BA435

Financial Modeling and Valuation

Winter 2011 MWF 12:00-1:05 WBC117
Professor: Scott Fullwiler, Ph.D., Associate Professor of Economics, James A. Leach Chair in Banking & Monetary Economics, and Social Entrepreneurship Program Co-Director. Email: scott.fullwiler@wartburg.edu or scott.fullwiler@gmail.com Office Phone: 319-352-8452 Office Hours: TH 2-3 and W 10-11 or by appointment (please email) Course Description: This course is a continuation of BA334, providing more in-depth application and integration of tools of financial analysis learned in that course, but also adding new analytical tools that will likewise be integrated and applied. The additional material here includes the cost of capital, capital structure, and company valuation, while previous topics such as financial planning and capital budgeting are significantly expanded upon. Applications will involve analyzing data for real-world corporations, financial modeling in Excel, and several complex case studies. Finally, and very significantly, each of these will be integrated into recent literature in the field regarding balancing or otherwise reconciling the traditional goals of financial management and investors with evolving concerns of both and other stakeholders about social, environmental, and governance issues.. A note on prerequisites: You are expected to have a basic understanding of BA334, AC121/122, and CS100/102 (regarding the latter, you must have a working understanding of how to use Excel). If you do not recall some of this material when it arises, then it is your responsibility to bring yourself up to date, not mine. There is a natural progression to the material covered throughout the business curriculum, and it simply must be expected that you have taken basic knowledge with you from these courses (just as in progressions through a foreign language or a math curriculum, for instance). Last but not least, please be advised that there is a significant increase in difficulty in this course compared to BA334. Course Goals and Objectives: Goal 1: Demonstrate mastery of the basic tools of financial analysis Objectives: 1. Demonstrate overall competence with basic financial concepts and tools such as determining relevant cash flows, time value of money, risk, financial ratios, and so forth. 2. Proficiency in using Excel functions for basic tools of financial analysis. Goal 2: Demonstrate continued ability to apply finance tools to financial analysis Objectives: 1. Beyond mastery of individuals financial tools, demonstrate ability to synthesize the basic tools and concepts in the analysis of financial problems in different contexts. 2. Demonstrate ability to gather and evaluate data and other information, assess different types of risk, and reach sound conclusions in the context of financial planning, corporation valuation, capital budgeting, and capital structure. 3. Apply financial techniques and Excel background to the modeling and analysis of financial problems. 4. Completely integrate analysis of the environmental, social, and governance issues into valuation. Goal 3: Continue to improve skills in oral and written presentation and communication Objectives: 1. Demonstrate ability to write clear, organized, and well-argued essays and reports with almost NO grammatical or structural errors. 2. Demonstrate ability to clearly communicate and present financial analysis in both oral and written forms.

Course Materials: Aswath Damodaran. 2010. Applied Corporate Finance: A Users Manual. 3rd Edition. Hoboken, NJ: John Wiley and Sons. Three websites should be of interest to you regarding this book: The website for the book, which has data, annual reports, powerpoints, solutions to end of chapter questions, pre-designed spreadsheets for doing analysis of concepts discussed in the chapters, and much, much more: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/ACF3E/appldCF3E.htm Damodarans website, which is a truly a wealth of information on the field of finance (articles, data, info on all of his books, etc., etc.): http://pages.stern.nyu.edu/~adamodar/ Damodarans blog: http://www.aswathdamodaran.blogspot.com/ Aswath Damodaran. 2010. The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses. 2nd Edition. Upper Saddle River, NJ: FT Press. The support website for this book is http://pages.stern.nyu.edu/~adamodar/New_Home_Page/DSV2ed.htm PRIMIS Packetthis contains case studies that will be used in the course. H. Paul Herman. 2010. The HIP Investor: Make Bigger Profits by Building a Better World. Hoboken, NJ: John Wiley & Sons, Inc. The website for the book has a number of excellent resources that you will want to familiarize yourself with: http://www.hipinvestor.com/ Keith A. Allman. 2010. Corporate Valuation Modeling: A Step-by-Step Guide. Hoboken, NJ: John Wiley & Sons, Inc. Other readings will be linked to in the course outline below, handed out, posted to my.wartburg, or made available at Vogel Library. Grading Scale: 90% A- < 93% 80% B- < 83% 70% C- < 73% 60% D- < 63% F < 60%

A B < 87% B+ < 90% C < 77% C+ < 80% D < 67% D+ < 70%

Weights for Graded Activities: Highest Exam Score 2nd Highest Exam Score 3rd Highest Exam Score 4th Highest Exam Score The HIP Investor Chapter Reviews Company Modeling and Valuation Project Participation and Preparedness Total

