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Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
This map was prepared by an experienced editor at HBS Publishing, not by a teaching professor. Faculty at Harvard Business School were not involved in analyzing the textbook or selecting the cases and articles. Every case map provides only a partial list of relevant items from HBS Publishing. To explore alternatives, or for more information on the cases listed below, visit: www.hbsp.harvard.edu/educators
Case Title Institution,
HBSP Product Number, Length, Teaching Note
Geographical and Industry Setting, Company Size, Time Frame
Abstract, Key Subjects
Chapter 1 Introduction to Corporate Finance
Policy Management Systems Corp.: The Financial Reporting Crisis Amy P. Hutton
HBS 102013 10p TN available
United States, software, 4,000 employees, 1993
Explores the challenges facing Tim Williams, the new CFO of a publicly-traded enterprise software company, as he attempts to rebuild his company's reputation for reliable financial reporting following a highly visible financial reporting crisis. Armed with an understanding of the company business model, sales cycle, and revenue recognition policy, Williams must assess how various factors contributes to the company's crisis, and which policies and business practices can be changed to ensure against future financial reporting issues. Useful early in a course on financial reporting to develop a basic framework for the role of financial reporting and disclosure in the capital markets. Provides opportunities for discussing key aspects of the financial reporting system, including accrual accounting, management's responsibility for financial reporting, and the set of generally accepted accounting principles and audit practices that impose restrictions on management. Additionally, highlights the roles of capital market regulators (the SEC) and information intermediaries. Subjects: Accounting; Capital markets; Disclosure; Financial reporting; Financial strategy; Forecasting; GAAP; SEC; Software; Value of information
Clarkson Lumber Co. Thomas R. Piper
HBS 297028 6p TN available
United States, retail lumber, 11 employees, 1991
The owner of a rapidly growing retail lumber company is considering the financial implications of continued rapid growth. The magnitude of the company's future financing requirements must be assessed in the context of the company's access to bank finance and/or equity finance. Develops skills
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
in financial analysis, financial forecasting, and financial planning. Subjects: Financial analysis; Financial planning; Forecasting; Loan evaluation
Chapter 2 Accounting Statements and Cash Flow
The Balance Sheet (HBS background note) David F. Hawkins; Jacob Cohen
HBS 7p 101108
N/A Discusses the accounting equation and defines common terms found in the statement. Also provides an example of the balance sheets of Coca-Cola Co., Ariba, Inc., and Safeway, Inc. Subjects: Accounting; Balance sheets; Financial reporting
Kmart Corp. Christopher F. Noe
HBS 10p 199017
United States, retail $30 billion revenues 1995-1996
Describes a situation in which a company (Kmart) refinances a portion of its debt. Used to illustrate how the asset and liability sides of the balance sheet are linked. Subjects: Accounting procedures; Assets; Balance sheets; Debt management; Discount department stores; Liability; Retail stores
The Income Statement (HBS background note) David F. Hawkins; Jacob Cohen
HBS 6p 101109
N/A
Includes a description of the common components of the income statement. Includes examples of the income statements of Home Depot, Inc., Lucent Technology, Inc., Gap, Inc., and McDonald's Corp. and lends itself to a brief discussion regarding these companies. Subjects: Accounting; Financial reporting; Income
The Statement of Cash Flows (HBS background note) David F. Hawkins; Jacob Cohen
HBS 8p 101107
N/A Discusses the components of the statement of cash flow and its direct and indirect format of presentation. Also briefly explains the difference between cash and accrual accounting and provides examples of Standard Microsystems Corp. and Intel Corp. Subjects: Accounting; Cash flow; Financial reporting
Preparing and Using the Statement of Cash Flows (HBS background note) Robert L. Simons Antonio Davila
HBS 10p 196108
N/A Explains the concepts and procedures behind the statement of cash flows. Presents an overview of the reporting objectives of this report, and describes in detail the preparation of the cash flow statement using both the indirect method and the direct method. A complete numerical example is presented. Financial analysis techniques using the cash flow statement are also described. A rewritten version of an earlier note. Subjects: Accounting procedures; Capital budgeting; Cash flow; Financial analysis; Financial ratios; Financial reporting
Statements of Cash Flows: Three Examples William J. Bruns Jr.; Julie H. Hertenstein
