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.
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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).
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
Topic
Assignment
Intro..to course, case method
Lecture/discussion: valuation, risk, capital structure, cost of capital
Sep 11
Lecture/discussion: acquisitions, takeovers
Sep 18
Sep 25
Oct 2
Lecture/discussion: financial analysis
Lecture/discussion: financial forecasting
Ben & Jerry's TN1
Supplemental reading
Higgins chap. 2
Higgins chap. 3
Case 4: Ben & Jerry's Homemade
Lecture/discussion: estimating cost of capital
Lecture/discussion: debt restructuring
Reading 1
Supplemental reading
Case 8: Padgett Paper Products
Lecture/discussion: capital budgeting
Higgins chap 7
Case 10: Deutsche Braurei
Lecture/discussion: risk analysis
Higgins chap. 8
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Oct 9
Oct 16
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
Assign Euroland Teams
Oct 23
Oct 30
Nov 6
Nov 13
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
Paginas Amarelas TN1, TN2
Readings 2, 3
Euroland Foods TN1
Reading 5
Reading 4
Diamond Chemicals Supp. 2
Supplemental reading
eBay TN1, TN3
Higgins chap. 5
Higgins chap. 9
Higgins chap 6
Reading 6
Nov 20
case 26: eBay (A). Note: eBay (B) will be distributed for class discussion..
Lecture/discussion: private equity valuation
Supplemental reading
Dec 4
case 32: Rosario Acero
Dec 11
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 Padgett’s strategy and financial performance to date?
2. Why should Francis Libris, the banker, seek to structure Padgett’s 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
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Deutsche Brauerei
[financial analysis, financial policy]
1. What accounts for Deutsche Brauerei’s rapid growth in recent years? Specifically, what policy choices account
for this success?
2. What is Deutsche Brauerei’s credit policy toward its distributors in Ukraine? Why is it different from the policy
toward its other distributors? Is the company’s 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 Є698,000?
c. Adoption of the financial plan for 2001?
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 doesn’t 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?
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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]
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
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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 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.
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