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					                                  University of Puget Sound
                              School of Business and Leadership

                           BUS 434 Advanced Corporate Finance
                              Professor Alva Wright Butcher
                              McIntyre 303 T-Th 2:00-3:20
                                    Fall Semester 2009

Office: McIntyre 111 I                                   Phone: 253-879-3349
                                                         FAX: 253-879-3156

Office Hours:                                             T-Th: 3:30-4:30
                                                          Wed: 10:00-12:00
                                                          And by appointment
Note that I am always willing to schedule additional office hours by appointment. I check email
frequently, so that is also a good way to communicate. Do not hesitate to call me at home. If you
cannot reach me, please leave a number so that I can get back to you.

Email: butcher@pugetsound.edu

Home: 206-285-3990 or 360-779-4706

Required Course Materials:
         1. Brigham and Daves, Intermediate Financial Management, 9 th Edition, Thompson
         South-Western, 2007

           2. Cases from Harvard Business School, the University of Virginia Darden School,
           and the Stanford Graduate School of Business
                The URL is http://cb.hbsp.harvard.edu/cb/access/4462341 . This allows you to
                purchase these cases online at a student discount.
                     Wood-Tech Inc. (I will provide you with a copy of this case.)
                     Note on Mergers and Acquisitions and Valuation
                     Ben & Jerry’s Homemade
                     RJR Nabisco
                     Dividend Policy at FPL Group Inc.
                     How Venture Capitalists Evaluate Potential Venture Opportunities
                     Juniper Networks
                     Investment Banking in 2008(A): Rise and Fall of the Bear
                     Wall Street, Main Street, and a credit crunch: Thoughts on the current
                        financial crisis
                     Subprime Meltdown:American Housing and Global Financial Turmoil

            3. During the semester we will be reading several relevant articles. The following list
               notes some of those articles. Others will be assigned later in the semester.

            These can be downloaded from the library’s online data base, Business Source
            Premier. I have provided links to some of the articles.
                    “Courage of Misguided Convictions: the Trading Behavior of Individual
                        Investors,” Brad Barber and Terrance Odean, Financial Analysts
                        Journal, Vol 55, Issue 6, 1999
                        This is posted on Blackboard under Assignments.


BUS 434   Fall 2009   Professor Alva Butcher                                                     1
                           “Why Johnny Can’t Invest,” Fortune, 11/09/98
                           Persistent link to this record (Permalink):
                           http://ezproxy.ups.edu/login?url=http://search.ebscohost.com/login.asp x?direct=
                           true&db=buh&AN=1281196&loginpage=login.asp&site=ehost-live&scope=site

                           “Using APV: A Better Tool for Valuing Operations,” Timothy
                           Luehrman, Harvard Business Review, May-June, 1997, Vol. 75, Issue 3,
                           p145-154.
                           This is posted on Blackboard under Assignments

                           “The Perfect Payday; Some CEOs reap millions by landing stock
                           options when they are most valuable,” Charles Forelle and James
                           Bandler, Wall Street Journal, Mar 18, 2006. pg. A.1
                           http://ezproxy.ups.edu/login?url=http://proquest.umi.com.ezproxy.
                           ups.edu/pqdweb?did=1006034541&sid=1&Fmt=3&clientId=8812
                           &RQT=309&VName=PQD

            4. A financial calculator. The calculator must have functions for bond valuation, net
            present valuation (NPV), internal rate of return (IRR), present value (PV), and future
            value (FV). One suitable calculator is the HP10-B. It is available in the bookstore
            for around $30.

Recommended:
     Subscription to the Wall Street Journal or the Financial Times
     We will be working with the Wall Street Journal during several class sessions. As a
     business student, you should read this publication regularly.