HBS 8p 193103 TN available
N/A Introduces the statement of cash flow. Contains three examples of multi-year statements of cash flows from three unidentified companies. The analysis tasks include examination of cash flows, analysis of profitability of operations, investment policies, and financing. Teaching Purpose: To introduce the
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
statement of cash flows now required in the United States. Subjects: Accounting policies; Accounting procedures; Cash flow; Financial analysis; Financial reporting; Securities analysis
Chemalite, Inc. (B): Cash Flow Analysis Robert L. Simons Antonio Davila
HBS 195130 TN available
United States chemicals $2 million revenues 1991-1992
Students are asked to use actual and pro forma financial statements to prepare a statement of cash flows under both the direct and indirect method. Subjects: Accounting procedures; Cash flow; Chemicals; Financial analysis
Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc. Gregory S. Miller ; Christopher F. Noe
HBS 101011 18p TN available
United States, retail, 200,000 employees, 1997
This case is designed to familiarize students with the use of financial ratios. Two retailers, Sears, Roebuck and Co. and Wal-Mart Stores, Inc., have a very similar value for return on equity (ROE) in the 1997 fiscal year. Students use the information in the case and the accompanying exhibits, which include financial statements as well as disclosures regarding corporate strategies and accounting policies for each company, to analyze the value creation process for each firm. This case provides a good introduction regarding the combination of such information to create a powerful tool for financial statement analysis. Subjects: Discount department stores; Financial analysis; Financial ratios; Financial statements; Retail stores; Return on equity
Butler Lumber Co. Thomas R. Piper
HBS 4p 292013 TN available
United States retail lumber $3 million revenues 1991
The Butler Lumber Co. is faced with a need for increased bank financing due to its rapid sales growth and low profitability. Students must determine the reasons for the rising bank borrowing, estimate the amount of borrowing needed, and assess the attractiveness of the loan to the bank. A rewritten version of an earlier case. Allows students to practice ratio analysis, financial forecasting, and evaluating financing alternatives. Subjects: Financial analysis; Financial planning; Forecasting; Loan evaluation
Crystal Meadows of Tahoe, Inc. William J. Bruns Jr.
HBS 6p 192150 TN available
California, Utah skiing $20 million revenues 1991
An introductory case in cash flow analysis and the preparation of statements of cash flows. Based on the 1991 income statement and balance sheet at a ski resort company, the case provides additional information which allows a student to prepare both a direct and an indirect statement of cash flows. A rewritten version of an earlier case. Subjects: Accounting policies; Cash flow; Management accounting; Recreation
Toy World, Inc. W. Carl Kester
HBS 6p 295073 TN available
United States toys $10 million revenues 1994
A shift from seasonal to level production of toys will change the seasonal cycle of Toy World's working capital needs and necessitate new bank credit arrangements. Students must analyze the company's performance, forecast funds needs, and make a recommendation. Teaching Purpose: To introduce
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
the pattern of current assets and cash flows in a seasonal company and provide an elementary exercise in the construction of pro forma financial statements and estimation of funds needs. Subjects: Financing; Inventory management; Production planning; Production scheduling; Risk management; Toy industry
Chapter 3 Financial Markets and Net Present Value: First Principles of Finance (Advanced) and Chapter 4 Net Present Value
American International Group, Inc. Kenneth A. Froot Heidi Suzanne Nelson
HBS 31p 200026
United States insurance $30 billion revenues 1999
American International Group, Inc. (AIG), one of the world's largest and most innovative insurers and financial intermediaries, is thinking about strategy in an era of new competition and Internet distribution. Teaching Purpose: To demonstrate issues associated with a large financial intermediary. Subjects: Capital markets; Corporate strategy; Electronic commerce; Insurance; Internet
Fremont Financial Corp. Erik Sirri; Ann Zeitung
HBS 28p 294054
Los Angeles, CA banking $25 million revenues 1992
