School of Business and Economics

SEATTLE PACIFIC UNIVERSITY

BUS 6322 (CRN: 28618): Advanced Problems in Finance

Classroom: McKenna Hall SEM

Time: 6:00-8:50

Office: McKenna Hall, Rm. 207

Phone: 281-3523

Office Hours: W: 3:30-6:00

Professor: Herbert Kierulff

Welcome to winter quarter! Thanks to the generosity of Business Valuation Resources, LLC (BVR), you have free access to the expensive databases used by professionals in the field of valuation—access that would cost you over $5,000 each. Find the databases at Your knowledge of these databases can give you a significant advantage when you interview for finance positions. You have a user name and passwordfor the BVR site As a requirement for taking this course you promise to keep the name and password strictly confidential and to share these databases, name, and password with no one except your teammates. To do otherwise places you and the entire course in jeopardy.

We will use the DEF case. You will use BVR databases and what you learn in this course to come up with a value for this private company as of November 30, 2013. What you learn will also be of great importance in valuing public companies as well as private companies and other asset combinations like joint ventures, spin-outs, and company divisions.

COURSE OBJECTIVES

By the end of this course, you should be able to demonstrate competence in:

Valuing companies, divisions, spin-offs, joint ventures, and similar collections of assets.
Determining corporate, divisional and project cost of capital and hurdle rates.
Strategic analysis and decision making under conditions of rapid change and uncertainty.
Gathering information, separating relevant from irrelevant factors, selecting and evaluating relevant options with regard to their consequences, and selecting and defending a course of action.
Conceptualizing complex issues and reducing them to coherent written and oral statements.
Integrating valuation and investment analysis with the other functional areas of business administration including business processes and information technology.
Working effectively in group settings; demonstrating friendship, civility, respect, servant leadership, and community.
Integrating as appropriate the practical lessons of Christian spirituality, including ethics, faith, values, and personal integrity.

The course builds upon and applies tools, concepts and methodologies learned in the prerequisites for this class, but we will stick to the fundamentals of theory. The course is first and foremost a case-based course in evaluation and application of theory rather than introduction and examination of theory. And learning to critique and apply theory is very different from learning the theory itself. Evaluation and application involves further development of your abilities to separate relevant information from irrelevant, and to use (not develop or learn) theoretical models and problem solving skills in decision-making. Recognition of these facts is a key to understanding the course and getting the most from it.

This case based course requires you work in teams because cases discussed in teams seem to be among the best vehicles for learning. Recent research into learning reveals that most people retain

10% of what they read
20% of what they hear
30% of what they see
50% of what they both see and hear
70% of what is discussed with other people
80% of what they personally experience
90% of what they teach to someone else

Working in teams on cases places you in the 80-90% category, 90% to the extent that you learn the material and relate your knowledge to others in your team.

Valuation involves determining fair prices for ideas or things, whether they are innovative ways of doing something, marketable products or services, or plants or pieces of equipment. What is fair, of course, will depend upon who is buying and who is selling. But objective criteria such as those covered in this class can help set the boundaries—high and low. The more a price is perceived by all parties to be reasonably fair, the more it will be perceived as just. Justice tends to peace; justice and peace together are integral parts of good will towards others. Unconditional good will is a centerpiece of most faith traditions including Christianity.

REQUIRED READINGS/RESOURCES

The required readings include the assigned readings posted in the Course Schedule. Most these comefrom BVR. There is nothing to buy.

PREREQUISITES

It is assumed that you have had the appropriate prerequisites for this course, including BUS 6220, or their authorized equivalents, and retain an understanding of the fundamentals of finance. However, we will review in some detail the theory underlying all of the applications in this course.

COURSE ASSIGNMENTS:

1. DEF Case. The DEF Case is found on blackboard. You will be in a team. The final write-up of the case will involve preparing an executive summary of 20-25 pages plus Exhibits that update the Moss Adams valuation to the end of 2012/beginning of 2013. The write-up should consist of a cover sheet, table of contents, introduction, economic analysis, industry analysis, company analysis and recommendations, income method valuation, market method valuation, conclusion of value, and list of references. Components of the Income and Market Methods need to have extensive appendixes showing the methodology and assumptions associated with the component. In other words, how did you get to the numbers you did? The Exhibits should be similar to the ones in DEF, but I encourage you to use your creativity. Exhibits 1-7 as well as outlines for the other Exhibits are available in blackboard for you to follow. The final report should include Exhibits 8-13 and 15 or reasonable substitutes. I will be available during and outside of class as your consultant while you work on the valuation.

Double space all written work and use 14 point Cambria (or similar) font. Use tables, charts, and other displays when they will make your point clearer or more concise. Use The Everyday Writer as your resource. For your references, use the American Psychological Association guidelines provided in The Everyday Writer or other APA source.

Very important. It is impossible to prepare an adequate DEF report during the last few days of class. Develop the report in sections as each section is covered in class to prepare for exams and so that on the last days of the class you will only need to put the sections together. If, for example, your team or assigned team member does not understand Build-up ModelCAPM by the first part of June, it is highly unlikely that a satisfactory analysis can be done using the method. There is just not enough time.