References and Support Materials:
       1. Please contact me for other sources that deal with this material. Some excellent
       references are:
                Brealey and Myers, Principles of Corporate Finance
                Copeland and Weston, Financial Theory and Corporate Policy
                Higgins, Analysis for Financial Management
       2. Self-Test Questions are available in each chapter of the text.
       3. Intermediate steps and final answers to selected end-of-chapter problems can be found
       in Appendix B of the text.
       4. The Student CD that accompanies the textbook and the website supported by the
       publisher (http://www.swlearning.com/finance/brigham/ifm8e/ifm8e.html ) provide a
       range of support materials. These include:
                Beginning of Chapter Models
                Each chapter begins with several integrative questions. You should use these
                questions to get a sense of the important issues covered in the chapter. The
                spreadsheet models that illustrate the answers to some of these questions are
                available on the Student CD and the text’s website.
                Build a Model Spreadsheet Templates
                Selected chapters end with an integrative spreadsheet problem that allows you to
                apply concepts studied in the chapter. These spreadsheet templates provide the
                data given in the problem and facilitate the development of the spreadsheet
                model. The templates are available on the Student CD and the text’s website.




BUS 434   Fall 2009       Professor Alva Butcher                                                         2
                Tool Kits
                These self taught tutorials demonstrate calculations for a particular chapter. The
                tool kit model includes comments and screen shots that explain features and
                functions of Excel. The models are available on the Student CD and the text’s
                website.
                Web Extensions
                Additional discussion or examples pertaining to material in the text is available
                on the text’s web page under Student Resources.
                Web Safaris
                The Safari guides your search on the Internet for data to answer questions related
                to a chapter. This feature is available for selected chapters and can be found on
                the text’s web page under Student Resources.

Course Objectives: Valuation will be discussed as a unifying theme in this course. This
includes such issues as how to value a firm that is not publicly traded, how to value a potential
merger, how to value an investment project. We will examine the use of debt in a firm’s financial
structure and ask if that has an impact on the value of the firm. If a firm pays dividends, does that
increase the firm’s value?

The key objective of this course is to build on the foundation of your introductory course in
financial concepts and to apply more advanced concepts in corporate finance in a decision
making context. Since computer literacy is essential to the application of finance theory, the
course will incorporate a number of opportunities for the use of computer tools in a problem
solving environment.

After you have successfully completed this course, you will be able to:
        Differentiate between risk in a stand alone context and risk in a portfolio context.

        Understand some of the basic calculations behind the Capital Asset Pricing Model.

        Apply value based management to guide investment decisions

        Be aware of the underlying factors that impact the value of a financial option.

        Be aware of some of the pros and cons of using options as part of a compensation
        package.

        Understand the basic features of options contracts and how they are priced.

        Understand how the firm’s mixture of debt and equity, the capital structure, can impact
        the value of the firm.

        Be able to apply the arbitrage proof to the Modigliani and Miller model of capital
        structure.

        Explain the theories that have been advanced as to whether investors in the aggregate
        tend to favor high or low dividend payout ratios.

        Understand the basic calculations behind investment by a venture capitalist.




BUS 434    Fall 2009   Professor Alva Butcher                                                      3
        Understand the role of mergers and acquisitions in the growth of a firm and the impact of
        these deals on the shareholders of both the acquiring and acquired firms.

        Be aware of the role of derivatives in risk management, in particular-futures contracts.


Class Preparation and Participation: Preparation for class is extremely important. Prior to
class, you are expected to have read the assigned reading material. You are also expected to have
analyzed any assigned discussion problems and to be prepared to participate in the class
discussion. If for some reason you are not prepared to participate in the discussion please let me
know prior to class.

Your presence and contribution to class discussion are important. There are three categories:
present, absent with leave, and AWOL.

Homework: Homework assignments are listed on the course outline and are due at the
beginning of class on the date indicated on the outline. These assignments are designed to
reinforce your familiarity with the material, to train you in the use of your financial calculator and
computer spreadsheets, to identify areas in which you may be having difficulty, and to serve as a
basis for classroom discussion.

The end of each chapter includes Questions, Problems, and Spreadsheet Problems. The course
outline notes two categories of homework: discussion and written. Written homework
assignments will be collected at the beginning of class, and a subset of these problems will be
selected on a random basis for grading.
Homework assignments are due at the beginning of the class period. To receive
credit, you must show the logic behind your solution.
Late homework assignments will not receive full credit.

Case Analyses and Projects: Several case studies and projects will be assigned during the term.
These are utilized to enable you to: 1) practice effective communication techniques, both written
and oral; 2) engage in an active learning situation; 3) perform data interpretation and analysis; 4)
gain experience in decision making under uncertainty. They are also designed to give you an
opportunity to use an essential tool in real world business finance - the application of computer
models in financial analyses.

