Finance 463- Case Studies in Corporate Finance – Spring 2012
Instructor:
Textbook and
Course Materials:
Prof. Josh Pierce
Office:
Office phone:
E-mail:
Office hours:
457
777-4900
piercej@moore.sc.edu
TBA
Class Hours:
T TH 9:30-10:45am
T TH 11:00-12:15pm
T TH 12:30-1:45pm
1. Case Studies in Finance 463
Author: Pierce
Publisher: MCG/PRIMIS
2. Packet #27
Visit the Smarttext Mobile Kiosk located at 211 Main Street (the
Lofts at USC, formerly Whaley’s Mill), in the rear lot.
Course Objective:
The goal of this course is to provide you with a deep understanding
of the financing issues that firms must deal with when raising and
spending money. The course will include many cases that
illustrate different real-world financing situations faced by
corporations. All of the cases we discuss will be Harvard Business
School and are used in many of the world’s leading business
schools. This course will help prepare students for careers in
commercial and investment banking, corporate financial
management, as well as more general business careers that have a
substantial finance component. By the end of this course you must
be able to both conceptually and analytically attack the financing
and investing decisions firms make using real-life cases.
Course Format:
On days when we are covering textbook material, the course will
follow a traditional lecture format. For most of the lecture material
I will use overhead slides. I encourage student participation and
thus will at times actively call on students. My intention is not to
test you, but rather to keep everyone actively engaged in the
material.
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Course
Requirements:
There are two important components to this class. The first
component is the textbook material. You are required to learn this
material. I will be following the textbook fairly closely, but some
material not in the textbook will be covered in class.
The second important component of the class is the case material. I
have chosen 6 cases that illustrate and amplify the issues that we
cover in the textbook. You must work on the cases in a group of 4-6
people. The group should hand in one assignment and all group
members will receive the same grade. These assignments are due at
the start of class on the day we cover the case. All assignments must
be handed in. No email. Be prepared to discuss your solutions as I
will actively call on students to discuss their answers in class.
Grading:
Cases:
Class participation:
Financial Policy Assignment:
Exam 1: February 28
Exam 2: Varies by Section
25% of your grade
10% of your grade
15% of your grade
25% of your grade
25% of your grade
Notes on grading:
Cases- These will be graded on a scale from 1 to 10. You are encouraged and
allowed to work with others on these assignments. Each group will hand in one assignment.
Class participation- For this class to be a success, I need your active participation.
Your class participation grade will be based on my evaluation of your level of participation in
class discussions.
Financial Policy Assignment- I will require your group to complete a report on the
financial policy of a current publicly traded firm. This assignment is intended to force you to
explore the concepts from the course in the context of a real-world firm. More details on this
assignment are posted at the end of the syllabus. The assignment must be turned in to me at
the beginning of class on April 19th.
Exams: The exams are not cumulative. However, some material from earlier in the
course will be necessary to understand material later in the course. I will tell you more about
each exam as we get closer to the exam dates. You are allowed to bring a calculator and a
single-sided 8 ½ x 11 sheet of notes and formulas to each exam.
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Make-up Exams, Late Assignments, and Grade Changes:
Late case assignments will not be accepted. If you have an issue with how your case was
graded, you must write down your complaint and give the case back to me. I will regrade the entire case and reserve the right to raise or lower your score.
A missed exam without prior notification will be recorded as a zero. If an emergency
arises, be prepared to provide me with written documentation explaining your situation.
Honor Code
You are expected to practice the highest possible standards of academic integrity. Any
deviation from this expectation will result in a minimum of your failing the assignment,
and may result in additional, more severe disciplinary measures. This includes improper
citation of sources, using another student’s work, and any other form of academic
misrepresentation.
The first tenet of the Carolinian Creed is, “I will practice personal and academic
integrity.”
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Financial Policy Assignment
I would like you to identify a firm that went public sometime between 1995 and 2000, is
still public today, and currently has total assets with a book value of at least $5 billion.
As we proceed through the course you should investigate the firm's financial policy and
how it has evolved over time. Using the materials and concepts in the course, I would
like you to prepare a report analyzing and assessing the firm's financial strategy. This
report should be completed by your group and turned in to me no later than the beginning
of class on April 19th. Your report should incorporate answers to the following questions
if they are relevant for your firm. You are also welcome to address any other issues in
your report that you feel are germane to the topics of the course. You will be graded on
the depth and quality of your analysis. Your report must be limited to 5-typed pages
including any supporting tables/graphs. Please briefly indicate the sources you used at
the end of the report.
Questions
[1] When did the firm go public? What fraction of the firm was sold in the IPO? Was
the issue initially underpriced? What has the long-run stock performance been?