19% 17% 15% 13% 10% 20% 5% 100%

All decimals on final grades in each category listed above will be rounded up (e.g., a score of 79.3% will be rounded up to 80%). However, your cumulative grade for the course will not be rounded up or down (e.g., a course average of 79.999% will receive a final grade of C+). Exams: There will be four examsthe first three will be take home, the fourth will be in class during finals week. The take home exams will cover material from Damodaran, case studies, and Herman books. There will be at least one question on each that will require you to design a financial model in Excel and write a report. The final exam will be a case studyI will provide you with the case a week before the exam; you will be allowed to have all notes and texts with you for this exam (that is, completely open book and open notes). The HIP Investor Chapter Reviews: As we know, the classic corporate finance answer to the question what should the firms objective be? is value maximization. This view is close to unanimous in the profession, and is both powerful in an ideological sense (pro-

business, pro-capitalism, pro-free markets, etc.) as well as in a more theoretical/analytical sense (Porters competitive advantage, Levs intangible assets, etc.). At the same time, this classic view is being challenged. Academic critiques often question the efficiency of financial markets. As Damodaran writes on p. 61 of Ch. 2,
A confession is in order here. In earlier editions of this book we argued that the objective in corporate finance should be stock price maximization, notwithstanding the failures of financial markets. This is the first time that we have strayed from this classical objective, illustrating not only the effects of the market turmoil in 2008-2009 but also the collective evidence that has accumulated that investors are not always rational in the way they price assets, at least in the short run.

Even farther reaching, the double or triple bottom line approaches, or the maximizing stakeholder value approach, seek to blend value maximization with other concerns. The field of academic corporate finance, as Damodarans chapter 2 demonstrates, is struggling with how to integrate the classic view of firm value maximization with these approaches that place a firm within a larger social and environmental context. As he writes (also on p. 61):
The conflict between wealth maximization for the firm and social welfare is the genesis for the attention paid to ethics in business schools. There will never be an objective set of decision rules that perfectly factor in societal concerns, simply because many of these concerns are difficult to quantify and are subjective. Thus, corporate financial theory, in some sense, ASSUMES THAT DECISION MAKERS WILL NOT MAKE DECISIONS THAT CREATE LARGE SOCIAL COSTS. This assumption that decision makers are for the most part ethical and will not create unreasonable costs for society or for other stakeholders is unstated but UNDERLIES CORPORATE FINANCIAL THEORY. When it is violated, it exposes corporate financial theory to ethical and moral criticism, though the criticism may be better directed at the violators. (emphasis/caps added)

Note here the difficultyhow can consistent decisions be made if there is more than one objective for the firms managers (for instance, firm value maximization plus social and/or environmental sustainability)? How does a firm make a decision when the two or three main criteria tell it to do different things? Damodaran flat out doesnt think its possible (as the second quote above demonstrates). This is where The HIP Investor comes in, as it provides a rigorous method for evaluating companies on profitability as well as social, environmental, and governance issues. The author of the book argues persuasively that portfolios designed using companies that score highly using his method outperform the market consistently. From a managers perspective, such a detailed methodology would provide a framework for making decisions, which is a big deal. YOUR ASSIGNMENT for this book is to write 400-500 word summaries of individual chapters: For each chapter, prepare an essays that covers the three most important items of the chapter. The basic point here is to demonstrate that you understand the main thrust of the chapter. As a basic outline, choose you three main points, then list them in your introduction; in the body of the essay, discuss each of these thoroughly and demonstrate that you understand them; provide a conclusion. DO NOT write a play by play of the article that simply goes through the points made, step-by-step (the article discusses A, then it discusses B, then C, . . . ). Again, find the three points you want to discuss and explain them as completely as you can. Also be sure to interpret and explain the relevance of any quotes you provide from the article. These are not opinion papersyou are to write a synopsis of the main points in the chapter, not your opinions on the chapter. There will be ample time to discuss your agreements/disagreements with the chapter in class (note that I dont agree with everything in the book, either, but Ive still assigned it because its an important book on an important topic). Only hardcopies will be gradedI will not grade any emailed copies as it takes too much time to print out everyones assignments and department budgets are very tight. Writing grading criteria are in effectsee course rule #3 below. Most importantly, cite pages and provide works cited at the bottom of the essay (you dont need to put this on an additional page).

Company Modeling and Valuation Project: You will select a company to design a financial model for and value. The approach to modeling will follow that in Allmans book blended with The HIP Investor. I will also add a few more items to both. I will give you dates throughout the semester that you will have the option (that is, not required) to hand in a section of your project that we have been discussing in class and I will provide comments for you regarding what you are doing correctly or incorrectly. These will be your primary opportunities for feedback on your projects so you will be better off taking advantage of them. I will provide you with a detailed handout on requirements during the second week of the semester, though you should have your company selected by then. Projects are due at 5pm on the last day of finals week. Participation and Preparedness: This class wont work very well if students dont participate, and by participate, I actually mean drive the learning in the course. There is no way this class will be interesting to you if I am lecturing for 3 hours/day. How do we avoid that? First, you must come to class prepared. Given the nature of the summer session, consider EACH day of class as the equivalent of MORE than one week of a normal semester. This means you should expect to do a good deal of reading, researching, and so forth, usually around 2-5 hours/day, in preparation for each day of class. Particularly because there are no in-class exams for this course, I expect you to come to class prepared to contribute. Second, you must take part in class, actively. This means contributing your thoughts and analysis. It means frequently, though not necessarily always, tying your comments into those of others or the main topic under consideration. It also means asking questions when you have them. But, note that QUALITY of your contribution is more important than quantitywe want everyone to have a chance to participate, rather than having only a small percent of the students are dominating discussion. To repeat, questions are just as important as analysiswe need to help each other learn, and we cant do that if people arent willing to offer up where their thinking currently stands, what they are still trying to figure out, and what they just have no idea about. In assigning grades for this portion of the course, I will use the following categories: A-level contributor (full 5% earned): In-class contributions reflect excellent preparation. Ideas offered are always substantive and provide insight and/or useful direction for the class. Supporting arguments are persuasively presented. Comments also demonstrate that this person is an excellent listener, both in terms of listening to the professor and to the other students. If this person were not a member of the class, the quality of the class would be greatly diminished: B-level contributor (3% out of possible 5% earned): In-class contributions reflect thorough preparation. Ideas offered are usually substantive and sometimes provide useful insight and/or direction for the class. Supporting arguments are usually persuasively presented. Comments demonstrate that this person is a good listener, both in terms of listening to the professor and to the other students. If this person were not a member of the class, the quality of the class would be diminished considerably: C-level contributor (1% out of possible 5% earned): In-class contributions reflect satisfactory preparation. Ideas offered are sometimes substantive and sometimes provide useful insight, but seldom provide direction for the class. Supporting arguments are moderately persuasive. Comments demonstrate that this person is a passable listener, both in terms of listening to the professor and to the other students. If this person were not a member of the class, the quality of the class would be diminished somewhat. D-level contributor (0% out of possible 5% earned): In-class contributions reflect inadequate preparation. Ideas offered are seldom important and usually provide no useful insight or direction for the class. Supporting arguments are not persuasive. Comments demonstrate that this person is not a very good listener, both in terms of listening to the professor and to the other students. This person does little to further the thinking and potential contributions of others in the class F-level NON-contributor (-2% out of possible 5% earned): This person has said little or nothing in class to this point, so has contributed virtually nothing. Such persons are free-riders because they benefit from comments and courage of

