vtestbanktop.com/wp-content/uploads/2017/02/Solution... · Web viewTN30 Purinex, Inc. PART 6...

Instructor’s Resource Manual

to accompany

Case Studies in FinanceManaging for Corporate Value Creation

Sixth Edition

Robert F. BrunerKenneth M. Eades

andMichael J. Schill

Darden Graduate School of Business AdministrationUniversity of Virginia

MCGRAW-HILL/IRWIN1333 Burr Ridge Parkway

Burr Ridge, IL 60521

[Copyright Page]

In Dedication

-

Henry P. and Marjorie W. Bruner

Coleman R. Jeffers and Ann J. Eades

Ronald L. and Barbara J. Schill

Contents

Preface.................................................................................................................................Note on Developing a Case-Method Teaching Plan...........................................................Note on Designing a Case-Method Course.........................................................................Case Study with the Aid of a Personal Computer:

Note on Using the Downloadable Spreadsheet Files..................................................Table of Spreadsheet Files Accompanying the Cases.................................................

Note on Equity Costs: Some Conventions on Using the CAPM........................................The Fifth Edition “At-a-Glance”........................................................................................

PART 1Setting Some Themes

TN1 Warren E. Buffett, 2005....................................................................................TN2 Bill Miller and Value Trust...............................................................................TN3 Ben & Jerry’s Homemade, Inc..........................................................................TN4 The Battle for Value, 2004: FedEx Corp. vs.

United Parcel Service, Inc.................................................................................

PART 2Financial Analysis and Forecasting

TN6 The Financial Detective, 2005..........................................................................TN7 Krispy Kreme Doughnuts, Inc..........................................................................TN8 The Body Shop International Plc 2001: An Introduction to

Financial Modeling...........................................................................................TN9 Horniman Horticulture......................................................................................

TN10 Kota Fibres Ltd.................................................................................................TN11 Deutsche Brauerei.............................................................................................TN12 Value Line Publishing: October 2002...............................................................

PART 3Estimating the Cost of Capital

TN14 Nike, Inc.: Cost of Capital................................................................................TN15 Teletech Corporation, 2005..............................................................................TN16 The Boeing 7E7................................................................................................

PART 4Capital Budgeting and Resource Allocation

TN17 The Investment Detective.................................................................................TN18 Worldwide Paper Company..............................................................................TN19 Target Corporation............................................................................................TN20 Aurora Textile Company..................................................................................TN21 Compass Records..............................................................................................TN22 Victoria Chemicals Plc (A) and (B)..................................................................TN24 Euroland Foods S.A..........................................................................................TN25 Star River Electronics Ltd.................................................................................

PART 5Management of the Firm’s Equity: Dividends, Repurchases, Initial Offerings

TN26 Gainesboro Machine Tools Corp......................................................................TN27 EMI Group PLC................................................................................................TN28 JetBlue Airways IPO Valuation........................................................................TN29 TRX, Inc.: Initial Public Offering.....................................................................TN30 Purinex, Inc.......................................................................................................

PART 6Management of the Corporate Capital Structure

TN31 Introduction to Debt Policy and Value.............................................................TN33 California Pizza Kitchen...................................................................................TN34 The Wm. Wrigley, Jr. Company: Capital Structure, Valuation,

and Cost of Capital............................................................................................TN35 Deluxe Corporation...........................................................................................TN36 Deutsche Bank Securities: Financing the Acquisition of

Consolidated Supply S.A..................................................................................

PART 7Analysis of Financing Tactics: Leases, Options, and Foreign Currency

TN37 Baker Adhesives...............................................................................................TN38 Carrefour S.A....................................................................................................TN39 Primus Automation Division, 2002..................................................................TN40 MoGen, Inc.......................................................................................................

PART 8Valuing the Enterprise: Acquisitions and Buyouts

TN42 Arcadian Microarray Technologies, Inc...........................................................TN43 Flinder Valves and Controls Inc.......................................................................TN44 Hershey Foods Corporation..............................................................................TN45 General Mills’ Acquisition of Pillsbury from Diageo Plc................................TN46 The Timken Company......................................................................................TN47 Palamon Capital Partners/TeamSystem S.p.A..................................................TN49 General Electric’s Proposed Acquisition of Honeywell...................................

Supplemental Cases Available Online From McGraw-Hill/Irwin for Instructors Who Adopt Case Studies in Finance

Case 50 Walt Disney Productions, June 1984................................................................TN50 Walt Disney Productions, June 1984................................................................

Case 51 Brown-Forman Distillers Corporation..............................................................TN51 Brown-Forman Distillers Corporation..............................................................

Case 52 Chrysler's Warrants, September 1983...............................................................TN52 Chrysler's Warrants, September 1983...............................................................

Case 53 Tonka Corporation............................................................................................TN53 Tonka Corporation............................................................................................

Case 54 Coleco Industries, Inc.......................................................................................TN54 Coleco Industries, Inc.......................................................................................

Case 55 Merit Marine Corporation.................................................................................TN55 Merit Marine Corporation.................................................................................

Case 56 Calaveras Vineyards.........................................................................................TN56 Calaveras Vineyards.........................................................................................

Case 57 Fonderia Di Torino S.p.A.................................................................................TN57 Fonderia Di Torino S.p.A.................................................................................

Case 58 Chrysler Corporation: Negotiations between Daimler and Chrysler........................................................................................

Case 59 Daimler-Benz A.G.: Negotiations between Daimler and Chrysler........................................................................................

TN58 Chrysler Corporation: Negotiations between Daimler and Chrysler........................................................................................

Note: Cases 5, 13, 19, 32, 41 and 48 from Case Studies in Finance are intended to serve as background preparation for students. No teaching notes support their use, although their application is referred to in other teaching notes.

Preface

The sixth edition of Case Studies in Finance: Managing for Corporate Value Creation incorporates many appealing new items. At the same time, this edition remains committed to a vision of case literature in finance, described in the preface to the casebook: a focus on value creation, linkage to capital markets, respect for the administrative point of view, and contemporaneity.

Highlights of Changes in the Sixth Edition

This sixth edition has changed Case Studies in Finance in the following ways:

New cases. Thirty-five percent of the cases are new or significantly updated. All of the cases are set in 2000 or after. These new cases help the instructor achieve a contemporary course design. Several of the most favorite “classic” cases from the previous editions are available online from McGraw-Hill/Irwin where instructors who adopt this edition may copy them for classroom use. All cases and teaching notes have been edited to sharpen the opportunities for student analysis.

Strong international aspect. Eighteen of the cases, 37%, are set outside the United States or feature significant cross-border issues. This helps the instructor address the growing interest in the globalization of business and finance.

Thirty-three percent of the cases feature a female decision-maker. This helps reflect the growing role of women in managerial roles.

Supporting spreadsheet files. Downloadable spreadsheet files supporting the cases are presented in Microsoft Excel. These permit students to get right into the case analysis, rather than consume time entering data into spreadsheets. The files are user-friendly in format and appearance.

Enhanced teaching notes. Teaching notes link case problems to the finance research literature clearly.

Resources in the Instructor’s Manual

The resources in this manual assist the designing of effective courses and preparation to teach.

The teaching notes aim to show an analysis of each case and a plan for delivering a discussion (or exercise) of that case in class. Seasoned teachers inevitably prepare their

own plan and notes. Therefore, the notes provided here are written mainly for the first-time user and the novice teacher. We have tried to clarify the analyses and teaching opportunities in each case where possible.

The “Note on Developing a Case-Method Teaching Plan” is offered to help the first-time instructor make the transition from the notes in this manual to a set of customized notes.

The “Note on Designing a Case-Method Course” covers a number of considerations useful in fashioning a series of cases into a coherent course of study. This note contains tables that allow the instructor to survey the cases quickly by topic, synopsis, objectives, general task, and level of challenge. Course design efforts are helped by the table, The Sixth Edition “At-A-Glance” which accompanies this note.

“Case Study with the Aid of a Personal Computer: Note on Using the Downloadable Spreadsheet Files” describes the use, contents, and method of accessing spreadsheet files that support the cases and teaching notes. These files may be downloaded from the website of McGraw-Hill/Irwin by instructors who adopt Case Studies in Finance for classroom use.

The “Note on Equity Costs: Some Conventions on Using the CAPM,” describes the two approaches used most frequently in the teaching notes. The aim is to alert the instructor to the multiple approaches possible.

Book on Teaching by the Case Method

Instructors who adopt Case Studies in Finance for classroom use can request a complimentary copy of Socrates’ Muse: Reflections on Effective Case Discussion Leadership, published by McGraw-Hill/Irwin. This book by Robert F. Bruner offers direct advice and deeper reflections about achieving an effective case discussion leadership style.

Using Companion Cases and Teaching Notes in the Instructor’s Manual

This manual contains supplemental information that act as companion materials to cases in the book. The information is published here, rather than in the case book, because it presents information that would give away or otherwise adversely affect student preparation and discussion of the cases. The instructor is cautioned not to distribute this material at the start of the semester without first consulting the respective teaching notes about the intended use. The student spreadsheet files supporting the supplemental cases are to be found on the web site: www.mhhe.com/bruner6e.

At no time should the instructor share teaching notes with the students. These notes enter wider circulation easily, and abbreviate the learning experience for the students.

http://www.mhhe.com/bruner6e

Using Supplemental Cases

Instructors who adopt Case Studies in Finance for classroom use can use without charge eight other classic cases for teaching purposes. These are highly popular cases drawn from previous editions and are offered as an additional supplement for the instructor. To review and download these cases and their teaching notes, please visit the Web site: www.mhhe.com/bruner6e .

Permission to Duplicate Cases in the Instructor's Manual

The University of Virginia Darden School Foundation and McGraw-Hill/Irwin grant permission to duplicate the cases in this instructor’s manual, provided that Case Studies in Finance: Managing for Corporate Value Creation, 6th edition has been adopted as a required text in the course for which the copies are made and that the number of copies made does not exceed the enrollment of the course.

Obtaining Loose-Leaf Copies of Cases and Notes

The instructor may obtain loose-leaf copies or site licenses for duplicating most of the cases in the sixth edition (as well as the cases in the first, second, third, fourth, and fifth editions) by contacting Darden Business Publishing, Darden Graduate School of Business Administration, University of Virginia, Box 6550, Charlottesville, Virginia 22906. Telephone: (800) 246-3367. Fax (434) 924-4859. E-Mail: [email protected]. Please respect copyrights on these items. The modest fees paid to Darden support ongoing case writing efforts.

