Fall 2015

Business Analysis and Valuation

MGMT E-2620
Wednesdays 5:30 7:30 pm (EST) Web conference
First Class: September 2, 2015

Professor:

Yvette R. Austin Smith, Principal,

The Brattle Group (http://www.brattle.com/experts/yvette-austin-smith)
yaustinsmith@fas.harvard.edu

Telephone conferences: Please email for appointment

Course website: https://canvas.harvard.edu/courses/4494
Download Coursepack: https://cb.hbsp.harvard.edu/cbmp/access/38570738
Course Description:
Financial statements are important sources of insight as to the financial health, prospects, and value of a
company. But just how accurate and complete are these reports in reflecting economic reality? What
are the warnings of bias? This course introduces a framework for the analysis of financial statements
and financial plans, with particular focus on their usefulness in valuing and financing companies and in
the evaluation of corporate performance. Throughout the semester we will make extensive use of
readings and of case studies so that you can gain the knowledge of the relevant theory and techniques
and an ability to use them in actual situations.

Prerequisites:
This is an MBA-level course that assumes students have had prior academic or professional exposure to
basic corporate finance principles and introductory accounting. Students should also be able to
proficiently use Microsoft Excel and be able to access/read .pdf documents.

Cases and Readings:

The readings for this course consists of:
A coursepack that can be purchased and downloaded electronically. Registered students will receive
instructions to download the coursepack.
Textbook:

Title: Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions
Authors: Joshua Rosenbaum and Joshua Pearl
Publisher: John Wiley & Sons
ISBN: 978-0-470-44220-3

Please note that his class will not utilize the models and templates that may be available
electronically with this text. However, students are encouraged to download the
materials for self-study and additional reference.

A few additional readings will be posted to the course website during the semester.

Class Format
This course will combine traditional lecture and case method teaching. Traditional lectures will largely
be used to teach technical valuation material and expose students to theoretical valuation frameworks.
Case method teaching will be used to assist students in applying the theoretical frameworks and
technical skills to real world situations. Please note that the class format has been updated from
previous semesters based, in part, on prior and helpful student feedback.
The Extension School is committed to providing an accessible academic community. The Disability
Services Office offers a variety of accommodations and services to students with documented
disabilities. Please visit www.extension.harvard.edu/resources-policies/resources/disability-servicesaccessibility for more information.

Class Assignments, Midterm, Final

All class assignments, the midterm and the final should be submitted via drop box. (Students will be
given specific instructions related to the drop box during the first session.) Specific due dates and times
are noted on the following pages. Please note that assignments are due 1 hour prior to the start of the
specified class. Late assignments cannot be accepted. If you are unable to submit your work due to a
technical difficulty, please alert me, via email, of the situation before the due date and time. The email
should explain the nature of the technical problem and your assignment should be attached (as a file) to
the email. Credit cannot be given for emails and/or assignment received after the due date and time.
All assignments, additional materials, the mid-term and the final will be posted to the course website.
The mid-term will be a predominately quantitative assignment that will require students to value a
company using multiple methodologies. The final will require students to prepare both qualitative and
quantitative analyses to analyze and value a business opportunity under various scenarios.
As noted below, all homework assignments are group assignments. Students are strongly encouraged
to work in a group (of no more than four students). Students will be primarily responsible for forming
their own groups though I will lend what assistance I can. Please ensure that the submitted assignment
lists the names of all members in the group. The mid-term and final exams must be completed
individually and cannot be completed as a group.
All files of submitted work should be in either Word or Excel, depending on the nature of the
assignment. Please use Excel for work that is primarily quantitative.

Grading:
Class Participation
Assignments
Mid-term

15%
25%
30%

Final
Total

30%
100%

Class Participation:
It is necessary and expected that students thoroughly read and analyze all readings before the start of
the class to which those readings are assigned. It is estimated that each two hour class will require 3- 4
hours of preparation. The course is based on the premise that active engagement in the issues both
before and during class is essential for deep learning and to the development of the capacity to use the
theory and techniques in uncertain, messy situations. Class time will be largely devoted to discussion of
the case studies, general conceptual issues raised in the cases and readings, and quantitative tools.
Students should attend class prepared to discuss the Discussion Questions for each class. If you are
unable to attend a class, please notify me ahead of time by email. If you anticipate being unable to
attend three or more classes during the semester, you should strongly consider not taking the course
until your schedule allows for full engagement. Active class participation is required thus all students
should have a stable internet connection and be able to verbally participate in class discussions.

Academic Honesty:
You are responsible for understanding Harvard Extension School policies on academic integrity
(www.extension.harvard.edu/resources-policies/student-conduct/academic-integrity) and how to use
sources responsibly. Not knowing the rules, misunderstanding the rules, running out of time, submitting
"the wrong draft", or being overwhelmed with multiple demands are not acceptable excuses. There are
no excuses for failure to uphold academic integrity. To support your learning about academic citation
rules, please visit the Harvard Extension School Tips to Avoid Plagiarism
(www.extension.harvard.edu/resources-policies/resources/tips-avoid-plagiarism), where you'll find links
to the Harvard Guide to Using Sources and two, free, online 15-minute tutorials to test your knowledge
of academic citation policy. The tutorials are anonymous open-learning tools.

