Case Studies in Financial Management FIN 653
Professor Moon H. Song Summer 2008
3357
Office Hours : TUE/THUR, 17:00-18:00pm ; and by prearranges appointment
Email : moon.song@sdsu.edu
619-594-5334 phone
619-594-3272 fax
Course Description And Objectives
Using the case method, Fin 653 brings financial management decisions from the business world to the classroom. The case method helps students develop decision-making skills in unstructured, uncertain, and complex (i.e., realistic) situations. The assigned cases cover a broad range if financial analysis with an emphasis on strategic valuations (mergers, acquisitions, and restructurings) and corporate financial strategy. The course is integrative in nature, with special attention to the integration of theory and managerial judgment.
Textbook And Materials
Case Studies in Finance, R. F. Bruner 5th ed., Irwin.
Lecture notes.
Prerequisite
The specific prerequisite is
BA 665 or equivalent. A single undergraduate introductory finance
course, by itself, is not sufficient preparation for this course.
Format
Classes are divided between presentation and lecture/discussion sessions with emphasis on case presentations. The primary focus of presentation sessions is the analysis and discussion of a case. The focus of lecture/discussion sessions is to review, expand on, or introduce relevant topics.
Administrative Notes
Grades. Grade components are weighted as follows:
50% case presentations
20% strategy paper
20% Participation
10% attendance
Peer Evaluation. At the end of each presentation, I will ask you to fill out a form to evaluate the degree to which member of your group has contributed to the group’s efforts. No grades will be increased based on these evaluations. The teamwork portion of the grades of low contributiors will be reduced.
Consultation. I will be glad to help you with any questions of a general nature that pertain to this course and to your cases. However, you should be aware that I will not address certain types of case-specific questions. I will not, for example, give advice on the best approach to a case, nor will I pre-approve any assumptions your group may be considering, not will I attempt to resolve any ambiguities in the cases.
Computer Files.
Spreadsheet files for many of
your cases are available for download at the McGraw-Hill Web site (www.
mhhe.com/bruner4e)
Risk analysis. Risk analysis is an essential part of all financial analysis. You are expected to use risk-analysis techniques to test the robustness of your results to reasonable variations in key underlying assumptions. In the modern business world point estimates of important decision variable are seldom sufficient. A reasonable range of values is required. A particular requirement of this course is that simulation be one of the risk-analysis techniques used in every case solution.
Strategy Papers. Strategy papers are individual assignments. Each student on group assigned a strategy paper will write a three-page (single space) paper providing a methodology that could be followed to actually solve the case. The strategy paper is not an actual solution to the case – it should simply explain how one would go about solving the case, step by step. The strategy paper should skip background details and deal only with recommended procedures. The level of detail that is appropriate in describing the procedures depends upon the objective of the particular case.
Case Presentations
No later than 24 hours before class, the Presentation Group will provide the case solution to the Instructor via email attachment. All presentation and supporting spreadsheet files will be provided at this time.
The Presentation Group will come to class prepared to present the assigned case. At the beginning of class, the Presentation Group will provide a paper copy of final Power Point and spreadsheets to the instructor and each of the members of the class. The Presentation Group will assume the role of a team of outside consultants who have been hired by the Corporate Headquarters Group (class) to present independent recommendations and a solution to the problem at hand. All of the assumptions necessary to solve the case should be collected together and displayed on one or more sequential transparencies. The Presentation Group will have 45minutes in which to make their formal presentation. With the exception of requires for clarification, the Group will be uninterrupted during its presentation. After the Presentation Group had finished, the Headquarters Group will become involved in an unrestricted question and answer session.
It is important to limit presentation time to 45 minutes to allow sufficient time for class discussion and my concluding comments. As a general guideline, we will allow 45 minutes for the presentation, 20-25 minutes for the question and answer session, and 5-10 minutes for my concluding comments.
I will generally limit my closing comments to one or more of the following area.
§ The Appropriateness; The approach to the case and the reasonableness of assumptions.
§ Internal consistency; Were the groups’ solution and conclusions generally consistent with their approach and their assumptions?
§ Relevant generalizations or extensions.
§ The historical outcome of the case (if available).
A typical request at the end of a case discussion is – “What is the answer?” Let me emphasize that the case method does not provide THE ANSWER. Unlike deterministic end-of-chapter problems, cases are complex statements of real-world situations and they will invariably have multiple variable answers. In spite of the apparent precision of our quantitative models, financial analysis is not an exact science. Different sets of assumptions will produce different answers, even if the same analytical models are used. Qualitative issues will often be important, and different interpretations of qualitative issues can reasonably be drawn and defended. In general, there is no single, correct answer to complex business problems. A good case begins the questioning process, not ends it. In the final analysis, what any one person would have done – or even what actually happened – are not very significant. What is important, is that you know what you would have done in a specific situation. Ultimately, in the case method, the question, not the answer, is the key to effective learning.
