting the price that InBev should pay. 5. What alternative options does August Bush IV have to respond to InBev s public bid on June 11, 2008? Please value the company as of December 31, Dow s Bid for Rohm & Hass 1. Why does Dow want to buy Rohm & Hass? Was the $78 per share bid reasonable? 2. What are the major deal risks inherent in this merger transaction? How and to whom does the merger agreement allocate these key risks? Hint: analyze the various provisions in case exhibit 4. What risks does each provision address and which party ultimately bears the risk? 3. As of early February of 2009, what should Andrew Liveris (Dow s CEO) do and what should Raj Gupta (Rohm & Hass s CEO) do? 4. If you were the judge in the Delaware Court of Chancery, how would you resolve this legal dispute? 12-Valuation of Air Thread Connections 1. Please describe the methodological approach that should be used to value AirThread. Should Ms. Zhang use WACC, APV, or some combination of thereof? How should the cash flows be valued for 2008 to 2012? How should the terminal value (or ongoing concern) be estimated? How should the non-operating investments in equity affiliates be accounted for in the valuation? Hint: it may be possible to use more than one technique at a time. 2. What discount rate should Ms. Zhang use for the un-levered FCF for 2008 to 2012? Is this the same discount rate that should be used to value the terminal value? Why or why not? 3. Develop an estimate of the long-term growth rate that should be used to estimate AirThread s terminal value. Using your estimate of long term growth, what is the present value of the AirThread s growing concern? 4. What is the total value of AirThread before considering any synergies? What is the value of AirThread assuming Ms. Zhang s estimates for synergies are correct? Should the value of the tax shield reflect the personal tax disadvantage of interest income to ordinary debt holders? If so, what is the personal income tax disadvantage of the debt? 13-Monmouth Inc. 1. If you were Mr. Vincent, executive VP of Monmouth Inc, would you try to gain control of Robertson Tool? 2. What is the maximum price that Monmouth can afford to pay for Robertson? Which valuation method would you use? 10 P a g e P a p a d a k i s - S P

11 3. Why is Simmons eager to sell its position to Monmouth for $50 per share? What are the concerns and alternatives for each of the other groups of Robertson shareholders? 4. What offer would you make in an effort to gain the support of the Robertson family and the great majority of the shareholders, while improving the long-term trend of Monmouth s earnings per share over the next five years? 14-Kohler Co. (A) 1. What is the total enterprise value of Kohler Co. using a discounted cash flows approach? What is the total enterprise value using a multiples approach? What is the value of a share held by a minority shareholder in Kholer Co. that is implied by your valuation? 2. What assumptions can you use to arrive approximately at the share price of $55,400 that was estimated by Kohler Co.? Show how these assumptions impact your valuation. 3. What assumptions can you use to arrive at the share price of approximately $273,000 that was estimated by the dissenting shareholders? Show how these assumptions impact your valuation. 4. What is the maximum share price at which Herbert Kohler should be willing to settle with the dissenting shareholders in order to stop the 4/11/2000 trial? 15-LinkedIn 1. What set of assumptions underline the $9B market valuation for LinkedIn as of the end of July 7, What is your assessment of those assumptions? Note that, based on the first seven weeks of trading for LinkedIn stock, its estimated Beta is What do you think LinkedIn intrinsic value is? Be ready to support your conclusions. For example, if you use comparables, what companies and metrics do you chose? 3. If you wanted to buy LinkedIn stock, would you be willing to pay more than the value you derived in question (2)? 4. What other factors (for example, low float, dual class pf shares) may be contributing to LinkedIn s market valuation? Flash Memory, Inc. Flash Memory Inc. serves as the final exam for Advanced Corporate Finance This is a group final. A complete rubric is published on Carmen>Content including all case preparatory questions and grading guidelines. 11 P a g e P a p a d a k i s - S P