Preliminary Schedule: Business Analysis and Valuation

Class 1: Sep 2
What is Value and How is it Measured?
Readings: Valuation: Measuring and Managing the Value of Companies (See course website.
You dont need to focus on the review questions at the end of this reading)
Companies with Benefits, The New Yorker, August 4, 2014 (see course website)
Understanding Financial Statements: Making More Authoritative Decisions
(5238BC) (Note: This is an introductory level reading that will be most helpful to
those with a weaker accounting background. For students with a strong
accounting backgrounds, this reading is optional)
Cases: Harman International and KKR (A) (UV4260)
Assignments: N/A
Discussion What is shareholder value and why is it important?
Questions: What are the competing priorities to shareholder value?
What are the primary sources of information to measure or assess the value
of a company (or an economic interest in that company)?
What are the advantages and limitations of each primary source?

Class 2: Sep 9
Introduction to Valuation Frameworks
Readings: Business Valuation: Standard Approaches and Applications (UV6586-PDF-ENG)
Students should begin reading Chapters 1 3 of Investment Banking. These
chapters will provide greater depth to the material presented in Business
Valuation: Standard Approaches and Applications
Cases: N/A
Assignments: N/A
Discussion What are the three principal valuation approaches?
Questions: What are the primary inputs to each approach?
What are the typical sources for these inputs?
What are the key underlying assumptions behind these approaches to value?
Describe circumstances in which one valuation approach may tend to be more
or less accurate than other approaches

Class 3: Sep 16
Financial Statements, Stock Price and Value
Readings: Tescos Accounting Problems: Not So Funny, The Economist (course website)
What Went Wrong at Tesco?, Financial Times (course website)
Cases: Bristol-Myers Squibb Company - Managing Shareholders Expectations (905B08)
Assignments: N/A

Discussion
Questions:

How did BMS find itself in this situation?

How did BMS revenue recognition impact each of the three methods of
valuation?
Were all valuation methods equally impacted?
What role do qualitative public disclosures play in interpreting financial
statements?
How do the situations at Tesco and BMS compare?

Class 4: Sep 23
Readings:
Cases:
Assignments:

Due Diligence, Financial Ratios and Financial Forecasting

Continue reading Chapters 1 3 of Investment Banking
Krispy Kreme Doughnuts (103018)
Students will be assigned the Krispy Kreme forecast assignment (Class Assignment
1) in class. The assignment and an Excel Valuation Template Model will be posted
to the course website. Student will need to be familiar with this model to
complete several of the next assignments.
Discussion
What is the outlook for the market in which Krispy Kreme operates?
Questions:
What factors are driving the growth of Krispy Kreme?
How might the future mix of store types impact the company forecasts?
Do you think that certain aspects of Krispy Kremes business will grow
faster or be more profitable than others
How dependent is the companys growth on capital expenditures? On
working capital?
What additional information would be helpful to more accurately prepare
company projections?

Class 5: Sep 30
Readings:
Cases:
Assignment:

Financial Forecasting and Sustainable Growth

N/A
Krispy Kreme Doughnuts (103018)
Class Assignment 1:
Prior to the start of class students will be required to hand-in the Krispy Kreme
forecast assignment.

All assignments must be turned in to the drop box by Tuesday, September 30,
2014, 4:30 PM EST.
Discussion Please come to class prepared to discuss your solution to Assignment 1 and
Questions: critique that of your classmates:

Class 6: Oct 7
Application of Discounted Cash Flow and Net Present Value Analysis Part I
Readings: Students should have completed reading Chapters 1 - 3 of Investment Banking
Cases: Pacific Grove Spice (4366)

Assignment: Students should become familiar with the Pacific Grove Spice case. Pacific Grove
Spice will be the basis for discussion during this class and during future classes.
Students will be assigned the AirThread Connections NPV assignment (Class
Assignment 2) in class. The assignment will be posted to the course website. The
assignment should be completed using the Excel Valuation Template Model.
Discussion
How accurately does DCF measure value?
Questions:
Why might market value differ from a DCF-derived value?
Under what circumstances is DCF less likely to be accurate?

Class 7: Oct 14
Readings:
Cases:
Assignment:

Application of Discounted Cash Flow and Net Present Value Analysis Part II
Students should have completed reading Chapters 1 - 3 of Investment Banking
Valuation of AirThread Connections (4263)
Class Assignment 2:
Prior to the start of class, students will be required to hand-in the AirThread
Connections NPV assignment.