QUESTIONS AND REFERENCES FOR ASSIGNED CASES
A serious of questions for each case is provided below to direct your attention and guide your analysis. I want you to address these questions, but do not feel constrained by them. There may be important issues not addressed by these questions that need to be dealt with in your analysis.
1. Coke vs
Pepsi, 2001
As a
banker, how would you evaluate Padgett’s strategy and financial performance to
date?
1.
What is EVA? What are the advantages and disadvantages of using EVA as
a measurement of company performance?
2.
Examine the historical performance of Coca-cola and PepsiCo in terms of
EVA. What trend you observe? What are the factors behind those trends? What do
you think the key drivers of EVA?
3.
What is the weighted-average cost of capital and why is it important to
estimate it? Is the cost of capital something that managers set? Who sets it?
4.
Calculate the WACCs for Coca-Cola and
PepsiCo.
5.
Interpret the results of your WACC calculations. What observation can
you make?
6.
Calculate EVA for 2001 to 2003 using the forecast given in the case and
the WACCs you have estimated.
7.
Interpret the results of your EVA calculation. If you had to choose
Coca-Cola and PepsiCo, which one would you choose? Why??
2. The Boeing 7E7
1.
What is an appropriate required rate of return against which to
evaluate the prospective IRRs from the Boeing 7E7?
a.
Please use the CAPM to estimate the cost of equity. At the date of the
case, the 74-year equity market risk premium (EMRP) was estimated to be ______.
Which beta and risk-free rate did you use? Why?
b.
Which capital-structure weights
did you use and why?
2.
Judged against your WACC, how attractive is the Boeing 7E7 project?
a.
Under what circumstances is the project economically attractive?
b.
What does sensitivity analysis (your own
and/or that shown in the case) reveal about the nature of Boeing’s gamble on
the 7E7?
3.
Should the board approve the 7E7? Why or why not?
3. JetBlue Airways IPO Valuation
1.
What is an IPO and why is it such a big deal? Is this a good idea for
JetBlue? Why?
2.
Calculate the value of JetBlue stock.
3.
What different approaches can be used to evaluate JetBlue stock.
4. Delux
Corporation
1.
What are the risks associated with Deluxe’s
business and strategy? What financing requirement do you foresee for the firm
in the coming years?
2.
What are the main objectives of the financial policy that Rajat Singh must recommend to Deluxe Corporation’s board of
directors?
3.
Drawing on the financial ratios in case Exhibit 6, how much debt could
Deluxe borrow at each rating level? What
capitalization ratios would results from the borrowing implied by each rating category?
4.
Using Hudson Bancorp’s estimates of the costs of debt and equity in
case Exhibit 8, which rating category has the lowest overall cost of funds?
5.
Is Deluxe’s current debt level appropriate?
Why or why not?
6.
What should Singh recommend regarding:
·
The target bond rating
·
The level of flexibility or reserves
·
The mix of debt and equity
5. Rosario Acera
S.A.
1.
Why is Pablo Este considering obtaining long-term capital?
2.
How will the two financing alternatives affect the performance of the
firm? Please examine the financial forecasts contained in Exhibits 6 through 11
in the case.
3.
How are the principal risks the firm faces? Under some reasonable
downside scenario, could Rosario Acero continue to
service its debt?
4.
From
5.
As for the possible equity issue, would an offering price of $9.00 per
share be fair?
6.
Which course of action should Este adopt? In preparing your
recommendation, use the FRICTO framework to identify the trade-offs between the
two alternatives.
6. National Railroad Passenger Corporation
1. What is a financial lease? What advantages or disadvantages does it have over debt?
2. What are the pros and cons of each of the three financing alternatives given in the case?
3. Which alternative did you choose? Why? Provide quantitative support for your answer.
7. Corning, Inc.
1.
Why do you suppose
2. What kinds of insights do the descriptive rations in case Exhibit 5 give you?
3. Please value the convertible bond
4. In valuing the call option, does Coopers need to adjust the stock price for dividends?
5. What should Coopers use as her assumption for volatility? Check the sensitivity of your call-option value to variations in the assumption. In the call-option value highly sensitive to volatility? Why is volatility so important?
6.
What does it mean to force
conversion? Under what circumstances would
7. Should Julianna Coopers invest in this bond offering?
8. Yeats Valves and Controls, Inc.
1. What is the situation this company faces? What are the strengths and weaknesses of this company, and its counterparty? Why should your company and the counterparty company want to negotiate?
