UNIVERSITY OF SOUTHERN CALIFORNIA



|[pic] |Course Title: FBE 529: FINANCIAL ANALYSIS AND VALUATION |

| |Syllabus for Fall 2012 |

| |Professor: Lloyd Levitin |

| |Office: Acc. 301E |

| |Office Phone: 310-740-6524 |

| |E-mail: levitin@marshall.usc.edu |

|Lecture Class |

| |Thu |6:30 – 9:30 P.M. Room: JKP 110 |

| | | |

|Office Hours | |

| |Monday |3:00 – 3:45 P.M. |

| |Tuesday |2:15 – 3:15 P.M. |

| |Wednesday |3:00 – 3:45 P.M. |

| | | |

|Teaching Assistant: |Jon Ringer (jon.ringer@) |

COURSE OBJECTIVE

Understanding what determines the value of a firm and how to estimate that value is a prerequisite for making rational business decisions. Entire industries (investment banking, securities analysis, and consulting) have grown prosperous providing valuation skills to investors and managers. The objective of this course is to provide you with a competent foundation in various valuation approaches, with an emphasis on the “best practices.” We cover discounted cash flow models, market multiple models, as well as specialized models used for M&A transactions and LBOs. We focus on valuation of businesses at the divisional and corporate levels. The course emphasizes practical and “real world” applications of valuation methodologies.

LEARNING OBJECTIVES

By the end of the course, students should be able to:

• Perform a valuation for any public or private company whether for purchase or sale, investment of a minority interest, going public in an IPO, implementing a LBO, or a restructuring.

• See clearly how industry fundamentals and competitive forces directly impact financial results and, in the process, drive stock valuation.

• Assess whether a company is creating value for its shareholders.

• Pull apart the financial statements to get at the relevant information for valuing equities.

• To identify “red flags” that indicates manipulation of financial statements and/or an impending liquidity crisis.

• Evaluate the reports of business valuation experts and to be able to ask the “right” questions of these experts.

WHO SHOULD TAKE THE COURSE

The course is of interest to those contemplating careers in investment banking, security analysis, consulting, private equity, and corporate finance. And it will also help with personal investing.

PREREQUISITE KNOWLEDGE

This course assumes that the background knowledge of students include basic finance and accounting. Prerequisites are one from GSBA 521 or GSBA 521b or GSBA 548.

COURSE DESCRIPTION

This course focuses on the financial analysis and valuation of companies. The course is segmented into four major sections:

Section I. Fundamentals Principles of Valuation

In section one, we discuss the four basic valuation approaches: Discounted Cash Flow, Market Multiples, Adjusted Book Value and Current Market Value. Then we discuss the basic valuation concepts including the principles of value creation and their relevance to a range of business decisions including strategy, growth, the business portfolio, mergers and acquisitions, and capital structure.

Section II. Analyzing Historical Performance

The second section covers financial analysis using data from the annual report. Our primary goal is to build a true understanding of operating performance across business units and for the entire company. We examine how industry fundamentals and competitive forces directly impact financial results and look for “red flags” that indicate manipulation of financial statements and/or an impending liquidity crisis. We spend considerable time on this because these financial statements provide many clues to future performance, and a firm’s valuation depends on future earnings and cash flow. With this analysis we are ready for a step-by-step guide to valuing a company.

Section III. Guide For Valuing a Company

In the third section, we build an integrated valuation model using discounted cash flow. We discuss how to decide which DCF model to use of the many commonly found in practice, the fundamentals of forecasting cash flow, how to determine the appropriate forecast period, and various issues related to estimating terminal value. We derive the appropriate cost of capital, focusing on how to estimate the inputs. We then discuss an alternative to DCF valuation, market multiples, which employs valuation ratios of comparable companies to value a company. We conclude with how to value an acquisition, a LBO, and a company with multiple businesses.

Section IV. Special Topics

In the final section, we cover special topics, namely, valuation of private companies, early stage high growth companies, cross-border acquisitions and distressed companies. Finally, we discuss issues of when to apply control and marketability discounts.

TEACHING METHODS

The course will be in the form of lectures, class discussions, practice assignments, and group projects.