All assignments must be turned in to the drop box by Wednesday, October 14,
2014, 4:30 PM EST.
Discussion Please come to class prepared to discuss your solution to Assignment 2 and
Questions: critique that of your classmates

Class 8: Oct 21
Application of Market Multiples
Readings: Students should have completed reading Chapters 1 - 3 of Investment Banking
Pacific Grove Guideline Public Companies (will be posted to course website)
Cases: Review AirThread Connections
Review Pacific Grove Spice
Assignment: Students will be assigned the AirThread Connections Market Multiple assignment
(Class Assignment 3) in class. The assignment, along with supporting materials,
will be posted to the course website. The assignment should be completed using
the Excel Valuation Template Model.
Discussion
What characteristics of a company are most important when selecting
Questions:
guideline public companies?
How accurately do market multiples measure value?
When is a value based on market multiples likely to be less accurate?
Which valuation multiple(s) would you use to value Pacific Grove Spice?
Why?
Assume there were no publicly-traded companies that sold cooking spices,
how would you select guideline public companies?

Class 9: Oct 28
Readings:
Cases:
Assignment:

Valuing AirThread Connections Using Market Multiples

N/A
Valuation of AirThread Connections (4263)
Class Assignment 3:
Prior to the start of class students will be required to hand-in the AirThread
Connections Market Multiple assignment.

All assignments must be turned in to the drop box by Wednesday, October 28,
2014, 4:30 PM EST.
Discussion Please come to class prepared to discuss your solution to Assignment 3 and
Questions: critique that of your classmates

Class 10: Nov 4

Review and Comparison of Valuation Techniques

This will be a review class before the Midterm Assignment
Readings: Review prior readings
Cases: Review prior cases
Assignment: Midterm (Individual):
Students will be assigned an open-book midterm at the end of class (due the
following week). The midterm will consist of valuing a company based on all three
valuation techniques. The midterm should be completed using the Excel Valuation
Template Model.
All assignments must be turned in to the drop box by Wednesday, November 4,
2014, 4:30 PM EST.

Class 11: Nov 11

Survey of Additional Valuation Methods
Readings: Materials posted to course website
Cases: N/A
Discussion
How do these methods relate to more traditional methods of valuation?
Questions:
When might these methods provide additional accuracy in estimating
value?

Class 12: Nov 18

Readings:
Cases:
Assignments:
Discussion
Questions:

WACC Part II and Optimal Capital Structure

See course website
Hill County Snack Foods Co. (913517)
N/A
What are the components of WACC and how are they determined?
How much business risk does Hill County face? How much financial risk
would the company face at each of the three alternative debt-to-equity
ratios presented in Exhibit 4?
What debt-to-equity capital structure would you recommend as optimal
for the company?
What methods could the company use to alter its capital structure?
Would a more leveraged capital structure create additional value for
shareholders? How?

Note: No class on Thursday, November 25, 2015 (due to Thanksgiving holiday)

Class 13: Dec 2

Valuing Companies in Transition and Intro to Leveraged Buy-Outs
Readings: Optional:
Dell Special Committee Investor Presentation (June 2013)
Southeastern: Presentation to ISS Opposing the Proposed Dell Take-Private
Transaction (June 24, 2013)
Cases: Taking Dell Private (714421)
Southeastern Asset Management Challenges Buyout at Dell (114015)
Assignments: Students will be assigned the Bain and Dollorama LBO assignment (Class
Assignment 4) in class. The assignment, along with supporting materials, will be
posted to the course website.
Discussion
When valuing Dell at the date of the transaction, what is the correct capital
Questions:
structure?
What methods of valuation will tend to me more (or less) accurate when
valuing Dell at the date of the transaction?
Does the going-private transaction result in a difference in received value
for long-term versus short-term shareholders?

Class 15: Dec 9

Readings:
Cases:
Assignments:

Valuation for Leveraged Buy-Outs

Valuation of Late Stage Companies and Buyouts (UV5637)
Bain and Dollorama (W12782)
Student will NOT be required to hand-in Class Assignment 4. However, students
should be prepared to actively discuss the assignment in class and respond to
questions that will be posed at random. Grades for this homework assignment will
be based on class participation.
Discussion
See homework assignment
Questions:

Class 16: Dec 16

Reserved for Final Exam
Readings:
Cases:
Assignments: The final exam will be distributed immediately prior to the start of class and must
be completed and submitted to the drop box by the end of the scheduled class
time (7:30 pm EST).

OPTIONAL: TBD
Long-Term versus Short-Term Shareholder Value
Readings: Air Products and Chemicals, Inc v. Airgas et al, Delaware Court of Chancery opinion,
February 15, 2011 (course website)
Letter from Larry Fink (Blackrock) to CEOs, March 31, 2015 (course website)
Focusing Capital on the Long Term, Harvard Business Review, Jan-Feb 2014
(coursepack)
Long-Term Effects of Hedge Fund Activism, L. Bebchuk, June 2015 (course website)
Cases: N/A
Discussion
Is there a difference between long-term and short-term value?
Questions:
Should the interests of long-term or short-term shareholders take
precedence?
From a valuation perspective, what do you think of the Chancery Court
opinion? Did the court get it right?