others but offer little to nothing in return. If this person were not in the class, the quality of the discussion would be unchanged or possibly improved. Basic Rules for this Course: 1. Always come to class prepared to learn and participate in class Standard College expectations are that you will spend at least 2 hours outside of class preparing/studying each week for every 1 hour in class. As there are a bit over 3 hours in class per week, you are expected to spend around 6-7 hours per week on this course outside of class. Course readings, assignments, and exams will be based on these expectations. During class periods, it is expected that you will be prepared, able, and willing to participate. Similarly, for any assigned group activities, it is expected that you will be available to the needs of the team and will pull your weight. There is no attendance policy for this course. Please be aware, though, that students that miss more than a few of my courses almost always do poorly. Also, since there are opportunities for interactions among team members in class, missing class could negatively affect your teammates evaluation of your contributions, and thus, your grades on team-related assignments.

2. Always ask questions when you dont understand something My classes are intended to be challenging. This means that, if all goes as planned, there will be several instances in which you find the course material or assignments difficult, and some periods in which you find it very difficult. I will provide you with many opportunities in class, every day, to slow down the pace of the course (within limits) and to ask questions, receive clarification, and so forth. While I accept much responsibility for organizing material and assignments as coherently as possible, education and learning are two-way streets, and thus I place substantial responsibility on you to take advantage of these opportunities. If you do not understand but you do not tell me, then I will continue to proceed through course material and assignmentsin short, I am not a mind reader or a face reader and I therefore can only go on the feedback you verbally provide (showing me your grumpy or confused face doesnt cut it. Get used to telling people when you need help, and being specific about itthats a useful skill for your entire life.). Note also, since this is a finance/economics course, I view it to be a very bad financial decision to pay tuition only to sit in the classroom and be confused. 3. Always challenge yourself to do your best in this course Anything and everything you hand in will be assessed not only for content but also writing skills such as spelling, correct language usage, and punctuation. See the file on http://my.wartburg.edu titled Grading Criteria for Assignments for the criteria I will use on all graded work. (Grading criteria are also attached to this syllabus.) I accept that sometimes life intervenes and things are not handed in at their due dates. So, regarding late work, recognize that it is not possible to grade consistently, or be fair to people who take trouble to do assignments on time, if I am absorbing a continual stream of late work. Therefore, late assignments will be penalized three percent (3%) of the total possible points for every day that they are late. Please note that assignments handed in even one minute after a due date/time has passed are considered to be one day late. Assignments handed in the next day (beginning at 12:01am the following day) are considered two days late, and so forth (again, each respective day for assessing an additional penalty will begin at 12:01am). Further, once I have either provided the class with answers or have returned an assignment to the class or even to one member of the class, late work will no longer be accepted. Extra Credit: You should expect that there will be no opportunities for extra credit during the semester. In particular, there will be absolutely NO opportunities for extra credit on an individual basis, as this would be unfair to others in the class. Rather than hoping for extra credit opportunities, take responsibility for your performance in the course throughout the semester by following the advice provided above. Incompletes will be given only in rare cases of extreme personal or familial difficulties that prevent a student from completing the semesters work, and in those cases only if the student has a grade of C- or better and has completed at least 2/3 of the course.