Acknowledgments

Each teaching note bears an acknowledgment of our individual debts to particular colleagues, research assistants, and students. Our staff colleagues at Darden, Catherine Wiese and Stephen Smith, were the nonpareil editors on this project and lent unusual organization and initiative; this manual simply would not have been possible without their efforts. Sherry Alston provided word-processing support and Ginny Fisher provided a wide range of administrative assistance. The commitment, patience, and good humor of each of these people were highly valued.

This sixth edition is the product of relentless combing for the nettlesome typos, inconsistencies, and “gremlins” that plague all case writers. We and our assistants at Darden and McGraw-Hill/Irwin have worked harder than ever to produce a book of the highest quality. From long experience as a case writer, We know that one approaches perfection asymptotically—you


can hope to approximate it, but never reach it. If you find opportunities for improvement in this edition, or if you have any comments or suggestions on the cases or notes, please send them to us. Naturally, we welcome learning about your good experiences too. We hope you enjoy using the cases.

Robert F. BrunerDean and Charles C. Abbott Professor of Business Administration

http://faculty.darden.edu/brunerb/[email protected]

Kenneth M. EadesProfessor of Business Administration

http://faculty.darden.edu/eadesk/[email protected]

Michael J. SchillAssociate Professor of Business Administration

http://faculty.darden.edu/schillm/[email protected]

Darden Graduate School of Business AdministrationUniversity of Virginia

Box 6550Charlottesville, Virginia 22906

mailto:[email protected]

http://faculty.darden.edu/schillm/


http://faculty.darden.edu/eadesk/


http://faculty.darden.edu/brunerb/

Note on Developing a Case-Method Teaching Plan1

“plan v.t. To bother about the best method of accomplishing an accidental result.”

– Ambrose Bierce, The Devil’s Dictionary2

The case method educates best when it is student-centered rather than instructor-centered. Some case-method teachers recognize this truth and, minimize their planning for individual classes. Why should one plan? First and foremost, a plan imposes a discipline on one's own preparation of a case. Anticipating specific topics of discussion helps target your analysis effectively. Second, a plan can help anticipate areas of difficulty for the students. And third, the plan can serve as a compass for more active discussion leadership if the students’ momentum loses its steam.

From the perspective of the student-centered teacher, the teaching plan is not a script. We have used the suggested teaching plans in this manual and have also departed from them freely, as the needs of the students and our teaching goals required. Moreover, any time we teach a case, we are bound to tailor the teaching plan in ways suggested by the following questions:

Whom am I teaching? What are their goals? Needs? Skills? An assessment of the course client is the origin of any plan. For instance, MBA students generally have an appetite for learning hard skills and conceptual frameworks. Business executives, on the other hand tend to want practical solutions to problems they encounter.

Why is this case in the course? What are my teaching objectives in this session? Many of the cases in this book are rich enough to carry many teaching points. The relevant task of teaching is not maximization, however, but optimization. Shoe-horning in all possible teaching points is less desirable than making a lasting impression of a few key points. The selection of specific teaching objectives should be dictated by the needs of the students and the conceptual flow of the course. The success of subsequent cases may depend on consolidation of earlier teaching points or the introduction of new ideas or both.

What question or statement is the most effective way to open the discussion? This question is often the most difficult to answer in developing a teaching plan. A good opener sets the stage, raises the curtain effectively, and builds drama. Bad openers mire

1 This chapter is an excerpt from Socrates’ Muse: Reflections on Effective Case Discussion Leadership, Burr Ridge: McGraw-Hill 2002.2 Ambrose Bierce, The Devil’s Dictionary New York: Oxford University Press, 1999, page 146.

the discussion in trivial issues or issues that are substantive but far afield from the objectives of the discussion. The opener should be tailored to the nature of the case: where the case problem is clearly defined and specific figure analysis is to be done, we favor openers that help establish the relevance of the analysis and launch the discussion into the figures. For cases where the challenge is to define the problem, we favor openers that bring out the richness and complexity of the situation.

What questions are appropriate in the middle of the discussion? Random questioning can send a discussion far off course. Like the opener, questions for the body of the case discussion should be motivated by the teaching objectives of the case and the needs of the students. Regarding student needs, or instance, it pays to pause in the discussion and ask students to define new technical terms that may have come up.

How should I close the discussion? Some instructors believe that closure (in the form of class consensus or summary of teaching points) is unnecessary. What matters to them is the process of debate that occurred in the body of the case discussion. We prefer a formal closure as a way of concluding any drama that may have been created during the discussion. As the teaching plans in this manual show, one can use devices such as a vote of the class on a decision, the presentation of the epilogue to the case, or a discussion of summary points by either the students or the instructor. Used in this way, the closing is a learning opportunity for the students; indeed, the sharp reversals from expectations in some of the epilogues often leave the most lasting impressions of a case discussion.

Note on Designing a Case-Method Course3

“I was a spectator up to the Skowhegan fair last summer…This year the feature was the releasin’ of a lighter-than-air balloon at twelve o’clock on the last day of the fair. Howard Perkins and I won the raffle to take her up. After a few words of instruction, we climbed into the gondola, cut the moorin’ lines, and we were out of sight of land in about four minutes. The wind carried us over the ocean in an hour and then veered north to carry us back over land. We let some of the gas out and come down to see where we were. Saw a farmer plowin’ in a field, so I cried out, ‘Where are we?’ ‘You’re in a balloon, you damn fool.’”4

These balloonists illustrate the virtue of carrying a map, even a mental map, of one’s route. Like the balloonists, the student sees the immediate landscape (the case), but he or she may not gain a sense of true location until the end of the course. It helps for the guide—the instructor—to have the “satellite photo” in mind and to communicate it in various ways in order to stimulate the process of discovery. The most successful case-method courses have in common many of the following attributes:

Focus on learning, not teaching. The first rule in the design of a case course is to start where the student is. The instructor needs to define the student and his or her needs. From their starting point, how does one construct the required understanding? This is a bottom-up design perspective.

A few big ideas. A large temptation of a teacher is to cover many ideas in the belief that this adds the most value to the student. But this focuses on volume instead of quality, and ignores the basic fact that repetition is one of the soundest foundations of learning. In the pursuit of value-added to the student, an emphasis on quality of learning (rather than quantity) must rule. One must ask, “What few big ideas, which if learned well, will make this course truly valuable?” The answer should become the underlying themes of the course to which the instructor can return repeatedly and which form the basis of the closing class session. These are the kinds of ideas that students will recall for a long time.

Conceptual or topical flow: Eclecticism is the entropy of a case-method course. It pulls hard at any structure the instructor might have in mind, and is powered by sentiments and situations common to most teachers: a list of favorite cases; the absence of good cases on particular topics; the natural reluctance to dally with new and uncertain teaching materials; the belief that, in the case method, the students are responsible for figuring

3 This chapter is an excerpt from Socrates’ Muse: Reflections on Effective Case Discussion Leadership (Burr Ridge: McGraw-Hill, 2002).4 From Marshall Dodge and Robert Bryan, Bert and I and Other Stories from Down East (Ipswich, MA: Bert and I, Inc., 1981) pages 1-5.

things out for themselves; and the awkwardness with which corporate finance fits into a linear course plan.

Nevertheless, a good course design has a beginning, middle, and end; it flows. An important benefit of a good design is that it fosters the students’ trust and respect for the instructor, which can yield huge dividends when the time comes to convey difficult concepts or techniques. More importantly, if topics are structured on top of each other, each new module of cases reinforces the work in earlier modules; the learning gain is multiplicative rather than merely additive. A way to begin the process of building the flow of your course is to survey the materials available and to look for ways in which they fit well together. One strives to build a mosaic of individual learning experiences in which the individual pieces fit with, and contribute to a sensible whole.

Carefully designed beginnings and endings: The opening and closing of a course (and of modules within it) present excellent opportunities to frame the subject matter of the course. At the opening, one creates expectations about the contents of the course and the effort necessary to absorb the contents. Above all, the course opener should convey some of the intellectual excitement inherent in corporate finance. At the closing, one has the opportunity to summarize and build students' self-confidence in mastery of the material.

One strategy for exploiting these opportunities is to use comprehensive cases to open the course. With a case such as that, the challenge for the student is to assess a situation rather than to crunch many numbers—assessment permits students to focus on themes rather than on minute details. Comprehensive cases also challenge the students from the outset. Many instructors prefer the opposite opening strategy. They use a relatively simple case, seeking to minimize possible confusion at the start of the course and to give even novices a sense of accomplishment on the opening day. At the close of a course, comprehensive cases help review the terrain covered by the course and build student confidence.

Variety in delivery: Variety enlivens student participation and learning. Within a course, an instructor can achieve considerable variety along the following dimensions:

Format: A steady stream of standard case discussions can be leavened with classes based on team presentations, role plays, or negotiation exercises.

Task: Students appreciate a mixture of both number-crunching problems and situations in which interpretation and the exercise of managerial judgment are important.

Pacing/intensity: Try to offer a mixture of cases according to challenge. Students welcome periodic “breathers” and opportunities to dwell more carefully than usual on a complex situation. Other cases are rich enough to be taught over two class periods if time permits detailed exploration.

Direction/ambiguity: Another dimension of variation is the degree to which the instructor “sets up” the case discussion—that is, through a choice of problem or use of advance assignment questions. This collection contains a number of relatively ambiguous, less directive cases which are useful vehicles for problem identification, for which the case method is excellent exercise.

Variation of unknowns: An instructor tries to reinforce what has come before without being repetitious. It may help to have one day's case solve for B given A, and the next day’s case solve for A given B.

Helping the students help themselves: In the case method, one often observes that the hardest-won insights are the best-learned. Unfortunately, this kind of “best learning” is difficult to stimulate: the instructor must walk a thin line between giving away too much and giving away too little. Ultimately, we believe the best an instructor can do is to help prepare students for the process of self-discovery in the following ways:

Collateral readings: Where especially useful, some of the teaching notes cite articles and textbook chapters that help set the conceptual foundations for the case analysis. Habitually assigning supporting readings, however, might signal to the student that the case is an extended problem meant to exercise a specific technique in the reading, which no true case study will do effectively.

Course tracking: Preparing a syllabus and sending periodic memos to students can help them track the flow of the course and follow the progressive structure of concepts and techniques. Memos should not present case solutions, but should remind students about ideas/techniques/terms recently presented and worth thinking about further.