Highlights the relationship between financial markets and financial intermediaries in the capital raising process. Fremont Financial is an asset-based lender to middle market companies. The firm has three options to raise capital to finance its loan portfolio. Fremont can: 1) extend its existing bank line of credit, 2) issue commercial paper through a special purpose conduit, or 3) securitize and sell the loan portfolio into the capital markets. Emphasizes the problems and potential solutions to asymmetric information and moral hazard problems that are endemic to financial intermediation. Teaching Purpose: Can be used to highlight the differences between financial markets and financial intermediaries in the modern capital raising process. Subjects: Banking; Capital markets; Commercial banking; Commercial credit; Financial services; Small business
NetFlix.com, Inc. E. Scott Mayfield
HBS 11p 201037 TN available
Los Gatos, CA Internet/home video start-up $5 million revenues 2000
The CEO of a successful Internet start-up must decide whether or not to delay the company's initial public offering following a significant decline in the NASDAQ market during the spring of 2000. The company's CFO is asked to reevaluate the company's projected cash flow needs in light of the new requirement that, in order to go public, Internet companies show positive cash flows within a 12-month horizon. While examining ways to extend the company's working capital, the CFO considers various changes to the company's existing business model, including changes in the company's
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
contractual relationships with both its suppliers and its customers. Teaching Purpose: Provides an opportunity for students to construct a detailed cash flow model (a subscriber model) for a company in a fast-growing market for which standard financial ratios provide limited insight. The specific case setting requires students to think critically about the expected cash flows that are likely to be generated by the business. Also provides the setting for an interesting discussion about strategic versus financial value related to the acquisition of subscribers to a new Internet service. Highlights the need to coordinate operating and financial strategies and demonstrates that financing considerations may preclude first-best operating strategies. Subjects: Cash flow; Electronic commerce; Financial planning; Forecasting; Internet; IPO
Ginny's Restaurant (Exercise) Mark Mitchell
HBS 2p 201099 TN available
N/A
An individual is considering the development of a new restaurant. To make the decision, she uses NPV analysis to determine whether she should undertake the investment, and if so, the optimal size of the investment. Teaching Purpose: Introduces net present value analysis. Subjects: Capital budgeting; Present value; Restaurants
Investment Analysis Exercises Dwight B. Crane Penny Joseph
HBS 4p 299049
N/A To teach present value analysis. Subjects: Financial analysis; Present value
Whirlpool Europe Richard S. Ruback; Sudhakar Balachandran; Aldo Sesia
HBS 7p 202017 TN available
Italy home appliances 1999
Presents a capital budgeting problem. Whirlpool Europe is evaluating an investment in an enterprise resource planning (ERP) system that would reorganize the information flow throughout the company. Students derive the cash flows from working capital, sales, and other improvements along with the cost of the investment. Teaching Purpose: Students evaluate the potential investment using a discount cash flow analysis. Subjects: Appliances; Capital budgeting; Cash flow; ERP; Europe; Forecasting; Investments; Present value
Chapter 5 How to Value Bonds and Stocks
Bond Math (Exercises) Todd Pulvino
HBS 4p 201101
N/A A set of four exercises that teach compounding interest and valuing bonds. Teaching Purpose: To teach the mechanics of valuing bonds. Subjects: Bonds; Financial instruments; Interest rates; Present value; Valuation
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
Note on Valuation in Private Equity Settings Joshua Lerner; John Willinge
HBS 21p 297050
N/A Discusses several ways in which venture-backed firms can be valued, including comparables, net present value, decision-tree analysis, and the "venture capital method." Teaching Purpose: Provides an introduction to valuation of entrepreneurial firms. Subjects: Entrepreneurial finance; Entrepreneurship; Financial analysis; Valuation; Venture capital
Cougars Scott P. Mason ; Mihir Desai
HBS 295006 6p TN available
Unspecified Provides an introduction to zero coupon bonds and stripping coupon bonds. Concerns the relationship between the spot curve, the strip curve, and the coupon curve. Subjects: Bonds; Innovation; Interest rates; Pricing
Jupiter Management Co. Ronald W. Moore
HBS 292107 24p TN available
United States, money management
The manager of a small company growth fund considers relative merits of investing in a company's convertible debt versus its common. Subjects: Investment management; Mutual funds; Portfolio management
Arbitrage in the Government Bond Market? Michael E. Edleson; Peter Tufano
HBS 293093 9p TN available
United States, money management, 1991
