GEORGIA STATE UNIVERSITY
J. Mack Robinson College of Business
FI 8320 – Cases and Readings in Corporate Finance
Fall Semester 2006
Day: Monday
Location: ALC304
Professor: Chip Ryan
Phone: (404) 651-2674
Time: 7:15 – 9:45
Office: 1226 RCB
e-mail: cryan@gsu.edu
Fax: (404) 651-2630
Mailing Address: Department of Finance. J. Mack Robinson College of Business, Georgia State University
35 Broad Street, Suite 1221, Atlanta, GA 30303
Office Hours:
I don’t know if it makes much sense to establish formal office hours for a night course when most
students work during the day, so office hours will be by appointment. I am usually in the office until
6:00 or 7:00 PM, so I can meet you in the early evening if it is more convenient for your schedule.
Course
Objectives:
In this course, we seek to enhance our understanding our understand of corporate finance and to improve
our ability to make decisions in the firm that create shareholder value. Although the primary emphasis
will be on financial decision making within the firm, we will also explore the interactions between
corporate finance and economic activity, the legal environment, and social and ethical norms.
Required:
Case Packet at the PrintShop, 6 Decatur Street, Atlanta, GA 30303. (404) 523-2679.
Reading assignments on electronic reserve in the library or posted on WebCT.
Recommended: Any good corporate finance text book. I will refer to Principles of Corporate Finance by Richard
Brealey, Stewart Myers, and Franklin Allen (earlier versions included only Brealey and Myers).
Expected:
Expertise in using a spreadsheet package, a word processing package, and a financial calculator.
Class Format:
Discussion of cases and articles with some lecture on techniques and concepts.
Evaluation:
Case Report – Valmont Industries
Case Report – Carlton Polish
Final Exam
Quizzes on Reading Assignments/Cases
Class Participation
Grading:
The Department of Finance provides its instructional faculty with the following guidance. For masters
level courses (MBA and FI prefixed), it is expected that no more than 35 percent of the students in a
given class will receive a grade of A. The majority of the remaining students are expected to receive
grades of B. Those students demonstrating significantly lagging performance shall earn grades of C or
lower as appropriate.
Final Exam:
The final exam will test your understanding of and ability to apply the skills and concepts that we
develop and study throughout the course. The exam is an in-class exam. You may refer to your text and
to your notes during the exam.
Participation:
This class requires frequent high-quality participation. The goal of your participation should be to raise
the quality of the learning experience for everyone, not just yourself. Students can enhance the learning
experience in many ways. Some students make insightful comments and ask probing questions. Other
students bear risk and answer a question when nobody else will, even if they are wrong. Other students
use appropriate humor to help make a point and also to make the process fun. There are many ways that
you can contribute, but you must be well prepared for class. To provide quality participation you also
must attend regularly and be on time for class. If you do not attend, you cannot participate. Late
arrivals distract the class. Consistent late arrivals will negatively affect your participation grade.
Page 1 of 9
FI 8320 – Readings and Cases in Corporate Finance
20%
20%
20%
20%
20%
Fall, 2006
In your business careers, you are judged according to how you are perceived by others. I base your
participation grade on my perceptions of your contributions to class. Do not expect a high participation
grade for just showing up. It is your job to participate in class, raise the level of learning, and to make a
good impression. By participating in these ways, you make the people around you better and the class
better. Your employer should expect the same from you in the work place.
Quizzes:
We will have random quizzes on the cases and on the reading articles. Quizzes will be open notes, e.g.,
you may refer to your own analysis or notes but not to the case or the article itself. If you prepare the
case and read the articles before class you should be prepared for the quizzes. I will administer the quiz,
if we have one, at the beginning of class.
Cases:
I will provide you with a list of questions on the cases to guide, but not limit, your thinking. You should
thoroughly prepare the case and should come to class ready to discuss the case and critique solutions.
