BI Norwegian Business School

Finance Department

GRA6538 Instructor: Janis Berzins

Applied Valuation Office: B4-082
Winter/Spring 2024 janis.berzins@bi.no

All four sections meet in: C2-040 (see exceptions in calendar.pdf)

Syllabus version: January 7, 2024

Contents
1 Course Objectives 2

2 Course Requirements 2
2.1 Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1.1 Pack (https://hbsp.harvard.edu/import/1132336) . . . . . . . . . . . . . . . . . . . 2
2.1.2 Course textbook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1.3 Background readings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Class participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Case analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3.1 Case groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3.2 Written case analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3.3 Case presentations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Final Exam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.5 Expectations and class conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3 Grading 5

4 Office Hours 6

5 Detailed Course Outline 6

6 Summary Course Outline 11

1 Course Objectives
The central objective of this course is to establish a framework that puts you in a position to
make managerial decisions based on an understanding of corporate value creation, corporate
value destruction, and how to enhance the former while avoiding the latter. Case discussions
and visitors will be used to illustrate how corporate valuation is related to managerial decision
making in a variety of settings and finance sectors.
The course builds on the valuation concepts and skills developed in the core Theory of
Finance or Corporate Finance courses. We will revisit all the valuation techniques that you
were exposed to in the core courses and introduce some new techniques. The emphasis will
be on establishing a good understanding of when one valuation technique works better than
another and of how to apply them. To accomplish this, we will examine corporate valuation
in a variety of settings: initial public offerings, private equity, large project financing, mergers
and acquisitions, and natural resource development. The main insights will emerge from the
process of making and defending your decisions based on the corporate valuations you will be
doing throughout the course.
At the end of the course you should be able to:

• See the relationships between value estimates, bidding strategies, and market values.

• Master the following valuation approaches: Enterprise Discounted Cash Flow (DCF), Ad-
justed Present Value, Equity DCF, traded- and transaction multiples.

• Understand how various dimensions of ESG fit in valuation decisions.

• Understand when and why a particular valuation approach may be better than others.

• Structure an investment using project financing.

• Analyze historical performance and understand the importance of value drivers.

• Understand why Economic Value analysis (such as EVA) is a useful management/consulting

tool.

2 Course Requirements
2.1 Literature
The materials for the course consist of a textbook, slides, videos, and a set of cases and readings
contained in the course packet. The course packet is available online for a fee. Additional
material and assignments will be distributed in class.

2.1.1 Pack (https://hbsp.harvard.edu/import/1132336)

The online course pack contains the following readings.

[Case] Pinkerton (A), HBS 9-291-051

[Case] Netscape’s Initial Public Offering, HBS case 9-296-088

[Case] Airbus A3XX: Developing the worlds largest commercial jet, HBS case 9-201-028

[Case] Bidding for Antamina, HBS case 9-297-054.

[Article] Copper and Zinc Markets 1996, HBS 9-297-055

[Case] MediMedia International, Darden UVA-F-1032

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 [Case] Printicomm’s proposed acquisition of Digitech: Negotiating price and form of pay-
ment, Darden, UVA-F-1264.

[Article] Technical Note on Structuring and Valuing Incentive Payments in M&A: Earnouts
and other Contingent Payments to the Seller. Darden, UVA-F-1322-SSRN

2.1.2 Course textbook

[KGW6] Tim Koller, Marc Goedhart, and David Wessels, Valuation: Measuring and Man-
aging the Value of Companies, 7th Edition, McKinsey & Company, Inc. Wiley, 2020.
(Most chapters are also in the 6th edition with notable exceptions: e.g., ESG chapter. I
will keep a cross reference for the 6th edition)

2.1.3 Background readings

The following books are useful to refresh your memory. You should have these (or similar books)
from earlier finance courses. Additional books are on specific valuation subtopics such as early
stage or small company valuation.