4. Always show respect for everyone in the classclassmates, the professor, and YOURSELF

Everyone in the class will conduct themselves in a mature and professional manner. I will not, nor will Wartburg College, tolerate any form of harassment in the classroom (including, but not limited to, harassment related to gender, race, or lifestyle). If you have a complaint, please bring it to my attention or to the attention of the Dean of Students You will be evaluating your team members after any team-related assignments are handed inyour own score may be a bit higher or lower than your teams grade as a result. It will be assumed that all team members have reviewed and are in general agreement with all analysis contained in any team-related assignments. Be respectful of your teammates need to review your contributions as a result of this assumption (and remember that they will have the opportunity to evaluate your contributions to the team after each assignment). The exception for any individual member will only be when he/she submits via email a dissent to me BEFORE the graded team assignment is handed in to me. Dissents will be kept confidential. Academic Integrity/Honesty: Academic integrity is one of the basic principles of a college community. By attending Wartburg College, students are demonstrating their dedication to the Honor Code. The Honor Code reminds students of their responsibility to promote academic honesty by opposing cheating and plagiarism and reporting dishonest work. ALL assignments are done by you (and nobody else) with no help or collaboration whatsoever unless EXPLICITLY allowed in writing by me. This means that you cannot defend yourself after the fact by claiming that I did not explicitly prohibit such activity on any assignment. Any form of academic dishonesty will result in one or more of the following sanctions: a) loss of points for that specific assignment or exam; b) reduction in the final course grade; c) issuance of a grade of F for the entire course.

Commitment to Students with Disabilities: The Americans with Disabilities Act of 1990 (ADA) provides protection from illegal discrimination for qualified individuals with disabilities. Students requesting instructional accommodations due to disabilities can arrange for such accommodations by contacting Pathways Associate for Testing and Advising Carla Coates. She can be reached at the Pathways Center, 314 Vogel Library, 352-8230, carla.coates@wartburg.edu. Presenting documentation of a students disability early (before the beginning of classes) is helpful and often necessary to secure needed materials in a timely way. Accommodations should be requested PRIOR to affected due dates. For more detailed information, please see the following website: http://www.wartburg.edu/pathways/testing/AccomodationProcessStudents.pdf

Course Outline: Class 1: FoundationsAn Integrated Framework and Some Review (1/12) Read through the syllabus completely before this class period. Damodaran, Ch. 1, The Foundations O Damodarans powerpoints posted to my.wartburg Damodaran, Appendix 2: Financial Statements. Text Value Line Publishing: October 2002 Case Study, pp. 99-111 O See my ratios notes posted to my.wartburg O What do the financial statements in Exhibit 4 and the financial ratios in Exhibit 7 tell you about the performance of Home Depot? O Be prepared to discuss financial statements and calculate/discuss similar ratios for Lowes. What similarities/differences do you see between Lowes and Home Depot? Register for S&P data before next class period. Class 2: FoundationsValue Maximization and Stakeholders (1/14) Damodaran, Ch. 2, The Objective in Decision Making

See my notes for this chapter on my.wartburg Go to the website for Damodarans book (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/ACF3E/appldCF3E.htm#ch1) O Look over the links for Chapter 1 and Chapter 2 (illustrations section) The HIP Investor, chapter 1 review due by 5pm.

Class 3: FoundationsThe Drivers of Valuation (1/17) 50 Minute period. Tim Koller, Marc Goedhart, and David Wessels. Ch. 3: Fundamental Principles of Value Creation. In Valuation: Measuring and Managing the Value of Companies, 4th Edition, pp. 47-63. Hoboken, NJ: John Wiley and Sons, 2005. Read my notes posted to my.wartburg before class on . . . The Drivers of Valuation Ratios Handout on Home Depot and Lowes Accounting and Valuation Ratios o Be prepared to discuss how you would evaluate HD vs. L Text California Pizza Kitchen Case Study, pp. 59-75. O What would be your estimates for ROIC and growth of California Pizza Kitchen if you were valuing it? O Evaluate California Pizza Kitchens performance using ratios in my handout. Class 4: FoundationsFinance, Strategy, and the Business Model (1/19) Have your company chosen by now for the project. It must have at least 61 months of stock data on Yahoo! and it must be sold on a US stock exchange. Also, this is much simpler if the company reports financial statements in $US. Look for the companys 10-K to know for sure. Porters Five Forces. http://www.quickmba.com/strategy/porter.shtml Michael E. Porter. 2008. The Five Competitive Forces that Shape Strategy. Harvard Business Review (January). Available via EbscoHost. See an interview (13 minutes) with Porter regarding this article at http://www.youtube.com/watch?v=mYF2_FBCvXw Read my notes posted to my.wartburg before class on . . . Notes on Porters Five Forces Finance and the Business Model Text California Pizza Kitchen Case Study, pp. 59-75. JetBlue Airways IPO Valuation Case Study, pp. 113-131. O What are the issues facing these firms? O Evaluate the firms strategies and business models using Porters five forces and my handout on finance and the business model. Class 5: FoundationsWrap-up (1/21) The HIP Investor, chapter 2 review due by 5pm. Class 6: Weighted Average Cost of CapitalModeling Equity Risk: Theory (1/24) Damodaran, Appendix 1: Basic Statistics. Damodaran, Ch. 3, The Basics of Risk, pp. 1-41 ONLY. Both my notes and Damodarans powerpoints are posted to my.wartburg. Relevant problems to practice: 1-16. Answers posted to my.wartburg. Ask questions if you have them. Be prepared to discuss these, also: o Be able to explain the benefits to diversification using the concepts return, standard deviation, and correlation.

o o o o o o o

How would you determine who the marginal investor is for your companies? Why is it generally assumed that the marginal investor is diversified? Why do we usually say that investors are concerned with market risk, not stand-alone risk? What is beta? How is it calculated? What is the difference between CAPM and APT? Whats the difference between factor models and proxy models? What are the strengths and weaknesses of the CAPM, APT, factor, and proxy models?

