Financial Management Articles
Fall, 2005
Answer questions with a “*” on Blackboard
In many cases, there is no one right answer to the questions. Use your best judgment
thinking not only about finance concepts but general business knowledge (e.g.,
marketing, management, information systems, accounting,) to answer the questions.
Stock Valuation
Why Wal-Mart is Still a Smart Buy, May 9, 2005 BW
1. * Interpret, “the stock goes for 17.5 [i.e., PE = 17.5] times this year’s profit, a
modest premium to the broad market (15.5 times) and a discount to Target
(18.7).” Worded differently, based on the PE ratio, which one is more expensive,
Wal Mart or Target? Explain.
2. Is spending $32 billion on operations (i.e., capital expenditures) the past three
years a positive for the future stock price of Wal Mart? Explain.
3. How does the repurchase of company stock influence EPS (Earnings Per Share)?
Explain.
4. Are you optimistic about Wal-Mart’s future? Explain.
Capital Budgeting
P&G’s $57 Billion Bargain, July 25, 2005 BW
5. * If you were P&G management deciding whether to purchase Gillette, what
factors would you consider? Please be as specific as possible.
6. What process would management go through to determine how much to pay for
Gillette?
A Place for Cocoa Nuts? July 15, 2005 WSJ
7. * If you were Mars or Hershey management deciding whether to build retail
chocolate stores, what factors would you consider? Please be as specific as
possible.
8. What process would management go through to determine whether to open retail
chocolate stores?
9. Should chocolate manufacturers open retail restaurant stores? Explain.
Test-Driving a Hertz IPO, July 18, 2005 BW
10. * In your opinion, has Ford’s management of Hertz been rational? Explain.
11. What factors should Ford’s management consider when deciding whether to sell
or hold on to Hertz?
12. Should Ford sell Hertz?
Dell Puts Cash Flow to Work, April 25, 2005 WSJ
13. *What factors should Dell’s management consider when deciding whether to
finance (loan money to customers) and/or purchase CIT Group?
14. Should Dell purchase CIT Group? Explain.
A Ball ESPN Couldn’t Afford to Drop, May 2, 2005
15. * What factors go into forecasting an operating profit of $100 million to $200
million per year?
16. In your opinion, is a $100 million to $200 million operating profit a wide range?
If only $100 million profit is truly realized, could purchasing the rights to Monday
Night Football be a bad capital budgeting decision?
Financial Statement Analysis
Auto-Industry Price War Fuels Sales, July 25, 2005 WSJ
17. *How does the employee-discount program influence automobile manufacturers’
financial statements and ratios?
Cash-Rich Firms Feel Pressure to Spend, July 11, 2005 WSJ
18. What financial statement shows a company’s cash position?
19. * “32% of all nonfinancial companies in the S&P500 have more cash than debt,
up from 17% . . .” Why don’t these companies pay off all their debt?
20. If a company has a lot of cash, how might this be interpreted as bad news?
All the Rage Since Reagan, July 25, 2005 BW
21. *Why do you think the Air Force 1 (AF1) has generated such a high profit margin
(70%)? Note: profit margin is a vague term. It is difficult to know whether this
is gross profit margin or operating profit margin.
22. Do you think the AF1’s inventory turnover is high or low? Explain.
Water, Water Everywhere, June 20, 2005 Forbes
23. * How does Andy use financial statements to run his business?
24. What ratios do you think are the most important to Andy?
Colgate’s Fight for Market Share Will Likely Erode Profit, December 13, 2004 WSJ
25. * Link the various business decisions or industry events in the article with how
these events or decision affect the financial statements of Colgate, P&G, etc.
Pier 1 Plots Sales Turnaround, August 2, 2005 WSJ
26. *How should Pier 1 evaluate whether its strategy is successful? Be specific.
27. Do you think Pier 1 will be successful?
Cash Flow/Financial Planning/Budgeting
Why a Big-Spending EBay Is a Bummer? BW
28. *Is a Big-Spending EBay a Bummer? Explain.
Cogent Leaving its Prints on the Biometrics Market, June 6, 2005 BW
29. * How difficult do you think it is for Cogent to develop an accurate cash budget?
Explain.
Cost of Capital/Risk and Return
How Super is Your Market?, March 1, 2005 WSJ
30. * What were some of Winn Dixie’s primary risks?
GM Debt Downgraded by Moody’s, April 6, 2005 WSJ
31. * If you were a finance manager looking to raise capital, how might this article
help you?
32. When determining a credit rating for a company, what factors do you think are
important to an analyst?
33. What is the value of bond ratings?
Lessons From the Brain-Damaged Investor, July 22, 2005 WSJ
34. * When analyzing risk and determining a required return, what is more important,
the external factors that you analyze or your “psychological make-up” which
influences how you analyze external factors? Explain.
Leverage/Capital Structure
Slice of Pi: New Google Mystery Centers on $4 Billion Share Sale, August 19, 2005
WSJ
35. If the Google stock price appears relatively high and new shares are offered, what
is the benefit to current Google shareholders?
36. *If you were a stockholder of Google, what would be your concerns about this
additional stock offering?
37. Is $2.95 billion a lot of money for Google? Explain.
38. Does the stock issue increase or decrease the risk of Google? Explain.
New at Blockbuster: Debt Troubles, August 12, 2005 WSJ
39. *What are some of the options/strategies/tactics you, as Blockbuster management,
would be considering to work out your “debt troubles”?
40. What do you think the “real” problem (not symptom of the problem) is for
Blockbuster?
Revlon Moves to Relieve Cash Crisis, February 13, 2004 WSJ
41. *Does “righting the capital structure” help Revlon compete in a soft market for
cosmetics? Explain.
Gorging on Buybacks, May 30, 2005 Fortune
42. *What are the potential advantages and disadvantages of a company buying back
its stock?
43. Compare stock buybacks vs. paying dividends. How does the capital structure,
EPS, ROE, and liquidity change with stock buybacks? How does the capital
structure, EPS, ROE, and liquidity change with dividends?
44. When are stock buybacks better than paying dividends? When are dividends
better than stock buybacks?
Working Capital
U.S. Companies Decide to Keep the Money, September 9, 2004 WSJ
45. *What factors should Lexmark, Siebel, and Bed, Bath, & Beyond consider in
determining their cash positions?
46. How can a company decrease its cash balances?
Ignored Money Waiting to Be Spent, August 30, 2004 WSJ
Net Working Capital = Current Assets – Current Liabilities.
47. *What business decisions can be made to increase or decrease a company’s net
working capital? Be specific.
48. Why might a company desire to increase or decrease its net working capital?
A Surprise in Office Depot’s In-Box?, October 25, 2004 BW
49. *What decisions by Office Depot will increase (and decrease) Office Depot’s net
working capital?