[RWJ] Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe, Bradford D. Jordan, and
Hamdi Driss. 2022. Corporate finance. Ninth edition. McGraw Hill.

[GT] Hillier, David, Mark Grinblatt, and Sheridan Titman. 2023. Financial Markets and
Corporate Strategy. European Edition, 3e. McGraw Hill.

[BD] Berk, Jonathan and Peter DeMarzo. 2024. Corporate Finance. Sixth edition. Pear-
son.

Gregory R. Caruso, The Art of Business Valuation: Accurately Valuing a Small Business,
Wiley, 2020.

Antonella Puca, Early Stage Valuation: A Fair Value Perspective, Wiley, 2020.

2.2 Class participation

You are expected to contribute actively to the class discussion. This does not mean that you
need to contribute in every class. Quality will be valued above quantity. Cold calling will be
used as I see fit. Participation points are registered online on ItsLearning. Students register
their points and suggest why their contribution during the class stands out to warrant points
above the basic points. I review the request and register appropriate points. We end up with
an auditable trail of performance. Coming to class is enough for a grade C on the participation
component, a higher grade requires active participation. Participation becomes part of self-
reflection note, where the score is based on ItsLearing registrations and is submitted at the end
of the semester with the case grades.

2.3 Case analysis

This course relies heavily on business cases. You will be required to prepare and hand in a
written analysis of three cases. You should also be prepared to present your analysis to the rest
of the class. Groups will either volunteer or be cold-called to present. You are also expected to
participate in class discussions of all cases.

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2.3.1 Case groups
The written case analysis requires that you work in teams. The teams must have between five
and six members and you have to inform me via ItsLearning about who the members are by
Monday January 30. If groups have less than five members I may combine groups to achieve
as many groups as possible with five members (if this requires that I split up groups—I will do
so.) Groups can be formed across sessions.

2.3.2 Written case analysis

You have to let me know what cases you would like to work on when you inform me about who
your group members are (deadline: Monday January 30.) I will try to make sure that you get
to work on the cases you select. But, since there should be an approximately equal number of
groups that work on each case, you are not guaranteed to get the cases you select.
The written case analysis should be handed in at the beginning of the class where the case
will be discussed. The analysis should be no longer than two pages excluding exhibits and no
longer than six pages including exhibits. Please adhere to the following formatting guidelines:

Font: 11pt or 12pt. Margins: Top 2cm, left 2 cm, right 5 cm, bottom 2 cm. Line spacing
1.

The structure of the written case analysis should be as follows:

One paragraph executive summary: Provide a concise recommendation that ad-

dresses the core concern in the case. State your advice/decision and the main reason for
this recommendation. Do not simply summarize the case setting.

Detailed analysis. The analysis that puts you in a position to make a recommendation.
Make sure to justify the choices you are making.

Exhibits. Tables that report findings and support your arguments in the “Detailed anal-
ysis.” Only report the information you are using actively in the analysis. All exhibits
should be self-contained and referenced in the text.

When you are done writing up the case, ask yourselves the question “Would a decision maker
be able to use what we have written to make a decision?” If the answer is no, your grade will
not be good. See section 3 for a more detailed description of how the case write-ups are graded.

2.3.3 Case presentations

At the beginning of case-classes, I may call upon case groups to make a short presentation of
their case analysis. You are required to be prepared to give such a presentation. If you decide to
prepare the presentation using PowerPoint slides—use a maximum of three slides. I will grade
your presentation and it will count towards your class participation grade.

2.4 Final Exam

There will be a two-hour Final Exam. The exam date is on TBA.

2.5 Expectations and class conduct

This course has a significant workload. Although the course, most of the time, is not technically
hard—you should expect to be challenged both in class and outside of class. In class, I will
cold call you and challenge your arguments. Outside of class, you will have to deal with lots of
readings and work on ensuring that your group works well as a team. In return for your hard

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work and dedication, you will be well prepared for jobs in consulting, corporate finance, private
equity, and investment banking.
To make the sailing as smooth as possible, I expect you to adhere to the following simple
rules of conduct:

• Come to class prepared.