Documents a pricing anomaly in the large and liquid treasury bond market. The prices of callable treasury bonds seem to be inconsistent with the prices of noncallable treasuries and an arbitrage opportunity appears to exist. Permits instructors to introduce the treasury market, the concept of creating synthetic instruments, principles of arbitrage, and institutional frictions in the bond markets. Subjects: Bonds; Capital markets; Securities analysis; Valuation
Ford Motor Co.’s Value Enhancement Plan (A) Andre F. Perold
HBS 201079 17p B case available
Michigan, automobiles, 335,000 employees, 2000
In April 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to significantly recapitalize the firm's ownership structure. Ford had accumulated $23 billion in cash reserves and under the VEP would return as much as $10 billion of this cash to shareholders. Students must wrestle with the following questions: Why was Ford proposing this transaction instead of a traditional share repurchase or a cash dividend? How did the interests of the Ford family factor into this decision, and what did the transaction imply about the future involvement of the family in the company? Why was Ford distributing such a significant amount of cash at this particular point in time? Did the distribution signal a change in the company's appetite for making acquisitions or future capital expenditures? If shareholders collectively elected to receive less than $10 billion in cash, how would Ford distribute the remaining cash? Provides a rich setting in which to discuss one of the most basic decisions corporations face: how to return cash to
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
shareholders. It is a vehicle for discussing corporate financial policies and capital structure decisions, particularly as they relate to cash dividends and share repurchases. Subjects: Automobile industry; Capital structure; Cash flow; Dividends; Financial strategy; Stockholders; Stocks; Taxation
Global Equity Markets: The Case of Royal Dutch and Shell Kenneth A. Froot Andre F. Perold
HBS 296077 19p TN available
N/A Royal Dutch and Shell common stocks are securities with linked cash flow, so that the ratio of their stock prices should be fixed. In fact, the ratio is highly variable, moving with the markets where the securities are intensively traded. Royal Dutch trades more actively in the Netherlands and U.S. markets, whereas Shell trades more actively in the United States. The result is that the Royal Dutch/Shell relative price moves positively with the Netherlands and U.S. markets and negatively with the U.K. market. The ability to arbitrage these disparities and their causes are major case focal points. Demonstrates how valuation is affected by the location of trade/ownership, and why arbitrage doesn't lead to integration of international financial markets.
Dividend Policy at FPL Group, Inc. (A) Benjamin C. Esty Craig F. Schreiber
HBSP 295059 17p B case available TN available
Florida, electric utility, 12,400 employees, 1994
A Wall Street analyst has just learned that FPL (the holding company for Florida's largest electric utility) may cut its dividend in several days despite a 47-year streak of consecutive dividend increases. In response to the deregulation of the electric utility industry, FPL has substantially revised its competitive strategy over the past several years. The analyst must decide whether a change in dividend policy will be a part of FPL's financial strategy. Allows students to examine how firms set and change dividend policy. Also provides background for examining why firms pay dividends and whether dividend policy matters. Subjects: Corporate strategy; Deregulation; Dividends; Electric power; Financial strategy; Securities analysis
Chapter 6 Some Alternative Investment Rules
Investment Analysis and Lockheed TriStar Michael E. Edleson
HBS 6p 291031 TN available
aerospace Fortune 500 1968-1973
A set of five exercises in capital budgeting. Student calculates and compares various decision criteria (including IRR and NPV) for capital investment projects. This is an introductory case, where relevant cash flows are provided, and the focus is on the discounting mechanics and the decision to invest. In addition, one exercise directly probes the link between positive NPV projects, and value added to the shareholders. The final "exercise" is a three page mini-case analyzing Lockheed's decision to invest in
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
the TriStar L-1011 Airbus project. This drives home the importance of discounting and NPV, and shows the adverse effect of a negative NPV project on shareholder value. Subjects: Aerospace industry; Capital budgeting; Capital investments; Present value; Project evaluation; Securities analysis
Valuing the Option Component of Debt and Its Relevance to DCF-Based Valuation Methods (HBS background note) Lisa Meulbroek
HBS 5p 201110
