Financial Management Simulation Game BITS Pilani Work Integrated Learning Programmes Division By: Dr. Vaishali Pagaria vaishali.pagaria@wilp.bits-pilani.ac.in BITS Pilani Work Integrated Learning Programmes Division Case Study Analysis Guidelines General Instructions • • • • • • • • • • • • It’s a group activity but submission is individual. The same report will be submitted by all the team members individually on Taxila under Experimental Learning Assignment 3: Case Study. Groups are same as CESIM Simulation game activity. The group is free to select any one case study from the given two. All the answers must be supported by appropriate and significant analysis. Calculations must be shown in tabular format followed by interpretation. Use class material and reference material for better understanding of the concepts and their applications. Submission is on E-learn platform. MS Word/PDF and MS Excel files can be uploaded. The cover page should include the team no., team members names, IDs and their contribution. Must attach MS Excel file to review the relevant calculations. Submission dead line: 23rd April 2023. Weightage : 5% = 5 Marks Top 5 teams will be asked to present their analysis. 4/22/2023 3 BITS Pilani, WILPD BITS Pilani Work Integrated Learning Programmes Division Case Study 1: Paul V. Dietrich Farms’ Ltd.: Expansion Plan Synopsis In November 2020, Paul Dietrich, a seventh-generation Canadian farmer, was presented with an investment opportunity. A local farmland owner was selling a 150 acre parcel that adjoined some land Dietrich already owned. The current owner wished to sell the property privately and offered the opportunity to bid to only two businesses: Paul V. Dietrich Farms Ltd. (Dietrich Farms) and a local dairy farm. Dietrich knew that the local dairy farm was eager to expand its land base and was aggressive with tits plans to do so. Given that and the recent appreciation in land values, Dietrich estimated that a competitive bid would need to be offered to get the deal. 4/22/2023 5 BITS Pilani, WILPD Contd…. Dietrich wanted to evaluate the attractiveness of this opportunity, considering the long-term financing required for a land purchase as well as short-term financing needs to navigate the seasonal nature of cashflows that came with growing field crops. He new it would be imperative to consider both how this opportunity would be perceived by his bank and how best to present this opportunity to his bank. He also wanted to evaluate whether an investment in tile drainage would be worthwhile should he be successful in purchasing the 150-acre parcel. 4/22/2023 6 BITS Pilani, WILPD Concepts in Practice 1. Classification of risks: • Business Risk Vs. Financial Risk • Market Risk, Credit Risk, Operational Risk • Leverage and Break Even Analysis 2. Cost of Capital : Financing cost 3. Capital Budgeting: • Discounted Cash flow methods of evaluation : NPV and IRR 4. Risk Analysis in Capital Budgeting • Sensitivity Analysis and Scenario Analysis 4/22/2023 7 BITS Pilani, WILPD You are required to answer: 1. What risks and opportunities does Dietrich face in the field cropping industry? 2. Identify key success factors for this industry. Is Dietrich wellpositioned for success? 3. Project Dietrich’s cashflow for 2020-2023 and evaluate the farmland investment decision. Should Dietrich put in a bid? 4. If Dietrich purchases the land, is the investment in the tile drainage worthwhile? 5. How should Dietrich present his proposed plan to bank? 4/22/2023 8 BITS Pilani, WILPD Hints for Analysis • Identify all the risks and opportunities of agriculture industry which may affect Dietrich. Also identify key success factors like strengths. You can also carry out SWOT analysis of the business. • Identify relevant costs and project monthly cashflows. You need to project cash inflows and outflows of the proposed investment. Use information from Exhibits 5-8. • Calculate and interpret net present value, internal rate of return, and discounted cash flow. • Conduct thoughtful sensitivity analysis that reflects an understanding on the industry and business risk profiles – Use ‘what if’ analysis. • Evaluate a business expansion opportunity from the perspective of a prospective funder i.e. Bank. – Calculate relevant ratios – Use information from Exhibits 1-3 4/22/2023 9 BITS Pilani, WILPD Reference Articles 1. https://thoughtleadership.rbc.com/farmer-4-0-how-thecoming-skills-revolution-can-transform-agriculture/ 2. https://ontariograinfarmer.ca/2020/11/01/watermanagement-4/ 3. https://nutrientstewardship.org/implementation/subsurfa ce-tile-drainagemanagement/#:~:text=For%20most%20farmers%2C%2 0though%2C%20drainage,is%20a%20production%2Dli miting%20factor. 4. http://www.empireconstructionandtrenching.com/theeconomics-of-tile-drainage/ 4/22/2023 10 BITS Pilani, WILPD BITS Pilani Work Integrated Learning Programmes Division Case Study 2: California Pizza Kitchen (CPK) Synopsis 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. 4/22/2023 12 BITS Pilani, WILPD Concepts in Practice 1. The Modigliani-Miller intuition of capital structure irrelevance; 2. How the cost of equity is affected by capital structure decisions 3. Financial Risk and the levered-beta capital asset pricing model (CAPM) equation; 4. Interest tax deductibility and the valuation tax shields; 5. Importance of debt capacity in a growing business 4/22/2023 13 BITS Pilani, WILPD You are required to answer: 1. What is going on at CPK? In what way can Susan Collyns facilitate the success of CPK? 2. May be we can all be right. Is there a case for that? 3. How does debt add value to CPK? Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital? 4. Based on the analysis in case Exhibit 9, what is the anticipated CPK share price under each scenario? How many shares will CPK be likely to repurchase under each scenario? What role does the tax deductibility of interest play in encouraging debt financing at CPK? 5. What is the case for not doing the recapitalization? 6. What capital structure policy would you recommend for CPK? 4/22/2023 14 BITS Pilani, WILPD Hints for Analysis • In assessing the effect of leverage on the cost of capital, you may assume that the a firm’s CAPM beta can be modeled in the following manner. 𝛽𝐿 = 𝛽𝑣 [ 1 + (1-T) D/E] Where, 𝛽𝑣 is the firm’s beta without leverage, T is the corporate income tax rate D is the market value of the debt E is the market value of equity • • • • • In your estimate, you may assume that the market risk premium in CAPM is 5%. Interest rate of CPK’s credit facility with the Bank of America: LIBOR + 0.8% = 6.16% EBIT includes interest income Market value of debt = book value of the debt Actual market value of equity equals the share price ($22.10) multiplied by the current number of shares outstanding (29.13 million) 4/22/2023 15 BITS Pilani, WILPD BITS Pilani Work Integrated Learning Programmes Division Thank You. 4/22/2023 16