Class 7: Weighted Average Cost of CapitalModeling Equity Risk: Historical Betas (1/26) Damodaran, Ch. 4, Risk Measurement and Hurdle Rates in Practice, pp. 1-40 ONLY. Both my notes and Damodarans powerpoints are posted to my.wartburg. Relevant problems for practice are 1, 4, 5(a,b,c,d), 10, 11, 12 (a,b,c,d), 13 (a,b), 14, 15 (a,b,c), 16a, 22. Ask questions on these if you have them. Also, be prepared to discuss the following: o According to Damodaran, should stocks always earn a higher return than bonds or bills in the long run? o Which measure, historical (and which one?) or implied, of the market risk premium should be used? Explain your view. o For your companies, what should be the risk-free rates and the market risk premium you will use to calculate the cost of equity? o Be prepared to discuss the historical beta estimates for Disney, Aracruz, Deutsche Bank, and Tata Chemicals. Which market indexes should be used? o Be prepared to find historical betas for your companies, and be able to interpret all the various statistical information (R-squared, beta, alpha, Jensens alpha, t-ratio, etc.). Ask questions in class if you have them. Class 8: Weighted Average Cost of CapitalModeling Equity Risk: Fundamental Betas (1/28) Damodaran, Ch. 4, Risk Measurement and Hurdle Rates in Practice, pp. 41-71 ONLY. Both my notes and Damodarans powerpoints are posted to my.wartburg. Relevant practice problems are 2, 3, 5d, 6, 7, 8, 9, 12e, 13c, 15d, 16b, 17, 18, 19, 20, 21, 23. Answers are posted to my.wartburg.. Ask questions if you have them. o Be prepared to discuss Damodarans process for calculating fundamental betas and costs of equity for Disney, Aracruz, Tata Chemicals, Deutsche Bank, and Bookscape Books. o Be prepared to find fundamental betas for your companies. The HIP Investor, chapter 3 review due by 5pm. Class 9: Weighted Average Cost of CapitalFundamental Betas & Cost of Equity Practice (1/31) Be prepared to find cost of equity for your companies California Pizza Kitchen Case Study, pp. 59-75. o What is the cost of equity at the time of this case studys writing? Use the fundamental beta method described in Damodarans chapter. JetBlue Airways IPO Valuation Case Study, pp. 171-190 o Be prepared to calculate the cost of equity for JBLU at the time of the case. Class 10: Weighted Average Cost of CapitalCost of Equity Practice (2/2) Be prepared to discuss cost of equity calculations for cases in the textCalifornia Pizza Kitchen, Jet Blue, Aurora Textiles, Timken, Better World Books, and Teletech. Class 11: Weighted Average Cost of CapitalEquity, Debt, and the WACC (2/4) Damodaran, Ch. 3, The Basics of Risk, pp. 41-51 ONLY. Damodaran, Ch. 4, Risk Measurement and Hurdle Rates in Practice, pp. 71-96 ONLY.

Be prepared to discuss and calculate the cost of debt and weighted average cost of capital as described and calculated by Damodaran for Disney, Aracruz, Tata Chemicals, Deutsche Bank, and Bookscape Books. o Be prepared to discuss and calculate weighted average cost of capital for your companies. The HIP Investor, chapter 4, pp. 59-83 ONLY review due by 5pm.

Class 12: Weighted Average Cost of CapitalCases (2/7) Be prepared to discuss WACC calculations for cases in the textJet Blue, Aurora Textiles, Timken, Better World Books, and Teletech Class 13: Weighted Average Cost of CapitalMore practice (2/9) Class 14: Capital BudgetingRelevant Discount Rates and Project Cash Flows (2/11) Damodaran, Ch. 5, Measuring Return on Investments, pp. 1-40 ONLY. Both my notes and Damodarans powerpoints are posted to my.wartburg. Relevant practice problems are 1 &2 (model cash flows only), 6a. Answers are posted to my.wartburg. Ask questions if you have them. Additional good practice can be had by looking over examples in tables 5.2, 5.3, 5.4, 5.5, 5.6, exhibits 5.1, 5.2, 5.3, 5.4, and in-chapter questions 5.1, 5.2, 5.3, 5.4, 5.5, 5.6. Answers to the in-chapter questions can be found on Damodarans site for the book. Ask questions if you have them. The HIP Investor, chapter 4, pp. 83-114 ONLY review due by 5pm. Class 15: Capital BudgetingMeasuring Returns to Projects (2/14) Damodaran, Appendix 3: Time Value of Money, (refresher reading, if necessary). Damodaran, Ch. 5, Measuring Return on Investments, pp. 41-71 ONLY. Also, look at page 12 of Ch. 6 (this describes MIRR) Both my notes and Damodarans powerpoints are posted to my.wartburg. Relevant problems for practice are 6bcd, 8, 11-19. Answers are posted to my.wartburg. Ask questions if you have them. Class 16: Capital Budgeting: Project Cash Flows and Returns (2/16) Text Aurora Textile Company Case Study, pp. 151-162 o How has Aurora Textile performed over the past four years? Be prepared to provide financial ratios that present a clear picture of Auroras financial condition. o List the factors affecting the textile industry. What do you think is the state of the industry in the United States? How should you incorporate the state of the textile industry into your analysis? Why should anyone invest money in the industry? o What are the relevant cash flows for the Zinser investment? What are the value drivers in your analysis? What do you estimate as the cost per pound for customer returns under the Zinser alternative? (Hint: for a replacement decision, analysts often find it helpful to prepare two sets of cash flows and two NPVsone for the status quo and one for the new machine.) Class 17: Capital BudgetingRisk and Probabilities for Projects (2/18) Damodaran, Ch. 5, Measuring Return on Investments, pp. 71-96 ONLY. Both my notes and Damodarans powerpoints are posted to my.wartburg. The HIP Investor, chapter 5 review due by 5pm. Class 18: Capital BudgetingAdditional Issues (2/21) Damodaran, Ch. 6, Project Interactions, Side Costs, and Side Benefits, pp. 1-42 ONLY. Both my notes and Damodarans powerpoints are posted to my.wartburg. Relevant practice problems are questions 1-21. Answers are posted to my.wartburg. Ask questions on these if you have them.