Study groups: Small group discussions before class can be an extremely effective device for building self-confidence and student mastery of the material. The instructor can encourage the voluntary formation of these groups simply by suggesting the idea and letting motivated individuals do the rest. In my experience, a significant percentage of students will participate in study groups. (Incidentally, when study groups are used, the instructor will need to establish the norm that every student is individually accountable for class preparation; one needs to discourage free riding.)

Feedback: Quizzes, exams, and written and oral comments on class participation can give students a sense of their grasp of the material and can motivate students’ efforts to consolidate course material periodically.

Experimentation and tinkering. The best case-method course designs grow out of relentless tinkering. Use case studies in whatever combinations make sense to you (i.e., rather than what case writers may advise). Students genuinely respect instructors who are themselves seekers and learners. Yet all too often instructors rest on the laurels of a successful course design (“If it ain’t broke, don’t fix it.”) or resist the professional

exposure of trying new course designs and materials (“It ain’t in my paycheck.”). To these one can reply:

“Success is never final.” These immortal words of Winston Churchill have borne the test of time in both politics and business. Typically, an industry leader will neglect product or process improvements and then decline. In like manner, course designs gradually grow stale. To prevent this, one must continually tinker.

“A mistake is an event, the full benefit of which has not yet been turned to your advantage.” (Edwin Land, founder of Polaroid.) One runs risks by tinkering with course designs. Often they pay off handsomely. But the occasional failures need to be viewed as failed lab experiments—the source of insights on which to build the next success.

Karl Weick argued that true teaching was itself a learning process for the instructor, a philosophy that carries important implications for course design:

When teaching becomes learning, then once something is learned, it is time to move on to something else. Each year, I throw away most of my lecture notes, syllabi, and exercises. And each year I vow never to do that again. And each year I build most of my courses from scratch. This makes it tough to build a reputation for a course because, whatever new students expect on the basis of previous students, they seldom find. …I believe strongly that there are such things as classics…yet I often act like a hypocrite. In the interest of learning, I treat nothing as classic…And I’m eternally on the lookout for unexpected classics…But even classics disappear for a year or so, only to reappear mysteriously and seemingly at random. What is constant amid all this shuffling is learning in real time.5

Communicating your design. The final important element in any course design is a strategy for communicating the design to students. Remember the story of the balloonists: they know they’re in a balloon, but have no idea of larger location. This is the predicament of many students. Self-discovery and making personal meaning out of a course are fundamental precepts of Socratic teaching, but well-timed communication about the direction and velocity of the course can help students find their own coordinates. The instructor has several tools to choose from in this regard:

o Course syllabus. A carefully-prepared syllabus is vital. Not only does it offer a general idea about the flow of a course, but in summarizing the grading, course requirements, and teacher’s expectations, it forms the basis for the implicit contract between teacher and student. A number of faculty now place their course syllabi on the Internet.

5 In Karl E. Weick, “Teaching as Learning in Public,” in Researchers Hooked on Teaching, Rae Andre and Peter J. Frost eds., Thousand Oaks, CA: Sage Publications, 1997, pages 294-295.

o Course web page. The instructor can post a running commentary on the course here, and any supplemental resources that will help students get their bearings. Included could be a “Frequently Asked Questions” (FAQ) department—these help forestall heavy office visits related to challenging aspects of the course.

o Module notes. The instructor could distribute brief (e.g., two-page) commentaries at the end of each general subject segment of the course. A module note should never give solutions or answers to cases, but rather suggest linkages among the daily learning experiences.

o Class comments. The instructor might use the opening and closing segments of class to comment on the direction of the course, the subjects, and next steps. Students could be invited to offer linkages among individual case discussions.

ConclusionIn the aggregate, these eight pointers amount to viewing course design as process not

product. If one continually asks the questions behind these pointers, effective designs will emerge.

Case Study with the Aid of a Personal Computer:Note on Using the Downloadable Spreadsheet Files

The personal computer has revolutionized corporate financial analysis. Used properly in a training setting, the computer can help the student attain insights faster and more surely than calculations by hand.6 With the diffusion of the personal computer throughout the corporate workplace, computer-based case analysis is increasingly relevant. A chief barrier to the use of computers in case study, however, is data entry. The spreadsheet files accompanying this instructor’s manual help surmount that barrier.

What the Spreadsheet Files Include

At the McGraw-Hill/Irwin website, www.mhhe.com/bruner6e you will find two directories of spreadsheet files that support Case Studies in Finance:

1. Student Edition. This directory contains files for ordinary student access. The Excel spreadsheet files contain the primary exhibits of their cases. Many of these are exercisable models, which allow the student to test ideas with minimum setup time. None of the student files contains suggestions for analysis that are not already in the case. The student files are not answer sets.

2. Instructor Edition. Files for the instructor. This directory contains the Excel models that generated the analysis in many of the teaching notes. These models can help the instructor in several ways, including saving setup time, affording examination of the computations underlying the teaching notes, and enabling what-if analysis and customization. Please do not distribute the instructor files to students. We also provide files for restricted student access and cases that contain information for various sides of a negotiation exercise.

The table accompanying this note lists the downloadable files and their corresponding cases.

6 Proper use requires thoughtful guidance of the student by the instructor. Computer-based case analysis offers many traps, including (1) focusing on programming instead of financial analysis, and (2) “data dredging” or “analysis paralysis” (i.e., focusing on financial analysis, but without strategy or direction.) The instructor can help students skirt these problems by suggesting that the students use the disks only if they have an understanding of Excel and by setting a standard for case discussion that students may discuss financial insights only, not the modeling techniques by which they are derived.


Software Requirements

You will need a copy of Microsoft Excel software (version 1995 or later).

Finding Your Way Within Each File

Each file is organized as a workbook with separate exhibits taking different pages in the workbook. In Excel, the pages are indicated by tabs shown at the bottom of the screen. The tabs are named according to the exhibits in the case. The first tab presents useful information reminding the user about special features.

Suggestions on Administering Student Use of the Files

Students should be expected to work on their own copies of the files. Perhaps the best method of distributing the files is through a computer network website, or by e-mail. Alternatively, copies of the files could be placed on reserve at the circulation desk of your library or with a secretary or teaching assistant. Make one or more backup copies of the files and store the copy in a safe and secure place. Please do not distribute files from the Instructor Center directory to students. Instructor files tend to disseminate rapidly across the Internet. Their spread can impair the learning of students and the efforts of teachers.

Table of Spreadsheet Files Accompanying the Casesin Case Studies in Finance, 6th Edition

StudentInstructor

OnlyStudent

(Restricted)Part 1: Setting Some Themes

1 Warren E. Buffett, 2005 none none none2 Bill Miller and Value Trust none none none3 Ben & Jerry’s Homemade, Inc. none none none

4The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc. none none none

Part 2: Financial Analysis and Forecasting

5 The Thoughtful Forecaster none none none6 The Financial Detective, 2005 none none none7 Krispy Kreme Doughnuts, Inc. none none none

8The Body Shop International PLC 2001: An Introduction to Financial Modeling Case_8 TN_8 none

9 Horniman Horticulture Case_9 TN_9 none10 Kota Fibres, Ltd. Case_10 TN_10 none11 Deutsche Brauerei Case_11 TN_11 none12 Value Line Publishing: October 2002 Case_12 TN_12 none

Part 3: Estimating the Cost of Capital

13Best Practices In Estimating The Cost of Capital: Survey and Synthesis none none none

14 Nike, Inc.: Cost of Capital none none none15 Teletech Corporation, 2005 Case_15 TN_15 none16 The Boeing 7E7 Case_16 TN_16 none

Part 4: Capital Budgeting and Resource Allocation

17 The Investment Detective Case_17 TN_17 none18 Worldwide Paper Company none TN_18 none19 Target Corporation Case_19 TN_19 none20 Aurora Textile Company Case_20 TN_20 none21 Compass Records none TN_21 none22 Victoria Chemicals plc (A): The Merseyside Project Case_22 TN_22 none

23Victoria Chemicals plc (B): Merseyside and Rotterdam Projects none none Case_23

24 Euroland Foods S.A. Case_24 TN_24 none25 Star River Electronics Ltd. Case_25 TN_25 none

StudentInstructor

OnlyStudent

(Restricted)Part 5: Management of the Firm's Equity: Dividends, Repurchases, Initial Offerings

26 Gainesboro Machine Tools Corporation Case_26 TN_26 none27 EMI Group PLC Case_27 none none28 JetBlue Airways IPO Valuation Case_28 TN_28 none29 TRX, Inc.: Initial Public Offering Case_29 none none30 Purinex, Inc. none TN_30 none

Part 6: Management of the Corporate Capital Structure

31 An Introduction to Debt Policy and Value Case_31 TN_31 none

32Structuring Coprorate Financial Policy: Diagnosis of Problems and Evaluation of Strategies none none none

33 California Pizza Kitchen Case_33 TN_33 none

34The Wm. Wrigley Jr. Company: Capital Structure, Valuation, and Cost of Capital Case_34 TN_34 none

35 Deluxe Corporation Case_35 TN_35 none

36Deutsche Bank Securities: Financing the Acquisition of Consolidated Supply S.A. Case_36 TN_36 none

Part 7: Analysis of Financing Tactics: Leases, Options and Foreign Currency

37 Baker Adhesives Case_37 TN_37 none38 Carrefour S.A. Case_38 TN_38 none39 Primus Automation Division, 2002 Case_39 none none40 MoGen, Inc. Case_40 TN_40 none

Part 8: Valuing the Enterprise: Acquisitions and Buyouts

41 Methods of Valuation: Mergers and Acquisitions none none none42 Arcadian Microarray Technologies, Inc. Case_42 TN_42 none43 Flinder Valves and Controls Inc. Case_43 TN_43 none44 Hershey Foods Corporation Case_44 TN_44 none

45General Mills' Acquisition of Pillsbury from Diageo PLC none none none

46 The Timken Company Case_46 TN_46 none47 Palamon Capital Partners/TeamSystem S.p.A. Case_47 TN_47 Case_47_FCF48 Hostile Takeovers: A Primer for the Decision Maker none none none

49General Electric's Proposed Acquisition of Honeywell Case_49 TN_49 none

StudentInstructor

OnlyStudent

(Restricted)SUPPLEMENTAL CASES

50 Walt Disney Productions, June 1984 Case_50 none none51 Brown-Forman Distillers Corporation Case_51 TN_51 none52 Chrysler’s Warrants: September 1983 none none none53 Tonka Corporation Case_53 TN_53 none54 Coleco Industries, Inc. Case_54 none none55 Merit Marine Corporation Case_55 none none56 Calaveras Vineyards Case_56 TN_56 none57 Fonderia Di Torino S.p.A. none TN_57 none

58Chrysler Corporation: Negotiations Between Daimler and Chrysler none none Case_58

59Daimler-Benz A.G.: Negotiations Between Daimler and Chrysler none none Case_59

Note on Equity Costs:Some Conventions on Using the CAPM

One of the starkest contrasts in finance is found in comparing the elegance of capital-asset pricing theory with the coarseness of its application. Although the capital-asset pricing model (CAPM) is well understood, the theory says nothing about which risk-free rates, market premia, and betas to use in the model. Possibilities abound, and any sampling of academicians and practitioners will summon up many combinations and permutations of methods. Indeed, this is summarized in Chapter 12 of the book which reprints research by Bob Bruner, Ken Eades, Bob Harris, and Rocky Higgins, “Best Practices in Estimating the Cost of Capital: Survey and Synthesis.” The article underscores many points of common practice in regard to cost of capital, but it also illuminates wide disagreement in the use of the CAPM. Rather than let the student thrash ineffectually, the cases provide data for two main approaches, A and B, outlined below. The teaching notes employ mainly method B.