N/A The flows-to-equity or equity cash flows valuation method is a discounted cash flow method used to estimate the equity portion of the capital structure. It is closely related to the venture capital/buyout valuation method, which estimates the IRR of the stream of cash flows accruing to equity holders. Both of these methods are likely to result in an estimate of equity value that is too low when the firm's debt is risky (or, equivalently, an IRR that is too high, depending on the method used to estimate terminal value.) This note describes a method for estimating the size of this bias, drawing upon insight from option-pricing. Teaching Purpose: Can be used in conjunction with cases involving direct estimation of equity value, using a discounted cash flow technique, and with cases employing the venture capital/buyout fund valuation method. Subjects: Capital structure; Cash flow; Entrepreneurial finance; Leveraged buyouts; Option pricing; Risk; Valuation; Venture capital
Chapter 7 Net Present Value and Capital Budgeting
Ocean Carriers Erik Stafford; Angela Chao; Kathleen S. Luchs
HBS 6p 202027 TN available
New York, Hong Kong shipping 2001
In January 2001, Mary Linn, VP of finance for Ocean Carriers, a shipping company with offices in New York and Hong Kong, was evaluating a proposed lease of a ship for a three-year period, beginning in early 2003. The customer was eager to finalize the contract to meet his own commitments and offered very attractive terms. No ship in Ocean Carrier's current fleet met the customer's requirements. Mary Linn, therefore, had to decide whether Ocean Carriers should immediately commission a new capsize carrier that would be completed two years hence and could be leased to the customer. Teaching Purpose: Provides the opportunity for students to make a capital budgeting decision. The key pedagogical objective is to develop an understanding of how discounted cash flow analysis can be used to make investment and corporate policy decisions. Subjects: Asia; Capital budgeting; Cash flow; Present value; Sales forecasting; Shipping; Valuation
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
Tree Values Richard S. Ruback; Kathleen S. Luchs
HBS 3p 201031 TN available
New Hampshire forestry 1999
Describes two alternative tree-cutting strategies. The first is to cut all trees that are at least 12 inches in diameter at breast height. The second is to thin the forest by cutting less desirable trees immediately and harvesting the crop trees later. The case presents information for students to estimate the cash flows for each alternative. After estimating the corresponding cash flows, students have the opportunity to use discounted cash flow techniques to decide when to cut trees under each strategy and to select which strategy maximizes the value of the forest. Subjects: Capital budgeting; Cash flow; Forest products; Present value; Valuation
Capital Budgeting: Discounted Cash Flow Analysis (Exercise) Thomas R. Piper
HBS 6p 298068
N/A Comprises seven problems that collectively allow students to work through each type of cash flow that is encountered in capital budgeting. The instructor can also address such issues as product cannibalization and real options. Teaching Purpose: An effective introduction to capital budgeting. Subjects: Capital budgeting; Cash flow
Sellars' Market (HBS exercise) David E. Bell
HBS 2p 189001
N/A A shop owner has limited shelf space for display of impulse purchase products near the cash register. He must select only nine to display. Exercise shows the relevance of opportunity cost or resource pricing. By setting an appropriate charge for the shelf space the products self-select for the appropriate shelves. Subjects: Linear programming; Managerial economics; Resource allocation; Retailing; Transfer pricing
Chapter 8 Strategy and Analysis in Using Net Present Value
Note on Valuation in Private Equity Settings Joshua Lerner; John Willinge
HBS 21p 297050
N/A Discusses several ways in which venture-backed firms can be valued, including comparables, net present value, decision-tree analysis, and the "venture capital method." Teaching Purpose: Provides an introduction to valuation of entrepreneurial firms. Subjects: Entrepreneurial finance; Entrepreneurship; Financial analysis; Valuation; Venture capital
Merck & Co.: Evaluating a Drug Licensing Opportunity Richard S. Ruback; David Krieger
HBS 6p 201023 TN available
pharmaceuticals Fortune 500 $33 billion revenues 1999
Explores the valuation of an opportunity to license a compound before it enters clinical trials. Describes Merck's decision tree evaluation process. Also provides the information required to evaluate a specific licensing opportunity, including the costs of the three phases of the review process, the revenues if approved, along with the probability of various outcomes. Provides an introduction to decision tree analysis and valuation. Teaching Purpose: Presents
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
the opportunity for students to explore decision tree analysis and risk/reward modeling. The primary pedagogical objective is to learn how to build and use decision trees. Subjects: Capital budgeting; Decision trees; Investments; Pharmaceuticals; Present value; Valuation