Class 19: Capital BudgetingReal Options, EVA, and Competitive Advantage (2/23) Damodaran, Appendix 4: Option Pricing. Damodaran, Ch. 6, Project Interactions, Side Costs, and Side Benefits, pp. 41-79 ONLY. Both my notes and Damodarans poweropints are posted to my.wartburg. Note the Excel file, Real Options posted to my.wartburg for use in determining the theoretical value of real options using the Black-Scholes model. o Be prepared to discuss the possibility of real options existing in the case studies covered in classes 18-23. o As an example of real options, assume its the 1980s and Bill Gates is considering a new operating program called Windows. Its VERY risky. How would you evaluate this using the traditional discounted cash flow method? How would a real options approach value it? o Be prepared to discuss EVA, ROIC vs. WACC, and ROE vs. cost of equity for the following companies covered in case studies: Target, Aurora Textile, JetBlue, California Pizza Kitchen, and Better World Books. Class 20: Capital BudgetingWrap Up (2/25) The HIP Investor, chapter 6 review due by 5pm. Class 21: Capital StructureTypes of Financing and the Firms Life Cycle (3/7) Damodaran, Ch. 7, Capital Structure: Overview of the Financing Decision, pp. 1-44 ONLY. My notes, my powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Relevant problems for practice are questions 1-17. Answers are posted to my.wartburg. Ask questions on these if you have them. Class 22: Capital StructureBenefits of Debt and the Optimal Financial Mix in Theory (3/9) Damodaran, Ch. 7, Capital Structure: Overview of the Financing Decision, pp. 44-79 ONLY. My notes, powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Relevant problems for practice are questions 18-29. Answers are posted to my.wartburg. Ask questions if you have them. The HIP Investor, chapter 7 review due by 5pm. Class 23: Capital StructureOptimal Financial Mix in Practice (3/11) Damodaran, Ch. 8, Capital Structure: The Optimal Financial Mix, pp. 1-30 ONLY. My notes, powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Relevant practice problems are questions 1-14, 15a. Answers are posted to my.wartburg. Ask questions if you have them. Class 24: Capital StructureOptimal Financial Mix in Practice (3/14) Damodaran, Ch. 8, Capital Structure: The Optimal Financial Mix, pp. 31-52 ONLY. My notes, powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Relevant practice problems are questions 15b, 16-22. Answers are posted to my.wartburg. Ask questions if you have them. Class 25: Capital StructureOptimal Financial Mix in Practice (contd) (3/16) Text An Introduction to Debt Policy and Value Case Study, 35-40. California Pizza Kitchen Case Study, pp. 59-76. o Does adding debt add value to CPK? Be prepared to answer this and provide calculations o What is the case for NOT doing the recapitalization? o The HIP Investor, chapter 8 review due by 5pm.

Class 26: Capital StructureOptimal Financial Mix in Practice (contd) (3/18) Damodaran, Ch. 9, Capital Structure: The Financing Details, pp. 1-26 ONLY. My notes, powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Relevant practice problems are questions 1-4. Answers are posted to my.wartburg. Ask questions if you have them. Class 27: Capital StructureStructuring Corporate Financial Policy (3/21) Damodaran, Ch. 9, Capital Structure: The Financing Details, pp. 26-57 ONLY. My notes, powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Class 28: Capital StructureStructuring Corporate Financial Policy (contd) (3/23) o Text Structuring Corporate Financial Policy: Diagnosis of Problems and Evaluation of Strategies, Case Study, pp. 41-58. o Be prepared to discuss the similarities between this and Damodarans framework. In particular, consider where Damodarans framework fits into the graph on page 218. (Note that the framework in this chapter is a bit broader in scope.) o Be prepared to evaluate financial policies of CPK and Wrigleys with respect to the framework in this chapter. Class 29: Company ValuationBasics (3/25) Text Methods of Valuation for Mergers and Acquisitions Case Study, pp. 77-95. Be prepared to begin applying this to Jet Blue, Better World Books, and Timken. The HIP Investor, chapter 9 review due by 5pm. Class 30: Company Valuation3 Different Models for Firm Valuation from Fundamentals (3/28) Damodaran, Ch. 12, Valuation: Principles and Practice, pp. 1-59 ONLY. In your reading, focus less on the details of terminal values, and more on the overarching structure of the different models. My notes, powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Relevant problems for practice are questions 1-12. Answers are posted to my.wartburg. Ask questions if you have them. Class 31: Company ValuationUnderstanding Terminal Values (3/30) Damodaran, Ch. 12, Valuation: Principles and Practice, focus on discussion of terminal values from previous reading (pp. 1-59). My notes, powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Class 32: Company ValuationScenario Analysis and Simulations (4/1) Damodaran, Ch. 12, Valuation: Principles and Practice, pp. 64-69. My notes, powerpoints from W2009, and Damodarans powerpoints are all posted to my.wartburg. Aswath Damodaran. Chapter 3: Probabilistic Valuation: Scenario Analysis, Decision Trees, and Simulations. In The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, 2nd Edition, pp. 64-89. Upper Saddle River, NJ: FT Press, 2010. o Be prepared to discuss application of the methods in these readings to valuations of Home Depot, Lowes and CPK. Keith A. Allman. 2010. Chapter 9, Free Cash Flow, Terminal Value, and Discount Rates and Methods, pp. 185-207 of Corporate Valuation Modeling: A Step-by-Step Guide. Class 33: Company ValuationComparable Firms and Relative Valuation (4/4) Damodaran, Ch. 12, Valuation: Principles and Practice, pp. 69-81 ONLY My notes and Damodarans powerpoints are both posted to my.wartburg.