A. Short-term risk-free rate and arithmetic market premium: The argument for this approach is that short-term rates are the best proxy for riskless rates: as obligations of the U.S. (or other) government, short-term rates are the closest to being default-risk free. As short-term rates, they suffer little risk of illiquidity or capital loss because of sudden rises in market yields. For the purposes of these notes, short-term is defined as 90 to 360 days. The corresponding market premium used is the arithmetic average premium estimated over the long term (e.g., 1926 to the date of the case). For the period through 2004, this average was estimated to be 8.02.7 If there is a bias in academia and in practice, it is toward the arithmetic premium, because, when compounded over many periods, an arithmetic mean return is the one that gives the expected value (i.e., mean) of the probability distribution of expected ending values.

B. Long-term risk-free rate and geometric-mean market premium: Partisans of the long-term risk-free rate argue that most corporate investments are for the long term and that the long rate better matches the term of the companies being valued. According to this view, investors want to earn a market-risk premium equal to the compound rate of return (over time) that the stock market has earned over and above returns on long-term bonds. For the purposes of these notes, long-term is defined as 20 or 30 years. If one uses the yield on long-term U.S. (or other) government bonds as the estimate for the risk-free rate, then one should estimate the market premium (annualized compound rate) over a typical period of the same length. For instance, if you use the 30-year long bond as the basis for the risk-free rate, then you might average the compound rates for the periods 1926 to 1956 and for 1957 to 1986. A convenient approximation for this average, however,

7 The source for the estimated market premia is Jeremy J. Siegel, “Perspectives on the Equity Risk Premium,” Financial Analysts Journal, November/December 2005.

would be the geometric-average over the entire period. For the years 1926 to 2004, the geometric mean market premium was 4.53%.

Selection of Beta

At any time, you can uncover a range of estimated betas for many large companies published by statistical services, financial institutions, and consulting firms. Most betas quoted in these cases come from Bloomberg or Value Line Investment Survey (for the U.S.), and Risk Measurement Services (for the U.K.), a selection made on the basis of ready accessibility to students, in the hope that accessibility might stimulate their further research.

Caveat

None of these conventions is correct, per se. Research shows that market premia vary through time. Moreover, the CAPM only approximates market reality. Lacking a perfect forecast of equity returns, the analyst is left to wrest estimated required returns from arguable conventions, such as those described here.

The Sixth Edition “At-a-Glance”Case Studies in Finance: Managing for Corporate Value Creation

Case, Level of Challenge, andSuggestions for Complementary Cases Synopsis Objectives

1. Warren E. Buffett, 2005

(Introductory)

Equity valuation: cases 14, 42, 43, 47

Money management and market efficiency: cases 2, 42, 49

Set in May 2005, this case invites the student to assess Berkshire Hathaway’s bid, through MidAmerican Energy Holdings Company, its wholly owned subsidiary, for the regulated energy utility PacifiCorp. The task for the student is to perform a simple valuation of PacifiCorp and to consider the reasonableness of Berkshire’s offer. Student analysis readily extends into the investment philosophy and the remarkable record of Berkshire’s chair and CEO, Warren E. Buffett. The case is intended to be used as an introduction to a finance course or as a module on capital markets. The analytical tasks are straightforward and are intended to provide a springboard into a discussion of the main tenets of modern finance.

• Set themes at the beginning of a finance course, including risk and return, economic reality (i.e., not accounting reality), time value of money, and the benefits of alignment of agents and owners.

• Link valuation to behavior of investors in the capital market.

• Model good practice in management and investment through an exemplar (Buffett).

• Characterize stock prices as equaling the present value of future equity cash flows.

• Exercise simple equity valuation skills using DCF analysis.

2. Bill Miller and Value Trust

(Introductory/Intermediate)

Capital-market efficiency and market anomalies: case 1

Money management and market efficiency: cases 42, 45

Set in the autumn of 2005, the case recounts the remarkable performance record of Value Trust, a mutual fund managed by William H. (Bill) Miller III at Legg Mason, Inc. The case describes the investment style of Miller, whose record with Value Trust had beaten the S&P 500 fourteen years in a row. The tasks for the student are to assess the performance of the fund, consider the sources of that success, and to decide on the sustainability of Miller’s performance. Consistent with the introductory nature of this case, the analysis requires no numerical calculations. The instructor should not be deceived, however, because the absorption of the capital-market background and the implications of the finance concepts in the case will fully occupy the novice.

• Motivate a discussion of the concept of capital-market efficiency.

• Impart some recent capital-market history.

• Convey a perspective on the role of large institutions in setting securities’ prices.

• Introduce the basic concept of value additivity. As illustrated by the net asset valuation of mutual funds, a firm’s value will be equal to the sum of the values of its parts.

• Affirm the notion of using market benchmarks to assess performance.

3. Ben & Jerry’s Homemade, Inc.

(Introductory)

Evaluation of corporate performance: cases 4, 6, 7, 11

Valuation: cases 42, 43, 44, 46, 47

Takeovers: cases 48, 50

This case examines issues of asset control for Ben & Jerry’s Homemade, Inc. in light of the outstanding takeover offers by Chartwell Investments, Dreyer’s Grand, Unilever, and Meadowbrook Lane Capital in January 2000. The case provides a unique opportunity to discuss fundamental firm objectives and the implications of a non-traditional corporate orientation. The case reviews the development of Ben & Jerry’s strong social consciousness and the takeover defense mechanisms that maintain management’s control on company assets. Taking the role of an outside board member, students are invited to review management’s performance, estimate the economic cost of its social agenda, and evaluate the implications of takeover defense strategies. The students must take a position on whether Ben & Jerry's should continue to pursue its social agenda independently or accept one of the attractive takeover offers and accept a shift toward greater profit orientation.

• Review the role of corporate objectives and the merits of profit and nonprofit orientations.

• Stimulate an appreciation for the tension regarding asset control among corporate stakeholders.

• Evaluate the role of corporate takeovers and the merits of takeover defenses.

• Introduce corporate valuation using investor multiple measures.

• The case requires relatively little prior finance knowledge and is designed largely to provide a stimulating introduction to the principles of a traditional corporate finance curriculum.


4. The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.


Evaluation of corporate performance: cases 3, 6, 7, 11

Set in June 2004, this case invites the student to assess the financial performance of FedEx Corp. and United Parcel Service, Inc. The two firms have competed intensely for dominance of the overnight express package industry. This case is intended for use in an introductory discussion of corporate value creation and its sources. It requires no numerical computations from the student; rather, the tasks for the student are to interpret the results and to reflect upon their implications.

• Define excellence from a corporate-finance perspective.

• Assess economic profit analysis and, more generally, the measurement of financial performance and health.

• Evaluate the financial implications of rigorous competition and corporate transformation.

5. The Thoughtful Forecaster

(Introductory)

Forecasting and financial-modeling skills: cases 6, 7, 8, 9, 10, 11, 12

This note examines principles in the art and science of thoughtful financial forecasting. In particular, it reviews the importance of (1) understanding the financial relationships of a business enterprise, (2) grounding business forecasts in the reality of the industry and macroenvironment, (3) modeling a base case forecast that incorporates the expectations for business strategy, and (4) recognizing the potential for cognitive bias in the forecasting process. The note closes with an example of financial forecasting based on the Maytag Corporation, a U.S. appliance manufacturer.

• Review motivation and definition of financial ratios

• Discuss principles of good financial modeling and forecasting

• Intended to be a companion note to cases in this module

6. The Financial Detective, 2005

(Introductory)

Financial-ratio analysis and performance assessment: cases 4, 7, 11, 12

The case presents the student with financial ratios for eight pairs of unidentified companies and asks them to mate the description of the company with the financial profile derived from the ratios. The primary objective of this case is to introduce students to financial ratio analysis—in particular, the range of ratios and the insights each one affords. This case presumes that students have already been introduced to the definitions of various financial ratios through other readings or lectures.

• Introduce students to financial-ratio analysisCin particular, the range of ratios and the insights each affords.

• Show how the economics of individual industries and managerial choices and strategies account for significant variation in financial ratios.

• Illustrate how financial performance results from managerial choices; within industries, the wide variation in financial ratios is often a result of differences in corporate strategy.

7. Krispy Kreme Doughnuts, Inc.

(Introductory/intermediate)

Financial ratio analysis and performance assessment: cases 4, 6, 11, 12

This case considers the sudden and very large drop in the market value of equity for Krispy Kreme Doughnuts, Inc., associated with a series of announcements made in 2004. Those announcements caused investors to revise their expectations about the future growth of Krispy Kreme, which had been one of the most rapidly growing American corporations in the new millennium. The task for the student is to evaluate the implications of those announcements and to assess the financial health of the company.

• Provide a first exercise in financial statement analysis.

• Lay the foundation for two important financial themes: the concept of financial health, and the financial-economic definition of value and its determinants.


8. The Body Shop International Plc 2001: An Introduction to Financial Modeling

(Introductory)

Forecasting and financial-modeling skills: cases 9, 10, 11, 12

The student is cast into the role of adviser to Anita Roddick, the managing director of The Body Shop, and must prepare a three-year forecast of the firm's income statements and balance sheet.

• Provide a first-time introduction to percent-of-sales forecasting and walk the student through the preparation of a simplified forecast, first using pencil and paper, then using a spreadsheet program.

• Emphasize the importance of being able to talk plainly about a firm’s financial forecast and to offer practical insights of use to the general manager.

