FALL 2019-20

FINN 400 APPLIED CORPORATE FINANCE

GROUP CASE ANALYSIS AND ASSIGNMENT SCHEDULE

Topic: Overview of Corporate Finance

Session 1
Reading: Note to the Student: How to Study and Discuss
Cases
Topic: Analyzing the Firms Operations and Environment
Session 2
• Case: Z-Factor Rescue by the Numbers
Topic: Financial Analysis & Performance Assessment
Session 3
Case: Value Line Publishing: October 2002; BES #10

Topic: Free Cash Flows and Building Financial Models

Session 4
Case: The Body Shop International PLC 2001: An
Introduction to Financial Modeling; BES #9
Topic: Corporate Financial Strategy and Financial
Markets
Session 5
Case: Guna Fibres, Ltd.; BES #12
Topic: Corporate Financial Strategy and Financial
Markets
Session 6
Case: Bill Miller and Value Trust; BES #2

Topic: Cost of Capital – Theory and Practice

Session 7
Case: “Best Practices” in Estimating the Cost of Capital:
Survey and Synthesis, BES #13.

Topic: Estimating Cost of Capital of the Firm 1. What is the WACC and why is it important to estimate a firm’s cost
Session 8 of capital? Do you agree with Joanna Cohen’s WACC calculation?
Case: Nike, Inc.: Cost of Capital; BES # 15 Why or why not?

Topic: Multifaceted Capital Investment Decisions
Session 9
Case: The Investment Detective BES # 18
Topic: Capital Budgeting – Relevant Cash Flows
Session 10
Case: Aurora Textile Company; BES # 21
Topic: Risk in Capital Budgeting
Session 11
Case: Star River Electronics Ltd - BES # 26
Individual Case Analysis Assignment
Group 1 and Group 9
Group 2 and Group 8
2. If you do not agree with Cohen’s analysis, calculate your own
WACC for Nike and be prepared to justify your assumptions.
3. Calculate the costs of equity using CAPM, the DDM, and the
earnings capitalization ratio. What are the advantages and
disadvantages of each method?
4. What should Kimi Ford recommend regarding an investment in
Nike?
1. How has Aurora Textile performed over the past four years? Be
prepared to provide financial ratios that present a clear picture of
Aurora’s financial condition.
2. List the factors affecting the textile industry. What do you think is
the state of the industry in the United States? How should you
incorporate the state of the textile industry into your analysis? Why
should anyone invest money in the industry?
3. What are the relevant cash flows for the Zinser investment? Using
a 10% WACC and assuming a 36% tax rate, what do you get as the
NPV for the project? What are the value drivers in your analysis?
What do you estimate as the cost per pound for customer returns
under the Zinser alternative? (Hint: for a replacement decision,
analysts often find it helpful to prepare two sets of cash flows and two
NPVs—one for the status quo and one for the new machine.)
1. Assess the current financial health and recent financial performance
of the company. What strengths and/or weaknesses would you
highlight to Adeline Koh?
2. Forecast the firm’s financial statements for 2016 and 2017. What
will be the external financing requirements of the firm in those years?
Can the firm repay its loan within a reasonable period?
3. What are the key driver assumptions of the firm’s future financial
performance? What are the managerial implications of those key
drivers? That is, what aspects of the firm’s activities should Koh
focus on especially?
4. What is Star River’s weighted-average cost of capital (WACC)?
What methods did you use to estimate WACC? What are the key
assumptions that especially influence WACC?

