Finance 653 Case Studies in Financial Management Fall 2003

Instructor: Dr. Hugh Hunter Office: SSE 3405 Phone: 594-6887

Section 1, TH 1800-2040 SS 2512 Sched. 14711

E-mail: hughh3@sbcglobal.net; hhunter@mail.sdsu.edu Office hours: T 1250-1400, 1700-1830 Note: Hours TH 1250-1400, 1700-1745 may change

Prerequisite: BA 665. FIN 617 or some other 2nd course in corporate finance, such as FIN 325, would help. You should have available a good finance text for reference. The best is Brealey-Myers, Principles of Corporate Finance, any addition. Ross, Westerfield, Jaffe, Corporate Finance is also very good. . Web Site: This site contains information pertaining to this course including announcements of assignment or schedule changes case tips, supplemental information and final exam questions. About this class: For an introduction to the case method, see the last page of this syllabus and Note To the Student: How To Study and Discuss Cases in the Bruner book, pp. xxv-xxx. Each case deals with specific finance topics. Case topics are listed along with study questions at the end of the syllabus. We will review these topics sometime before the case presentation. However, if you feel a need to review certain of these topics apart from class assignments, refer to the appropriate chapters in a corporate finance text. Most of our class time will be devoted to discussion of cases and finance topics related to the cases. It is your class, so treat it as such. For the class to be successful, you must work to that end. That means coming each time prepared to engage the assigned material. Not only will lack of effort diminish the quality of the class, it will also diminish your grade. Each week I will call on a few people at random to discuss the case. This does not diminish the importance of volunteering. Written Reports Aim for 3-4 pages per report, typed, double spaced, plus appendices that you deem appropriate. Your grade is not based on page count. In your report, identify the primary problem the question or questions that need answering. In most cases, that is evident. If you are in doubt, take your cues from the discussion questions. Do enough analysis to reach and support your conclusions. Most cases provide the necessary data in usable form, and the more numerically complex cases come with spreadsheets. Don't try to force each case into some sort of template. Each case presents a unique problem and set of conditions. They vary in complexity and require different analytical approaches. Generally the more "strategic" cases are more complex, but require less quantitative analysis. Those that require more number crunching tend to be more targeted less abstract, and more "tactical" than strategic. In other words, fit your approach to the problem. Reports will be due at the end of the class period. If you miss class, arrange to get your report to me on the assigned day. I will send your grades and a written critique via email. Text and Supplements Bruner, Case Studies in Finance, 4th. Higgins, Analysis for Financial Management, 7th. A computer spreadsheet program such as Excel. Access to the web to search out information on companies, industries and the macroeconomic setting for the cases. Case spreadsheets are available on the text web site, or I will copy them for you if you give me a formatted HD floppy. Readings 1. Bruner, Best Practices in Estimating the Cost of Capital, Case 12 (text) 2. Lessard, Incorporating Country Risk in the Valuation of Offshore Projects, Journal of Applied Corporate Finance (Fall 1996).
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3. Godfrey, Espinoza, A Practical Approach to Calculating Costs of Equity for Investments in Emerging Markets, Journal of Applied Corporate Finance (Fall 1996). 4. Gitman, Vandenberg, "Cost of Capital Techniques Used by Major U.S. Firms: 1997 vs. 1980," Financial Practice and Education (Winter 2000). 5. Mukherjee, Hingorani, "Capital Rationing Decisions of Fortune 500 Firms: A Survey," Financial Practice and Education (Spring 1999). 6. Bruner, Structuring Corporate Financial Policy, Case 29 (text) 7. "Diamond Chemicals Supplement 2" Grading We will be discussing twelve (12) cases this semester. You will turn in written reports on any eight (8) cases. Written reports (8 x 6%) 48% Class participation 32% Final exam 20% You will receive a numerical grade (0-100) for all of your work. I will use the standard conversion to assign a final letter grade for the course: 90 - 100 A 70 - 79 C <60 F 80 89 B 60 - 69 D Within these ranges, I will assign (+) and (-) grades. The final exam will consist of about 5 of the questions posted on my web site. Questions are drawn from assigned text chapters, readings, class discussions and the cases themselves. Schedule This schedule may change slightly as the class progresses. Last day to add/drop, Sept 22. Date Sep 4 Sep 11 Topic Assignment Intro..to course, case method Lecture/discussion: valuation, risk, capital structure, cost of capital Lecture/discussion: acquisitions, takeovers Lecture/discussion: financial analysis Lecture/discussion: financial forecasting Sep 18 Case 4: Ben & Jerry's Homemade Lecture/discussion: estimating cost of capital Lecture/discussion: debt restructuring Case 8: Padgett Paper Products Lecture/discussion: capital budgeting Case 10: Deutsche Braurei Lecture/discussion: risk analysis Case 13: Nike Lecture/discussion: valuing cross-border investments Lecture/discussion: Country risk, emerging markets Case 15: Teletech Corporation Lecture/discussion: capital rationing Lecture/discussion: cost of capital in practice Ben & Jerry's TN1 Supplemental reading Higgins chap. 2 Higgins chap. 3 Reading 1 Supplemental reading Higgins chap 7 Higgins chap. 8 Paginas Amarelas TN1, TN2 Readings 2, 3 Euroland Foods TN1 Reading 5 Reading 4
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Sep 25 Oct 2 Oct 9

