Tel Aviv University
Recanati Graduate School of Business Administration
3340-01-b-z
1231.3340 - Corporate Financial Policy
Spring 2001
Dr. Shlomith Zuta
Office: Recanati 442
Phone: (03) 640-8191
E-mail: szuta@glue.umd.edu
Office Hours: Tuesday, 3-4 PM and by appointment
Teaching Assistant: Moti Topaz
Phone: (03) 546-6656
Cell phone: (052) 553-378
E-mail: motitopaz@bezeqint.net
TA’s Office Hours: Sunday, 8-9 PM and by appointment
Textbook:
Ross, Westerfield, and Jaffe, Corporate Finance, Fifth Edition, Chicago: Irwin/McGraw-Hill,
1999 (henceforth RW&J), ISBN 0-256-24640-8.
Grading:
Three case write-ups, 5% each
One case presentation or Q&A
Final examination
15%
15%
70%
Class participation can lead to a bonus of 5%.
Homework: Homework is assigned throughout the semester. You are required to turn in these
problems. Failure to turn in at least 90% of the homework will result in 10 points being taken off
your final grade. Homework will not be graded. However, note that the homework is indicative
of your ability to understand the material covered in class. In addition, the solution manual to the
book problems will be available in the library. I highly recommend that you solve as many of
those problems as your time permits.
Case Studies: Three case write-ups and one presentation or critique (Q&A) are required. There
will be three groups, each consisting of 3 or 4 members, preparing to analyze each case.
Following a lottery at the beginning of class, two groups will be presenting each case and one
group will be doing the critique (Q&A). The case studies are placed at the end of a particular
topic and are to be used as analytical and discussion tools. The objective in using case studies is
to provide examples of companies or individuals that have faced the topic at hand and to apply
theoretical tools to real problems. Included in this syllabus are questions and ideas that you may
use as guidelines for analyzing the case. Do not just answer the questions in a 1,2,3,4 format.
Write up the case analysis as an essay/executive memo. The content of the case write-up is as
follows:
1.
The cases should be done in groups with all group members receiving the same grade for
the write-up. If your name is on the report as part of the group, it means you participated
in the analysis.
2.
The case write-up should be a two-page single-spaced (maximum) report. The two-page
maximum does not apply to exhibits such as graphs and tables, but please keep these to a
minimum. You may use as many exhibits as necessary to make your point but the exhibits
must be referred to in your write-up. The case write-up should be typed in a 12 point
font.
3.
The case questions are designed to help you streamline the issues to be addressed. If you
believe that these questions do not effectively address the problems in the case, feel free
to go outside the parameters of the questions.
4.
It is not necessary to rehash the case situation in your write-up. Do not, however, assume
that I know every single number and detail. Use your judgment on how much of the case
to include in your write-up.
5.
Most importantly, you must take a position regarding the problem in the case and
make specific recommendations on how to solve it. Support your
recommendation as succinctly and as effectively as you can.
Please note that while cases tend to be very open-ended, you need to make reasonable
assumptions and proceed logically. Please state your assumptions clearly and substantiate them
if appropriate.
The presentations and write-ups can be done in English or Hebrew. I encourage you to do
them in English for your own benefit (but your choice will not affect the grade).
Class Participation: It is important that everyone come prepared to "open the case" and to
discuss in detail the problem and its potential resolution. Each team presentation will consist of
an analysis concerning the problem facing the firm and their proposed “solution”. Each group
will be responsible for one case presentation or one critique (Q&A). All group members
should be present at the presentation or Q&A. Note that groups presenting the case or doing
the Q&A need not turn in that particular case write-up. However, they are required to turn in a
hardcopy of their slides.
The ideal of case discussion is for the class to interactively come to an appreciation of the various
avenues that can be explored to understand the case problem and its possible resolution.
Good Internet Finance Sites that are useful for getting stock price data and company
information. Many others are available.
1.
10K’s, Annual Reports at the Securities Exchange Commission:
http://www.sec.gov/edgarhp.htm
2.
Nasdaq Stock Market:
http://www.nasdaq.com
3.
Quote Com Stock Quotes:
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http://www.quote.com
Financial Calculator: Although a financial calculator is not required for this course, the student
may find it helpful to purchase one. .
Exams: Makeup exams are only allowed for medical emergencies or reserve duty. Plan other
events in your schedule accordingly. A doubled-sided, standard size formula sheet will be
allowed in the exam.
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Overview of Course and Readings
Readings - RW&J
Chapter 13
Chapter 15
Chapters 15, 16
Chapter 18
Topic
Introduction and Overview
Efficient Markets
Introduction to Capital Structure
Capital Structure – Taxes and Financial Distress
Dividend Policy
Chapters 16,18, 21
Chapter 32
Chapter 30
Agency Problems, Options in a Corporate Finance Framework
Mergers, Acquisitions and Restructuring
International Corporate Finance
Please note that topics may be added or deleted with an advance notice of at least a week.
