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Weatherhead School of Management Case Western Reserve University

BAFI 404: Financial Modeling

Fall 2008 Professor Christa H.S. Bouwman

Office hours: Office: E-mail:

Mon, 2 – 3 PM Class time: Tue, 3.30 – 5.30 PM Tue, 1.30 – 3PM (or by appointment) Location: 106 PBL 362 Peter B. Lewis Bldg (“PBL”) Pre-requisite: BAFI 402 [email protected] TAs: to be announced

Course description and objectives Firms try to create value. In their day-to-day operations, they are faced with numerous challenges: Should we make a particular investment? Given limited resources, which positive NPV projects should we select? How much will the bank lend to us? If sales growth goes up, how does that affect our free cash flows? In each of these situations firms try to quantify the impact of their actions on firm value. The goal of this course is to develop your financial modeling / valuation skills, so you can tackle issues like the ones described above. You will learn this through homeworks, case studies, and a group project. By the end of the course you should:

• Be able to compute and forecast Free Cash Flows. • Possess a set of cutting-edge financial modeling and Excel skills. • Understand and be able to apply four important valuation methods (WACC, liquidation value,

multiples, and EVA). • Know where theory stops and practice begins: the role of assumptions… • Have a deeper understanding of how strategic decisions impact firm value.

Who should take this course? This course is designed for students who aspire to work in (i) corporate finance (including mergers and acquisitions); (ii) strategy; or (iii) equity analysis. This course will be highly beneficial for you if you want a career in any of these areas, whether in a regular company, a bank or a consulting firm. The course will be demanding because I want you to feel comfortable with the many aspects of financial modeling and valuation by the end of the semester. Valuation is an essential skill for you to acquire, but one you can only master by doing. If you do not want to work hard, please do not take this course. If you are willing to work hard, I can assure you that you will have a lot of fun and satisfaction from learning a lot of exciting and important aspects of finance. To enhance your learning experience, please stop by during my office hours or send me an e-mail with any questions you may have. I also encourage you to give me any suggestions that you have about improving the course.

BAFI 404: Financial Modeling – Fall 2008 Prof. Bouwman

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Course materials The course materials consist of two parts: 1. Required Textbooks "Microsoft Office Excel 2007: Data analysis and business modeling" by Wayne Winston (Microsoft Press, 2007, ISBN: 0735623961). This book is available in the bookstore and online. “The Value Sphere: Secrets of Creating & Retaining Shareholder Wealth” by John Boquist, Todd Milbourn and Anjan Thakor (Value Integration Associates, 2006, 3rd edition). This is a “print-on-demand” book – ordering instructions will follow shortly. These two books will serve as supplements to the materials in the Coursepack. The first book provides a very hands-on approach to improving your Excel spreadsheet skills. The second book is written like a novel, tracing the growth of an entrepreneur’s business from scratch to a large publicly-traded company: it is an engaging book that focuses more on strategic aspects related to valuation and value creation. 2. Coursepack You are required to buy the Coursepack. It contains the overheads, the case studies (copyright issues require that you buy these cases), and all the assignments. I will distribute the first part class, the rest you can pick up from the department administrator Tedda Nathan (PBL 371). Recommended Reference Textbooks (you are not required to buy these) If you are interested in reading more on valuation topics not covered in class, you may consider:

• “Valuation” by Copeland, Koller and Murrin. This book focuses more on strategic issues and discusses special topics such as valuing cyclical companies, banks and insurance companies, and valuation outside the US.

• “The dark side of valuation” by Damodaran. This book analyzes the valuation of high-tech firms.

• “Applied Mergers & Acquisitions” by Bruner. This book provides a comprehensive overview of M&A and discusses valuation, strategy, diligence, governance, transaction terms, regulation, integration and best practices.

Assignments In addition to classroom lectures and discussion, the course will employ a mixture of assignments: individual homework assignments, group case studies, and a group project.

• Individual homework assignments: There will be six individual homework assignments. These assignments are designed to help you understand and directly apply the material discussed in class. You will be required to hand in your own solutions although you may discuss the homework with your peers. I expect that there will be a high correlation between your ability to solve the homework questions and your performance on the mid-term. Therefore, I strongly encourage you to make sure that you know how to solve the questions before you hand them in. I also encourage you to take full advantage of office hours.


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I will drop the lowest homework score (including a missed homework) when computing your homework grade. Late homeworks will not be accepted. If you are unable to hand in a homework due to medical reasons, I will discount that homework if you provide me with a note from a doctor or a clinic. What to hand in when and how? o A hard-copy of your individual homework is due at the beginning of class on the due date

indicated in the course outline. The hard-copy of your homework should contain your write-up and a print-out of your spreadsheets. The hard-copy should show all your calculations, including intermediate steps.

o An electronic version of your Excel spreadsheets must be e-mailed before the beginning of

class. Make sure that your Excel spreadsheets prints out neatly. For example, a table should generally print out as one table on a single sheet of paper. Please send your spreadsheet to myself ([email protected]) and my TAs (t.b.a.) and indicate BAFI404 HW#, e.g. “BAFI404 HW1” in the subject line of your e-mail.

• Group homeworks and group case studies:

There will be two group homeworks and two group case studies. These assignments are related to the material we have discussed in class. You will apply the concepts you learned in class to different settings. See below for more information about groups. What to hand in when and how? o A hard-copy of your group assignment is due at the beginning of class on the due date

indicated in the course outline. Please make sure that your group number and the names of the group members appear on the first page of the assignment. The format of case write-ups should be as follows: Executive summary: here you briefly describe the situation, the key questions you address, and short answers to these questions. Remember: if I ask you six questions, probably not all of them are key questions… Body of the write-up: here you give a more detailed description of the situation and explain how you arrived at the answers to all the questions I posed. If you believe I have left out an important question: try to formulate it yourself, and, if possible, try to answer it. Appendix: this contains relevant exhibits and calculations that support your analysis. You should only include exhibits that you explicitly mention in the main text, and you should clearly indicate what information each exhibit provides. Do not forget to add titles. Case write-ups should be no more than two to three pages excluding the appendix (double-spaced; min. 11 point font), and no more than six pages long including the appendix. I will be strict on this: if you hand in more, I will only consider the first three pages of written material and the first three pages of the appendix. Why? It is very important to learn to formulate your thoughts in a concise manner.


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o An electronic version of your group homeworks and any Excel exhibits in case write-ups must be e-mailed before the beginning of class. Make sure that your Excel spreadsheets prints out neatly. For example, a table should generally print out as one table on a single sheet of paper. Please send your spreadsheet to myself ([email protected]) and my TAs (t.b.a.) and indicate “BAFI404 Group# Assignment#”, e.g. “BAFI404 Group1 Case1” in the subject line of your e-mail.