Relevant problems for practice are questions 13-20. Answers are posted to my.wartburg. Ask questions if you have them. Aswath Damodaran. Chapter 4: Relative Valuation. In The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, 2nd Edition, pp. 90-113. Upper Saddle River, NJ: FT Press, 2010. Text Be prepared to apply relative valuation to Jet Blue, Timken, and Better World Books.

Class 34: Company ValuationValuing Young Firms (4/6) Damodaran, Ch. 12, Valuation: Principles and Practice, pp. 59-64 ONLY My notes and Damodarans powerpoints are both posted to my.wartburg. Aswath Damodaran. Chapter 9: Baby Steps: Young and Start-Up Companies. In The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, 2nd Edition, pp. 213-252. Upper Saddle River, NJ: FT Press, 2010. Text Better World Books Case. Class 35: Company ValuationValuing an IPO (4/8) Aswath Damodaran. Chapter10: Shooting Stars? Growth Companies. In The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, 2nd Edition, pp. 263-311. Upper Saddle River, NJ: FT Press, 2010. Text JetBlue Airways IPO Valuation Case Study, pp. 171-190. Does the financial forecast in case Exhibit 13 seem reasonable? What are the key assumptions? Is the length of the forecast period reasonable? What is your approach for terminal value? At what value do you think JetBlues stock should be priced? Class 36: Company Valuation--Intangibles (4/11) Aswath Damodaran. Chapter 15: Invisible Investments: Firms with Intangible Assets. In The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, 2nd Edition, pp. 476-504. Upper Saddle River, NJ: FT Press, 2010. Ignore parts here on options. Class 37: Company ValuationValuing an Acquisition (4/13) Text The Timken Company Case Study, pp. 97-112. Class 38: Company ValuationWrap Up (4/15) Class 39: Final Exam, 12:00-2:00pm, Thursday April 21 Projects due by 5pm on the last day of finals week. PLEASE DO NOT SCHEDULE TRAVEL FROM CAMPUS EARLIER IN FINALS WEEK OR OTHERWISE PLAN TO BE GONE THIS DAYIT WILL NOT BE POSSIBLE TO ALLOW YOU TO TAKE THIS EXAM EARLIER AND YOU WILL RECEIVE A SCORE OF 0 ON THE EXAM. IF YOU KNOW THAT YOU MUST LEAVE CAMPUS EARLIER, THEN CONSIDER DROPPING THE COURSE.

FULLWILERS GENERAL GRADING CRITERIA FOR ALL ASSIGNMENTS

I. Correctness (60 percent of total grade) Answers or essays provide accurate, thoughtful answers to ALL of the assigned question(s) or problem(s);