Topic: Working Capital Management Policies
Session 12
Case: Dell’s Working Capital
Topic: Structuring Corporate Financial Policy
Session 13
Case: Structuring Corporate Financial Policy; BES # 32
Topic: Analysis of Leverage Restructuring
Session 14
*Case: The Wm Wrigley Jr. Co.; BES # 34
5. What are the free cash flows of the packaging-machine investment?
Should Koh approve the investment?
1. How was Dell’s working capital policy a competitive advantage?
2. How did Dell fund its 52% growth in 1996?
3. Assuming Dell sales will grow 50% in 1997, how might the
company fund this growth internally? How much would working
Individual Case Analysis Assignment capital need to be reduced and/or profit margin increased? What steps
do you recommend the company take?
4. How would your answers to Question 3 change if Dell also
repurchased $500 million of common stock in 1997 and repaid its
long-term debt?
1. In the abstract, what is Blanka Dobrynin hoping to accomplish
through her active-investor strategy?
2. What will be the effects of issuing $3 billion of new debt and using
the proceeds either to pay a dividend or to repurchase shares on:
a. Wrigley’s outstanding shares?
b. Wrigley’s book value of equity?
c. The price per share of Wrigley stock?
d. Earnings per share?
Group 3 and Group 7 e. Debt interest coverage ratios and financial flexibility?
f. Voting control by the Wrigley family?
3. What is Wrigley’s current (prerecapitalization) weighted-average
cost of capital (WACC)?
4. What would you expect to happen to Wrigley’s WACC if it issued
$3 billion in debt and used the proceeds to pay a dividend or to
repurchase shares?
5. Should Blanka Dobrynin try to convince Wrigley’s directors to
undertake the recapitalization?
 1. What are the risks associated with Deluxe’s business and strategy?
What financing requirements do you foresee for the firm in the
coming years?
2. What are the main objectives of the financial policy that Rajat
Singh must recommend to Deluxe Corporation’s board of directors?
3. Drawing on the financial ratios in case Exhibit 6, how much debt
could Deluxe borrow at each rating level? What capitalization ratios
would result from the borrowings implied by each rating category?
Topic: Financial Flexibility and Alternative Sources of 4. Using Hudson Bancorp’s estimates of the costs of debt and equity
Financing in case Exhibit 8, which rating category has the lowest overall cost of
Session 15
funds? Do you agree with Hudson Bancorp’s view that equity
Case: Deluxe Corp.; BES # 35 investors are indifferent to the increases in financial risk across the
investment-grade debt categories?
5. Is Deluxe’s current debt level appropriate? Why or why not?
6. What should Singh recommend regarding:
• the target bond rating
• the level of flexibility or reserves
• the mix of debt and equity
• any other issues you believe should be brought to the attention of
the CEO and the board
1. Why is Primus Automation considering the lease of its factory-
automation system to Avantjet?
2. How did Tom Baumann analyze the problem of setting the lease-
financing terms? How does he calculate NPV and internal rate of
return (IRR) for the lease and borrow-and-buy alternatives? Please
Topic: Introduction to Leasing
complete case Exhibit 6.
Session 16 Group 4 and Group 6
3. How are Faulhaber and Honshu Heavy Industries using their
*Case: Primus Automation Division, 2002- BES # 40
leasing plans?
4. What lease terms should Baumann recommend? How should
Primus’s sales and leasing divisions structure the terms of the deal
with Avantjet? How would you approach the negotiations with
Avantjet?
1. What happens to Gainesboro’s financing need and unused debt
Topic: Dividends and Alternative Payouts capacity if:
a. no dividends are paid?
Session 17 Group 5 and Group 1
Case: Gainesboro Machine Tools Corporation - BES # b. a 20% payout is pursued?
29 c. a 40% payout is pursued?
d. a residual payout policy is pursued?
 Assume that maximum debt capacity is, as a matter of policy, 40% of
the book value of equity.
2. How might Gainesboro’s various providers of capital, such as its
stockholders and creditors, react if Gainesboro declares a dividend in
2005? What are the arguments for and against the zero payout, 40%
payout, and residual payout policies? What should Ashley Swenson
recommend to the board of directors with regard to a long-term
dividend payout policy for Gainesboro Machine Tools Corporation?
3. How might various providers of capital, such as stockholders and
creditors, react if Gainesboro repurchased its shares? Should
Gainesboro do so?
4. Should Swenson recommend the corporate-image advertising
campaign and corporate name change to the Gainesboro’s directors?
Do the advertising and name change have any bearing on the dividend
policy or the stock repurchase policy that you propose?
Topic: Alternative Methods of Firm Valuation
Session 18
Case: Methods of Valuation for Mergers and Acquisitions
– BES #42
1. The shares of American Greetings are currently trading at an
EBITDA multiple that is at the bottom of its peer group. Do you think
a 3.5-times multiple is appropriate for American Greetings? If not,
what multiple of EBITDA do you think is justified? What is the
implied share price that corresponds to that multiple?
Topic: Valuation of the Firm 2. Please model cash flows for American Greetings for fiscal years
Session 19 Group 2 and Group 3 2012 through 2015 based on the two sets of ratios in case Exhibit 8.