• Group project:

Each group will value a listed company. In this exercise you will pull together the tools and concepts you learned in the course. The last few pages of the syllabus contain information on the time line, the available companies, and the content and length of your report and presentation. Important dates: o bids are due by 5PM on Sunday, Sept. 14; o electronic version of your report (and spreadsheet) due at 5PM on Monday, Nov. 24; o hardcopy of your report and in-class presentation of your results on Tuesday, Nov. 25. Please start your group project early! Once you know which firm you will value, you can read up on the company and the industry, and begin identifying useful information sources. As the semester develops, I will provide you with suggestions/hints on which parts of the analysis you can do based on the tools you have learned up to that day.

Groups Groups should consist of four or five students. If you want to create your own group you must let me know the names of the students in your group by 5PM on Friday, Aug. 29. If you have not chosen your own group by that date, I will assign you to one. You will remain in your group for the entire semester. In forming your groups, you may want to keep the following in mind: • You will learn more if your group members have different skills. Someone may have taken more

strategy courses, another person may be good in finance, etc. When working together, make sure that you do not specialize in what you are already good at, but rather learn from each other!

• Please take a look at the companies you can bid for (group project) before selecting your group: if you have a specific desire to work in a certain industry, or maybe for one of the companies on the list, you may want to find a group interested in bidding for the same company.

Try to get the most out of your group: I strongly suggest that you meet with your group more often than just to cover the case studies or work on the big group project. It helps to go over material together: even if you think you already understand the material, you will learn from explaining it to others, or you may find out that you did not understand it as well as you thought you did. Exams There will be two exams: an in-class midterm on Tuesday, Oct. 14, and an in-class final on Tuesday, Dec. 2. The final will be cumulative, but will be weighted toward the material that we cover in the second half of the semester.


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Both exams will be (partially) done on a computer. The exams will be closed book, except that you will be allowed one cheat sheet of 4 x 6 inch. Grading Your course grade will be a weighted average of: Mid-term (in-class):* 20% Final (in-class):* 28% Individual homeworks (5 out of 6): 15% Group case write-ups (2) and group homeworks (2): 12% Group project (1): 15% Class participation: 10% * If you perform better on the final than on the midterm, I will discard your midterm grade and

assign your final exam a weight of 48%. If you have a question about the way I grade any of your work, please come and talk to me immediately. Class Norms and Expectations How useful this course is to you will depend not only on what I teach you, but also on your dedication, hard work and class participation. To this end, I will expect you to observe the following norms:

• Come to class on time and stay the entire duration. Late arrival and early departure without my explicit prior approval is not acceptable.

• Please turn off mobile phones during the duration of the class. If you are interviewing, recruiters will understand that they cannot reach you when you are in class. If some emergency requires you to leave your cell phone on, please let me know before class.

• Ask questions whenever something is not clear. It takes time to learn new concepts, and asking questions helps. If I do not know the answer to your question straight away, I will get back to you as soon as possible.

• Participate actively during lectures and case discussions. This way you will get the most out of this course. If you are shy, now is your chance to get over it. I will systematically cold call on groups and individuals. So make sure you are up to speed with the material, and – on case discussion days – know the content of your group’s case write-up.

• I will never view honest mistakes negatively. I will use them as valuable learning opportunities. Often, there is not even a “right” answer. I simply want to know where you are in the learning process and prefer you to make a mistake to you not answering at all. But remember, if it is obvious that you were unprepared for the discussion, it will negatively affect you class participation grade.

• If you have something to say, share it with everybody. No whispered comments to someone sitting next to you.

• Learn to challenge the ideas of your classmates, but be courteous. Always treat your fellow students with respect, listen to their answers and react to the issues raised by them. You will be surprised at how much you can learn from each other.


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• Please prepare a legible name card and use it every lecture. This will help me and your peers to learn your names more quickly.

• Adhere to university standards of academic integrity. I will not tolerate cheating, plagiarism, and other forms of academic dishonesty. This includes, but is not limited to, consulting with another person during an exam, turning in written work that was prepared by someone other than you, and making minor modifications to the work of someone else and turning it in as your own. Ignorance will not be permitted as an excuse. If you are not sure whether something you plan to submit would be considered either cheating or plagiarism, it is your responsibility to ask for clarification. o You are permitted to discuss individual HWs with others, but you have to hand in your

own work (i.e. use your own words). o You are permitted to bring a 4x6 cheat sheet to exams.

• Strive for perfection. You may have heard about the 80-20 rule: it takes only 20% of your time to do 80% of the work. It costs an additional 80% to do the last 20%. It may be tempting at times to stop after the 20%. My sincere advice to you is: don’t. Try to hand in perfect assignments and be well prepared for class and meetings with your group. It is not just that I want you to get the most out of my course and do well. A deeper motivation is that good work habits often determine the difference between an “OK” career and an excellent career. Right now is the time to develop such work habits. So please accept my challenge: go the extra mile!

• I want you to feel this is a spectacular course. What are the three key things I / we have to

achieve during the semester for you to always remember this as a spectacular course? • I would like to understand you and your motivation for taking this course. Please e-mail

me the following information by 5PM on Friday, Aug. 29: a. Your full name. b. A few lines on your background (courses taken that may help you in this course). c. Why you want to take this course. d. Anything else you feel I should know about you (learning disability, etc.). e. The three key things we have to achieve during the semester for you to always remember

this as a spectacular course.

Please see the next pages for my bio and the schedule of classes

Good luck with your work and enjoy the process!


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Bio of Professor Christa H.S. Bouwman: Christa Bouwman is an Assistant Professor of Banking and Finance and the Lewis-Progressive Professor of Management at the Weatherhead School of Management at Case Western Reserve University. She holds a Ph.D. in Finance from the University of Michigan, a Master’s degree in Economics and Business (cum laude) from the University of Groningen – the Netherlands, and an MBA from the Johnson Graduate School of Management – Cornell University. She was a member of the Johnson School’s European Advisory Board and a Vice-President of the Cornell Club in the Netherlands for five years. Professor Bouwman has taught Corporate Finance at the Weatherhead School of Management – Case Western Reserve University, the Ross School of Business – University of Michigan, and at the University of Amsterdam – the Netherlands. She has been nominated for several undergraduate and MBA teaching awards. Her research and teaching interests focus on corporate finance and banking. Professional experience Professor Bouwman worked for five years in Corporate Finance at ABN AMRO Bank (in particular in Venture Capital, Project Finance Advisory, and Capital Structure Advisory). She was a litigative consultant for the U.S. Department of Justice, assisting an expert witness in several cases related to the Savings & Loan crisis in the early 1980s. She is a regular visitor at the Cleveland Federal Reserve Bank and the Federal Reserve Board in Washington D.C.