Oct 16

Assign Euroland Teams Oct 23 case 16: Paginas Amarelas Lecture/discussion: real options Case 22: Euroland Foods Lecture/discussion: initial public offerings case 19: Diamond Chemicals (A) Lecture/discussion: valuation & restructuring Case 20: Diamond Chemicals (B) Lecture/discussion: capital structure Diamond Chemicals Supp. 2 Supplemental reading eBay TN1, TN3 Higgins chap. 5 Higgins chap. 9 Higgins chap 6 Reading 6

Oct 30

Nov 6 Nov 13

Nov 20 Dec 4 Dec 11

case 26: eBay (A). Note: eBay (B) will be distributed for class discussion.. Lecture/discussion: private equity valuation Supplemental reading case 32: Rosario Acero case 41: Palamon Capital Partners review for final

Thursday, Dec 18, 1900-2100, final Study Questions and Suggested Readings These are general guidelines for approaching the case. Do not confine your analysis or attention to these questions. Ben & Jerry's Homemade [performance, valuation, takeover] 1. How has Ben & Jerry's fulfilled its mission statement? 2. How did Ben & Jerry's become a takeover target? 3. What might Ben & Jerry's be worth if its mission were purely economic? 4. Should Morgan support a takeover? If so, which offer should be recommended? If not, what are the wealth implications for Ben & Jerry's shareholders? Teaching note 1, Higgins 2 Padgett Paper Products [financial analysis, debt restructuring] 1. As a banker, how would you evaluate Padgetts strategy and financial performance to date? 2. Why should Francis Libris, the banker, seek to structure Padgetts loan on a more orderly basis? 3. Why does Padgett need a loan? How fast can Padgett repay the loan? 4. What should Libris propose as terms for the new loan structure? Higgins 3 Deutsche Brauerei [financial analysis, financial policy] 1. What accounts for Deutsche Brauereis rapid growth in recent years? Specifically, what policy choices account for this success? 2. What is Deutsche Brauereis credit policy toward its distributors in Ukraine? Why is it different from the policy toward its other distributors? Is the companys credit policy appropriate? Is it profitable? If not, how would you change it? If so, what arguments would you offer to the board of directors in its defense? 3. Why does this profitable firm need increasing amounts of bank debt? 4. As a member of the board of directors, how would you vote on: a. The proposed raise for Oleg Pinchuk? b. The quarterly dividend declaration of 698,000? c. Adoption of the financial plan for 2001?
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Reading 1, case10.xls Nike [cost of capital] 1. What is WACC and why is it important to estimate a firm's cost of capital? 2. Do you agree with Joanna Cohen's WACC calculation? Why or why not? 3. If you do not agree with Joanna's analysis, calculate your own WACC for Nike and be ready to justify your assumptions. 4. Calculate the costs of equity using CAPM, the dividend discount model and the earnings capitalization model. What are the advantages and disadvantages of each? 5. what should Kimi Ford recommend regarding an investment in Nike? Higgins 8, Reading 1 Teletech Corporation [risk adjusted discount rate] 1. How does Teletech currently use the hurdle rate? 2. Estimate segment WACCs for Teletech (see worksheet in case Ex.1). What assumptions did you use? 3. Interpret Rick Phillips's graph (Fig.2). How does the choice of constant versus risk-adjusted rates affect the evaluation of Teletech's two segments? What are the implications for Teletech's resource allocation strategy? 4. Do you agree that "all money is green"? Why, why not? 5. Is Helen Buono correct that value would be destroyed if all the firm's assets were redeployed into telecommunications? Why, why not? Support your view with a numerical example. 6. Has Products and Systems destroyed value? Cite evidence to support your answer. 7. How should Teletech respond to Victor Yossarian? Higgins 8, case15.xls Paginas Amarelas [cost of capital, risk assessment, emerging markets] 1. What is the valuation problem here? In what currency are the cash flows denominated? In what currency should the discount rate be denominated? Be sure you understand exhibits 1, 2, 3, and 4 of the case. 2. In this case, why doesnt J.P. Morgan discount local cash flows at a local required rate of return? In fact, why not use that approach generally? 3. To complete the estimation of a required rate of return, what other effects should we incorporate into our standard weighted average cost of capital (WACC) and capital asset pricing model formulas? 4. Estimate required rates of return for the cash flows originating in Argentina, Brazil and Chile. 5. Estimate a long-term perpetual growth rate for the businesses in Argentina, Brazil and Chile. 