2. What is the range of plausible values of Yeats Valves? How did you estimate this range? What are the key value drives?
3. Please prepare a recommendation for the price and exchange ratio for a combination of TSE International and Yeats Valves. What steps do you recommend Bill Yeats take? What should be said to whom?
9. Palamon Capital Partners/TeamSystem S.P.A
1. What is private-equity financing? Who participates in it and why? How is Palamon positioned in the industry?
2. How does private-equity investing compare with public-market investing? What are the similarities and differences between the two?
3. Why is Palamon interested in TeamSystem? Does it fit with Palamon’s investment strategy?
4. How much is 51 percent of TeamSystem’s common equity worth? Prepare discounted-cash-flow analysis using free cash flows implied by the forecast financial statements. Supplement this with a multiple-based valuation to justify your recommendations.
5. What complexities do cross-border deals introduce? What are the specific risks of this deal?
6. What should Elson recommend to his partners? Go/no go? If “go,” what nonprice terms are important? If “no go,” what counterproposal would you recommend?
10. General Mills Acquisition of Pillsbury
1. What are General Mill’s motives for this deal? Please estimate the present value of the expected cost savings.
2. Why was the contingent payment included in this transaction? How does the “claw-back” affect the attractiveness of the deal from the standpoints of General Mills and Diageo?
3. How does the contingent payment work? Please prepare a payoff diagram (i.e. “hockey-stick diagram”) of the claw-back feature.
4. What is the contingent payment worth in early December 2000?
5. Is this deal economically attractive to General Mills’ shareholders? Would you recommend that shareholders approve, or reject, this deal?
11. Printicomm’s
Proposed Acquisition of Digitech:
1. What is Jay Risher’s job? Can he get a
fixed-price deal here?
2. How do the two proposals differ?
3. How did you value the alternatives? What did you find?
4. Why do the same terms look so different to the two sides? Why do
the values of the three-and –five year earnouts
differ so greatly?
5. Are there other issues Jay Risher
should consider?
6. What do you recommend Jay Risher
do? Why?
12. Structuring Repsol’s Acquisition of YPF(A)
1. How significant are the expected synergies and restructuring effects? Please prepare an estimate of the value of these.
2. Please assess the price that Cortina proposes to offer to YPF shareholders. At $44.78 per share, would Repsol underpay, overpay, or just a fair price?
3. Please assess the current pricing of Repsol shares in the market. Is Repsol undervalues, overvalues, or just fairly values in the global equity markets at this time? Is new a good time to issue Repsol shares?
4. Compare the relative advantages and disadvantages of offering to the shareholders of YPF either (a) cash or (b) shares of Repsol. If you were a shareholder in YPF, which form of consideration would be more attractive (assuming that the amount of consideration would be constant at $44.78 per share)?
5. Whether or not you recommend a cash-based offer for YPF, please compare the relative advantages and disadvantages of the (a) all-debt-finances cash offer, (b) all-equity-finances cash offer, and (c) blended financing of debt, preferred stock, and equity. How significant are variations in default risk in the assessment of the financing alternatives (see case Exhibit 10)?
6. What course of action would you recommend that Alfonso Cortina adopt regarding form of payment and financing for the tender offer for YPF? On what “key bets” does your recommendation depend?
______________________________________________________________________________________________________________________________________________________
Schedule for Fin653, Summer 2008
|
Thursday, 10 July |
Organization Session, Module 1 and 2 |
|
Tuesday, 15 July |
Module 2 and 3 |
|
Thursday, 17 July |
Module 4 |
|
Tuesday, 22 July |
Coke A, Coke B, Boeing A |
|
Thursday, 24 July |
Boeing B, JetBlue A, JetBlue B |
|
Tuesday, 29 July |
Delux A, Delux
B, Rosario A |
|
Thursday, 31 July |
Rosario B, National A, National B |
|
Tuesday, 5 August |
Work Period |
|
Thursday, 7 August |
Corning A, |
|
Tuesday, 12 August |
Yeats B, Palamon A, Palamon B |
|
Thursday, 14 August |
General A, General B, Printicomm A |
|
Tuesday, 19 August |
Printicomm B, Repsol A (bidder), Repsol B (Target) |
Sequence of Lecture/Discussion Topics
Module 1: Valuation.
Module 2: Capital Structure
Module 3: Lease/Option
Module 4: Option/Merger
__________________________________________________________________________________________________________________________________________________________
Group Evaluation
Report
(Note: These evaluations are completely
confidential.)