E.I. du Pont de Nemours & Co.: Titanium Dioxide W. Carl Kester; Robert R. Glauber; David W. Mullins Jr.; Stacy S. Dick
HBS 7p 284066 TN available
United States chemicals Fortune 500 $4 billion assets 1972
Disequilibrium in the $350 million TiO2 market has prompted Du Pont's Pigments Department to develop two strategies for competing in this market in the future. The growth strategy has a smaller internal rate of return than the alternative strategy due to large capital outlays in early years and positive cash flows arising only in later years. However, it is the more valuable project on a net present value basis for all discount rates less than 21%. Students are faced with the task of converting strategic plans and objectives into free cash flow projections and determining a breakeven discount rate between these mutually exclusive projects. A decision about which strategy to pursue must then be made. Rewritten version of an earlier case by the same author. Subjects: Capital budgeting; Chemicals; Financial management; Present value; Rates of return; Return on investment; Strategic planning
Chapter 9 Capital Market Theory: An Overview
Note on Commodity Futures Jay O. Light Kenneth A. Froot Nancy Donohue
HBS 12p 293018
N/A Describes how commodity futures work, what products and exchanges are available, and who the players in the commodity markets are. Also presents a careful discussion of the pricing of futures in commodity markets, focusing on cost of carry and risk premium approaches, and explaining backwardation and contango markets. Subjects: Commodity markets; Financial services
Chapter 10 Return and Risk: The Capital-Asset Pricing Model
Why Manage Risk? (HBS background note) Peter Tufano Jonathan S. Headley
HBS 6p 294107
N/A Conventional finance theory demonstrates that, under simplistic assumptions, firms cannot add to shareholder value through the use of risk management activities. Modern finance theory recently has begun to carefully consider and examine those circumstances under which firms can add to shareholder value. This note briefly reviews the major ideas prevalent in both conventional and modern finance literature regarding the potential benefits of risk management. Teaching Purpose: Enables students to question the conventional wisdom that assumes risk management activities are always beneficial to a corporation. In addition, students will examine five specific
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
conditions under which financial risk management can demonstrably add to shareholder value. Subjects: Financial management, Hedging, Interest rates, Risk management.
Lex Service PLC: Cost of Capital W. Carl Kester Kendall Backstrand
HBSP 296003 12p
United Kingdom, automotive, 1993
The Lex Service company has grown to become a large multidivisional company with a substantial capital budget. In 1993, the board was reviewing its capital budgeting procedures. Specifically, it sought to determine the company's cost of capital and whether it should use different hurdle rates for different divisions. Introduces practical techniques for estimating the cost of equity using CAPM, and designing discount rates appropriate for businesses of different risk. Subjects: Automotive supplies; Capital budgeting; Capital costs; United Kingdom
Marriott Corp.: The Cost of Capital (Abridged) Richard S. Ruback
HBS 10p 289047 TN available
hotels and restaurants 1988
Gives students the opportunity to explore how a company uses the Capital Asset Pricing Model (CAPM) to compute the cost of capital for each of its divisions. The use of Weighted Average Cost of Capital (WACC) formula and the mechanics of applying it are stressed. Subjects: Capital costs; Hotels & motels
Concordia Electronic Systems Test Thomas R. Piper
HBS 2p 298115
United States electronics 1996
The management of an electronics company is attempting to decide whether to use a single hurdle rate for all projects or to move to a system of different hurdle rates for each of its two divisions. The divisions differ substantially in terms of risk and seem to have substantially different costs of capital. Teaching Purpose: Estimation of cost of capital based on the capital asset pricing model. Subjects: Capital costs; Electronics; Models; Risk assessment; Risk management; Valuation
Cost of Capital at Ameritrade Mark Mitchell; Erik Stafford
HBS 24p 201046 TN available
Omaha, NE brokerage $77 million revenues 1997
Ameritrade Holding Corp. is planning large marketing and technology investments to improve the company's competitive position in deep-discount brokerage by taking advantage of emerging economies of scale. In order to evaluate whether the strategy would generate sufficient future cash flows to merit the investment, Joe Ricketts, chairman and CEO of Ameritrade, would need an estimate of the project's cost of capital. There is considerable disagreement as to the correct cost of capital estimate. A research analyst pegs the cost of capital at 12%, the CFO of Ameritrade uses 15%, and some members of Ameritrade management believe that the borrowing rate of 9% is the rate by which to discount the future cash flows expected to result from the project. Teaching Purpose: A two-day case to estimate the cost of capital that Ameritrade should