You must be able to support your opinions with financial analysis. I ask that you write up a case report
on two cases – Valmont Industries and Carlton Polish. In your deliverable you should report your
analysis and not re-tell the case. Outline the problem/decision, identify key assumptions and risks,
report your conclusion/recommendation, and use your analysis to support your conclusion. You are not
writing a mystery novel – the reader should know your recommendation from the very beginning. Your
report should contain a one-page executive summary and you limit the body of your report to five pages.
Make good use of bullet points, tables, graphs, etc. to effectively make your point. Put key support data
(e.g., a table showing the NPVs under various scenarios) in the main report, but relegate the details of
how you conduct the analysis to an appendix (which is in addition to the five pages of the report. End
your report with a brief summary or conclusion.
Financial
Calculator:
Students are required to have a financial calculator that is capable of accepting uneven cash flows and
calculating NPV and IRR (look for these two functions). Acceptable calculators include the HP 10B,
the HP 17B II, the HP 19B, the TI Business Analyst II Plus, or the Sharp EL 733A. One can generally
purchase an acceptable calculator for approximately $35-$45. Students may not share calculators on
examinations or quizzes.
Ethics:
In encourage you to work together in this class. You have great deal of flexibility to share your work
and knowledge, but an obligation to draw the line between plagiarism and copying the work of others. If
you use the opinions of others in your project, for instance some data presented in an analyst’s published
report, make sure that you cite the work. If you work with another student (or anyone else for that
matter) on a case, make sure that you acknowledge the collaboration in your report. You should never
copy another student’s work or allow another student to copy your work. Obviously, you should not
copy or attempt to copy another student’s work on the final examination or use any prohibited materials.
You should be familiar with the student code of conduct. I will deal with any ethical violations as
prescribed by University policy.
Page 2 of 9
FI 8320 – Readings and Cases in Corporate Finance
Fall, 2006
COURSE SCHEDULE
Week
Aug 21
TOPIC
INTRODUCTION AND CLASS ORGANIZATION
Turn in a copy of your resume. Please attach a picture (e.g., any picture or copy your ID)
Aug 28
COST OF CAPITAL
Lecture Notes (Web CT)
Fuller, Russell J. and Halbert S. Kerr, Estimating the Divisional Cost of Capital: An
Analysis of the Pure-Play Technique. The Journal of Finance, December 1981.
(WebCT)
Conine, Thomas E. and Maurry Tamarkin, Divisional Cost of Capital Estimation:
Adjusting for Leverage. Financial Management, Spring 1985. (WebCT)
Turn in a copy of your resume. Please attach a picture (e.g., any picture or copy your ID)
Sep 4
LABOR DAY HOLIDAY
Sep 11
COST OF CAPITAL
Case: Marriott Corporation: The cost of Capital – HBS 9-298-101
Sep 18
CAPITAL BUDGETING
Lecture Notes (Web CT)
Copeland, Thomas E. and Vladimir Antikarov, Real Options: Meeting the
Georgetown Challenge. Journal of Applied Corporate Finance, Spring 2005.
(Electronic Reserve)
Sep 25
CAPITAL BUDGETING
Case: Diamond Chemicals PLC (A): The Merseyside Project – UVA-F-1351
Oct 2
REAL OPTIONS
Lecture Notes (Web CT)
Oct 9
CAPITAL BUDGETING AND REAL OPTIONS
Case: Diamond Chemicals PLC (B): Merseyside and Rotterdam Projects –
UVA-F-1352
Page 3 of 9
FI 8320 – Readings and Cases in Corporate Finance
Fall, 2006
Oct 16
FINANCIAL ANALYSIS AND FORECASTING
Lecture Notes (WebCT)
Gallinger, George W., A Framework for Financial Statement Analysis Part 1 – Part
4. Business Credit, February 2000 – May 2000. (WebCT)
Oct 23
CORPORATE DIVERSIFICATION AND EVA®
Lecture Notes (Web CT)
Martin, John D. and Sayrak Akin, Corporate Diversification and Shareholder
Value: A Survey of Recent Literature. Journal of Corporate Finance, 2003.