• Have your camera on as long as we use Zoom (e.g., in the drop-ins).

• login to Zoom by using your BI credentials (non-identified users will be able to join).

• Come to class on time. If you are late for class, wait outside the classroom until the next
break.

• Stay for the duration of the class (unless you have arranged with me to leave early).

• Attend the section you are assigned to (if you need to attend a different section- clear it
with me beforehand).

• Be professional. Challenging your classmates’ ideas is encouraged—but, be courteous.

• If you are using any screened device actively in class, I will expect that you are working
out something interesting and cold call you.

• Hand in assignments on time.

3 Grading
The overall grade for the course will be a weighted average of your performance on the follow-
ing, where the class participation, group case grade, and case presentation grade are submitted
together as a portfolio submission at the end of the semester:

Class participation 10%

Group written case analysis 25%
Case group presentation 5%
Final exam 60%

The group written case analysis, class participation, case presentation, and the final exam will
all be graded on a zero to 100 scale. The numeric scale maps to letter grades as follows:

Points Grade
75 – 100 A
65 – 74 B
55 – 64 C
45 – 54 D
35 – 44 E
0 – 34 F

Class participation. Your grade will depend on your contribution to class discussion. The
participation grade starts at 55, and improves based on your performance. If your participation
is limited to coming to class, you will get 55 on participation. If you do not show up for class,
you will receive a class participation grade of zero for the class.

Midterm. Graded on a zero to 100 scale.

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Group written case analysis. Case write-ups are a group effort. You should not cooperate
with members from other groups. You are not allowed to consult with students previously
enrolled in this class, their class notes, or other material that were otherwise provided in the
past. Public information available prior to the decision point in a case is fair game (but, rarely
necessary). Sources must be referenced. The case grade will be based on:
Presentation of executive summary.
Coverage of the assignment points.
Quality of presentation and integration of the write-up.
Quality and integration of exhibits in the write-up.
Originality.
The case write-ups are graded as follows:
Grade A+. Simply much better than I expect. This typically happens once or twice
each time the class is taught.
Grade A. You do the valuation correctly and explain it very well. You discuss other
issues relevant to your conclusion and allow this discussion to impact your recommenda-
tion/decision. You write very well (i.e., you are clear and precise). You show extra effort
along a dimension of your choice.
Grade B. You do most of the valuation correctly and explain it reasonably well. You do
talk about other issues but it is not clear why it is relevant to addressing the key question.
Your writing is fine but needs some more work. You, in general, are not as precise as grade
A on one or more of the above points.
Grade C. Your valuation contains errors, but, is not all wrong. You have nothing to add
beyond describing your valuation. Your write-up would be of little use for a decision-maker.
Your writing needs to be improved.
Grades 35–45. Typically incomprehensible writing.

Final Exam. Graded on a zero to 100 scale.

Failing the course. If you receive below 35 points on class participation (i.e., you do not
show up for class) or below 35 points on the Final Exam, you will fail the course.

4 Office Hours
Office hours are by appointment. If you wish to set up an appointment, you should send me
a request by e-mail where you suggest a time for the appointment and also include a brief
description of what you would like to discuss. The preferred meeting point is during drop-ins.

5 Detailed Course Outline

The following pages give a detailed description of course content. Readings acronyms are defined
as follows: C = Coursepack. IL = ItsLearning. KGW = Koller, Goedhart, and Wessels. BD =
Berk and DeMarzo.

Class 1: Monday/Tuesday January 8/9, 2024

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Introduction. Free Cash Flow (FCF). Introduction to the Course. Overview of Valuation.
Computing FCF from historical accounting statements. Forecasting FCF. Bidding Strategies.