6. Based on your answers to questions 4 and 5, and referring to exhibits 2, 3, and 4, what is a reasonable range of value for Brasil Investimentos yellow pages business? What key assumptions underlie your suggested value range? Teaching notes 1, 2, Readings 2, 3, case16.xls Euroland Foods S.A. [capital budgeting, capital rationing, behavioral] 1. Prepare to discuss the strengths and weaknesses of the various measures of investment attractiveness as used by Euroland foods. Will all of the measures rank the projects identically? Why or why not? 2. Rank the 11 proposals on the basis of purely economic considerations. Then rank them a second time based on any considerations you consider to be important. Are the rankings identical? Why or why not? 3. Which set of projects should Wilhelmina Verdin recommend to the board of Euroland as the capital budget for 2001? Readings 4, 5, Higgins 7, Teaching note 1, case22.xls Diamond Chemicals, (A) [capital budgeting] 1. What changes, if any, should Lucy Morris ask Frank Greystock to make in his discounted-cash-flow analysis? Why? What should Morris be prepared to say to the transport division, the director of sales, her assistant plant manager, and the analyst from the treasury staff? 2. How attractive is the Merseyside project? By what criteria? 3. Should Morris continue to promote the project for funding? Higgins 8, case19.xls Diamond Chemicals, (B) [capital budgeting]
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1. Why are the Merseyside and Rotterdam projects mutually exclusive? 2. How do the two projects compare on the basis of Diamond Chemicals investment criteria? What might account for differences in rankings? 3. Is it possible to quantify the value of managerial flexibility associated with the Merseyside project? How, if at all, does this flexibility affect the economic attractiveness of the project? 4. What are the differences in the ways Elizabeth Eustace and Lucy Morris have advocated their respective projects? How might these differences in style affect the outcome of the decision? 5. Which project should James Fawn propose to the chief executive officer and board of directors? Supplemental Note 2 eBay (A) [IPO, market timing, valuation] 1. What are the associated costs and benefits of eBay going public 2. How should Bengier prepare to negotiate an offer price with the underwriters? What is an appropriate price? Should he be concerned about the IPO pricing patterns in case Ex. 9? 3. How does the current market condition affect eBay's decision? Should eBay go ahead with the offering? Teaching notes 1, 3, Higgins 5 Rosario Acero [capital structure, restructuring] 1. Why is Pablo Este considering obtaining long-term capital? 2. How will the two financing alternatives affect the performance of the firm? Examine case Exhibits 6-11. 3. What primary risks does the firm face? Considering normal downside risk can the company continue to service the debt? 4. From Rosario's standpoint, are the terms are the terms of the notes-and-warrants package competitive? Are they attractive? 5. Would an offering price of $9.00 per share for the equity issue be fair? 6. Which course of action should Este adopt? State your reasons. Reading 6, Higgins 6, 9, case32.xls Palamon Capital Partners [valuation, private equity] 1. Should Palamon invest in TeamSystem? Why or why not? 2a. How much is a 51 percent stake in TeamSystem worth? 2b. What cash flows did you use? How did you estimate cash flows? 2c. What multiples did you use? How did you arrive at these multiples? 3. What factors other than valuation should be considered in this investment? 4. What should Louis Elson do? 5. Why does such an attractive investment opportunity exist? Case41.xls Introduction to the Case Method Cases are the closest possible classroom approximations of actual business situations. There are a number of parallels between cases and situations that you are likely to encounter in business. First, many cases are complex; that is, there are a number of problems and issues that must be dealt with simultaneously. Often, solving one problem only exacerbates another, forcing compromise solutions. It is this complexity that leads individuals to different conclusions. Many cases are ambiguous, meaning that you will never have enough information. Problems are sometimes hidden not obvious, and vital information is not easily available. Information is costly and you must weigh the potential benefits against the cost of added information. Quite often, principals in the case are part of the problem. The human element sometimes confounds the most logical, rational solution. As in actual business, you cannot ignore human foibles and follies. There is another human aspect to cases. You are thrust into a role. It may be as a consultant, staff assistant, executive or business owner, or any number of other stakeholders in the company. As in real life, your approach to the problems and solutions are affected by who you are. Successful completion of a case class will arm you with a set of skills that should serve you well in business. Also, just as in business, you will at times experience frustration with seemingly insoluble analytical problems,, lack of information, behavior of teammates, and with those who are not persuaded by your solutions. While no
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single approach fits all cases, the following process works well for most. First, identify the problems. Bring the appropriate analytical tools to bear. Develop a solution and plan of action. Often this requires you to choose among alternative solutions. Finally, be prepared to defend your position. Persuade others that your solution is the best possible.