9. Horniman Horticulture


Financial forecasting and estimation of funds needs: cases 8, 10, 11, 12

At the end of 2005, Bob and Maggie Brown have completed their third year of operating Horniman Horticulture, a $1-million-revenue woody-shrub nursery in central Virginia. While experiencing booming demand and improving margins, the Browns are puzzled by their plummeting cash balance. This case captures the problems concerning cash flow and working-capital management typical of small, growing businesses.

• Motivating the use of financial models.

• Introduce financial-ratio analysis, developing the concept of the cash cycle and working-capital management

• Highlight the difference between cash flow and accounting profits, as well as the common financial effects of growth on cash flow.

• Provide a forum for instilling appreciation for the relevance of free cash flow to business owners and managers,

10. Kota Fibres Ltd.

(Intermediate/Advanced)

Financial forecasting and estimation of funds needs: cases 8, 9, 11, 12

In January 2000 the chief executive of this small yarn- production company must resolve a surprising cash shortage. The task for the student is to evaluate the causes of this shortage (using a completed “base case” forecast given in the case), and then to assess the usefulness of various possible remedies suggested by managers in the company.

• Provide a thorough exercise in the management of working capital, with primary focus on accounts receivable and inventory.

• Explore the cash cycle of the firm.

• Demonstrate forecasting with T-accounts, which may be contrasted with percent-of-sales forecasting illustrated in other cases.

11. Deutsche Brauerei


Financial-statement analysis: cases 6, 7, 8, 9, 10, 12

Setting financial policy: cases 26, 30

Emerging markets: case 25

A new director of this small German beer brewer must prepare to vote on three issues coming before the board of directors the next day: approval of the financial plan for 1993, quarterly dividend declaration, and an incentive compensation plan for the marketing manager. The task for the student is to evaluate the past and prospective financial performance of the company and to assess the firm’s extremely liberal credit and inventory policies.

• Introduce and exercise tools and concepts of financial statement analysis (including financial ratios, breakeven analysis, and cash flow statements).

• Consider the interdependence among corporate objectives regarding growth, dividends, and debt financing.

• Explore the link between compensation incentives and financial performance.


12. Value Line Publishing: October 2002


Financial-statement analysis: cases 6, 7, 8, 9, 10, 11

This case follows the performance-review and financial-statement-forecasting decisions of a Value Line analyst for the retail-building-supply industry in October 2002. The case contrasts the strong operating performance of Home Depot with the strong stock-market performance of Lowe’s. Students examine a financial-ratio analysis for Home Depot that acts as a template to generate a comparable ratio analysis for Lowe’s. The students’ ratio analysis is designed to build intuition with respect to interpreting individual ratios as well as ratio inter-relationships (e.g., the DuPont framework). Students are invited to scrutinize the analyst’s five-year income-statement and asset-side balance-sheet forecast for Home Depot. The case expressly focuses on the asset side of the balance sheet as a preview for other cases using free-cash-flow forecasting. The Home Depot forecast exercise exposes students to the mechanics of financial-statement modeling and sensitivity analysis, which they can use in building their own forecast for Lowe’s.

• Explore financial-statement and financial-ratio analysis.

• Review basics of financial forecasting as a platform for cash-flow forecasting. Build consideration of internal consistency of forecasting with respect to industry, peer, and own-firm comparisons.

• Investigate forecast-sensitivity analysis and value drivers.

• Prepare students for thoughtful cash-flow forecasting in the context of capital budgeting and acquisition valuation.

13. Best Practices in Estimating the Cost of Capital: Survey and Synthesis

(Introductory)

Cost of capital: cases 14, 15, 16

This reprint of a survey article describes the many points of commonality in practice among leading firms as they estimate their weighted average cost of capital. The article also highlights the varieties of practice in using the CAPM.

This article has been used in MBA programs and executive education programs as a supplement to textbook presentations on cost of capital. It validates the application of finance theory among leading firms, and illustrates the variety of ways in which the theory is applied in practice.

14. Nike Inc.: Cost of Capital

(Introductory)

Cost of capital: cases 13, 15

In 2001, a mutual fund portfolio manager requests an estimate Nike’s cost of capital for the purpose of valuing the firm, and deciding whether to invest in its shares.

This case is intended introduce the calculation of the Weighted Average Cost of Capital (WACC). The case provides a WACC calculation that contains errors based on conceptual misunderstandings. The task of the student is to identify and explain the mistakes in the analysis. The case assumes that students have been exposed to the WACC, CAPM, the Dividend Discount Model and the Earnings Capitalization Model.

15. Teletech Corporation, 2005

(Introductory)

Cost of capital: cases 13, 14

Business-segment performance analysis: cases 4, 11

In October 2005 the chief financial officer of a telecommunications company must fashion a response to a raider who claims that a major business segment of this company should be sold because it is not earning a satisfactory rate of return. The case recounts the debate within the company over the use of a single hurdle rate to evaluate all segments of the company versus a risk-adjusted hurdle-rate system. The tasks for the student are to resolve the debate, estimate weighted average costs of capital for Teletech’s two business segments, and respond to the raider.

• Introduce the topic of cost of capital.

• Exercise thinking about the concept of the hurdle rate, the costs of equity and debt, the weighted-average cost-of-capital, tax adjustments, the use of marginal, as opposed to average, costs and weights, and the adjustment for risk in the capital-budgeting process.


16. The Boeing 7E7


Cost of capital: cases 13, 14, 15

Interest-rate parity and the influence of currency on investment and financing decisions: case 37, 38

Emerging markets: cases 11, 25

In 2003, the Boeing Company announced plans to build a new “super-efficient” commercial jet called the “7E7” or “Dreamliner.” This was a “bet the farm” gamble by Boeing, similar in magnitude to its earlier introductions of the 747 and 777 airliners. The technological superiority of the new airframe and its likely penetration a rapidly growing market segment, were arguments for approval of the project. On the other hand, the current market for commercial airplanes was depressed because of terrorism risks, war, and SARS, a contagious illness that resulted in global travel warnings. Boeing’s board of directors would need to weigh those considerations before granting final approval to proceed with the project.

• Exercise students’ skills in estimating a weighted-average cost of capital and cost of equity.

• Critique different estimates of beta and to manipulate the levered-beta formulas.

• Engage the concept of value additivity. Boeing competes in both the commercial aircraft and the defense business. Thus, deriving the appropriate benchmark WACC for the 7E7 project requires isolating the commercial aircraft component from Boeing’s overall corporate WACC.

17. The Investment Detective

(Introductory)

Measures of investment attractiveness: case 18, 19, 20, 21, 22, 25

Ranking problems: case 23, 24

The case presents the cash flows of eight unidentified investments, all of equal initial-investment size. The task of the student is to rank the projects.

• Motivate a critical examination of the principal capital-budgeting criteria.

• Consider the problem that arises when NPV and IRR disagree when ranking two mutually exclusive projects.

• Explore the problem created in attempting to rank projects of unequal life and its solution–the equivalent annuity criterion.

18. Worldwide Paper Company

(Introductory)

Measures of investment attractiveness: case 17, 19, 20, 21, 22, 23, 24, 25

Relevant cash flows: cases 20, 22, 23, 25

The controller for a paper mill must decide whether the addition of a new on-site longwood woodyard is economically attractive. The addition requires a substantial capital investment, but affords both cost savings as well as new revenues for the company. The case presents sufficient information to build cash-flow forecasts of production costs incremental to this investment.

• Introduce students to mechanics of DCF analysis of go/no-go capital investment decisions.

• Consider the principle of incremental analysis as the foundation for identifying relevant cash flows for a project.

• Introduce the impact of inflation upon cash flows and NPV

• Review the calculation of weighted average cost of capital (optional)


19. Target Corporation


Measures of investment attractiveness: case 18, 19, 20, 21, 22, 25

Target Corporation’s CFO is considering the pros and cons of a variety of capital-investment proposals as he prepares for the November 2006 meeting of the Capital Expenditure Committee (CEC). During that meeting he will concentrate on the merits of 5 specific capital-project requests (CPR), each of which has a “dashboard” that summarizes the critical inputs used to compute the net present value (NPV) and internal rate of return (IRR). The dashboards also contain data about the type of investment (new store or remodel), market size, location, customer-demographic information, as well as the sensitivity of NPV and IRR to changes in various inputs. The CEC must consider qualitative issues as brand awareness and the corporate goal of 100 new stores per year as considerations for accepting or rejecting the projects. Thus, the student is tasked with balancing corporate strategy with investment opportunities and profitability.

• To understand the capital-budgeting-decision process for a large corporation. Each decision process should support the corporation’s business and financial objectives.

• To review the use of NPV and IRR as decision metrics and the importance of sensitivity analysis for the value drivers of a capital project.

• To understand the multidimensionality of a capital-investment decision, such as the impact of brand awareness.

20. Aurora Textile Company

(Intermediate)

Measures of investment analysis: cases 17, 18, 19, 21, 22, 24, 25

Relevant cash flows: cases 18, 22, 23

In 2003 the CFO of Aurora Textile Company is examining the investment in a new ring spinning machine, the Zinser 351. The textile industry in the U.S. had experienced a series of bankruptcies and Aurora’s recent financial performance had been poor enough to make the CFO wonder if any investment in the company was justified. The case presents enough information for side-by-side cash flow projections for the existing spinning machine and the new Zinser machine. The main driver of the cash flows and the NPV is the improvement in margins, which is offset to some extent by a decrease in volume and an increase in the liability associated with returns from retailers. To simplify the analysis the case specifies the cost of capital.

• Apply DCF analysis to an either/or capital investment decision.

• Interpret the NPV and IRR results.

• Exercise a sensitivity analysis to determine the factors that have the most effect on an investment’s potential outcome.

• Demonstrate that a reduced investment horizon is a significant consequence of financial distress within a troubled industry.

21. Compass Records

(Introductory/intermediate)

Measures of investment analysis: cases 17, 18, 22, 24, 25


In 2005 the cofounders of a small, independent music recording company, must decide whether to produce and own the next album of an up-and-coming folk musician, or simply license her finished recording. The case presents information sufficient to build cash flow forecasts for either investment alternative. The task for the students is to build a valuation model for the two capital investment alternatives, whereby they can evaluate the attractiveness of the investment based on net present value and the internal rate of return of the discounted cash flows. The student will have the opportunity to interpret those results and to test those measures’ sensitivity to variability in the base case.

• Apply DCF analysis to an either/or capital investment decision.

• Interpret the NPV and IRR results.

• Exercise a sensitivity analysis to determine the factors that have the most effect on an investment’s potential outcome.