Readings KGW7: Ch 10. Background Ch 11–14. IL: bidding.pdf (A note on bidding

strategies)

Class 2: Monday/Tuesday January 15/16, 2024

FCF continued. Valuation methods. Estimating cost of capital. Relative valuation.

Readings: KGW7: Ch 19, App C. Background Ch 16, 17, App B.

Class 3: Monday/Tuesday January 22/23, 2024

WACC and Multiples. Estimating cost of capital. Relative valuation.

Readings: KGW7: Ch 15, 18

Class 4: Monday/Tuesday February 5/6, 2024

ROIC. Growth. Bloomberg introduction. Value creation through improved ROIC and
growth.

Readings KGW7: Ch 6, 8, 9. Background Ch 7.

Class 5: Monday/Tuesday February 12/13, 2024

M&A Valuation. Target valuation. Financing the acquisition.

Readings C: Pinkerton. KGW7: Ch 31. Background Ch 28-30.

Case Questions (tentative).

1. How much is Pinkerton worth to Wathen? Value Pinkerton using DCF and multiples.
What are the different synergies in this deal and what are they worth?

2. What is the value of Pinkerton under American Brands? How much could other bidders
pay for Pinkerton? Are any of the synergies unique to Wathen?

3. Should Wathen finance the $100 million bid with debt or equity? What debt ratio will the
merged firm have if the bid is financed with 75% debt and 100% debt, respectively? Will
there be sufficient cash flow to cover the debt payments?

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 4. What do you think of the proposed terms for the $25 million equity contribution from the
investment firm? Which financing alternative would you recommend to Wathen?

Class 6: Monday/Tuesday February 19/20, 2024

IPO Valuation Value a company when historical information is scarce.

Readings C: Netscape. KGW7: Ch 36. Background BD: Chr 32.

Case Questions (tentative).

1. Why has Netscape been successful to date? What is its strategy? How risky is its current
competitive situation?

2. 2. Value Netscape. Use the following assumptions:

(a) Total cost of revenues stays at 10.4% of total revenues.

(b) R&D stays at 36.8% of total revenues.
(c) Other operating expenses decline as a percentage of total revenues from 1995 to 2001
so that operating income as a percentage of total revenues is similar to Microsoft’s in
2001.
(d) Capital expenditures decline as a percentage of total revenues from 1995 to 2001 so
capital expenditures as a percentage of total revenues is similar to Microsoft’s in 2001.
(e) Property, Plant, and Equipment straight-line depreciate over 10 years.
(f) Changes in networking capital are essentially zero.
(g) Long-term steady-state growth of 4% annually after 2005.
(h) Long-term risk-free rate=6.71%, tax rate=34%, risk premium=6%.

3. How fast does Netscape have to grow on an annual basis over the next 10 years to justify
the $28 offer price?

4. How much capital does Netscape need?

5. What sources of capital other than the public equity markets could be tapped to satisfy
these capital needs?

6. What are the advantages and disadvantages of public ownership?

7. Why are many IPOs underpriced?

Class 7: Monday/Tuesday February 26/27, 2024

Large Long-Term Projects in a Competitive Environment Valuation of long-term

projects that require huge up-front investments. Note: PwC Lecture on valuation is held one
evening the week of March 18.

Readings C: Airbus. KGW7: Ch 37. Background Ch 1-4.

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Case Questions (tentative).
1. Why is Airbus interested in building the A3XX? What are its objectives?

2. How many aircraft does Airbus need to sell in order to break even on the investment?
Is this number greater or less than your estimate of total demand for very large aircraft
(VLA) over the next 20 years?

Hint: Consider all capital providers as a single entity and calculate the break-even return
to them collectively. Please assume that the market premium is 6%.

3. As Boeing, how would you respond to this situation? How does your answer depend on
what you think Airbus is likely to do?

4. Should Airbus commit to build the A3XX? How many orders should Airbus have before
committing to develop the plane?

Class 8: Monday/Tuesday March 4/5, 2024

Real Options Using option valuation methods to value flexibility. Bidding strategies.