II. Completeness and Effort (20 percent of total grade) A. Full points awarded here only if work demonstrates a serious effort to meet and even go beyond requirements of the assignment. Examples include (but are not limited to) the following: 1. Handing in a very polished, well-argued, highly analytical assignment that leaves no doubt of your mastery of the required material; 2. Appropriately tying other course materials/assignments in with this assignment to demonstrate bigger picture understanding; 3. Finding additional sources beyond required sources and correctly applying them; 4. Significant effort expended in designing a creative presentation that adds substantively to the content of the work being handed in; B. Average effortdoing only what is minimally requiredsubtracts at least of possible points for this area; C. Any minimum length requirements not met will result in zero points for Completeness/Effort; III. Organization/Writing Style/Presentation (20 percent of total grade) A. Organization: 1. All essays should have proper paragraph orderingintroduction paragraph, body or idea development paragraphs, and concluding paragraphshould contribute to effective argument/delivery of information; 2. Give the reader a clear idea of issues to be addressed in a short and focused introductory paragraph; 3. Address topics in an order apparent to the reader (chronological, specific-to-general or vice versa, theoretical vs. applied, 2 or 3 main points to be discussed, and so forth); 4. In the idea development paragraphs, distinguish between discussing main topics and a point-by-point list or paraphrasing (author said this, then said this). This is VERY important; 5. In the idea development paragraphs, distinguish between summarizing the argument or work of another and interjecting evaluative comments of your own; 6. Give the reader a clear indication that the paper has concluded in a concluding paragraph that extends/connects/comments on main themes; the reader should not be left wondering if/why something has been left unaddressed or unfinished; B. Writing Style: 1. Writing style should be formal and serious. Points deducted for less formal tone, slang, etc. 2. Avoid awkward uses of language, unorganized ideas, or overuse of words. Avoid informal, slang, or otherwise vernacular language. 3. Do not write that the author or paper talks about. Use discusses, explains, or other similar verbs; 4. Do not overuse quotes or paraphrasing, and be sure to place them in context when you do; 5. When referring to an actual person, always use either their full name or their last name, never the first name only. If they have a title (President, Chair, etc.) then capitalize it when it is used; 6. Discuss the logic of an authors argument in the context of a given assignment or research question. Do NOT interject (implicitly or otherwise) your agreement or disagreement with another author unless you are explicitly asked for it. Remember, this is an academic forum, not a political one; 7. Refer to others work by their last name(s), NOT by the name of the article/book/journal. That is, write Friedman (1970) argues that . . . or the article by Friedman suggests that . . . . Do NOT write In the article, The Social Responsibility of Business, the author argues . . . or The article The Social Responsibility of Business argues that . . . . NEVER use an authors first name only in the text. 8. Be specific and avoid over generalizations or stereotypes; 9. Exaggeration does not impress; simply present your argument(s) and your supporting evidence; 10. Avoid describing your position using words like think, feel, or believe. Do some analysis and state the conclusions of your analysis; C. Presentation: 1. Neatness matters! Points deducted for sloppiness, messiness, and the like;

2. Any formulas in the assignment are clear and explained; 3. Any graphs or tables in the assignment are clear, completely labeled, and explained in the text. Data source(s) must be noted either in the figure or in the text; 4. Throughout the text, tables, and graphs, use of percentages (as in 15%), decimals (as in 0.15), or dollar values MUST BE CONSISTENT and CLEAR; the reader should NEVER be confused which you are referring to; IV. Spelling and Grammar (at least 1 point deducted for each spelling or grammatical error found); Common errors include but are not limited to the following: 1. Make sure every sentence has a subject and a verb; 2. Make sure that the number of subjects matches the case of the verb; 3. Avoid contractions in serious writing; 4. With very few exceptions, commas and periods go inside quotation marks and colons and semicolons go outside quotation marks; 5. Current convention is not to use an apostrophe for decades written as numerals, i.e., use 1980s, not 1980s; 6. Introduce an abbreviation in parentheses after writing the term/phrase entirely the first time; 7. definitely (theres no a in it!) 8. its is possessive; its contracts it is; 9. your possesses; youre contracts you are; 10. their possesses, there places; theyre contracts they are; 11. whose possesses, whos contracts who is; 12. too means also or can add emphasis as in too much; 13. then refers to time; than compares; 14. accept is to receive; except is to leave out; 15. affect is a verb; effect is most often a noun (though not always); 16. farther refers to distance; further measures degree, quantity, or time; 17. Book or journal titles are written in italics; article titles are written in quotes; 18. A quote within a quote uses , not . Example: According to Smith (2009, 11), Joness response was, the company will turn a profit this year. V. Write in the Third Person Use third person; DO NOT use first person (I or we/us) or second person (you) even once in your report, essay, or research for the class unless explicitly permitted or required by the assignment. Unless you are a very good writer, these do not usually appear professional; IF THIS IS NOT DONE, YOUR PAPER WILL RECEIVE AT LEAST A 10 PERCENTAGE POINT REDUCTION. VI. Avoid PlagiarismBe sure it is clear when you are borrowing anothers ideas A. Do not convey the ideas of others as your own. Be clear that it is the author of the article/book that has such ideas or opinions. You can do thisto give a few examplesby stating that the article argues that . . . or Smith writes that . . .; B. Within the text of your writing, EVERY quote or idea that is not your own needs to be cited. Simply place the following in the text: (Last Name or Title of Periodical if No Author Given Year, page number). Examples: (Smith 2003, 32), (The Economist 2003, 43). Also, when there are more than two authors, these can be cited in the text using et al. as in (Smith, et al. 2003, 32) or Smith, et al. (2003, 32) argue that . . .; C. For consecutive citations from the same source, starting with the second citation cite only page numbers; D. At the end of the essay or report list all sources in APA format under References or Works Cited; E. Do not overuse quotes or paraphrasing; they should not substitute for your own work. If you are having trouble with this, try to outline or otherwise map out the main points first, then continue writing; F. Cite sources for statistics, data, or other information unless it is generally accepted information. In this course, formulas, graphs (such as supply and demand), and theories are considered common knowledge and do not need to be cited, though you would want to cite any data, anecdotes, examples, or supporting discussion you are borrowing from course materials; IF YOU ARE NOT DOING THE ABOVE TO AVOID PLAGIARISM, YOUR PAPER WILL RECEIVE AT LEAST A 10 PERCENTAGE POINT REDUCTION (AND POSSIBLY A LOT MORE DEPENDING ON THE NATURE AND FREQUENCY OF THE VIOLATION).