Corporate Finance II - Yale School of Management

Corporate Finance II
Professor Matthew Spiegel
• 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
• Tables and graphs do not count.
• Syllabus on the web.
• Most will not be typical business school
• 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
– 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
• 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
– 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
• Business Browser
• Yahoo!
• SEC Free Edger
• Bloomberg
– There is a Bloomberg terminal in a breakout room on level A.
• 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.
• Click on finance and then enter the ticker
symbol of the firm you are interested in.
• Real time statistics.
• Historical prices.
• 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.
• 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
– Bond terms (covenants).
• Useful for stock data as well, but there are other
• 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.