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Tentative Schedule of Classes Session Date Topic Due:

1 Tue, Aug. 26 MODULE 0: COURSE OVERVIEW MODULE I: VALUATION AND FREE CASH FLOW (FCF) Material: Boquist, Milbourn & Thakor (“BMT”) Ch. 2 (pp. 37-52) and 8.2 Coursepack

2 Fri, Aug. 29 Make-up class (video-taped)

Start MODULE II: COST OF CAPITAL AND TWO VALUATION METHODS Cost of debt and equity, Weighted Average Cost of Capital (WACC), WACC method, liquidation value, valuing a private / recently-listed firm Material: BMT Ch. 8, 18 and Coursepack Due at 5PM: 1. background info about you 2. names of your group members

See left & pp. 4, 7.

Tue, Sept. 2 No class (video-taped make-up class on Friday, Aug. 29)

Individual HW 1

3 Tue, Sept. 9 Continue MODULE II: COST OF CAPITAL AND TWO VALUATION METHODS Material: BMT Ch. 8, 18 and Coursepack

Group HW 2

Sun, Sept. 14 Due at 5 PM: bids for group project See left & p. 44 Tue, Sept. 16 MODULE III: EXCEL TOOLS

Material: Coursepack Group HW 3

5 Tue, Sept. 23 Finish MODULE II: COST OF CAPITAL AND TWO VALUATION METHODS Case 1: Ameritrade Start MODULE IV: BUILDING PRO FORMA FINANCIAL STATEMENTS Building pro formas, value creation and value evaporation Material: BMT Ch. 1, 4, 5, 6 and Coursepack

Group Case 1

6 Tue, Sept. 30 Continue MODULE IV: BUILDING PRO FORMA FINANCIAL STATEMENTS Material: Coursepack

Individual HW 4

7 Tue, Oct. 7 MODULE V: EXCEL TOOLS: SENSITIVITY ANALYSIS AND SCRUTINIZE Material: Coursepack

Individual HW 5

t.b.a. MIDTERM REVIEW 8 Tue, Oct. 14 MIDTERM


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Session Date Topic Due: 9 Tue, Oct. 21 Discuss midterm

MODULE V: EXCEL TOOLS: SENSITIVITY ANALYSIS AND SCRUTINIZE Material: Coursepack

10 Tue, Oct. 28 Start MODULE VI: CREATE INDIVIDUAL PRO FORMA ITEMS Material: Coursepack

11 Tue, Nov. 4 Continue MODULE VI: CREATE INDIVIDUAL PRO FORMA ITEMS Material: Coursepack MODULE VII: VALUATION BY MULTIPLES Material: Coursepack

Individual HW 6

12 Tue, Nov. 11 Finish MODULE VI: CREATE INDIVIDUAL PRO FORMA ITEMS Case 2: Clarkson Lumber Start MODULE VIII: EXCEL TOOLS FOR CAPITAL BUDGETING Material: BMT Ch. 9 and Coursepack

Group Case 2

Tue, Nov. 18 Finish MODULE VIII: EXCEL TOOLS FOR CAPITAL BUDGETING Material: BMT Ch. 9 and Coursepack MODULE IX: PERFORMANCE MEASURES AND ECONOMIC VALUE ADDED (EVA) Material: BMT Ch. 10, 15, 16 and Coursepack

Individual HW 7

13 Mon, Nov. 24 Due at 5 PM: written report of group project See left & p. 414 Tue, Nov. 25 MODULE X: VALUE A LISTED FIRM

Presentation of group projects Presentation

t.b.a. FINAL REVIEW Fri, Nov. 28 Due at 5PM Individual

HW 8 15 Tue, Dec. 2 FINAL


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ASSIGNMENTS: Assignment: Description: Date due:

Individual HW 1 Tue, Sept. 2

Group HW 2 Tue, Sept. 9

Group HW 3 Tue, Sept. 16

Group Case 1 Ameritrade Tue, Sept. 23

Individual HW 4 Tue, Sept. 30

Individual HW 5 Tue, Oct. 7

Individual HW 6 Tue, Nov. 4

Group Case 2 Clarkson Lumber Tue, Nov. 11

Individual HW 7 Tue, Nov. 18

Group project Written report Mon, Nov. 24

Group project In-class presentation Tue, Nov. 25

Individual HW 8 Fri, Nov. 28


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Individual Homework 1 Please do the following two problems in Excel. Assume that I’m your busy boss and have asked you give me both a printout of your spreadsheet and the actual spreadsheet. Try to make sure that I can understand what you’ve done “within 30 seconds” (your boss doesn’t want to spend hours trying to figure out your calculations!). I want to use this exercise to get an initial impression of your mastery of Excel. Problem 1: Free Cash Flow Do Practice Problem 1 from Ch. 2 of BMT: calculate Michigan Electronics’ FCF for 2005. (Note: in the book, the balance sheet contains an entry “Total Net Assets”. This should be “Total Assets”!!) (Since you do not have the book yet, I am providing the problem here below.)

1. The Michigan Electronics Co. has the following data:

INCOME STATEMENT YEAR: 2005 ($ thousands)

Sales $2,000 Cost of Goods Sold (including depreciation) $1,600 SG&A $ 200

Operating Profit $ 200 Interest on debt $ 50 Pre-tax Income $ 150 Taxes (@ 40%) $ 60

Net Income $ 90

BALANCE SHEETS ($ thousands)

2004 2005

Total Current Assets $ 450 $ 500

Net Fixed Assets $1,200 $1,300

Total Assets $1,650 $1,800

Payables $ 150 $ 175Short-term Bank Debt $ 50 $ 75Current Portion of Long-term Debt $ 150 $ 125

Total Current Liabilities $ 350 $ 375Long-term Debt $1,000 $1,000Shareholders' Equity $ 300 $ 425

Total Liabilities and Equity $1,650 $1,800

Calculate Michigan Electronics' Free Cash Flow (FCF) for 2005.