ABOUT YOUR INSTRUCTOR

Lloyd Levitin is a Professor of Clinical Finance and Business Economics at Marshall. He was Executive Vice President and CFO of Pacific Enterprises from 1982-1995 (now Sempra Energy), and was actively involved in the firm’s diversification program which included numerous acquisitions. He testified as an expert on utility diversification to the Senate Finance Committee of the U.S. Congress and has been a consultant for JurEcon, Inc., a nationwide consulting and research firm for management and counsel. He has a MBA from Wharton and a JD from University of San Francisco. He practiced as a CPA after receiving his MBA, and as an attorney after receiving his JD.

VALUATION REQUIRES A SKILL SET THAT COMBINES BOTH ART AND SCIENCE

Various valuation models and formulae will be taught in this class. Learning how to plug numbers into models and formulae to produce a valuation answer is the easy part. The quality that separates winners from losers in the world of valuation is the ability to decide which information to use under the circumstances and what assumptions to make that become inputs to the models and formulae. In other words, one has to exercise good judgment to be a winner. This course will sharpen your skills in making these judgments.

The instructor will provide cases from his business career and his knowledge of valuation successes and failures of others to help students sharpen their ability to improve decision making. In the financial world, judgment is the quality that can make the difference between success and failure in one’s career.

REQUIRED COURSE MATERIALS

1. Instructor’s Valuation Notes to be posted to “Blackboard.” I have copywrited these notes.

2. Textbook: “Investment Banking: Valuation, Leveraged Buyouts and Mergers and Acquisitions” by Rosenbaum and Pearl, 2009, John Wiley and Sons, Inc.

3. Course Packet: The course packet available at the USC bookstore contains various articles.

4. Financial calculator capable of performing discounted cash flows (please bring calculator to each class).

INSTRUCTOR’S VALUATION WORKBOOK

The Workbook contains exercises and problems to help you master financial valuation. These exercises and problems are organized to follow each of the chapters in Levitin’s Notes. Solutions are also provided. These problems, with solutions, will be an excellent resource for exams. Most of these problems are from past exams. Chapters from the workbook will be posted to Blackboard as they are available.

GROUP PROJECT – COCA COLA COMPANIES

The purpose of the course is to close the gap between a theoretical valuation and the actual practice of valuing a real company. Valuation is best learned by doing. Therefore, you will be required to prepare a comprehensive valuation report on the Coca Cola Companies (KO). This project should be worked on during the entire semester, and the valuation report is due in the last session of class, December 6. The requirements for the valuation report are set forth on page 9 of this syllabus.

Students are to organize themselves into groups of 4-8 students by the end of the third week of class and elect a team leader who in turn notifies the teaching assistant by the end of the third week the names of group members. The team leader is responsible to equitably allocate the required work for a group assignment, and draw together each participant’s work to hand in when due. If you have problems finding a group, you must let the teaching assistant know by the end of the third week, and he will assign you to groups already formed, and notify the welcoming group. Groups, once formed, cannot be changed without unanimous written consent of all members.

GRADING SUMMARY

Students will be graded on a point basis with 100 available points:

|Assignments |Points |% of Grade |

| | | |

|TESTS Mid-Term |30 |30% |

| Final Exam |40 |40% |

| | | |

|TERM PROJECT | | |

| – Valuation of the Coca Cola Companies |15 |15% |

|– Peer evaluation |10 |105 |

| | | |

|CLASS PARTICIPATION | 5 | 5% |

|TOTAL |100 | 100% |

Final grades represent how you perform in the class relative to other students. Your grade will not be based on a mandated target, but on your performance. Three items are considered when assigning final grades:

1. Your average weighted score as a percentage of the available points for all assignments (the points you receive divided by the number of points possible).

2. The overall average percentage score within the class.

3. Your ranking among all students in the class.

Mid-terms and Final Exam

The exams will be closed-book, closed-notes. The final exam is cumulative from the beginning of the course.

Laptops or any hand-held device with email capabilities cannot be used. You should bring a calculator to perform calculations.

Peer Evaluation on Group Project (10%)

Group Projects provide a valuable learning experience – how to work effectively and efficiently in groups (a common practice in Corporate America), learning from others, and sharpening a student’s ability to communicate to others. However, human nature being what it is, some students are tempted to relax and let others carry their load. In order to provide an incentive for all students to make maximum contributions to the team project, students will be asked to grade each team member’s contributions on a 10-point scale.

This evaluation is to be submitted by email to the Instructor before the last day of classes. Any team member who does not email his (her) evaluation of team members will be deemed to have given a 10-point score to each member of the team.