Team No. ________ Your name:
_____________________________________
Please assign a numerical
grade (4.0 -- 2.0) to each of your group’s members based on your evaluation of
his/her overall contribution to your group's efforts during the term. Do not include yourself. Grade adjustments require majority
recommendation and affect only the portion of the final grade that is based on
group efforts. Use the following as a guide:
4.0.
Contributed approximately his/her share and should receive the full
grade earned by the group.
3.5.
Contributed somewhat less than his/her share. Grade should be slightly reduced.
3.0.
Contributed significantly less than his/her share. Grade should be significantly reduced.
2.5.
Contributed very little to the team's efforts. Grade should be greatly reduced, but
remain a passing grade.
2.0.
Contributed almost nothing. Does
not deserve a passing grade on the teamwork portion of the course.
Teammate's Name (please print) Grade
1. ________________________ ______
2. ________________________ ______
3. ________________________ ______
4. ________________________ ______
________________________________________________________________________________________________________________________________________
Case Evaluation Form
Case
______________________________________________ Date
_____________
Group ______ Overall
Grade ___________
Overview
7
6 5 4 3 2 1
(Note: This qualitative scale is also used for
remaining items.)
There is a
well-known axiom of presentation technique:
"First, tell them what you are going to tell them then tell
them then tell
them what you told them."
Accordingly, your presentation should be organized in three sections (1)
introduction (or overview), (2) main body, and (3) summary. In your overview, tell them what you are
going to tell them, along with any important environmental considerations that
set the stage. An overview will generally
Identification of Key Assumptions
Identify your
key assumptions, collect them together, and present them to your audience at
the beginning of your analysis.
Justification of Assumptions
Facts are
always better than assumptions. If you are
missing information that you need to solve the case you should make a
reasonable effort to obtain this information from available sources (only as of
the date of the case, however). If the
information is not reasonably available, then an assumption is justified. Note that all forecasts are
assumptions.
The only test
of an assumption is that it must be reasonable.
Reasonableness is the quality of being (i)
necessary, and (ii) no stronger than necessary (don’t assume away the
problem). Merely identifying assumptions
is not sufficient. To build audience (or
reader) confidence in your analysis you must justify your choice of
assumptions in terms of their reasonableness.
Overhead
Projections
Make sure
projected material is readable throughout the room. Limit the amount of material on any single
projection. Large complex overheads
should be broken down into smaller units, not simply projected in condensed
print. As a rule, 16 point text is the
smallest you should consider.
Organization
Was the presentation
well-organized in terms of logical progression, and did presenters allot
sufficient time to carefully explain each part of their analysis?
Quantitative
Analysis of Uncertainty
Virtually all
financial analysis should include a quantitative examination of the degree of
uncertainty involved in the analysis. Uncertainty analysis (or risk analysis)
is essentially a test of your key assumptions or inputs. The most important
risk-analysis techniques are simulation, sensitivity, and scenario analysis. Supplementary techniques that are useful in
some situations are decision trees, and breakeven analysis. The choice of techniques(s) used to quantify
uncertainty is a matter of judgment.
Defense
Your ability
to answer questions and otherwise defend your analysis. Needless to say, it is very important to be
receptive to criticism (and alternative viewpoints) in a professional and
non-contentious way.
Credibility
Your
credibility in the role of external consultants.
Presentation
of Results
Were important
results presented effectively? The whole
purpose of a presentation (or executive brief) is to make it easy for your
audience (reader) to understand and gain confidence in what you have done. Avoid
the common error of burying a series of related results (such as the
results of sensitivity analysis) in a sequence of complex spreadsheets. This makes it very hard for your audience to
compare results and understand what you have done. It is essential to present related results
in a brief table. Charts (or graphs)
are sometimes even more effective than tables for this purpose.
Summary
Present a
summary at the end of your presentation.
Tell them what you told them!
Review the major points made during your presentation. Your recommendations may be initially
presented here. Make your summary brief,
but not too brief. A common error is to
assume that since you just completed explaining your analysis in detail that it
is silly to go back over the major points again. Not so!
Studies have consistently shown that summaries are important
determinants of audience understanding.
Overall Quality of the Presentation
Was the
presentation convincing? Did the group organize and present their
analysis so as to convince their audience of the validity of their results and recommendations? You are responsible for convincing
your audience of the reasonableness of your assumptions and the validity
of your approach, results, and conclusions.
This is a building-block process and a selling job! Do not assume that good analysis will speak
for itself (especially if hastily presented).
Take care to bring your audience along with you, explaining, justifying,
and otherwise validating each step of your analysis.
Overall
Quality of the Analysis
Was the general approach to the case sound? Were financial principles properly
applied? Was uncertainty-analysis used
creatively? Were the solution and conclusions
generally consistent with the stated assumptions and the approach taken?