(WebCT)
Weaver, Sam. Measuring Economic Value Added: A Survey of the Practices of
EVA® Components. Journal of Applied Finance, 2001. (Electronic Reserve)
Godrej, Adi. Creating Value at a Conglomerate: The Case of the Godrej Group.
Journal of Applied Corporate Finance, Winter 2004. (Electronic Reserve)
Oct 30
CORPORATE DIVERSIFICATION AND EVA®
Case: Valmont Industries – UVA-F-1191
Case Report is due
Nov 6
CORPORATE GOVERNANCE AND INCENTIVE COMPENSATION
Lecture Notes (Web CT)
Hermalin, Benjamin E. and Michael S. Weisbach, Board of Directors as an
Endogenously Determined Institution: A Survey of the Economic Literature.
Economic Policy Review, April 2003. (WebCT)
Jensen, Michael C. and Kevin J. Murphy, CEO Incentives: It’s Not How Much You
Pay, But How. Harvard Business Review, May-June 1990. (WebCT)
Walt Disney Productions, June 1984 – UVA-F-0676 (background for next week)
Nov 13
CORPORATE GOVERNANCE AND INCENTIVE COMPENSATION
Case: Saving Disney – HBS 9-905-014
Nov 20
VALUATION
Lecture Notes (Web CT)
Ruback, Richard S., Capital Cash Flows: A Simple Approach to Valuing Risky
Cash Flows. Financial Management, Summer 2002. (WebCT)
Page 4 of 9
FI 8320 – Readings and Cases in Corporate Finance
Fall, 2006
Miller, Merton H., Leverage. Journal of Applied Corporate Finance, Winter 2005.
(Electronic Reserve)
Nov 23
Thanksgiving Holiday
Nov 27
VALUATION AND HIGHLY LEVERED TRANSACTIONS
Case: Carlton Polish HBS 9-283-008
Case Report is due
Dec 4
SUMMING UP AND ROUNDTABLE DISCUSSION
FINAL EXAM – Monday Dec 11, 7:15 – 9:45
NOTE: This syllabus is a general guideline. Deviations may be necessary. Students are
responsible for all announcements made in class or posted on the course web site. As the course
progresses it could be necessary to add or delete some articles.
Page 5 of 9
FI 8320 – Readings and Cases in Corporate Finance
Fall, 2006
Suggestions for Case Analysis
Note: These suggestions constitute a minimum requirement and are designed to guide but not limit
your thinking and analysis. Generally, you can and should go further.
Walt Disney Productions, June 1984
1. As Disney's CEO, would you buy back the Disney shares from Saul Steinberg? If so, why and
at what price? If not, why not?
2. What is the meaning of these different valuations? Why not just ask an accountant to tell us
what Disney is worth? How, in an efficient stock market, can there be a valuation discrepancy
this big? Estimate your own value for Disney.
3. Ron Miller, the CEO, said, "We have created unique value along with competitive and
strategic advantage..." What are the unique value and advantage to which he refers? Please be
as specific as possible for each business segment.
4. Is Disney excellent in financial terms? How do you define excellence? Why is operational
success not automatically accompanied by financial success?
5. Should Ron Miller pay greenmail? Is greenmail ethical?
Diamond Chemicals (A) and (B)
A case
1. What changes, if any, should Lucy Morris ask Frank Greystock to make in his discountedcash-flow analysis? Why? By what criteria?
2. How attractive is the Merseyside project? By what criteria?
3. Should Morris continue to promote the project for funding?
B case
1. Why are the Merseyside and Rotterdam projects mutually exclusive?
2. How do two projects compare on the basis of Empirical Chemical's (EC) investment criteria?
What might account for the differences in rankings?
3. Is it possible to quantify the value of managerial flexibility associated with the Merseyside
project? How 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?