Class Participation (5%)

Attendance and participation are essential for success in this course. Students are expected to actively participate in the class discussions. Class meetings will involve discussions of the assigned readings and current events. Preparation for each class is essential.

In evaluating your class participation, I will consider the quality and frequency of your participation, with a clear emphasis on quality. Students are required to display their name cards in each class. I will have no other way to determine who is present and participating.

ACADEMIC INTEGRITY

USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, (usc.edu/scampus or ) contains the University Student Conduct Code (see University Governance, Section 11.00), while the recommended sanctions are located in Appendix A.

Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: . Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal.

STUDENT DISABILITY

Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to be as early in the semester as possible. DSP is located in STU 301 and is open 8:30 AM to 5:00 PM, Monday through Friday. The phone number for DSP is (213) 740-0776. For more information visit usc.edu/disability.

TECHNOLOGY POLICY

Laptop and Internet usage is not permitted during academic or professional sessions unless otherwise stated by the professor. Use of other personal communication devices, such as cell phones, is considered unprofessional and is not permitted during academic or professional sessions. ANY e-devices (cell phones, PDAs, iPhones, Blackberries, other texting devices, laptops, iPods) must be completely turned off during class time. Videotaping faculty lectures is not permitted, due to copyright infringement regulations. Audiotaping may be permitted if approved by the professor. Use of any recorded material is reserved exclusively for USC students registered in this class.

ADD/DROP PROCESS

If you are absent six or more times prior to September 14, (the last day to withdraw from a course with a grade of “W”), I may ask you to withdraw from the class by that date. These policies maintain professionalism and ensure a system that is fair to all students.

RETENTION OF GRADED COURSEWORK

Final exams and all other graded work which affected the course grade will be retained for one year after the end of the course if the graded work has not been returned to the student (i.e., if I returned a graded paper to you, it is your responsibility to file it, not mine).

EMERGENCY PREPAREDNESS/COURSE CONTINUITY

In case of a declared emergency if travel to campus is not feasible, USC executive leadership will announce an electronic way for instructors to teach students in their residence halls or homes using a combination of Blackboard, teleconferencing, and other technologies.

Please activate your course in Blackboard with access to the course syllabus. Whether or not you use Blackboard regularly, these preparations will be crucial in an emergency. USC's Blackboard learning management system and support information is available at blackboard.usc.edu.

CLASS SCHEDULE AND ASSIGNMENTS

|Section |Date |Topic |Assignment(1), (2) and (3) |

|I. Fundamental Principles |Aug 30 |Valuation Approaches |LN-1 |

|of Valuation | | | |

| |Sept 6 |Valuation Concepts |LN-2 |

| |Sept 13 |Valuation Concepts – continued | |

|II. Analyzing Historical |Sept 20 |Industry and Company Fundamental Analysis |LN-3 |

|Performance | | | |

| |Sept 27 |Industry and Company Fundamental Analysis – continued | |

|III. Guide for Analyzing |Oct 4 |Enterprise DCF Model |T-3; LN-4 |

|and Valuing A Company | | | |

| |Oct 11 |Enterprise DCF Model – continued | |

| |Oct 18 |Enterprise DCF Model – continued | |

| |Oct 25 |Midterm; Other DCF Models |LN-5; R-1 |

| |Nov 1 |Market Multiples |LN-6; R-2; T-1 |

| |Nov 8 |Merger and Acquisition Valuation |LN-7; R-3; T-2, |

| |Nov 15 |LBO Valuation |LN-8, R-4; T-4 |

| |Nov 22 |Thanksgiving Holiday | |

|IV. Special Topics |Nov 29 |Restructuring and Break-Up Valuation; |LN-9 and LN-10 |

| | |Valuation of Private Companies; Application of Discounts |R-5, 6, 7 and 8 |

| | |and Premium; Valuation of Early Stage High Growth | |

| | |Companies; | |

| |Dec 6 |Valuation of Cross-Border Acquisitions; Valuation of |T-6; R-9 |

| | |Distressed Firms |Group Project Due (Coca Cola Companies) |

| |Dec 13 |Final Exam 7-9:00 P.M.(4) | |

(1)LN refers to Levitin’s Notes. LN-1 is Chapter 1 of Levitin’s Notes. LN-2 is Chapter 2 of Levitin’s Notes, etc. A complete list of chapters is attached on page 7.