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Problem 2: Balance Sheet and Income Statement The balance sheet of Company X as of December 2000 looks like this: Assets Liabilities + Shareholders’ Equity Cash Accounts Receivable Inventory Property Plant and Equipment

20,0005,0001,500

4,000

Accounts Payable Equity Contributed Capital Retained Earnings

2,000

28,000500

Total 30,500 Total 30,500 The following transactions occur in Company X during 2001:

• Inventory worth $7,000 was acquired. Out of this $ 3,000 was paid in cash and remaining was purchased on credit.

• Finished goods were sold for a total amount of $ 10,000. Out of this 6,000 was received in cash. The remaining $ 4,000 worth of sales were made on credit.

• The cost of the goods sold was the depletion of the inventory by $6,000. • The firm’s Property, Plant and Equipment was depreciated by $200. • Income Tax (40%) on profits was recorded as a liability.

a. Create a balance sheet and income statement of the firm as of December 2001. b. Now assume that in addition to all the transactions listed above, the firm also borrows

$4,000 from a bank in January 2001 and uses it to buy more Property, Plant and Equipment. Depreciation allowance during 2001 is now $400 instead of $200. In December 2001, the firm repays $500 of the principal borrowed and also pays 1% interest on the amount borrowed. Recreate the balance sheet and income statement.


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Group Homework 2 Calculate Johnson & Johnson’s Liquidation Value of Equity per share as of Dec. 31, 2005. This is a real-world exercise. I am not giving you fictitious data. Instead, you have to collect all the data just like you would if the CFO of Johnson & Johnson had asked you to calculate this, or you are an analyst, an investment banker, or a consultant. To make sure you don’t waste time in finding the data / info you are looking for, I am giving you extra guidance. You can use this approach for ANY firm you ever have to analyze. Approach: 1. Find key info on Johnson & Johnson’s (“J&J’s”) business units:

the number of units plus a brief description of their key activities. Get this info from J&J’s 10K or Annual Report: these reports typically start with a description of the business, including the different business units / segments.

2. For each business unit of J&J, collect key 2005 financials: Sales, EBIT (if available, otherwise use EBT), and the BV of Assets. You can typically find these data in the Footnotes of the financial statements. E.g., go to the 10K or Annual Report, and search for “segment” – you’ll find these key financials per business unit. You’ll see that J&J reports EBT (not EBIT) per unit – so use EBT!

3. Collect key 2005 financials on J&J: Income Statement: Sales and EBIT (use this if you have EBIT business unit data on, otherwise use EBT) Balance Sheet: Total Assets, Short-Term Debt, Long-Term Debt, Preferred Stock, BV of Equity (“Total Stockholders Equity” minus “Preferred Stock”), and Number of Shares Outstanding (typically found on the Balance Sheet under: Equity par value). Other data: Share Price as of Dec. 31 (see finance.yahoo.com pointers below). You can find these items in J&J’s 10K or Annual Report. You can also find it on Yahoo Finance (see pointers on using Yahoo Finance below).

4. For each business unit, find at least one comparable firm. It is important to select good comparable firms. So use several sources for this: - The business unit info in J&J’s 10K or Annual Report may list key competitors. - Yahoo Finance has info on competitors (see finance.yahoo.com pointers below). - Use a data source such as Hoovers. - Use Google… (type “Johnson & Johnson” and “competitors” – may find useful info). For each potential comparable firm, check the firm’s profile in e.g. Yahoo Finance: is the firm’s profile close to the profile of J&J’s business unit? (Use your judgement!)


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In practice, you may want to use multiple comparables for each unit. For our exercise, we limit ourselves to one comparable firm per business unit. If you want your solutions to be similar to mine, use the following comparable firms: for Consumer Products, use P&G; for Pharmaceuticals, use Merck; and for Medical Devices & Diagnostics, use Boston Scientific.

5. Collect key 2005 financials for each comparable firm. Collect the same items as listed under “3. Collect key 2005 financials on J&J”.

6. Calculate the Enterprise Value (= “EV” = “Firm Value”) of the comparables. Enterprise Value = Book Value of Short-Term Debt + Book Value of Long-Term Debt + Book Value of Preferred Stock + Market Value of Equity

7. Calculate key multiples for each comparable firm. For example: Sales multiple: Enterprise Value / Sales EBIT multiple: Enterprise Value / EBIT EBITDA multiple: Enterprise Value / EBITDA EBT multiple: Enterprise Value / EBT

8. Obtain the Liquidation Value of Assets for each of J&J’s business units using the key multiples. You will end up with several alternative liquidation values for each unit: none of them will be perfect, but on average, they give a good picture of the unit’s liquidation value: E.g., the liquidation value of assets of unit 1 using a sales multiple: unit 1’s sales * sales multiple of the corresponding comparable firm. Similarly, the liquidation value of assets of unit 1 using an EBIT multiple: unit 1’s EBIT * EBIT multiple of the corresponding comparable firm.

9. Calculate the Liquidation Value of Equity per share for J&J. Use the approach explained in class.


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Data sources to use: 1. Yahoo Finance: finance.yahoo.com

To get info on a firm, type in the name of the company in the box next to “get quotes”. E.g., type “Johnson & Johnson”. Several results are shown – the one at the very top is Johnson & Johnson listed on the NY Stock Exchange. Select this first entry or simply hit enter. Alternatively, if you know the firm’s ticker symbol (“JNJ”), you can enter that in the box next to “get quotes”. You obtain a page with general info on Johnson & Johnson. On the left, you see all the types of info you can get on the firm. For our exercise, you will need to click on Historical Prices, Income Statement, Balance Sheet, and Competitors to obtain the following data for each firm: “Historical Prices”: get the share price on the last trading date in 2005 (so enter, e.g., Start Date Dec 25, 2005 and End Date Jan 10, 2006). “Income Statement”: get Total Revenue (= Sales) and Income Before Tax (= EBT). “Balance Sheet”: get Total Assets, Short/Current Long-Term Debt, Long-Term Debt, and Preferred Stock. “Competitors”: you can find firms Yahoo Finance classifies as competitors. As you can see, it lists only a few, and those are competitors in two out of three business units only. So use this as a first step. “Profile”: this gives you a quick overview of the firm’s activities.

2. Annual Reports: Listed firms provide financial information on their firms online. Go to the firm’s website, and click on “investor information” or something similar. You will find links to their latest annual reports and 10Ks.