Readings C: Antamina. KGW7: Ch 39.

Copper and Zinc Markets 1996, HBS Note. Dixit, A. K and R. S. Pindyck, ”The
Options Approach to Capital Investment”.
Brennan, M. and E. Schwartz, ”A New Approach to Evaluating Natural Resource
Investments.”

Case questions. Case questions will be available as a separate file.

Class 9: Monday/Tuesday March 11/12, 2024

M&A Valuation: Management Buyout

Readings C: MediMedia. KGW7: Ch 33.

Luehrman, T.A., ”Using APV: A Better Tool of Valuing Operations”

Case questions.
1. Why is the typical LBO deal structured with a layer of mezzanine debt? Why not senior
debt? Why not equity?

2. Why did Dun & Bradstreet want to sell MediMedia?

3. Why did bidders other than the MediMedia management team drop out of the bidding?

4. Are the various claimants getting what they pay for?

Class 10: Monday/Tuesday March 18/19, 2024

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M&A Valuation: Acquisition of Privately Held Firms Valuation of Earnouts and other
contingent payments.

Readings C: Printicomm. Technical Note on Structuring and Valuing Incentive Pay-

ments in M&A: Earnouts and other Contingent Payments to the Seller. Darden
Technical Note.

Case questions (tentative).

1. Value the Earnout-based deals using Monte Carlo simulations.

2. Why does the value of the Earnout look so different from the perspectives of Printicomm
and Digitech?

3. What Earnout structure should Risher propose to Greene?

4. What are the pros and cons of an Earnout-based deal?

Class 11: Monday/Tuesday April 8/9, 2024

Review and special topics: possible extra points earned by presenting on special
pre-agreed topics, e.g., SPACs and valuation, private company valuation, crypto
and valuation

Readings

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6 Summary Course Outline

Date Class# Topic Readings/Case

January 8/9 1 Introduction. Free Cash KGW7: Ch 10. Background Ch 11–14. IL:
Flow (FCF). bidding.pdf (A note on bidding strategies)

January 15/16 2 FCF continued. Valuation KGW7: Ch 19, App C. Background Ch 16, 17,
methods. App B.

January 22/23 3 WACC and Multiples. KGW7: Ch 15, 18

February 5/6 4 ROIC. Growth. Bloomberg KGW7: Ch 6, 8, 9. Background Ch 7.

introduction.
February 12/13 5 M&A Valuation. C: Pinkerton. KGW7: Ch 31. Background Ch
28-30.
February 19/20 6 IPO Valuation C: Netscape. KGW7: Ch 36. Background BD:
Chr 32.
February 26/27 7 Large Long-Term Projects in C: Airbus. KGW7: Ch 37. Background Ch 1-4.
a Competitive Environment

March 4/5 8 Real Options C: Antamina. KGW7: Ch 39.

Copper and Zinc Markets 1996, HBS Note.
Dixit, A. K and R. S. Pindyck, ”The
Options Approach to Capital Investment”.
Brennan, M. and E. Schwartz, ”A New
Approach to Evaluating Natural Resource
Investments.”
March 11/12 9 M&A Valuation: Manage- C: MediMedia. KGW7: Ch 33.
ment Buyout Luehrman, T.A., ”Using APV: A Better
Tool of Valuing Operations”

March 18/19 10 M&A Valuation: Acquisition C: Printicomm. Technical Note on

of Privately Held Firms Structuring and Valuing Incentive
Payments in M&A: Earnouts and other
Contingent Payments to the Seller. Darden
Technical Note.
April 8/9 11 Review and special topics:
possible extra points earned
by presenting on special
pre-agreed topics, e.g.,
SPACs and valuation, private
company valuation, crypto
and valuation

C = Coursepack. IL = ItsLearning. KGW = Koller, Goedhart, and Wessels. BD = Berk and DeMarzo.