Case: American Greetings – BES #43 Based on the discounted cash flows associated with the forecast, what
is the implied enterprise value of American Greetings and the
corresponding share price?
3. What are the key drivers of value in your model?
4. What do you believe to be the value of American Greetings shares?
Do you recommend repurchasing shares?
1. What are the business and financing risks associated with the
Topic: Raising Capital Through Public Offerings
acquisition of Genentech? Is this a good time to do the deal?
Session 20 Group 8 and Group 7 2. Do you believe the bond issuance will have an impact on Roche’s
Case: Roche Holding Ag: Funding the Genentech
bond rating?
Acquisition; BES # 14
 3. What are the prevailing spreads for non-Roche bonds? Do you
think these spreads are similar to investors’ required yield for the
Roche bonds?
4. What is your specific recommendation for the coupon rate for the
Roche 5-year, 10-year, and 30-year US dollar bonds?
5. What would your coupon rate recommendation be for the 7-year
bond in euros?
Q1. What are the costs and benefits of Al Shaheer Corporation going
public? Briefly describe the IPO process.
Q2. What is the growth potential of the meat sector of Pakistan within
the global halal food market? How is Al Shaheer Corporation
positioned to benefit from this opportunity?
Q3. What are some of the key risks faced by Al Shaheer Corporation
Topic: The IPO Process
that could impact its financial position and performance in the future?
Session 21 Q4. Does Al Shaheer meet the Shariah criteria of Al Meezan
Case: The First Meat Sector IPO: Al Shaheer
Investment Management Limited to qualify for investment?
Corporation, LUMS
Q5. What is your estimate of the target stock price of Al Shaheer using
the Discounted Cash Flow approach and information provided in the
case? What about Al Shaheer’s stock value based on Market
Multiples?
Q6. Would you recommend Asad to participate in the IPO? Defend
your position.
Topic: Introduction to Adjusted Present Value (APV)
Session 22
Case: Using APV: A Better Tool for Valuing Operations
1. Assuming a discounted cash flow valuation:
a. What rate of return should Oracle require on the acquisition?
b. What base-case cash flows do you forecast?
c. What is your estimate of terminal value?
d. What is the enterprise value of Sun Microsystems? What is the
Topic: Merger and Acquisition Evaluation
equity value?
Session 23 Group 4 and Group 5
2. Conduct a multiples analysis to value Sun. What economic
Case: Sun Microsystems; BES # 48
fundamentals are reflected in the multiples?
3. Identify the synergies and conduct a sensitivity analysis to estimate
the effect of synergies on enterprise value.
4. If a competing bidder appears, how high a price should Oracle be
willing to offer?
 1. What went wrong after 1976? How did Massey respond? How did
its competitors respond? What were the consequences for Massey?
2. Assess the various alternatives at the current stage of Massey’s
difficulties. What options are available for alleviating Massey’s
financial problems?
Topic: Financial Distress and Corporate Restructuring 3. As a financial adviser to Massey’s management, what refinancing
Session 24 Individual Case Analysis Assignment plan would you propose? Give particular attention to the various
Case: Massey Ferguson, 1980 interested parties: shareholders, lenders, employees, governments,
and management.
45. Why, fundamentally, did Massey get into financial trouble? Were
a refinancing plan successfully executed, what would be the outlook
for Massey’s future? What alternative actions by management would
have reduced the severity of Massey’s financial difficulties?
1. What are the pros and cons of issuing convertible debt via straight
debt or equity?
2. The case states a convertible bond can be valued as the sum of a
straight bond plus a call option. Starting with the current stock price
of $77.98 per share, how can you use the Black-Scholes model to
estimate the value of the conversion option with a 25% conversion
premium for one share of MoGen stock? Be prepared to explain your
choice for the stock price, exercise price, risk-free rate, time to
maturity, dividend yield, and volatility. How should you convert this
Topic: Convertible Bond Valuation
option value per share into to the option value for a bond with $1,000
Session 25 Group 6 and Group 9
face value?
Case: MoGen, Inc.; BES #41
3. What is the value of the straight bond component? What coupon
rate should Manaavi propose in order for the convert to sell at exactly
$1,000 per bond? What discount rate did you use to value the straight
bond component? Conceptually, what should happen to the coupon
rate if Manaavi were to propose a 15% conversion premium? a 40%
conversion premium?
4. As MoGen’s CEO, what do like and not like about this proposal
from Merrill Lynch? In particular, do you like the 25% conversion
premium? the coupon rate?
1. How is Carrefour financing its growth? How risky is this financial
Topic: International Corporate Finance – Currency Risk
strategy?
Management
Session 26 2. Would you alter the mix of wholly owned stores, joint venture
stores, or franchise stores in the future? How? What are the financial
Case: Carrefour S.A. – BES #37 (CDC)
implications of each type of growth?
 3. In the future, should Carrefour concentrate its expansion in France
or move elsewhere? If it goes elsewhere, how should Carrefour alter
its financing strategy?
Topic: Ethical Perspectives in Finance Case: Ethics in
Finance
Session 27
Final Exam Review