3. Edgar Database: www.sec.gov/edgarhp.htm (bookmark this page or search for “edgar” in google): Click on “search for company filings”. Click on “historical EDGAR archives”. In the EDGAR search box, enter “Johnson & Johnson” and change the period to: “start” 2006 and “end” 2006. Click on “search”. You’ll see a long list of names (they all have something to do with Johnson & Johnson!), but not Johnson & Johnson. Click a few times on “next”. You need the 2005 10K. Since Johnson & Johnson’s fiscal year ends on Dec. 31, you should expect the firm to file its 10K somewhere in March. So look for “10K” around March 2006. Click on “html” (next to “10K”). Click on the link at the top of the page: it says “Form 10-K”


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Group Homework 3 Four ways to calculate Kellogg Co.’s WACC This is again a real-world exercise. You have to collect all the data just like you would if you were working at Kellogg, an investment bank, or a consulting firm. You know the formula for the WACC:

1 In this formula, Re is the cost of equity, E is the market value of equity, D is the market value of debt, Rd is the forward-looking weighted average cost of the firm’s debt,1 and Tc is the tax rate. In practice, we often use two short-cuts. We use: (1) the book value (rather than the market value) of debt; (2) the yield to maturity (YTM) on the longest-maturity bond (rather than the weighted average cost of all debt). It is typically fine to use these short-cuts since the market value of debt is often not very different from the book value, and the market value of equity dwarfs the amount of debt. In this homework, you will examine how these two short-cuts affect the WACC of Kellogg. Your assignment is to calculate Kellogg’s WACC as of today four different ways. I.e. calculate WACC:

1. Using the market value of debt and the weighted average cost of debt. 2. Using the market value of debt and the YTM on the longest-maturity bond. 3. Using the book value of debt and the weighted average cost of debt. 4. Using the book value of debt and the YTM on the longest-maturity bond.

Use the latest data in all your calculations: “today’s” share price, financial statement data from Kellogg’s latest fiscal year-end (Dec. 31, 2007), etc. Approach: A. Cost of equity (Re) and market value of equity: Step 1: Obtain the cost of equity using the CAPM, i.e. Re = Rf + beta * market risk premium

Rf: look this up on finance.yahoo.com (see below).

Beta: estimate this using five years of monthly return data (you can download stock prices from finance.yahoo.com – see below). Use regression analysis AND one of the other approaches we covered in class to check your calculations.

Market risk premium: take this to be 7%.

1 Recall that you should use forward-looking data rather than historical information. That is, you don’t want to use the interest rate on bank debt the firm obtained 10 years ago – the rate reflects the market circumstances 10 years ago rather than today’s circumstances.


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Step 2: Calculate the market value of equity.

MVE = number of shares currently outstanding (to be found on the “key statistics” page in finance.yahoo.com) times the closing price as of today. (To get answers that are similar to mine, use August 25, 2008 as “today”.)

B. Cost of debt (Rd), tax rate (T), the book value and market value of debt: Step 3: Calculate the effective tax rate = income taxes divided by EBT (both I/S items). Step 4: Calculate the cost of debt and the MV of debt:

Find the breakdown of Kellogg’s debt in one of the notes in its financial statements (you’ll need the 10K rather than the balance sheet from finance.yahoo.com because yahoo doesn’t provide sufficient detail for our purpose). Focus first on traded debt – bonds and commercial paper. (Note: commercial paper is traded short-term debt.)

Long-term bonds:

Price and cost: For each long-term bond outstanding, find the price and the YTM in finance.yahoo.com (see below). Weighed average price: Calculate the weighted average price of these outstanding bonds. (E.g., suppose the firm has 2 bonds outstanding: a $200 mln bond priced at 107.5 and a $100 mln bond priced at 100. The weighted average price is ($200 * 107.5 + $100 * 100) / ($200 + $100) = 315 / 300 = $105.) Weighted average cost: Similarly, calculate the weighted average YTM of these outstanding bonds. Commercial paper: Price: Commercial paper is a zero-coupon bond and can be priced as such. Check the maturity in the 10-K. If it is not provided, you need to make an assumption about the maturity. Typical maturities are 90 / 180 / 270 days. Weighted average price: Calculate the weighted average price of all the commercial paper issues. Cost at fiscal year-end: The cost of commercial paper, also called “rate” or “effective interest rate”, is a market rate (the rate on commercial paper changes based on market circumstances). To get the cost of commercial paper, it is important to know at what date you want this cost. If you need the cost at fiscal-year end, you can often find it in one of the notes in the annual report (look for “effective interest rate”).


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Cost at any date other than fiscal year-end: If you need the cost of commercial paper at a later date, you need to do the following. First, check what the rating on the firm’s commercial paper is (e.g. search on google: “commercial paper” rating Kellogg). Second, obtain commercial paper rate information from the Federal Reserve Board (see below) for firms with a similar commercial paper rating. Simply assume that the firm’s commercial paper rate (for all of its outstanding commercial paper!) equals the commercial paper rate of these similarly-rated firms. Weighted average cost: Calculate the weighted average effective interest rate. (Note: if you’re not familiar with commercial paper, you may want to read the following article written by the Federal Reserve Bank of Richmond: http://www.richmondfed.org/publications/economic_research/instruments_of_the_money_market/ch09.cfm) Market value of the firm’s debt: Apply the weighted average price of the firm’s bonds to the firm’s long-term debt, and apply the weighted average price of all the commercial paper issues to all of the firm’s short-term debt (e.g., commercial paper and ST bank debt). That is, the MV of the firm’s debt equals the amount of long-term debt multiplied by the weighted average price of long-term debt divided by 100 (e.g. $105/100) plus the amount of short-term debt multiplied by the weighted average price of short-term debt divided by 100. (E.g., if the price of the firm’s $50 mln in commercial paper is $99, the MV of debt equals $300 mln * 105/100 + $50 mln * 99/100 = $364.5.) Firm’s cost of debt: Calculate the firm’s cost of debt using the (weighted average) cost of commercial paper and (the weighted average cost of) the firm’s long-term debt. Firm’s cost of debt = (rate on similarly-rated commercial paper * amount of short-term debt + weighted average YTM on long-term debt * amount of long-term debt) / (amount of short-term debt plus amount of long-term debt)

Note: if you wanted to calculate the cost of debt at fiscal-year end (rather than today), you would have to use the average effective interest rate on commercial paper as found in the 10-K (rather than the rate on similarly-rated commercial paper) in the above formula.

In the spreadsheet you hand in, please include the balance sheet and the breakdown of the firm’s debt. Use a web query to import this data from Edgar. (See Coursepack: Module III.)


