Tel Aviv University

Recanati Graduate School of Business Administration

3340-01-b-z

1231.3340 - Corporate Financial Policy

Spring 2001
Dr. Shlomith Zuta
Office: Recanati 442
Phone: (03) 640-8191
E-mail: szuta@glue.umd.edu
Office Hours: Tuesday, 3-4 PM and by appointment
Teaching Assistant: Moti Topaz
Phone: (03) 546-6656
Cell phone: (052) 553-378
E-mail: motitopaz@bezeqint.net
TAs Office Hours: Sunday, 8-9 PM and by appointment

Textbook:
Ross, Westerfield, and Jaffe, Corporate Finance, Fifth Edition, Chicago: Irwin/McGraw-Hill,
1999 (henceforth RW&J), ISBN 0-256-24640-8.
Grading:

Three case write-ups, 5% each

One case presentation or Q&A
Final examination

15%
15%
70%

Class participation can lead to a bonus of 5%.

Homework: Homework is assigned throughout the semester. You are required to turn in these
problems. Failure to turn in at least 90% of the homework will result in 10 points being taken off
your final grade. Homework will not be graded. However, note that the homework is indicative of
your ability to understand the material covered in class. In addition, the solution manual to the
book problems will be available in the library. I highly recommend that you solve as many of those
problems as your time permits.
Case Studies: Three case write-ups and one presentation or critique (Q&A) are required. There
will be three groups, each consisting of 3 or 4 members, preparing to analyze each case.
Following a lottery at the beginning of class, two groups will be presenting each case and one
group will be doing the critique (Q&A). The case studies are placed at the end of a particular
topic and are to be used as analytical and discussion tools. The objective in using case studies is
to provide examples of companies or individuals that have faced the topic at hand and to apply
theoretical tools to real problems. Included in this syllabus are questions and ideas that you may
use as guidelines for analyzing the case. Do not just answer the questions in a 1,2,3,4 format.
Write up the case analysis as an essay/executive memo. The content of the case write-up is as
follows:

1.
2.

3.
4.
5.

The cases should be done in groups with all group members receiving the same grade for
the write-up. If your name is on the report as part of the group, it means you participated
in the analysis.
The case write-up should be a two-page single-spaced (maximum) report. The two-page
maximum does not apply to exhibits such as graphs and tables, but please keep these to a
minimum. You may use as many exhibits as necessary to make your point but the exhibits
must be referred to in your write-up. The case write-up should be typed in a 12 point
font.
The case questions are designed to help you streamline the issues to be addressed. If you
believe that these questions do not effectively address the problems in the case, feel free to
go outside the parameters of the questions.
It is not necessary to rehash the case situation in your write-up. Do not, however, assume
that I know every single number and detail. Use your judgment on how much of the case
to include in your write-up.
Most importantly, you must take a position regarding the problem in the case and make
specific recommendations on how to solve it. Support your recommendation as succinctly
and as effectively as you can.

Please note that while cases tend to be very open-ended, you need to make reasonable
assumptions and proceed logically. Please state your assumptions clearly and substantiate them if
appropriate.
The presentations and write-ups can be done in English or Hebrew. I encourage you to do
them in English for your own benefit (but your choice will not affect the grade).
Class Participation: It is important that everyone come prepared to "open the case" and to
discuss in detail the problem and its potential resolution. Each team presentation will consist of
an analysis concerning the problem facing the firm and their proposed solution. Each group
will be responsible for one case presentation or one critique (Q&A). All group members
should be present at the presentation or Q&A. Note that groups presenting the case or doing
the Q&A need not turn in that particular case write-up. However, they are required to turn in a
hardcopy of their slides.
The ideal of case discussion is for the class to interactively come to an appreciation of the various
avenues that can be explored to understand the case problem and its possible resolution.
Good Internet Finance Sites that are useful for getting stock price data and company
information. Many others are available.
1.

10Ks, Annual Reports at the Securities Exchange Commission:

2.

Nasdaq Stock Market:

3.

Quote Com Stock Quotes:

http://www.sec.gov/edgarhp.htm
http://www.nasdaq.com
http://www.quote.com

Financial Calculator: Although a financial calculator is not required for this course, the student
may find it helpful to purchase one. .
2

Exams: Makeup exams are only allowed for medical emergencies or reserve duty. Plan other
events in your schedule accordingly. A doubled-sided, standard size formula sheet will be allowed
in the exam.

