Corporate Finance II Professor Matthew Spiegel Overview • Cases and lectures. • Case groups of two. – Deadline is this Friday for the formation of groups! • Case days. – One group will be randomly selected to conduct a 45 to 60 minute presentation. – Each group must turn in a four page write up of each case. • Tables and graphs do not count. • Syllabus on the web. Cases • Most will not be typical business school cases! • Cases will ask you to examine a firm as it currently exists and to answer questions about it. How Will You Know if You Made the Right Call? • By waiting a few years to see what happened. – Such is life. • Too many cases rely on 20-20 hindsight. This is a luxury you do not have in real life. Here you are stuck making decisions based on arguments with the data at hand. Then How Will We be Graded? • Grades will depend on how well you defend your conclusions. • Bad defense: It seemed to us a 3% growth in sales for five years was reasonable. – Ad hoc. Why not assume 2% or 4%? • Better defense: Sales growth has been 3% for the past several years so we are projecting that forward for the next five years. – At least this is based on something. But why do you think the past growth rate is the appropriate one going forward? • Much better defense: Sales growth has been 3% for the past several years. Furthermore, the firm’s market share has been fairly constant and unless that changes we should see a 3% growth rate into the future. As of today management has not presented a plan that would improve upon that. Thus we using that as our projection for the next five years. – Uses past results for the projection’s basis, but also looks forward asking if there might be any changes in the works. Questions Every Presentation Should Answer • What does the firm do? • How has it performed relative to its peers? • What is its current and future financial policy? • Have their been any recent changes in its product mix. – Divisions purchased or sold. • Does it plan to add or subtract product lines in the foreseeable future? Lesson Specific Questions • At least a week prior to each case’s discussion in class questions specific to that case will be posted on the web. – Foamex is currently in financial distress. • • • • How did this happen? What should management do? What should the bond holders do? How much is the debt worth? Class Discussion • Do the presenters a favor and question what they say! • If the class has nothing to say I will assume they find the case presentation to be so abysmal that it is not even worth commenting on! • Do yourself a favor and question what the presentation. – Class participation is part of your grade! Discussion Goals • The goal of each discussion is to analyze the elements that go into making a business decision. – What data do you have? – What do you need to just assume in order to go forward? – What kind of additional analysis might you do if you had the resources and time? Class Notation • • • • • The value of a firm’s equity: E. The value of a firm’s debt: D. A firm’s marginal tax rate: TC. Risk free rate: rf. Expected return on the market: rm. Information Sources • Hoover’s – http://www.library.yale.edu/databases/ • Business Browser – http://www.library.yale.edu/socsci/databases/bbinfo.html • Yahoo! – http://www.yahoo.com • WRDS – http://wrds.wharton.upenn.edu/ • SEC Free Edger – http://www.sec.gov • Bloomberg – There is a Bloomberg terminal in a breakout room on level A. Hoover’s • Financial statement summaries. – Warning: not as good as going to the 10-k’s. • Financial and accounting ratios. • Comparisons with competitors. Business Browser • Financial statements. – As reported or standardized. – Use as reported! Standardize them yourself! • A few analyst reports. – In the real world a much better source is Thompson Financial. • Create peer lists. • Industries by SIC code. • Need to set up your own account. Yahoo! • Click on finance and then enter the ticker symbol of the firm you are interested in. • Real time statistics. • Historical prices. WRDS • CRSP stock price database. – – – – Daily stock returns through 2003. Extremely useful for testing theories you hope to develop. Web based, easy to use. Fast and easy source for data on E, rm, and rf. • Compustat database – Accounting data going back several decades. • Enter the firm. • Click on the accounting items you want. • Instant delivery of the spreadsheet data you want! • Class account. – Login name: xxxxx. Note all small letters! – Password: xxxxxxx. Who can argue with that? SEC Free Edger • The place to get the company’s current and past financial filings. Bloomberg • Essential for getting bond data. – Bond price quotes. • Good for bonds that are not currently going up or down in price by large amounts. • Quotes are likely to be stale for bonds seeing rapid price changes. – Bond terms (covenants). • Useful for stock data as well, but there are other sources. • Extremely user hostile! – Learning to use a Bloomberg terminal is a painful but, alas, essential experience. It is the standard data source on Wall Street.