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Data sources to use: Bond info on finance.yahoo.com: You can find bond info by clicking on Investing (one of the tabs on top of the page) Bonds On the first page, you will see US Treasury bond rates. If you want information on corporate bonds, type the name of the firm in “bond lookup” on the left. You will get an overview of the bonds outstanding, including their price, coupon, maturity, YTM, current yield, rating, and an indication whether the bond is callable. By clicking on a bond’s name, you can get additional info, including the issue date (= “dated date”). Stock return data on finance.yahoo.com: Enter the firm’s name in the box on the upper-left corner next to “get quotes” and hit enter. Click on historical prices on the left. Indicate the date range and type of data (daily, weekly, monthly): use “today” as the last data point. Download this data to a spreadsheet (this is an option at the bottom of the page). Market return data on finance.yahoo.com You can find the level of the stock market on Home (one of the tabs on top of the page). Use the S&P500 as the market: click on “S&P500” in the “market summary” box. Click on historical prices on the left. (If you wanted to use a different market index, go go “investing” (top) “market stats” “US” (on the left) you’ll see several tabs, including Dow Jones, NYSEE, NASDAQ, S&P; select e.g. “S&P”

click on ^SPSUPX if you want e.g. the S&P 1500 index. Commercial paper rates from the Federal Reserve Board: The Federal Reserve Board provides commercial paper data as of today on: http://www.federalreserve.gov/releases/cp/ It also provides downloadable (historical) data on commercial paper (at times useful to have): http://www.federalreserve.gov/DataDownload/default.htm Click on commercial paper. Select rates Do not click “go to download”. Instead, click “Go to select”. Select: 1. series type = “commercial paper rates”; continue 2. rate type = the rating you found for the firm’s commercial paper; continue 3. maturity term = “90 days” (commercial paper matures in less than 270 days; we

don’t know the actual maturity, but 90 days is the longest period for which the Federal Reserve Board provides data); continue

4. Frequency = “business day”; add to package Click: “go to format” Select: “dates”: indicate for which time period you want to obtain commercial paper rates. Click: “Go to download” Open the file and select the date for which you want the commercial paper rate.


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Individual Homework 4 It’s late Friday afternoon. You’re staring at a bunch of papers that lie scattered on your desk and you reflect on a conversation you had with your boss, the CFO of PackIt Inc., a major packaging company. Your boss told you that Specialty A, a private specialty chemicals company is for sale and that PackIt might want to buy this company. To find out how much the firm is worth, the CFO projected Specialty A’s FCFs and wanted to discount those FCFs using PackIt’s WACC. You explained to the CFO that this was not appropriate, since PackIt and Specialty A are active in very different sectors (packaging versus specialty chemicals).2 Instead, you have to find comparable firms (i.e. firms that are also specialty chemicals companies) that are listed and then you could use the “lever, unlever, relever” approach: i.e. estimate the (levered) cost of equity of the comparable firms, unlever their cost of equity, take the average, and then relever. The CFO thought you were brilliant and asked you for help: what is the appropriate WACC to use as the discount rate? You have found two comparable firms: “Specialty B” and “Specialty C” and collected some data (see below). You get yourself some green tea and a nice cranberry muffin, open up Excel, and start typing in some numbers… Oh, yes, and of course you remember to split the input data from the calculations, because you know the CFO really appreciates that, and you add some useful notes and formulas in your spreadsheet (like you always do!) so that your boss only has to glance at the spreadsheet for a minute or so to fully understand what you’ve done and believe that you have done an amazing job! T-Bill rate: 8%; 20-year Treasury bond rate: 9.5%; market risk premium: 7% Specialty B: Equity beta (obtained from yahoo): 1.1 Number of shares outstanding: 0.5 million Stock price: $11.5 Book value of debt: $0.48 million Marginal cost of debt: 11.25% Effective tax rate: 48%

Specialty C: Equity beta (obtained from yahoo): 1.2 Number of shares outstanding: 0.2 million Stock price: $23 Book value of debt: $0.63 million Marginal cost of debt: 11.00% Effective tax rate: 45%

PackIt’s marginal cost of debt is 11.50% and its effective tax rate is 41%. The CFO believes that these same rates will apply after Specialty A has acquired PackIt. Also, the CFO told you that PackIt has a long-term target Debt / Assets ratio = BV of Debt / (BV of Debt + MV of Equity) of 0.35, and that this ratio should be applied to Specialty A.

2 Note: It is appropriate to use PackIt’s WACC to value PackIt and you can also use PackIt’s WACC as the discount rate for new investment projects of similar risk, but not for new investments that have a very different risk profile. Rule: the discount rate should always reflect the riskiness of the cash flows! E.g., if you were to borrow $1,000 to invest in Treasuries, you should discount all the associated cash flows at the risk-free rate even if you borrow at 20%...


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Individual Homework 5

Please download “BAFI404 HW5.xlsx” (posted on Blackboard under “Homeworks”). It contains a template for Model 1: income statement, balance sheet, FCF and firm valuation. Problem 1: Building pro-forma financial statements Create the pro forma financial statements of Model 1 covered today in class. That is, project the balance sheet and income statement using formulas and appropriate cell references. When you’re done, the income statement and balance sheet should look exactly like the ones in the coursepack. Problem 2: Calculate FCF Below the income statement and balance sheet, you see a template for calculating FCF two ways (using two out of the three formulas we covered in Module I). Calculate the firm’s FCFs in years 1 through 5 using formulas and appropriate cell references. When you’re done, the numbers should look exactly like the ones in the coursepack. Problem 3: Calculate firm value In class, we covered the WACC method. At the bottom of the spreadsheet, you see a template for calculating firm value using this method. Based on the template given to you, try to value the firm as of now (date 0) assuming that the WACC equals 11% and that FCFs will grow at 3% per year after year 5. When you’re done, the numbers should look exactly like the ones in the coursepack. I show a few formulas on the spreadsheet that may be useful. Rather than simply plugging in the numbers, make sure you understand the formulas! Also, it is always important to build in ways to check your own work. E.g, to check whether you have used the NPV formula (to calculate the present value of the FCFs) correctly, fill in the last line in the spreadsheet: calculate the PV of each individual FCF in cells C73:G73, and add up those numbers (shown in cell B73). If you’ve done it correctly, the values in cells B63 and B73 are identical. Problem 4: Understanding the model You will now investigate how changing several assumptions affect your model. In each case: (1) indicate how the change affects the amount of debt, total assets, and FCF; (2) try to briefly explain why those numbers are / are not affected. (E.g., “debt drops to 800 in year 1 and increases to 950 in year 5 because….”) After having answered a question, change the parameters back to the original Model 1 values, and answer the next question. a. Increase the depreciation rate from 10% to 12%. b. Increase COGS plus SG&A / Sales from 70% to 90%. c. Increase the ratio of NWC / Sales. d. Decrease Gross Fixed Assets / Sales from 95% to 83%. e. Change the dividend payout ratio from 65% to 30%.