• Consider the impact of qualitative factors and real option value of follow-on investment decisions.


22. and 23. Victoria Chemicals plc (A): The Merseyside Project and Victoria Chemicals plc (B): Merseyside and Rotterdam Projects

(Intermediate)

Corporate resource allocation: cases 18, 19, 24, 25


Ethical issues: cases 3, 8, 11

These two cases consider the capital-investment decisions to be made by executives of this large chemicals firm in January 2008. The A case presents a go/no-go project evaluation regarding improvements to a polypropylene- production plant. The B case reviews the same project but, this time, from one level higher, where the executive faces an either/or investment decision between two mutually exclusive projects.

A: go/no-go decision

• Identify relevant cash flows.

• Critically assess a capital-investment evaluation system.

• Treat conflicts of interest and other ethical dilemmas arising in investment decisions.

B: either/or decision

• Present the classic “cross-over” problem, in which project rankings on the basis of NPV and IRR disagree.

• Estimate real option value latent in manager's flexibility to delay technology investment.

• Identify classic “games” or types of human behavior that can be counterproductive in the resource-allocation process.

24. Euroland Foods S.A.


Measures of investment analysis: cases 17, 18, 19, 21

Corporate resource allocation: case 19, 25

Behavioral influences on financial decision making: cases 11, 19, 43

In January 2001 the senior-management committee of this company has to decide which major projects should be funded for implementation by the company starting in 2001. The board of directors has arbitrarily set a limit of EUR120 million to be spent on capital projects in 2001. Various managers, however, have proposed projects totaling EUR316 million. The task for the student is to evaluate the completed discounted-cash-flow analyses which the case presents, along with qualitative factors (mainly strategic considerations and internal politics of the company), and to choose the projects to be approved.

• Explore the challenges of resource allocation within corporations.

• Illustrate and assess the impact of capital rationing on capital investment decisions.

• Exercise and interpret the implications of classic tools of investment analysis (e.g., NPV, IRR, payback), and to consider adjustments for differences among the projects in risk, size, and life.

• Consider the impact of behavioral influences on financial decision-making.

25. Star River Electronics Ltd.

(Introductory)

Relevant cash flows: case 18, 20, 21, 22, 23

Financial forecasting: cases 6, 8, 9, 10, 11, 12

In July 2001 a new CEO joins this small manufacturer of compact disks to discover that the firm is in the midst of a financial crisis, induced by rapid growth. The CEO asks an analyst for help with four tasks: review historical performance of the firm; forecast financing requirements for the next two years; exercise the forecasting model to identify key driver assumptions; estimate Star River’s weighted average cost of capital; and, analyze a proposed investment in a packaging machine. The analyst must offer insights and recommendations based on the work.

• Exercise students’ abilities in financial forecasting and analysis, and in the analysis of capital projects.

• Provide omnibus review of foundational tools and concepts.


26. Gainesboro Machine Tools Corporation

(Intermediate)

Dividend policy: case 27

In mid September 2005, Ashley Swenson, the chief financial officer of a large computer-aided design and computer-aided manufacturing equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders, or to repurchase stock. If she chose to pay dividends, she would have to decide upon the magnitude of the payout. A subsidiary question is whether the firm should embark on a corporate-image campaign, changing its corporate name to reflect its new outlook.

• Review many practical aspects of dividend and share buyback decisions, including signaling and clientele effects, and the finance and investment implications of increasing dividend payouts and share repurchase decisions.

• Highlight practical considerations when setting a firm’s dividend policy.

27. EMI Group PLC

(Intermediate)

Dividend policy: case 26

This case examines the April 2007 decision of British music company EMI to suspend its annual dividend as the company struggled to respond to the effect of digital audio distribution on its core business. The EMI case is intended to serve as an engaging introduction to corporate financial policy and themes in managing the right side of the balance sheet. The case contrasts EMI’s storied success with artists such as the Beatles, the Beach Boys, Pink Floyd, and Norah Jones with its recent inability to succeed in financial markets. In light of takeover threats and restructuring costs, EMI’s chief financial officer (CFO), Martin Stewart, must recommend EMI’s dividend policy.

• Introduce topics of financial policy, such as dividend policy and debt policy.

• Motivate the tension between investment policy and financial policy with respect to the sources and uses of cash.

• Prompt the Modigliani-Miller intuition of financial policy irrelevance and homemade dividends.

• Discuss the ways in which CFOs add value to the firm.

• Review the mechanics of corporate dividends.

28. Jetblue Airways IPO Valuation

(Intermediate)

Equity issuance: cases 29

Understanding financial intermediaries: cases 2, 3, 11

This case examines the April 2002 decision of Jetblue management to price the initial public offering of Jetblue stock during one of the worst periods in airline history. The case outlines Jetblue’s innovative strategy and the associated strong financial performance over its initial two years. Students are invited to value the stock and take a position on whether the current $25–$26 per share filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 67% first-day rise in Jetblue stock from the $27 offer price. With such a backdrop, students are exposed to one of the well-known finance anomalies—the IPO underpricing phenomenon—and are invited to critically discuss various proposed explanations.

• Review the institutional aspects of the equity issuance transaction.

• Explore the costs and benefits associated with public share offerings.

• Develop an appreciation for the challenges of valuing unseasoned firms.

• Hone corporate valuation skills, particularly using market multiples.

• Evaluate the received explanations of various finance anomalies, such as the IPO underpricing phenomenon.


29. TRX, Inc.: Initial Public Offering

(Intermediate)

Equity issuance: cases 28

In September, 2005 Trip Davis, CEO of TRX, Inc. had just completed a two-and-half-week road show across the country and Europe marketing the initial public offering (IPO) of his company. Under Davis TRX had experienced fast growth and had become a major data transaction and integration company for the travel industry. Now the company needed to raise capital to support future growth and to buyout its strategic owners. Davis knew those investors would be loathe to agree to an IPO price less than $11 per share, the price they had paid for TRX’s shares

• Review the institutional aspects of the equity issuance transaction.

• Explore the costs and benefits associated with public share offerings.

• Develop an appreciation for the challenges of valuing unseasoned firms.

• Hone corporate valuation skills, particularly using market multiples.

• Explore the strategic and governance issues associated with an IPO.

30. Purinex, Inc.

(Intermediate)

Entrepreneurial finance: cases 9, 42, 47, 56

In June 2004, the chief financial officer (CFO) of a small pharmaceutical development company was considering the financial strategy needed to fund the firm’s growth until it could secure a deal with a well-capitalized partner. The case presents three financing alternatives for the CFO: Seek funding from a venture capital firm, initiate a round of financing from angel investors, or wait until his company secures the deal with the “big pharma” partner. The case describes the terms for each financing alternative and the probabilities associated with securing the partnership deal. Also given are discussions of the pharmaceutical industry, the drug development process, and the access to capital for firms in this field. The tasks for the student are to interpret the probabilities, assess the implications of the alternatives, and recommend a financing strategy.

• Develop an understanding of the pecking order of financing alternatives to determine a near-term financial policy for a firm.

• Survey sources of equity in the life cycle of a young firm.

• Exercise skills in decision analysis, using decision-tree techniques.

• Understand the consequences of multiple rounds of financing and its implications for dilution.

• Assess the value of the option to delay.

• Examine the uncertainties surrounding multiple financing alternatives and the importance of deal structuring.

31. Introduction to Debt Policy and Value

(Introductory)

Valuing the levered firm: cases 32, 33, 34, 35, 36

This case consists of a set of incomplete worksheets with which the student must calculate (1) the effect of hypothetical changes in capital structure on firm value and (2) the effect of a major recapitalization on the share price of Koppers Company. After completing the worksheets, the student's task is to compare results among the problems.

The aim of this case is to exercise the mechanics of the Modigliani-Miller debt theory, illustrate the concept of value additivity, and afford an exercise in the adjusted present value method of valuing the enterprise.

32. Technical Note: Structuring Corporate Financial Policy: Diagnosis of Problems and Evaluation of Strategies

(Introductory)

Setting financial policy: cases 31, 35

This technical note lists a number of elements of financial policy that extend the concept of policy well beyond the mere discussion of mix of debt and equity, and choice of dividend payout. Also, the note surveys the classic FRICTO framework of analyzing financial choices.

The aim of the note is to broaden students’ thinking about financial policy, and to provide a framework for normative assessments of policy proposals.


33. California Pizza

(Introductory)

Setting financial policy: cases 28, 29, 34, 35, 36

This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program. The case is intended to provide an introduction to the Modigliani and Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions.

• Introduce the Modigliani-Miller intuition of capital structure irrelevance.

• Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered-beta capital asset pricing model (CAPM) equation..

• Discuss interest tax deductibility and the valuation tax shields.

• Explore the importance of debt capacity in a growing business.

34. The Wm. Wrigley Jr. Company: Capital Structure,Valuation, and Cost of Capital

(Introductory)

Valuing the levered firm: cases 31, 32, 33, 35, 36

In June 2002, a managing director of an active-investor hedge fund was considering the possible gains from increasing the debt capitalization of the Wm. Wrigley Jr. Company. Wrigley had been conservatively financed and at the date of the case, carried no debt. The case’s central teaching objective is to explore the financial effects of the capital structure change. Significant here is the trade-off between the tax benefits of debt and the associated costs in the form of financial distress and loss of flexibility. Related issues include signaling to investors, clientele effects (control considerations for the Wrigley family), and incentives created for directors and managers. Finally, the case affords a comparison of dividends and share repurchases.

• Estimate the potential change in value from relevering Wrigley using adjusted present value analysis.

• Assess the impact on the weighted-average cost of capital, earnings per share, the credit rating of the firm, and voting control of the Wrigley family.

• Consider the merits of dividend or share repurchase as a means of returning cash to shareholders.

35. Deluxe Corporation

(Intermediate)

Choosing the mix of debt and equity: cases 31, 32, 33, 34, 36

In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations for the company’s board of directors regarding the firm’s financial policy. Some special considerations are the mix of debt and equity, maintenance of financial flexibility, and the preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the firm’s core business. The student must recommend an appropriate financial policy for the firm and, in support of that recommendation, must show the impact on the firm’s cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations.

• Survey the determinants of corporate bond ratings by exploring profitability, coverage ratios, and capitalization ratios as measures of credit quality.

• Explore the practical challenges of determining the optimal mix of debt and equity, assessing trade-offs between the benefits of debt tax shields and the costs of financial distress. The case affords the opportunity to highlight methodological problems in estimating the optimal mix.