Some of the cases will require a written report and/or an Excel spreadsheet. Some of these
reports will be short memos; others will require more lengthy exposition. Reports must be typed,
with exhibits inserted in the narrative where appropriate, or at the end of the report. If the case
requires an Excel spreadsheet please submit a printed copy of your spreadsheet at the beginning
of class. An online version of your Excel spreadsheet must be submitted to the Digital Dropbox
on Blackboard prior to the beginning of the class period.

All cases will be discussed in detail during a regular class session. You should be prepared to
respond to specific questions, and to the comments of other students.

Grades for both written reports and class discussions will be based on content, exposition, and
clarity.
Late written reports and Excel spreadsheets will not be accepted. These are due at the beginning
of the class period. Please make an extra copy for your use during the class discussion.



BUS 434    Fall 2009   Professor Alva Butcher                                                        4
Blackboard: Instructions for cases and projects will be posted on Blackboard under
Assignments. After the homework assignment has been collected, solutions to the homework
will be posted on Blackboard. Your access code for this class is FCF.

Exams: There will be two midterm exams and a comprehensive final. Exams will be problem
oriented, but will also include short essay questions. Exams are closed book, but you may use
one side of an 8 by 11 paper for notes and formulae.
As a general policy, makeup exams will not be given.

Academic Honesty
Please carefully read the University policy on academic honesty in The Logger. The following is
a quote from The Logger.
        “The University of Puget Sound is a community of faculty, students, and
        staff engaged in the exchange of ideas contributing to intellectual growth
        and development. Essential to the mission of the academic community is a
        shared commitment to scholarly values, intellectual integr ity, and respect
        for the ideas and work of others. At Puget Sound, we share an assumption
        of academic integrity at all levels. Violations of academic integrity are a
        serious matter because they threaten the atmosphere of trust, fairness,
        and respect essential to learning and the dissemination of knowledge.”

Extra Credit Quizzes: During the term, there will be unannounced pop quizzes. These will
consist of a few multiple choice or true false questions, and will cover material presented in the
prior one or two class sessions. As with homework problems, these are designed to reinforce the
material, and to identify problem areas. By keeping current with the material, these quizzes also
provide you with a means of earning extra credit points.

Grades:
Grades will be based on the following weights:

Two Midterm Exams                                         40%

Comprehensive Final Exam                                  20%
(As scheduled by the University)

Projects and Case Analyses                                20%
        Case Discussion
        Written Reports/Excel Analysis

Homework and Class Discussion                             20%

Total                                                     100%

Extra Credit Quizzes                                      5%




BUS 434    Fall 2009    Professor Alva Butcher                                                       5
Course Outline

Tues 9/1 and Thurs 9/3
               Boot Camp During the first week of class we will be reviewing fundamental
               concepts of the time value of money and risk and return. I would suggest that
               you work together in study groups. By the end of this review period you should
               be comfortable with the concepts in the following questions and problems.

                 Chapter 28: Basic Financial Tools
                 This chapter is available on Blackboard. I would suggest that you print the
                 chapter so that you have it available as a reference throughout the semester.
                 Discussion
                 Questions: 28-3, 28-4, 28-5
                 Problems: 28-1, 28-2, 28-4, 28-5, 28-6(a), 28-7, 28-8, 28-9(a), 28-11(a), 28-14,
                 28-16, 28-20, 28-25

                 Chapter 2 Risk and Return Part 1
                 Discussion : Question 2-3,
                 Problems 2-2, 2-3, 2-9, 2-12, 2-13

Tues   9/8       Boot Camp Quiz

                 Behavioral Finance
                     “Courage of Misguided Convictions: the Trading Behavior of Individual
                        Investors,” Financial Analysts Journal, Vol 55, Issue 6, 1999
                        Brad Barber and Terrance Odean

                          Why Johnny Can’t Invest, Fortune, 11/09/98

                 Discussion Questions:
                 1. Why is risk aversion a standard assumption in economic models? Discuss why
                 this does or does not make sense.
                 2. Describe the data used in this study.
                 3. Describe the methodology used in this study.
                 4. What are the key results of this study?
                 5. Discuss some of the differences between traditional finance theory and
                 behavioral finance.