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Individual Homework 6

Please download “BAFI 404 HW 6.xlsx” from Blackboard (you can find it under “HWs and solutions”) and use it for this homework. The problems are very similar to the ones that are in the coursepack which we covered in class – I’ve only changed the numbers. So if you have forgotten how to do something, please check the coursepack (or send me an email!). Problem 1: Goal seek On tab “Pbm 1”, use goal seek to find out how high sales growth has to be for firm value to be $2,500. When goal seek has found the solution, click on “OK” to accept the sales growth number. Show this sales growth number with 2 digits (e.g. 3.45%). Problem 2: One-way and two-way table On tab “Pbm 2”, create the following tables. a. One-way table: show how changes in sales growth affect firm value and the value of equity. Let

sales growth increase from 0% to 10% (in 2% increments). After you have created the table: (1) hide the two numbers below the words “firm value” and

“equity value”; (2) show all values without any digits (e.g. 3,500 or $3,500); (3) add a border around the table (as in the course pack).

b. Two-way table: show how changes in sales growth and COGS plus SG&A (as a % of sales) affect firm value. Let sales growth increase from 0% to 10% (in 2% increments), and let COGS plus SG&A (% of sales) increase from 65% to 85% (in 5% increments). After you have created the table: (1) hide the number in the upper left corner (firm value); (2) show all values without any digits (e.g. 3,500 or $3,500); (3) add a border around the table (as in the course pack).

Problem 3: Scenario manager Use the data provided on tab “Pbm 3” to create the following three scenarios:

Scenario Sales growth COGSplusSG&A_sales Growth rate g Best 7% 70% 4% Most likely 5% 75% 3.5% Worst 4% 80% 2% Note: the “changing cells” are the cells that contain the sales growth number, the COGSplusSG&A_sales number, and the growth rate g. After you have created the three scenarios: (1) indicate in the table which input variables (“changing cells”) and output variables (“result cells”) are being used (see coursepack: words in italics); (2) hide the column that contains “current values” (select that column, right-click on it, and select “hide”).

Problem 4: Spinners On tab “Pbm 4”, create a spinner to show how changing WACC from 8% to 12% (using 1% increments) affects firm value.

Problem 5: Look-up functions (note: we did look-up formulas in Module III) On tab “Pbm 5”, you find a table with income tax data. Use this table to calculate the Total Amount of Taxes Due on Earnings Before Taxes of $100,000. Note: Name this table “Lookup”. Use three lookup functions to find the Base Tax Amount, the Marginal Tax Rate, the Marginal Income to be taxed. Then calculate the Tax on Marginal Income and the Total Amount of Taxes Due.


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Individual Homework 7 Please download “BAFI 404 HW 7.xlsx” from Blackboard (you can find it under “HWs and solutions”) and use it for this homework. Problem 1: Data validation (use tab “Pbm 1”) Make sure that: (1) sales growth can only be less than or equal to 12%; (2) COGSplusSG&A_sales is between 60% and 80% – add an input message that appears when the cell is selected: “Input has to be between 0.6 and 0.8”; (3) cells B5:B11 can only be numeric – add an input message that appears when any of those cells are selected: “Numeric inputs only!” Problem 2: Protect worksheet (use tab “Pbm 2”) Make sure that: (1) formulas can be selected, but their content is hidden; (2) all other cells can be selected and changed. Use “model” (without quotation marks, no capital letters) as the passwords. Problem 3: Multiples – Approaches 1 & 2 (use tab “Pbm 3”) a. Use the data provided on tab “Pbm 3”, calculate Chevron’s implied share price and market value

of equity using the average earnings multiple (Approach 1). Based on your calculations, is Chevron’s share price overvalued / undervalued? (I.e. compare the implied share price with the current share price.) Explain.

b. Obtain a range for Chevron’s implied share price and market value of equity using the highest & lowest earnings multiple (Approach 2). Based on your calculations, is Chevron’s share price overvalued / undervalued? Explain.

Problem 4: Multiples – using a multiple to estimate TV (use tab “Pbm 4”) A colleague of yours has decided to value Microsoft by forecasting its FCFs in 2006 and 2007, and using an EBITDA multiple to estimate the terminal value. His main reason for doing this: he doesn’t want to assume a growth rate beyond 2007. He has gathered information about Microsoft and three comparable firms: Google, IBM and Oracle. a. Value Microsoft using the info provided on tab “Pbm 4”. b. What growth rate is your colleague implicitly assuming? Problem 5: Projecting individual I/S items (use tab “Pbm 5”) You want to project Smucker’s I/S. The company does not report Depreciation separately on the I/S (but you were able to find the Depreciation amount on the Cash Flow Statement). Since you do not know how much Depreciation has been allocated to COGS and SG&A, you cannot project these items separately but have to project (COGS + SG&A – Depreciation). Use the I/S data for 2004 – 2006 provided on tab “Pbm 5” to do the following: (1) calculate Sales growth and use the historical average growth rate to project Sales in 2007 – 2009; (2) calculate (COGS + SG&A – Depreciation) as a % of Sales and use the historical average to project (COGS + SG&A – Depreciation) in 2007 – 2009.


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Individual Homework 8 Please download “BAFI 404 HW 8.xlsx” from Blackboard (you can find it under “HWs and solutions”) and use it for this HW. The problems are similar to the ones in the coursepack. Problem 1: Calculate the NPV and IRR Exxon Mobil wants to explore an oil well. A colleague of yours has just given you an estimate of the timing and the level of the associated cash flows. You know the firm’s cost of capital is 9%. a. Use the data provided on tab “Pbm 1” part a to calculate the NPV assuming that all cash flows

occur: (1) at the end of each period (use the NPV function); (2) at the beginning of each period; (3) in the middle of each period.

b. Use the data provided on tab “Pbm 1” part b to calculate: (1) the NPV of this exploration project as of April 9, 2007 (use the XNPV function); (2) the IRR of the exploration project (use the XIRR function). Note: make sure you have the data analysis toolpak installed! See coursepack.

Problem 2: Borrowing (use tab “Pbm 2”) P&G borrows $10 million on a 9-month loan with an 8% annual interest rate. Determine the monthly payment, interest payment each month, and amount paid toward principal each month. a. Assuming end-of-month payments. b. Assuming beginning-of-month payments. c. How high would P&G’s monthly payment be if P&G wants to have a $1 million ending balance

at the end of the 9th month? (Assume end-of-month payments.)