• Consider the concepts of debt capacity and financial flexibility. The notion advanced in this case is that flexibility is the ability to access capital without falling short of the firm’s minimum target credit rating.


36. Deutsche Bank Securities: Financing the Acquisition of Consolidated Supply S.A.


Valuing the levered firm: cases 31, 32, 35

Design of terms in a merger or acquisition: 43, 45, 46

In November 2003, Maria Ober, a vice president of Deutsche Bank Securities, received a client request for financing the acquisition of a large hospital-supply distributor. The client needed to present the seller with an offering price and an indication of financial commitment within two weeks. The contemplated transaction entailed a highly-leveraged acquisition of the target. The tasks for the student are to value the target firm and projected synergies, assess the credit worthiness of the target (i.e., its ability to bear the high debt), and critically evaluate the general design of the transaction.

• Profile the highly leveraged acquisition and its financial structure. The particular perspective of this case is that of the creditor. Thus, the case complements other cases on leveraged buyouts that consider the view of the equity investor.

• Exercise skills in valuing a business. The case includes a completed financial forecast and an estimation of the IRR for the equity investor. The student must assess the adequacy of the return and consider valuation insights based on peer firms and transactions.

• Exercise skills in credit analysis. The case gives ample information on projected performance, forecasted interest coverage, and credit rating standards. The student must assess whether the return to the lender is adequate in light of the assessed credit risks.

• Consider the impacts of changes in leverage, in control structure, and of a cross-border transaction with the attendant country risk and exchange rate bets.

37. Baker Adhesives


Design of hedges and instruments: cases 38, 39, 40

In June 2006 Baker Adhesives has just made its first foray into international sales and must come to grips with the impact of exchange-rate changes on the profitability of a past order. The company must also formulate a strategy for dealing with exchange-rate risks for future orders. The case is intended as an introduction to exchange-rate risk and the management of that risk. Upon receipt of payment from a past order, the firm realizes that exchange-rate movements have reduced the value of the sale. A follow-on order provides the context for exploring possible mechanisms for managing that risk. In particular, sufficient direction and information is provided to examine both a forward hedge and a money-market hedge.

• Highlight the typical issues facing exporters, importers, and others active in international trade: What is really at risk?; If there really is a risk of loss from fluctuating currencies, what should be done about it?; What instruments are appropriate to manage this risk?; How do the foreign exchange markets function and what is their relation to the financial markets?

• To analyze and explore the magnitude and effect of exchange-rate risks.

• To illustrate exchange-rate risk management through two conventional hedges—a forward-contract hedge and a money-market hedge.

38. Carrefour S.A.



In August 2002, the French retail giant Carrefour S.A. is considering alternative currencies for raising EUR750 million in the eurobond market. Carrefour’s investment bankers believe that the bonds can be issued at 5.25% in euros, 5.375% in British pounds, 3.625% in Swiss francs, and 5.5% in U.S. dollars. Despite the high nominal coupon rate and the lack of any material business activity in the United Kingdom, the British-pound issue appears to provide the lowest cost of funds.

• Introduce topics in international finance such as interest-rate parity, currency risk management, and the eurobond market.

• Explore why forward-currency exchange rates vary from spot rates.

• Propose a eurobond financing strategy for Carrefour.


39. Primus Automation Division, 2002



In early 2002, an analyst must propose terms for leasing one of his company’s advanced factory-automation systems to a major customer. From the lessor’s standpoint, the challenge is simply to design an annuity stream that yields a present value equal to or greater than the value of the asset being leased. Certain factors, however, serve to complicate the analysis. The tax exposure and debt rating of the customer are uncertain, leaving the analyst to estimate the impact of alternative lease terms under different tax and interest-rate assumptions. The customer is also considering leasing competing systems from companies in Germany and Japan, which limit Primus’s flexibility in tailoring its proposal. The student must design lease terms that exploit the lessee’s tax and interest-rate exposure within constraints set by competitive terms.

• Provide a comprehensive exercise in the economics of lease financing.

• Underscore important insights about capital markets, financial innovation, and financial contracting: alternatives to so-called “plain-vanilla” financial contracts arise to fulfill special needs of the issuer and investor.

• Provide some institutional background on lease financing. This is a challenging case in preparation for which students would benefit from a lecture on leases and/or a simple exercise on the estimation of lease cash flows and net present values (NPVs).

40. MoGen, Inc.



In 2006, Merrill Lynch must decide the coupon rate and conversion premium that will allow MoGen Inc. to sell its $5 billion convertible bond issue at face value. This pricing decision requires students understand the concept of valuing a convertible as the sum of a straight bond plus the conversion option. Valuing the conversion option as a call option requires the estimation of the Black-Scholes model, with the volatility being a particularly challenging input. The case presents the interesting financial challenge of funding a share repurchase plan and growth with a convertible bond issuance. An optional second class for the case involves a financial engineering transaction proposed by Merrill Lynch that increases the conversion premium of the issue.

• Introduce the principles of convertible security valuation. In particular, modeling a convertible bond as the sum of a straight bond plus a call option.

• Apply option pricing theory to valuing a conversion option.

• Expose students to the principle of matching the choice of financing to the underlying business risk of a company.

• Explore the connection between share repurchase program, growth and financing choice.

• Introduce the concepts of financial engineering and in particular how to alter the design of a convertible to have a higher conversion premium.

41. Methods of Valuation: Mergers and Acquisitions

(Introductory)

Firm Valuation: cases 42, 43, 44, 45, 46, 47, 48, 49

This technical note introduces the reader to the methods used to value companies in a mergers-and-acquisitions (M&A) setting. It provides a detailed description of the discounted-cash-flow (DCF) approach and reviews other methods of valuation, such as market multiples of peer firms, book value, liquidation value, replacement cost, market value, and comparable transaction multiples.

The objective of this technical note is to support student analysis of case studies involving valuing the company, either as an equity valuation or an enterprise valuation.


42. Arcadian Microarray Technologies, Inc.

(Introductory)

Approaches to equity valuation: cases 1, 3, 31, 42, 47

In August 2005, an investment manager of a hedge fund is considering purchasing an equity interest in the start-up biotechnology firm, Arcadian Microarray Technologies, Inc. The asking price is $40 million for a 60% equity interest. Managers of the firm are optimistic about the firm’s future performance; however, the investment manager is more conservative in his expectations. He calls on the help of an analyst with his firm to fashion a counterproposal to Arcadian’s management. The tasks for the students are to apply the concept of terminal value (TV), interpret the completed analyses and data, and derive implications of different terminal value assumptions in an effort to recommend a counterproposal. Very little numerical figure-work is required of the student.

• Survey many conceptual and practical challenges associated with estimating a terminal value for a firm.

• Issues addressed include: concept of terminal value, materiality of the terminal value assumption, varieties of terminal value estimators, taxation of terminal values, liquidation versus going concern terminal values, choosing a forecast horizon at which to estimate a terminal value, constant growth valuation model, use of the Fisher Formula as a foundation for estimating growth rate to infinity, using a variety of estimates to triangulate a terminal value estimate.

43. Flinder Valves and Controls Inc.


Valuing the firm’s equity: cases 1, 3, 31, 42, 47

Set in May 2008, this case reflects the separate perspectives of the CEOs as they approach the negotiations of RSE International to acquire Flinder Valves. The task for the student is to complete a valuation analysis of the target and buyer, and to negotiate a price and exchange ratio with the counterparty. The case contains a financial forecast for RSE and FVC, but the instructor provides private information to each side that affects their respective views of the FVC forecast. Therefore an important element in the negotiation is to obtain the private information of the other side, analyze it, and successfully negotiate terms of acquisition.

• Exercise valuation skills. The case affords opportunities for valuation based on discounted cash flow, comparable transaction multiples, and current market prices. Also present are interesting valuation details such as options and contingent interests, operating synergies, gains from horizontal expansion, and the need to satisfy various stakeholders.

• Exercise bargaining skills. The two sides come to the exercise differently “endowed,” the case contains asymmetries in expectations, bargaining strengths, and goals. In this environment, teams are rewarded for thinking carefully about how to approach and deal with their counter parties.

• Illustrate practical concerns about mergers and acquisitions. Additional questions the buyers and sellers face include setting the exchange ratio of shares, tax exposure, dilution, and voting power.


44. Hershey Foods Corporation

(Intermediate)

Valuing the firm: cases 1, 3, 42, 43, 45, 46, 47, 49

In 2002, six months after making its decision to explore a potential sale, the board of the Hershey Trust Company was examining two serious offers: a joint bid from Cadbury Schweppes PLC and Nestlé S.A. and an independent bid from the Wm. Wrigley Jr. Company. The primary question for the board’s 17 members was whether Hershey had been accurately valued by the bidders and, if so, whether the economic value created through the deal was consistent with their obligation to safeguard Hershey’s legacy of community involvement.

• Explore the unusual corporate-governance and ownership issues affecting a company with a long history of community involvement.

• Compare the discounted-cash-flow (DCF) method with industry comparables as a means for valuing a company.

• Use the DCF methodology to assess the impact of assumed synergies on firm valuation by bidding companies.

• Examine the complexities of international mergers and acquisitions.

• Highlight the importance of stakeholder interests in corporate decision-making.

45. General Mills’ Acquisition of Pillsbury from Diageo Plc

(Intermediate)

Design of terms in a merger or acquisition: case 49

In December 2000, General Mills outlined the terms by which it would acquire Pillsbury from Diageo plc. Payment was composed of shares of General Mills stock, assumption of Pillsbury debt, and an unusual contingent payment, a “clawback” that would return cash to General Mills if the firm’s share price rose over the next year. The task for the student is to value the costs and benefits of the deal in an effort to judge its attractiveness, and to recommend how shareholders should vote on the proposal.

• Exercise student skills of evaluating financial terms of an acquisition proposal. Expected synergies prove to be a significant consideration. One opportunity for student analysis is to value the projected cost savings.

• Explore the use of contingent payments in M&A, and illustrate how the use of contingent payments can bridge differing views about the value of a target firm. Student analysis can decompose the contingent payment into its two basic options, and value the whole instrument.

• Consider the role of risk management features in M&A. The instructor can use this case as a springboard for comments regarding the use of collars, contingent value rights, earnouts, and other devices.

46. The Timken Company

(Intermediate)

Valuing the firm: cases 1, 3, 42, 44, 47, 49

Design of terms in a merger or acquisition: cases 36, 43, 45

In 2002 Timken Company was negotiating the acquisition of Torrington from Ingersoll-Rand (IR). The acquisition required a strategy that would meet both the investment and the financing objectives of the Timken Company. The task for the student is to determine an appropriate bid price for Torrington as well as a financing strategy that allows Timken to retain its investment-grade rating and its target capital structure over the long term.