(2)R refers to assigned readings. R-1 refers to reading #1 on attached List of Readings (page 8), R-2 refers to reading #2 on attached List of Readings, etc.

(3)T refers to assigned text. T-1 refers to Chapters 1 in the text, T-2 is Chapter 2 in the text, etc.

(4)

INDEX TO CHAPTERS IN LEVITIN’S NOTES (LN)

Section I. Fundamental Principles of Valuation

Chapter 1 Valuation Approaches

Chapter 2 Valuation Concepts

Section II. Analyzing Historical Performance

Chapter 3 Industry and Company Fundamental Analysis

Section III. Guide For Analyzing and Valuing a Company

Chapter 4 Enterprise DCF Model

Chapter 5 Other DCF Models

Chapter 6 Market Multiples

Chapter 7 Merger and Acquisition Valuation

Chapter 8 LBO Valuation

Chapter 9 Restructuring and Break-Up Valuation

Section IV. Special Topics

Chapter 10 Special Topics

ASSIGNED READINGS (Indicated by R on Class Schedule)

1. “What’s It Worth? A General Managers Guide To Valuation,” by Timothy A. Luehrman, Harvard Business Review, Reprint 97305

2. “Introduction to Valuation Multiples,” by Robin Greenwood, Lucy White, 9-206-095, Rev: October 31, 2006

3. “A Note on Mergers and Acquisitions and Valuation,” Ivey 95 B023 (1995)

4. “Investing In Sponsor-Backed IPOs: The Case of Hertz,” Darden, UV1409, March 10, 2009

5. “Note on Valuing Control and Liquidity in Family and Closely Held Firms,” by Belén Villalonga, Harvard Business School, 9-209-104, Rev: June 2, 2010

6. “A Note on Valuation for Venture Capital,” Ivey, 909N09

7. “A Note on Valuation in Private Equity Settings,” by Josh Lerner and John Willinge, Harvard Business School, 9-297-050, Rev. March 18, 2011

8. “LinkedIn Corporation,” Harvard Business School, by Francois Brochet and James Weber 9-112-006 (Rev: January 6, 2012)

9. “Cross Border Valuation,” Harvard Business School, 9-295-100, Rev. August 7, 1997

GROUP PROJECT: VALUATION OF COCA COLA

You are to value Coca Cola using both the Enterprise DCF model and the market multiple (comparable company) method.

You are encouraged to use the DCF and comparable company model templates provided by the text book.

The model templates (and completed versions) for the valuation methodologies discussed in the text are available in Microsoft Excel format at go/investmentbanking password: wiley09. The website contains the following files:

Model Templates

_ Comparable Companies Template.xls

_ Precedent Transactions Template.xls

_ DCF Analysis Template.xls

_ LBO Analysis Template.xls

Completed Models

_ Comparable Companies Completed.xls

_ Precedent Transactions Completed.xls

_ DCF Analysis Completed.xls

_ LBO Analysis Completed.xls

Note: When opening the models in Microsoft Excel, please ensure that you perform the following procedure: in the main toolbar select Tools, select Options, select the “Calculation” tab, select Manual, select Iteration, and set “Maximum iterations:” to 1000 (also see Chapter 3, Exhibit 3.30). The model templates on the website are formatted with yellow shading and blue font to denote manual input cells. Black font denotes formula cells. In the text, however, gray shading is used to denote manual input cells, where possible.

Your valuation report should include the following sections:

a. Table of Contents

b. Executive Summary

i. Capsule description of the company

ii. Major recent developments

iii. Valuation summary. Prepare a chart showing the range of equity values you obtained from application of Enterprise DCF model and comparable company valuation, and the current stock price.

iv. Recommendation (buy, hold, or sell). Explain your reasoning for your recommendation.

c. Business Summary

i. Company description

ii. Industry analysis

iii. Competitive analysis

iv. Corporate strategies

v. Historical performance

d. Risks

i. Possible negative industry developments

ii. Possible negative regulatory and legal developments

iii. Possible negative company developments

iv. Risks in the forecasts

e. Valuation

i. DCF Analysis

ii. Market Multiple Analysis

iii. Valuation Range

iv. Statement of Conclusions

• The written report should be no longer than five pages in length. An unlimited number of attachments (exhibits) are allowed and will not be counted in the five pages.

• Font size must be 10 or higher

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