                 Written Assignment: Prepare a one to two page memo that discusses two
                 hypotheses tested by the Barber and Odean. What evidence allowed the authors
                 to accept or reject the hypothesis?

                 Another reference
                 Are Investors Reluctant to Realize Their Losses, Terrance Odean, Journal of
                 Finance, Vol 53, Oct 98




BUS 434   Fall 2009       Professor Alva Butcher                                                    6
Thurs 9/10        Chapter 6: Financial Options

                  “The Perfect Payday; Some CEOs reap millions by landing stock options when
                  they are most valuable,” Charles Forelle and James Bandler, Wall Street Journal,
                  Mar 18, 2006. pg. A.1 You will find additional information on the controversy
                  over the timing of options used as part of executive compensation on the Web
                  site WSJ.com-Perfect Payday. Be prepared to participate in a discussion in class
                  on the backdating of options.

                  Discussion Questions 6-1, 6-2, and 6-3

Tues   9/15       Chapter 6: Financial Options continued
                  Discussion: Problem 6.1 and 6.6
                  Written: Problem 6.2

                  Chapter 7: Accounting for Financial Management
                  How to use a firm’s financial statements in order to estimate FCF
                  Pages 213-223 Review of concepts covered in previous classes
                  Pages 224-231 NOPAT, FCF

                  Discussion We will be using the Mini Case (Pages 246-248) as a basis to
                  develop the concepts in Chapter 7. Please focus on questions a,b,c,d,e, and f of
                  the mini case.

Thurs 9/17        Chapter 7: continued
                  Chapter 11: Corporate Value and Value Based Management
                  How to use FCF to estimate the value of a firm and the value of its equity.

                  Note: If you need a review of financial ratios, please read Chapter 8: Analysis of
                  Financial Statements

                  Discussion: We will be using the Spreadsheet Problem in Chapter 11 as a basis
                  for the development of corporate valuation using FCF. An excel file with a
                  partial model is available on Blackboard under Assignments. Try to complete
                  parts a, b, d(value of operations), and e of this spreadsheet problem. Please bring
                  a hard copy to class as a basis for class discussion.
                  Written Problem 7-8

Tues 9/22         Chapter 11: Corporate Value and Value-Based Management continued
                  Discussion Problems 11-3 and 11-8

Thurs 9/24        Video: Mortgage Meltdown: A Primer on America’s Subprime Crisis

                  Background Reading:
                  Harvard Business School Case
                  Subprime Meltdown: American Housing and Global Financial Turmoil
                  Discussion Questions:
                       There are numerous players in this drama. How would you assess the
                          blame for the subprime turmoil of early 2008? Evaluate the role of
                          borrowers, originators, packagers, and servicers of mortgages.
                       In what sense did the regulatory authorities allow the crisis to develop?


BUS 434      Fall 2009   Professor Alva Butcher                                                      7
                            Evaluate some of the proposals the ameliorate the current situation of
                             homeowners:
                                 Help homeowners in trouble by rewriting their contracts by
                                     preventing interest rates from being reset.
                                 Allow judges to write down “cram down” the value of mortgages
                                     in bankruptcy proceeding when the mortgage exceeds the value
                                     of the house.

Tues 9/29        Chapter 12: Capital Budgeting: Decision Criteria, pp. 396-411.
                 Several sections of this chapter will be a review of topics covered in BUS 315.
                 We will focus on Net Present Value (NPV), Internal Rate of Return (IRR), and a
                 comparison of these two methods.

                 Chapter 13 Capital Budgeting: Estimating Cash Flows and Analyzing Risk
                 Read the entire chapter. Most of this will be review.
                 Our discussion will focus on
                 Managing Risk through Phased Decisions: Decision Trees, pp. 465-471

                 Discussion Video and Case on the mortgage crisis.. Be prepared to discuss the
                 questions noted above.
                 Discussion: Bring an article to class on the housing market and mortgage
                 market. For example, it could discuss the pros and/or cons of proposed
                 regulation, current market conditions etc. Be prepared to share key points in
                 class.