[2] Has the firm completed any subsequent equity issues? Were these issue public issues
or private issues? What was the market reaction to the issue decision?
[3] Has the firm ever issued public debt? Has the firm ever had a debt covenant waived
or experienced financial distress? What is the largest debt financing event that the firm
has undertaken?
[4] Does the firm appear to rely primarily on internal or external sources to fund its
growth?
[5] Has the firm ever issued dividends, repurchased shares, or deliberately retired a large
debt issue? What was the market reaction to these events?
[6] Do any of the financing events discussed in [1] - [4] appear consistent with the theory
of this course? Do any of the events seem inconsistent with the theory?
[7] Describe the firm's current capital structure and financial policy. How does their
capital structure compare to other firms in the same industry? Do you believe the firm
has adopted an optimal capital structure? Do you believe the firm has adopted an optimal
distribution policy? (Note: question [7] is the most important question in the assignment
and thus your discussion of this one should occupy proportionately more of your report
than the others.)
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Questions for Cases – Spring 2012 - Finance 463
Marriott Case
1.
What is the WACC for Marriott Corporation?
Hint: To answer this question think of these issues:
1. What risk-free rate and risk premium did you use?
2. How did you measure Mariott’s cost of debt?
2.
What is the cost of capital for the lodging and restaurant divisions of Marriott?
Hint: To answer this question, think of these issues:
a. What risk free rate and risk premium did you use in calculating the cost of equity for each
division? Why?
b. How did you measure cost of debt for each division? Should cost of debt differ across divisions?
Why?
c. How did you measure beta of each division?
3.
What is the cost of capital for Marriot’s contract services division? How can you estimate
its equity costs without publicly traded comparable companies?
4.
Can’t I just apply the overall cost of capital to each division? I thought Beta was Beta?
Help me out.
UST Case
Should UST borrow the $1 billion and use the proceeds to repurchase stock? How would
this action affect the stock price?
Massey Case
1. Net sales for Massey-Ferguson actually increased between 1979 and 1980. Despite
this, net income and income from continuing operations both dropped sharply in
1980. Which item on the income statement was most responsible for this drop in
income?
2. What was Massey-Ferguson’s market value of common stock at the end of fiscal
1980? Was this market value greater than or less than Massey-Ferguson’s book value
of equity? Why?
3. Why would the Canadian government have any interest in helping Massey-Ferguson
refinance its debt?
4. Why would it be difficult for Massey-Ferguson to conduct an equity issue to pay
down its debt?
5. How did Massey-Ferguson’s financing policy compare to its competitors in the
degree to which it exposed the firm to increases in interest rates?
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AHP Case
Note that the “net worth” term which is used in some of the exhibits is just
another name for the book value of equity.
You are a consultant brought in by American Home Product’s management to consult
with them on whether or not any of the recapitalization plans outlined in the case should
be pursued in January of 1981. The four possibilities are (a) do nothing, (b) repurchase
$595.2 million in stock, (c) repurchase $845.9 in stock, and (d) repurchase $1096.7
million in stock. Assume that for all of the repurchase plans the firm uses $233.0 million
in cash that it currently holds and raises the additional funds needed from a debt issue.
The data in exhibit 3 labeled actual 1981 data should be considered a forecast for 1981
assuming the company takes on no additional debt. Since you are a consultant, you may
need to make some additional assumptions in your analysis. Clearly explain what
assumptions you are making and your justification for these assumptions. Finally, what
would you suggest they do (a) (b) (c) or (d) from above and why.
Do you see any non-tax costs or benefits associated with leveraging up the company
under any of the proposed recapitalizations. Clearly explain your answer.
FPL Case
Would you recommend that FPL change its dividend policy? What might the impact of a
dividend cut be on the short-run and long-run stock price of FPL?
Eskimo Case
You are an investment banker helping Eskimo management prepare an Initial Public
Offering (IPO). Assume the following:
(i) Eskimo pays out $15 million in a special dividend immediately before the offering.
(ii) Eskimo borrows $4 million to help finance the special dividend. They
maintain this level of borrowing indefinitely following the IPO. (Note –
ignore any discussion of green shoe)
(iii) All of the shares of Eskimo are sold to the public. The proceeds of the IPO
are distributed to the current (pre-IPO) owners of Eskimo.
Question #1:
Estimate the market value of equity of Eskimo after the IPO using the WACC method.
Using this estimate, what do you recommend as the asking price for the shares in the
IPO?
Questions #2:
If you were Reynold’s management, would you sell Eskimo to Nestle or accept the
proposed IPO plan. Justify your answer.
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