To avoid a pile-up at the end of the quarter I should note that the material on the Discount for Lack of Marketability and Lack of Control as well as the Implied Private Company Pricing Model can be studied separately at any time. Reading materials and podcasts will explain most of the material without the need for lectures. You may wish to start early on this part.

2. In-class exams. In general, exams will cover the previous week's assignment and material presented in class since the last exam, the material in the last exam, and the assignment for the day of the exam unless otherwise stated. Since much of the course builds on itself, important earlier material may occasionally be included. The questions will be short answer and/or problems taken from the readings and lectures and will be emailed to you the day of the exam. The weekly exams are designed to make sure you keep up and are knowledgeable. You may use a calculator and a one-page reference sheet written on both sides. You take the exam on your laptop. At the end of the exam period, email your answers to me at .

All assigned work will receive letter grades corresponding to grade points as follows: A, 94-100; A-, 90-93; B+, 87-89; B, 83-86; B-, 80-82; and so on. Specific assignments weights are as follows:

Exams 8 @ 9% each (lowest grade dropped) 64%

Team Valuation 26

Presentation (See evaluation form in Addendum) 10

If you cannot be in class for an exam, let me know ahead of time. You should arrange to take the exam wherever you plan to be since it will be emailed to the class.

An extra two points will be added to your total exam grade if you complete the evaluation and email me the Banner receipt you receive showing that you have completed the evaluation. It will be most helpful to me if you will fill out the comments section of the evaluation because I use those comments in making changes to the course.

3. Presentation. During the final exam period your team will have up to 40 minutes to present your findings with up to 15 minutes of Q&A from the class, guest experts, and myself. Criteria for evaluation of your presentation are included near the end of this syllabus. You should practice together as a team to sharpen each person's part of the presentation.

4. Alternative Grading. Just as not everyone works well under the pressure of exams, not everyone works well in a team. As you all know, working in teams is a key element of the work environment in which almost all of you will find yourselves. It's important to get this experience in an academic environment. However, I want to grade the best you, as an individual, have to offer—what you truly have learned in the class. The exams and the presentations by themselves will allow me to do this best. A team grade will not because participation and actual learning is uneven among team members.

You wouldn't be at SPU if you were not smart. Given your intellectual gifts and current levels of knowledge,you or anyone with your finance background can get an A in this course. The difference for you will be effort—the amount of quality time you devote to learning the material. This depends entirely upon the priority the learning has for you at this time. The higher the priority, the better the grade.

For the reasons just explained you may at any time during the class (through the end of the last exam) decide to have your grades determined 90% by the exams and 10% by your grade on the presentation. Just state your intention for the quarter on any one of the exams. You still must participate in the team if for no other reason than your own learning. The DEFcase provides needed examples of how the valuation methods work and the exams will be a direct reflection of what you do on the case. Also, the case allows you to summarize the learning in the course and see how all the pieces fit together to come up with a value. If you decide to have a grade based upon exams and presentation only, a final written team report is still required. I will grade the written valuation report on a pass/fail basis for you. If the paper fails, your grade on the presentation will be reduced by 15 points—a 95 point presentation, for example, becomes an 80. Failure is defined as a D or E for our purposes, a 65 or below.

PRELIMINARY COURSE SCHEDULE
Date / Topic / Reading Assignments
(In BVR unless otherwise noted)
Jan 7 / Introduction and review of valuation concepts
Introduction / Valuation Executive Summary (Valuation Challenge Website: Fundamentals)
DEF Case (follow applicable sections as we move throughthe course)
Review Economic Outlook in BVR
Valuation Factors (Web Site: Fundamentals). We will discuss
in class.
Valuation-Factors&Methods (Web Site: Valuation). We will discuss in class.
Jan 14 / Introduction and review of valuation concepts
Build-up Model CAPM (BUMCAPM) / Financial Statement Example 2 (Website: Fundamentals)
Financial Statement Analysis (Web Site: Fundamentals) Analysis, Definition, and Forecasting tabs only. We will discuss in class.
Valuation Basics Study Guide (Website: Fundamentals). This
is a more detailed explanation of Valuation-Factors and Methods. Use this throughout the course as a reference to review the material covered in class. Not necessary to read all at once. Follow along with lectures.
Cost of Capital (Website: Findamentals) Summary of the lectures on cost of capital. Use this as a reference to review the lectures as they are given and to understand the organization of the class. Not necessary to read all at once. Follow along with lectures.
Cost of Equity with Duff & Phelps (Valuation Website) Summary of the lectures. Use this as a reference to review the lectures as they are given and to understand the organization
of the class. Not necessary to read all at once. Follow along with lectures.
Free Cash Flow (Website: Fundamentals)
PV & TV (Website: Fundamentals) We will discuss in class.
Recommended Library Resources (Website: Home Page).
Some are on line, others are in the library. Review to assist in research for Valuation Executive Summary.
Here is a review by Cindy Strong on how to use library resources:

Build-up Model CAPM (BUMCAPM). (Website: Valuation) We will review these lecture notes in class.
You can review the D&P methodology as described by D&P by following along in their Duff & Phelps Risk Premium Report publication as the lectures are presented
Jan 21 / Build-up Model CAPM (BUMCAPM)
How to use Business Valuation Resources databases / Exam 1: Exam 1 covers only lectures and associated reading material covering the areas discussed in the previous week's class.
BUMCAPM. We will continue to review these lecture notes in class.
Build-up Model CAPM (Website: Valuation) Review in class. Not on Exam 1
Duff & Phelps Risk Premium Report and Calculator (D&P)
2013 Report is in blackboard. Use 2013 Report--read pp. 1-48 and see Exhibits A and C), Appendix A, C, Glossary, and FAQ. The 2012 and 2013 Reports have only slight differences.
Introducing the 2012 Duff & Phelps Risk Premium Report and Calculator. See also same title BVR Webinar March 13, 2012.
You can find BVR information and webinars by going to andselecting Free Resources and Podcasts in the left column of the window.
Jan 28 / BUMCAPM
How to use Business Valuation Resources databases / Exam 2
Duff & Phelps Build-up Model with CAPM (Website: Valuation)
Review of BVR Pitchbook Guideline Public Company Comps (Pitchbook) Introduce in class, not on Exam 3.
Feb 4 / BUMCAPM
How to use Business Valuation Resources databases
BUM 1 / Exam 3
Review of Pratts Stats/Public Stats. BVR Introduce in class, not on Exam 3.
BVR Pratt’s Stats-Private Company Database FAQ (BVR menu
In Pratts Stats) Not on Exam 3.
BVR Pratt’s Stats-Public Company Database FAQ (BVR menu)
not on Exam 3.
Feb 11 / BUM1, (Cont.)
How to use Business Valuation Resources databases
BUM 2&3
Country Risk
Implied Private Company Pricing Model
Fama-French Model / Exam 4
Duff & Phelps Build-Up Model 2 and the Risk Study, Build-up model 3 (Website: Valuation—discuss in class, not on Exam 4)
Butler Pinkerton Total Cost of Equity Calculator in BVR (discuss in class, not on Exam 4)
The Butler Pinkerton Calculator: Come and See What All the Hoopla is About. In BVR. See also BVR Webinar Series April 29, 2010.
Duff & Phelps Risk Premium Calculator (discuss in class, not on Exam 4)
Country Risk: Damodaran (Valuation Website) Not on Exam 4
Implied Private Company Pricing Model (IPCPL-Model) In blackboard. Also IPCPL Webinar (April 17,2014 Webinar, BVR) Discuss in class, not on Exam 4.
Fama-French 5-Factor Model

D&P pp. 76-98, 112-116, 118
Feb 18 / Fama French (Cont.)
Pepperdine Capital Markets Report
Damodaran survey / Exam 5
Sign up for the free Pepperdine Capital Markets Report on the web. Obtain relevant report. Discuss in class. Not on Exam 5.
See Country Risk Premiums (Damodaran) on Google
Market Method (Web Site: Valuation)—discuss in class, not on Exam 5)
The Market Approach Today: Deciphering Messages from Markets, Courts, and Common Appraisal Errors (BVR Webinar Series, August 9, 2012)
Feb 25 / Market Method
How to use Business Valuation Resources databases / Exam 6
Compare Apples to Apples: Recommended Adjustments to Transactional Data. BVR Free Downloads February 15, 2013.
How to Use Transaction Databases for M&A, 2013 Update
BVR Free Downloads June 7, 2013 (not on Exam 6)
Mar 4 / Market Method (Cont.)
IPCPM
DLOM
How to use Business Valuation Resources databases / Exam 7
Lack of Marketability (Website: Valuation)
Everything You Always Wanted To Know About DLOM But
Were Too Afraid To Ask. See also same title BVR Webinar Series, August 11, 2010).
The FMV Restricted Stock Study with FMV DLOM Calculator in BVR. (discuss in class, not on Exam 7)
Introducing the FMV DLOM Calculator (discuss in class, not on exam 7)
IPCPL/IPCPM (In Blackboard)
Mar 11 / DLOM
Control Premiums and Discounts
How to use Business Valuation Resources databases / Exam 8
Valuation Advisors DLOM Study: Using the Newest Lack of Marketability Discount Data. See also same title (BVR Webinar Series, July 13, 2010)
Control Premiums & Discounts (BVR Webinar Series,
November 1, 2012)
Control Premium Study: Application & Analysis (in BVR)
Mar 18 / Control Premiums and Discounts
PRESENTAT-IONS / Control Premiums & Discounts (BVR Webinar Series,
November 1, 2012)
Mar 20 / Team written report due by midnight, Mar 20. See Course Assignment 1: DEF Case

SBE TEAMWORK/PEER EVALUATION RUBRIC