• To provide an example of the principle that investment and financing decisions can be considered independently.

• To illustrate the complexities created by large investments upon structuring the deal to meet the capital structure objectives of the firm.

• Exercise skills in valuing a company using cash flow forecasts and enterprise value multiples.

• Conduct a firm valuation with and without expected synergies as a basis for determining a feasible bid for the target.


47. Palamon Capital Partners / TeamSystem S.p.A.


Valuing the firm’s equity: cases 1, 3, 31, 32, 42, 43, 44

In February 2000, a managing partner of a U.K.-based private equity fund, Palamon Capital Partners, faced the decision of whether to invest in an Italian software company, TeamSystem, S.p.A. The rationale for this investment was a belief in the rapid future consolidation of the enterprise software industry in Italy, in combination with improvements in operating performance believed to arise from a stronger investor orientation after the transaction. The transaction entailed a leveraged recapitalization of the target that would significantly change its ownership, control and leverage. The task for the student is to evaluate the attractiveness of the investment, based on a strategic appraisal, a valuation of the target with its new capitalization, and an assessment of the proposed deal structure.

• Introduce the practice, goals, and process of private equity investing and to provide a basis for comparison with public market investing.

• Consider the diffusion of private equity investing practices around the world.

• Exercise skills in valuing a business. The valuation tasks present realistic constraints that face many private equity analysts, a lack of detailed historical and forecast financial information and few publicly traded comparable firms.

• Consider the impacts of changes in leverage, in control structure, and of a cross-border transaction with the attendant country risk and exchange rate bets.

48. Hostile Takeovers: A Primer for the Decision-Maker


Takeovers: cases 3, 49, 50

This technical note introduces the reader to the dynamics of the hostile takeover setting, and characterizes the decision problem as a “game.” In this context, it is necessary to understand other players and their modes of thought, defensive tactics, and rules (laws and court precedents) by which players compete. The survey covers these considerations and discusses the probabilistic analysis by which players can assess the possible actions of various parties. The paper was prepared to supplement case discussions on hostile takeovers.

The objective of this technical note is to support student analysis of case studies on hostile takeovers. The probabilistic analysis applies directly to the analysis required for case 49.

49. General Electric's Proposed Acquisition of Honeywell

(Intermediate)

Takeovers: cases 3, 48, 50

Design of terms in a merger or acquisition: cases 36, 45, 46

On March 1, 2001, the antitrust regulatory authority of the European Commission announced that it had initiated a review of the proposed takeover of Honeywell International Inc. by General Electric Company. The student, taking the perspective of a merger arbitrageur holding a long position in Honeywell and a short position in GE, must assess the proposed bid for Honeywell and evaluate the probability that the merger would be approved by antitrust regulators. The primary task for the student is to recommend a course of action for the arbitrageur. The student must determine the intrinsic value of Honeywell using a discounted cash flow model as well as information on peer firms and transactions. The student must develop investment returns for the arbitrageur’s positions and assess the likelihood of regulatory approval, using an analysis of price changes at earlier events in the contest for clues.

• Exercise students’ valuation skills. The opportunities in the case include valuing the firm using the DCF techniques and the data on comparable firms and transactions.

• Consider the ramifications of the differing approaches to merger regulation in the United States and the European Union.

• Assess sources of potential synergies and their effect on merger strategies.

• Explore the logic of the merger arbitrageur. The case affords the opportunity to interpret security returns for clues about market expectations and reveals the key value drivers for the arbitrageur.


50. (Supplemental case) Walt Disney Productions: June 1984

(Introductory)

Financial analysis of performance: cases 4, 6, 7, 11

Takeovers: cases 3, 48

This case is set in the midst of the attempted takeover of Walt Disney Productions by the raider Saul Steinberg in June 1984. Disney’s chief executive officer ponders whether to fight the takeover or to pay greenmail.

• Motivate a discussion of excellence from a corporate financial point of view and of the ways in which it might be measured.

• Review and compare various valuation methodologies and suggest some explanations for the disparities.

• Show that corporate value depends heavily on industry conditions and the strategic choices managers make.

• Estimate the economic costs and ethics of greenmail.

51. (Supplemental case) Brown-Forman Distillers Corporation


Basic corporate valuation: cases 1, 3, 31, 42, 43

The chief executive officer of this producer of branded liquors must decide whether to acquire Southern Comfort Corporation for $94.6 million. Although nominally this case is an exercise in DCF valuation of an acquisition target, the student’s analysis should also draw on the analysis of consumer demand and competitive trends.

• Introduce corporate valuation (DCF) and the general field of mergers and acquisitions.

• Explore the valuation of intangible assets, namely, the value of a brand name that has relatively few hard assets associated with it.

52. (Supplemental case) Chrysler’s Warrants: September 1983

(Intermediate)

Security design: cases 40, 55

The case dwells on Chrysler's decision to bid for warrants on its common stock, which were being auctioned by the U.S. government in September 1983. The origin of these warrants is explained in some detail: they were issued as a “kicker” to help compensate the government for its guarantee of Chrysler's debt in 1980.

• Establish the determinants of an option's value.

• See the correspondence of an option to loan guarantees and other financial phenomena.

• Exercise the Black-Scholes option-pricing model.

53. (Supplemental case) Tonka Corporation

(Introductory)

Value of debt tax shields: cases 31, 34

Debt policy and costs of financial distress: case 54

The case presents the financial and strategic positions of the sixth largest U.S. toy manufacturer, Tonka, as of early 1987. At this time, Tonka carried virtually no debt on its balance sheet, in sharp contrast to the other major toy manufacturers. Based on competitive and financial considerations, the student is challenged to recommend a capital-structure policy for the firm.

• Explore the determinants of corporate debt policy, especially the value-creating benefits of debt tax shields and the need for financial slack (excess cash and unused debt capacity) as dictated by the firm's competitive position.

• The case is usefully paired with “Coleco Industries, Inc.” (case 60), which also considers debt policy and illustrates the costs of financial distress.

54. (Supplemental case) Coleco Industries, Inc.

(Introductory)

Debt/equity mix: cases 31, 32, 33, 34, 35, 36

In March 1988 this large toy manufacturer is facing the consequences of bearing too much debt in a volatile competitive environment. The task of the student is to recommend a response to the worsening situation by which the firm can be returned to financial health. At the date of the case, the company is not under protection of the court, although bankruptcy looms as a distinct possibility if negotiations with lenders summon forth no mutually agreeable solution.

• Motivate a discussion of the determinants of corporate debt policy.

• Raises the costs of financial distress as a constraint on the use of debt (in contrast to “Tonka Corporation”, case 59).

• Clarify students’ thinking on the exact nature of financial distress and how it differs from the special case of bankruptcy.


55. (Supplemental case) Merit Marine Corporation

(Intermediate)

Using capital markets to hedge risks: cases 37, 38, 40

A lending officer is faced with restructuring a customer's balance sheet to extend the maturity of debt and to fix a portion of the firm's interest payments. The student must first determine the borrower's credit needs, then evaluate the relative costs and benefitsCto both the customer as well as the bankCof using a private placement or an interest-rate swap or both.

• Show a lending officer in the role of corporate financial advisor.

• Introduce the student to interest-rate swaps and private placements that fix a borrower’s interest payments.

• Illustrate how the earnings a bank generates from an existing credit relationship can be affected when alternatives to traditional bank debt are used.

56. (Supplemental case) Calaveras Vineyards

(Intermediate)

Valuing the firm: cases 1, 3, 42, 43, 44, 45, 46

Private equity investing: cases 30, 42, 47

In March 1994, a commercial loan officer at a West Coast financial institution must assess the opportunity to provide up to $4.5 million in credit to finance the acquisition of a California vineyard and winery. The tasks for the student are to assess the creditworthiness of this business, to perform an independent valuation as a means of testing the appropriateness of the purchase price, and to recommend possible changes in the structure of the deal.

• Estimate a discounted- cash-flow value of the firm.

• Explore the relative merits of different valuation estimates.

• Examine credit analysis, including ratio analysis of coverage and capitalization, sensitivity analysis of a financial forecast, and general schemes of credit analysis.

57. (Supplemental case) Fonderia di Torino, S.p.A


Introduction to time value of money: case 17

Relevant cash flows: cases 18, 20, 21, 22

Investment strategy: case 19, 23, 24, 25

The managing director of this specialty foundry must decide whether to approve a major investment to automate part of her plant's production process. The case presents sufficient information to build cash-flow forecasts of production costs incremental to this investment.

• Introduce students to mechanics of DCF analysis of go/no-go capital investment decisions.

• Consider the principle of incremental analysis as the foundation for identifying relevant cash flows for a project.

• Explore the classic tradeoffs in capital-for-labor investment.

• Review analytical adjustments required in comparing projects of unequal lives.


58. (Supplemental case) Chrysler Corporation: Negotiations Between Daimler and Chrysler.

59. Daimler-Benz A.G.: Negotiations Between Daimler and Chrysler

(Intermediate)

Valuing the firm’s equity: cases 1, 3, 31, 42, 43, 47

Set in February 1998, these cases reflect the separate perspectives of the CEOs of Chrysler and Daimler-Benz as they approach the negotiations to merge their two firms. The cases include ample information on strategy, the economic environment, and valuation. Students are presented with a completed valuation model for each firm that permits sensitivity analysis using multiples and discounted cash flow. Also, the models present the pro-forma financial results for the new firm, from which students may derive estimates of financial capacity and earnings dilution. The cases list a variety of items on which the CEOs would like to see agreement: price, form of payment, form of transaction (merger or negotiation), need for shareholder vote, choice of accounting treatment and tax treatment, possible side-deals for major shareholders, governance structure, country of headquarters, and official language.

• Exercise valuation skills. The case affords opportunities for valuation based on discounted cash flow, comparable transaction multiples, and current market prices. Also present are interesting valuation details such as options and contingent interests, operating synergies, gains from horizontal expansion, and the need to satisfy various stakeholders.

• Practice strategic analysis. To understand the motivations of the two sides, students must analyze the individual strengths and weaknesses of each, as well as the potential fit between the companies.

• Exercise bargaining skills. The two sides come to the exercise differently “endowed,” and the case contains asymmetries in expectations, bargaining strengths, and goals. In this environment, teams are rewarded for thinking carefully about how to approach and deal with their counter parties.

• Illustrate practical aspects of mergers and acquisitions.

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