Problem 3: Excel solver (use tab “Pbm 3”) Pfizer has identified 15 R&D projects that will tie up money and researchers for the next two years. It cannot undertake all of these projects. Merck’s CFO wants to know which projects it should undertake in order to maximize NPV. Use Solver to advice the CFO.


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Group Case 1: Ameritrade – cost of capital 1. What factors should Ameritrade management consider when evaluating the proposed advertising

program and technology upgrades. Why?

2. What is the estimate of the risk-free rate that should be employed in calculating the cost of capital for Ameritrade? Why?

3. What is the estimate of the market risk premium that should be employed in calculating the cost of capital for Ameritrade? Why?

4. Ameritrade has a short history of trading, so its beta cannot be computed precisely using its own historical data. Exhibit 4 provides various choices of comparable firms. What comparable firms do you think are appropriate to use as comparables to determine the beta of Ameritrade’s planned advertising and technology investments?

5. Using the stock price and returns data in Exhibit 5 and 6, and the capital structure information in

Exhibit 4, calculate the cost of capital and asset betas for the comparable firms.

Note that questions 1-4 are conceptual. You only have to perform calculations in question 5.


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Group Case 2: Clarkson Lumber – ratio analysis 1. Why has Clarkson Lumber borrowed increasing amounts despite its high profitability?

2. How has Mr. Clarkson met the financing needs of the company during the period 1993 – 1995?

Has the financial strength of Clarkson Lumber improved or deteriorated?

3. Is it attractive for Clarkson Lumber to take the trade discounts?

4. Do you agree with Mr. Clarkson’s estimate of the company’s loan requirements? How much will he need to finance the expected expansion in sales to $5.5 million in 1996?

5. As Mr. Clarkson’s financial advisor, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing?

6. As the banker, would you approve of Mr. Clarkson’s loan request, and if so, what conditions would you put on the loan?


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Group project The group project gives you the opportunity to apply the techniques you have learned to value a real company. This three-pager contains: (A) the names of the companies your group can bid for; (B) details on the actual assignment; and (C) some pointers on how to proceed. You will write a report and present your findings in class. Please e-mail me your written report (plus excel file) by 5PM on Monday, Nov. 24 and indicate BAFI404 Group# Company, e.g. “BAFI404 Group1 HP” in the subject line of your e-mail. You will present the results of your valuation project in class on Tuesday, Nov. 25. Please give me a hard-copy of your report in class. If you want to give a powerpoint presentation, please email me your presentation by 3PM on that day so that I can upload it on the computer before class. See Part B of this document for details about the content and length of your report and presentation. PART A: Companies to bid for: Lockheed Martin Wal-Mart

Walgreens Home Depot

Hewlett Packard General Motors

McDonalds

Your group must bid for the companies by 5PM on Sunday, Sept. 14. You have a total of 10 points to bid. You may spread these points across the companies in any manner you wish. Each company will be awarded to the two highest bidders. (So a maximum of two groups will value the same company.) Whenever bids are tied, I will assign the companies to groups by tossing a coin. Please think carefully about your bidding strategy. The bidding results will be announced in class on Tuesday, Sept. 16. Please start your group project early! Once you know which firm you will value, you can read up on the company and the industry, and begin identifying useful information sources. As the semester develops, I will provide you with suggestions/hints on which parts of the analysis you can do based on the tools you have learned up to that day. PART B: Actual group valuation assignment: Value your company using (at a minimum) the WACC method and multiples. Compare the value to the actual market value of the company and address: • Is your company overvalued or undervalued? • How should it act to increase shareholder value? Why? Make sure that your report / spreadsheet incorporate various techniques you have learned in this course (sensitivity analyses, if statements, etc.).

• Written report: Your written report including appendices, graphs, etc. is limited to 25 pages (double-spaced) and should contain: Executive summary (0.5 – 1 page): in the first paragraph you should explain what the firm does, the main goal of the report, and your main findings. In the paragraphs that follow you


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should address the key questions you formulated and your answers. Body of the report: here you explain from what perspective you are writing your report, which questions you address, which analyses you did to answer those questions, and your findings. Decide whether you want to include graphs and (small) tables in the body of your report or if you want to put those in Appendices. Appendices: the Appendices in your report, if any, should contain supporting information. This may include tables, graphs, but also a more detailed explanation of a specific approach you took. Each table / graph should have a title and contain a few lines explaining the purpose of the table / graph. Example: “This table shows that X has increased over time.” If you used specific sources to create the table / graph, indicate the sources underneath. Make sure you only include appendices which you also reference in the body of the report. Think carefully about how to write the report. What is the main message you want to get across to the reader? What are sub-messages? You may want to think in terms of a storyline. That is, try to build up your report in a logical way. Also, think carefully about how the appendices can support what you are telling in the body of the report. Think about whether you are including too much or too little information; whether it is better to include data in table format or create a graph. Make sure that your analyses are clear and that you defend your (key) assumptions.

• In-class presentation:

You will present your findings to the rest of the class. Each presentation will be limited to SIX minutes. In that time, you should explain which company you valued, whether it is overvalued / undervalued, your recommendation to the company, and any key insights you gained that will be interesting for the class.

PART C: Some pointers on how to proceed: How to get started? When you value a company, you need to understand the company well. This means that you need to know its main lines of business, its core competencies, and its past performance. Why? Ultimately because all of these pieces give you information about how it will generate its future cash flows, which will be used to pay off its debt holders and equity holders. You may want to start by reading up on the company itself and its main competitors. To better understand the company and its past performance, you could look at annual reports. How to continue and how not to get lost: Having done some background reading, you may want to sit together and make a plan: which key questions do you want to address? Per question, think of sub-questions and analyses that help you get the answer. Think in terms of output: what will this analysis show us? Divide the work up in a sensible way and make a timeline with clear deliverables. If I were you, I would not assign one person per question, but two or three. This way you will learn more because you get exposed to more parts of the project, you will discuss a lot more, and can probably avoid many obvious mistakes. It also means that you avoid not being done in time because one or two persons are


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not doing their part of the work or are producing quality that you don’t feel comfortable with. And above all: it’s a lot more fun to work together! To check whether your projections and valuations make sense, you may consult a broker report, as long as you don’t copy their work. I want you to learn how to make projections and do valuations yourselves. In the entire process, make sure you talk to me! If you want to get my opinion on your approach or if you have done certain analyses and your results don’t make sense, come and see me. Also, if you don’t have access to certain data, or don’t know where to find specific information, let me know. I may be able to help.

Have fun and enjoy! Dazzle me and amaze yourself!

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