Overview of Course and Readings

Readings - RW&J
Chapter 13
Chapter 15
Chapters 15, 16
Chapter 18

Topic
Case
2: Marriott Corporation: The Cost of
IntroductionCapital
and Overview
(Week 6)
Efficient Markets
Introduction to Capital Structure
Capital Structure Taxes and Financial Distress
Dividend Policy

Chapters 16,18, 21
Chapter 32
Chapter 30

Agency Problems, Options in a Corporate Finance Framework

Mergers, Acquisitions and Restructuring
International Corporate Finance

Please note that topics may be added or deleted with an advance notice of at least a week.
-----------------------------------------------------------------------------------------------------------------Cases: Questions and Approximate Dates
-----------------------------------------------------------------------------------------------------------------Case 1: Warren E. Buffet, 1995 (Week 4)

Case Questions:
1. What is the possible meaning of the changes in stock price for GEICO and
Berkshire Hathaway on the day of the acquisition announcement? Specifically,
what does the $718 million gain in Berkshires market value of equity imply
about the intrinsic value of GEICO? (Note that Berkshire owned 33.25 million
shares before the acquisition was announced.)
2. Based on Value Lines forecasted information, what is the range of possible
intrinsic values for GEICO? What questions might you have about this
estimated range?
3. How well has Berkshire Hathaway performed? In the aggregate? In its
investment in Scott & Fetzer? In its investment in earlier purchases of GEICO
stock? In its investments in convertible preferred securities?
4. What is intrinsic value in Warren Buffets perspective, and why is it accorded
such importance? How is it estimated? What are the alternatives to intrinsic
value, and why does Buffet reject them?
5. Please critically assess Buffets investment philosophy, and prepare to identify
points where you agree and disagree with him.
6. Should Berkshire shareholders endorse the acquisition of GEICO?

Case 3: American Home products (Week 8)

Case Questions:
1. Are the four components of Marriotts financial strategy consistent with its
growth objective?
2. How does Marriott use its estimate of its cost of capital? Does this make
sense?
3. What is the weighted average cost of capital for Marriott Corporation?
i) What risk-free rate and risk premium did you use to calculate the cost
of equity?
ii) How did you measure Marriotts cost of debt?
iii) Did you use arithmetic or geometric averages to measure rates of
return? Why?
4. What type of investments would you value using Marriotts WACC?
5. If Marriott used a single corporate hurdle rate for evaluating investment
opportunities in each of its lines of business, what would happen to the
company over time?
6. What is the cost of capital for the lodging and restaurant divisions of Marriott?
i) What risk-free rate and risk premium did you use in calculating the cost
of equity for each division? Why did you choose these numbers?
ii) How did you measure the cost of debt for each division? Should the
debt cost differ across divisions? Why?
iii) How did you measure the beta of each division?
7. What is the cost of capital for Marriotts contract services division? How can
you estimate its equity costs without publicly traded comparable companies?

Case Questions:
1. How much business risk does American Home Products face?
2. How much financial risk would AHP face at each of the proposed levels of
debt in exhibit 3?
3. How much potential value, if any, can AHP create for its shareholders at each
of the proposed levels of debt?
4. What capital structure would you recommend as appropriate for AHP? What
are the advantages and disadvantages?
5. How might AHP implement a more aggressive capital structure policy? What
are the alternative methods for leveraging up?

Case 4: Dividend policy at FPL Group (Week

10)

CaseQuestions:
1. WhatarethemostimportantissuesconfrontingFPLGroupinMay,
1994?
2. FromFPLmanagementsperspective,isFPLscurrentdividendratio
appropriate?Whatfactorsshouldbeconsideredindeterminingits
dividendpolicy?
3. WouldyourecommendachangeinFPLsdividendpolicy?Ifso,how
wouldyouimplementthechange?
4. Answerquestions2,3fromaninvestorsperspective.
5. AsKateStark,whatwouldyourecommendregardinginvestingin
FPLsstockbuy,sell,orhold?

Case 5: Interco (Week 12)

Case Questions:
1.
2.
3.

4.
5.

Assess Intercos financial performance. Why is the company a target

of a hostile takeover attempt?
As a member of Intercos board are you persuaded by the premiums
paid analysis (Exhibit 10) and the comparable transactions analysis
(Exhibit 11)? Why?
Wasserstein, Perella & Co. established a valuation range of $68-$80
per common share for Interco. Show that this valuation range can
follow from the assumptions described in the discounted cash flow
analysis section of Exhibit 12. As a member of Intercos board, which
assumptions would you have questioned? Why?
How would you advise the Interco board on the $70 per share offer?
How would you assess the actions of Intercos board up to August 8,
1988? Wasserstein, Perella & Co.s? The Rales brothers? Drexel
Burnhams?
6

HONOR CODE

Corporate Financial Policy

1.

I agree to only submit work that is based on my own efforts. I will not copy any other
past or current students work or submit group work if I did not participate actively in the
analysis or writeup.

2.

I agree not to include as members of a group any students who did not actively
participate in analyzing or writing up that assignment. This includes cases in which one or
more group members are out of town on work or otherwise unable to participate.
Students who are unable to participate in a group assignment need to make alternative
arrangements with the instructor.

3.

I will not use any handouts or solutions from prior years courses to help with any
assignment. This includes prior students work on the cases as well as any other material.

4.

I will not talk with any other student in Corporate Financial Policy about any exams,
makeup exams and assignments until all students have completed and handed in the
exam/assignment concerned.

5.

I will not use any other materials in and for the exams beyond what is allowed on a
formula sheet as stated in the syllabus.
I commit to follow this honor code explicitly and will also report any violations of this
code to the instructor. I understand that any violations of this code will at minimum result
in a zero on the exam/assignment concerned and may result in a failing grade in the course
and/or referral to the Honor Committee of the Business School for further review.

Signed: __________________________________