                 Written Problems 11-1 and 11-4

Thurs 10/1       Corporate Valuation Case
                 Wood-Tech Inc: Valuation of a Privately Held Firm
                 A wood products based company has been approached with an offer to purchase
                 the company. You have been asked to assess profit and operating performance
                 over the past several years. In addition, you must advise the owners on the sale
                 of the company. Should they sell, and if so, at what price.

                 Excel File
                 You will be developing two Excel files:
                     One with financial ratios based on historical data.
                     A second file in which you derive the free cash flows relevant to valuing
                         the equity of Wood-Tech.

                        A digital copy of your Excel file must be submitted on the Blackboard
                        Dropbox prior to the beginning of class. Please bring two hard copies of
                        your Excel file to class. One is due at the beginning of class. The second
                        will be used as a basis for your contribution to class discussion.

                 Written:
                 In addition, please submit a written report that addresses the following issues:
                           Based on historical data and financial ratios, assess the financial
                              health of Wood-Tech.




BUS 434     Fall 2009       Professor Alva Butcher                                                   8
                              Prepare a recommendation for Mr. Lanu on the sale to the Chinook
                               Group. Should he sell? If so, at what price?

                  Please bring two hard copies of your memo to class. One is due at the beginning
                  of class. The second will be used as a basis for your contribution to class
                  discussion.

                  Additional details are available on Blackboard.

Tues 10/6         Guest Speaker
                  Tom McClellan: McClellan Market Report


Thurs 10/8        Exam 1: Chapters 2, 6, 7, 11 , Behavioral Finance , and HBS Case on
                  Subprime Meltdown

Tues 10/13        Chapter 24 Derivatives and Risk Management
                  Selected readings: Background on Derivatives pp 832-843,
                  Risk Management and Hedging with Futures, pp 848-856,
                  The Use and Misuse of Derivatives, p858

                          A derivative is a contract or security the value of which depends
                          on the price of an underlying asset or on the level of an index or
                          interest rate. Figures from the Bank for International Settlements
                          suggest that the end of June 2003 the total notational amount of
                          financial derivatives outstanding worldwide was $208 trillion,
                          the equivalent of abut $34,000 for every human being on the
                          earth.

                  Working with the Wall Street Journal
                  I will provide copies of information on derivatives as reported in the
                  Wall Street Journal

                  Discussion: Problems 24-1 and 24-2
                  Discussion: Problem 12-1 (a, c, d), Problem 12-13 (a,c,d,e,f)
                  Discussion: Problem 13-10
                  Written: One to two page memo on the guest speaker. What topics did you find
                  to be of special interest? Are there other topics that you wish the speaker had
                  covered? Were any of the topics not of interest to you?

Thurs 10/15       Chapter 15 Capital Structure Decisions: Part 1
                  Does the use of debt financing impact the value of the firm?
                  Discussion: Problem 15-6
                  Written:    Problem 12-5 (Evaluate Projects S and L using the NPV and IRR
                  criteria.)

Tues 10/20        Fall Break

Thurs 10/22       Chapter 15: continued
                  Chapter 16 Capital Structure Decisions: Part 2
                  Written: Problem 15-1


BUS 434      Fall 2009   Professor Alva Butcher                                                     9
Tues 10/27       Chapter 16: continued
                 Discussion: Problem 16-2 and Problem 16-3
                 Written: Problem 15-3(a)

Thurs 10/29      Video: Rogue Trader
                 The movie is based on the true story of a young futures trader in Singapore who
                 brought down one of Britain’s oldest and most successful financial institutions,
                 Barings Bank.

                 Discussion Questions:
                 How was he able to do this? How was he able to hide his losses? What were
                 some of the problems at Barings Bank that led to this situation?


Tues 11/3        Reflections on the current financial crisis

                 Kellogg School of Management Case Discussion
                 Investment Banking in 2008: Rise and Fall of the Bear
                 The collapse of Bear Sterns and its subsequent bailout by the Federal Reserve
                 and JP Morgan sent shockwaves throughout the financial community. This case
                 provides some background material on the subprime crisis. You will assess Bear
                 Sterns actions.

                 Background reading:
                 “Wall Street, Main Street, and a credit crunch: Thoughts on the current
                 financial crisis”, Gregory F. Udell, Business Horizons (2009) 52, 117-125

                 Discussion: Questions related to the case and the background reading are
                 available on Blackboard.
                 Discussion: Be prepared to comment on the discussion questions for the video
                 Rogue Trader.