Page 6 of 9
FI 8320 – Readings and Cases in Corporate Finance
Fall, 2006
Cartwright Lumber
1. Prepare for analysis:
1) Sources and uses of cash table or indirect cash flow statement
2) Complete DuPont ratio analysis
3) Common size income and balance sheet
4) Pro forma income statement and balance sheet
5) Pro forma ratio analysis
6) Constant growth model
2. Why is this profitable company running short on cash?
3. What are the major sources and uses of cash?
4. How large does the bank loan need to be to satisfy the cash need?
5. Does Cartwright have collateral to support the loan request?
6. If you were the bank would you make the loan? Why or why not?
Marriott Corporation
1. What is the WACC for Marriott Corp.? How did you estimate the WACC?
2. What is the cost of capital for the lodging and restaurant divisions of Marriott?
3. How did you measure the cost of debt for each division and should they be different? How
did you measure Beta for each division?
4. What is the cost of capital for Marriott’s contract services? How can you estimate the cost
of equity with without publicly traded comparable companies?
Valmont Industries
1. Conduct a complete historical financial statement analysis based on the techniques that we
discussed in class.
2. Calculate EVA® for each reporting period.
3. Compare EVA® to stock price performance. Does EVA® correlate with stock-price
Page 7 of 9
FI 8320 – Readings and Cases in Corporate Finance
Fall, 2006
performance better than accounting ratios?
4. Does a historical correlation with stock-price performance indicate that the firm will increase
share-price performance if they adopt the system? Why or why not?
5. Does the multiple-business-segment organization create obstacles to a successful adoption?
6. What other problems or opportunities do you see?
Saving Disney
1. How and why did Disney’s performance change in the 1990s? What changes lead Michael
Eisner to go from the CEO who led Disney’s resurgence in the 1980s to the CEO who
oversaw value erosion in the late 1990s?
2. Did Disney offer top executives compensation packages that were excessive, structured
improperly, or both? Did compensation track performance in the late 1990s?
3. Is it possible to design a governance system that empowers a talented CEO such that he or
she can effectively run the company yet also provide suitable checks and balances for
shareholders?
4. To what extent did (i) public scrutiny (ii) activist institutional investors and (iii) the market
for corporate control effect governance changes at Disney?
5. In the end, do you believe that the governance system at Disney worked or failed? Why?
The Carlton Polish Company
1. Assume that Mr. Carlton will buy Mr. Miller's shares and Mr. Carlton will be the sole owner
after the buyout. Re-cast the balance sheet as if the LBO took place on 12/31/82.
2. Using the re-cast balance sheet as a basis, project the balance sheet forward through 1987 to
estimate Carlton's ability to "work out" the deal. Do a complete financial statement analysis.
Can Carlton service the loan? Be careful using Exhibit 4. The rental expense and executive
salaries are really memo items for 1982. They have already been included in cost of goods
sold and selling, general, and administrative expense for that year. They are not, however,
memo items for the years 1983-1987.
3. If you were the banker, would you be willing to make the bridge loan to Carlton? If you were
Miller, would you be willing to make the seller note?
4. Would you advise Carlton to pay $2.5 M for the company, or to pass to Miller? How much do
you think the company is worth? Do one or more valuations to support your number.
5. What non-financial issues add or detract from Carlton's ability to make this a successful deal?
Page 8 of 9
FI 8320 – Readings and Cases in Corporate Finance
Fall, 2006
Note: In the real event that motivated this case, Carlton and Miller engaged in a competitive
auction for the company. The rules were as follows.
1.
The bidding would start at $2,000,000 from Carlton.
2.
Miller would have 15 minutes to either accept the bid or respond with an increased
offer. The minimum allowable increase was $150,000.
3.
Assuming Miller raised the bid, Carlton could then accept or raise the bid (by at
least $150,000) within 15 minutes. The bidding would continue alternating in this
fashion until either Carlton or Miller accepted the other’s bid.
4.
Approximately half of the final price had to be delivered within 24 hours or the
bluffer would face severe financial penalties.
To begin our discussion, two people will be selected at random to simulate the actual auction
between Miller and Carlton. Come to class prepared to engage in this auction. Your price is not
restricted by the $2.5 M number in the case -- your actual valuation may be more or less. Assume,
however, that $2,000,000 is the floor.
Page 9 of 9
FI 8320 – Readings and Cases in Corporate Finance
Fall, 2006