-----------------------------------------------------------------------------------------------------------------Cases: Questions and Approximate Dates
------------------------------------------------------------------------------------------------------------------
Case 1: Warren E. Buffet, 1995 (Week 4)
Case Questions:
1. What is the possible meaning of the changes in stock price
for GEICO and Berkshire Hathaway on the day of the
acquisition announcement? Specifically, what does the
$718 million gain in Berkshire’s market value of equity
imply about the intrinsic value of GEICO? (Note that
Berkshire owned 33.25 million shares before the
acquisition was announced.)
2. Based on Value Line’s forecasted information, what is the
range of possible intrinsic values for GEICO? What
questions might you have about this estimated range?
3. How well has Berkshire Hathaway performed? In the
aggregate? In its investment in Scott & Fetzer? In its
investment in earlier purchases of GEICO stock? In its
investments in convertible preferred securities?
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4. What is “intrinsic value” in Warren Buffet’s perspective,
and why is it accorded such importance? How is it
estimated? What are the alternatives to intrinsic value, and
why does Buffet reject them?
5. Please critically assess Buffet’s investment philosophy, and
prepare to identify points where you agree and disagree
with him.
6. Should Berkshire shareholders endorse the acquisition of
GEICO?
Case 2: Marriott Corporation: The Cost of
Capital (Week 6)
Case Questions:
1. Are the four components of Marriott’s financial strategy
consistent with its growth objective?
2. How does Marriott use its estimate of its cost of capital?
Does this make sense?
3. What is the weighted average cost of capital for Marriott
Corporation?
i) What risk-free rate and risk premium did
you use to calculate the cost of equity?
ii) How did you measure Marriott’s cost of
debt?
iii) Did you use arithmetic or geometric
averages to measure rates of return? Why?
4. What type of investments would you value using Marriott’s
WACC?
5. If Marriott used a single corporate hurdle rate for evaluating
investment opportunities in each of its lines of business,
what would happen to the company over time?
6. What is the cost of capital for the lodging and restaurant
divisions of Marriott?
i) What risk-free rate and risk premium did
you use in calculating the cost of equity for
each division? Why did you choose these
numbers?
ii) How did you measure the cost of debt for
each division? Should the debt cost differ
across divisions? Why?
iii) How did you measure the beta of each
division?
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7. What is the cost of capital for Marriott’s contract services
division? How can you estimate its equity costs without
publicly traded comparable companies?
Case 3: American Home products (Week 8)
Case Questions:
1. How much business risk does American Home Products
face?
2. How much financial risk would AHP face at each of the
proposed levels of debt in exhibit 3?
3. How much potential value, if any, can AHP create for its
shareholders at each of the proposed levels of debt?
4. What capital structure would you recommend as
appropriate for AHP? What are the advantages and
disadvantages?
5. How might AHP implement a more aggressive capital
structure policy? What are the alternative methods for
leveraging up?
Case 4: Dividend policy at FPL Group (Week
10)
Case Questions:
1. What are the most important issues
confronting FPL Group in May, 1994?
2. From FPL management’s perspective, is
FPL’s current dividend ratio appropriate?
What factors should be considered in
determining its dividend policy?
3. Would you recommend a change in FPL’s
dividend policy? If so, how would you
implement the change?
4. Answer questions 2,3 from an investor’s
perspective.
5. As Kate Stark, what would you recommend
regarding investing in FPL’s stock – buy,
sell, or hold?
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Case 5: Interco (Week 12)
Case Questions:
1.
2.
3.
4.
5.
Assess Interco’s financial performance.
Why is the company a target of a hostile
takeover attempt?
As a member of Interco’s board are you
persuaded by the premiums paid analysis
(Exhibit 10) and the comparable
transactions analysis (Exhibit 11)? Why?
Wasserstein, Perella & Co. established a
valuation range of $68-$80 per common
share for Interco. Show that this valuation
range can follow from the assumptions
described in the discounted cash flow
analysis section of Exhibit 12. As a
member of Interco’s board, which
assumptions would you have questioned?
Why?
How would you advise the Interco board
on the $70 per share offer?
How would you assess the actions of
Interco’s board up to August 8, 1988?
Wasserstein, Perella & Co.’s? The Rales
brothers? Drexel Burnham’s?
HONOR CODE
Corporate Financial Policy
1.
I agree to only submit work that is based on my own efforts. I will not copy any other
past or current student’s work or submit group work if I did not participate actively in the
analysis or writeup.
2.
I agree not to include as members of a group any students who did not actively
participate in analyzing or writing up that assignment. This includes cases in which one
or more group members are out of town on work or otherwise unable to participate.
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Students who are unable to participate in a group assignment need to make alternative
arrangements with the instructor.
3.
I will not use any handouts or solutions from prior year’s courses to help with any
assignment. This includes prior students’ work on the cases as well as any other material.
4.
I will not talk with any other student in Corporate Financial Policy about any exams,
makeup exams and assignments until all students have completed and handed in the
exam/assignment concerned.
5.
I will not use any other materials in and for the exams beyond what is allowed on a
formula sheet as stated in the syllabus.
I commit to follow this honor code explicitly and will also report any violations of this
code to the instructor. I understand that any violations of this code will at minimum
result in a zero on the exam/assignment concerned and may result in a failing grade in the
course and/or referral to the Honor Committee of the Business School for further review.
Signed: __________________________________
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