                 Catch up and review

Thurs 11/5       Exam 2: Chapters 12, 13, 15, 16, Hedging with Futures

Tues 11/10       Chapter 17 Distributions to Shareholders: Dividends and Repurchases
                 Does the payment of dividends to shareholders impact the value of the firm?

                 Discussion: Questions 17.1 through 17.5
                 Discussion: Problems 17-2, 17-5, 17-9 (a, b, c, d, e)

Thurs 11/12      Chapter 17: Dividend Theory continued

                 Harvard Business School Case
                 Dividend Policy at FPL Group Inc.

                 Written: Memo on dividend policy based on the case, Dividend Policy at FPL
                 Group Inc. Additional details are available on Blackboard



BUS 434     Fall 2009   Professor Alva Butcher                                                  10
Tues 11/17     Harvard Business School Case
               How Venture Capitalists Evaluate Potential Venture Opportunities
               Discussion Questions
                    Even before reading the case, develop your own set of criteria for
                       evaluating a potential new venture.
                    How do the VCs evaluate the prospective venture’s business model?
                    How do the VCs evaluate the founding management team?
                    How do the VCs evaluate whether the business opportunity meets their
                       criteria?
                    How do they weigh risk and reward?
                    How does the notion of a prospective exit route enter into the evaluation?

               Stanford Business School Case Discussion
               Juniper Networks
               Discussion questions are available on Blackboard

Thurs 11/19    Guest Speaker

Tues 11/24     Chapter 26 Mergers, LBO’s Divestitures, and Holding Companies
               Selected readings: Rationale and background on mergers, pp 894-905
               Adjusted Present Value (APV), pp 905-908
               Valuation of a merger, pp 909-914
               Who wins: the empirical evidence, pp 929-933

               Adjusted Present Value
               “Using APV: A Better Tool for Valuing Operations,” Timothy Luehrman,
               Harvard Business Review, May-June, 1997

               Background Reading:
               Ivey Business School: Note on Mergers and Acquisitions and Valuation

               Discussion: Problem 26-1
               Discussion: APV versus (NPV using WACC)
               An Excel file with a summary of the APV example in the Harvard Business
               Review article is available on Blackboard under Course Documents. Please
               review this.
               Discussion: What are some of the advantages of APV over NPV?
               Written: One to two page memo on the guest speaker. What topics did you find
               to be of special interest? Are there other topics that you wish the speaker had
               covered? Were any of the topics not of interest to you?


Thurs 11/26    Thanksgiving Holiday




BUS 434   Fall 2009   Professor Alva Butcher                                                 11
Tues 12/1         University of Virginia Darden School Case Discussion
                  Ben & Jerry’s Homemade
                  This case examines issues of asset control for Ben & Jerry’s Homemade, Inc. in
                  light of outstanding takeover offers. You will take the role of an outside board
                  member. Ultimately you must take a position on whether the board should
                  defend the agenda of current management or accept one of the takeover offers.

                  Additional details are available on Blackboard

Thurs 12/3        Video: Barbarians at the Gate

Tues 12/8         Harvard Business School Case : RJR Nabisco
                  In 1988, Kohlberg Kravis Roberts and Co. (KKR) concluded the takeover of RJR
                  Nabisco Inc. (RJR). At that time, the $25 billion dollar deal to buy RJR was the
                  biggest takeover in history. The takeover battle was initiated by Ross Johnson,
                  the Chief Executive Officer of RJR and his management team. They proposed a
                  management buy-out in which they bid $75 per share for RJR stock. At the time
                  of the bid, the stock was trading at approximately $56 per share. A committee of
                  outside directors called this offer a “raider from the inside” and opened the
                  bidding to all comers. This led to a bidding war between the management team,
                  KKR, and First Boston. You will be involved in a live version of the takeover
                  battle.

                  The takeover raises interesting questions in many areas of finance, such as
                  agency theory, capital budgeting, tender offers, social responsibility, stock
                  valuation, and capital structure.

                  Additional details are available on Blackboard




BUS 434      Fall 2009   Professor Alva Butcher                                                   12

				
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