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
employ in evaluating the proposed large investments in marketing and technology. The lesson plan builds on the prior cases in the Risk & Return module. Uses the capital asset pricing model to estimate Ameritrade's cost of capital. Focus is on CAPM variables such as the risk free rate, market risk premium, and beta. Students will use regression analysis to directly calculate the beta estimates. Arguments will be made as to which comparable firms (brokerage firms or Internet firms) should be used to obtain beta estimates. Subjects: Capital budgeting; Capital costs; Capital markets; Financial services; Holding companies; Regression analysis; Valuation
New World Development Co. Ltd.: Diversify or Focus? Su Han Chan ; Ko Wang; Mary Ho
U. of Hong Kong 16p HKU166 TN available
Hong Kong 1997-2001
New World Development Co. Ltd. (NWD) was a leading conglomerate based in Hong Kong. After more than 20 years of operations, the group had expanded its core businesses to include property, infrastructure, services, and telecommunications. From late 1997 to June 2001, the stock price performance of the company had been abysmal. Its efforts at asset disposals to reduce gearing, while making additional investments in new businesses, confused investors. Security analysts also blamed the company for not keeping its promise to focus on its core business of property. Teaching Purpose: Requires students to conduct an objective assessment of NWD on both a divisional and a consolidated basis. It provides sufficient information for them to compute the divisional cost of capital using the capital asset pricing model (CAPM) and to conduct a simple Economic Value Added (EVA) analysis. Subjects: Asia; Capital costs; Conglomerates; Diversified companies; EVA; Financial analysis
Beta Management Co. Michael E. Edleson
HBS 292122 5p TN available
Investment management, 1991
A manager of a small investment company has been successfully using index funds for limited market timing. Growth has allowed her to move into picking stocks. She is considering two small and highly variable listed stocks, but is concerned about the risk that these investments might add to her "portfolio." Provides a lead-in to the CAPM. Students learn about total risk, non-diversifiable or portfolio risk, and (CAPM) beta; calculate variability of the stocks separately, and portfolio variance with and without the stocks, to see how an extremely risky (but low-beta) stock actually reduces risk; and calculate stock betas. Subjects: Cost benefit analysis; Diversification; Efficient markets; Investment management; Portfolio management; Regression
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
(McGraw-Hill, 2002)
Harvard Business School Publishing
800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu
www.hbsp.harvard.edu/educators
analysis; Risk assessment Chapter 11 An Alternative View of Risk and Return: The Arbitrage Pricing Theory
Long-Term Capital Management, L.P. (A) Andre F. Perold
HBS 23p 200007 B, C, and D supplemental cases available
Connecticut finance 1997-1998
Long-Term Capital Management, L.P. (LTCM) was in the business of engaging in trading strategies to exploit market pricing discrepancies. Because the firm employed strategies designed to make money over long horizons--six months to two years or more--it adopted a long-term financing structure designed to allow it to withstand short-term market fluctuations. In many of its trades, the firm was in effect a seller of liquidity. LTCM generally sought to hedge the risk-exposure components of its positions that were not expected to add incremental value to portfolio performance, and to increase the value-added component of its risk exposures by borrowing to increase the size of its positions. The fund's positions were diversified across many markets. This case is set in September 1997, when, after three and a half years of high investment returns, LTCM's fund capital had grown to $6.7 billion. Because of the limitations imposed by available market liquidity, LTCM was considering whether it was a prudent and opportune moment to return capital to investors. Teaching Purpose: Can be used to discuss a broad range of issues relating to arbitrage, market efficiency, implementation of investment strategies, liquidity shocks, risk management, financial intermediation, investment management, hedge funds, incentives, systemic risk, and regulation. Subjects: Arbitrage; Capital markets; Efficient markets; Financial institutions; Investment management; Risk management
Strategic Capital Management, LLC (A) Erik Stafford; Mark Mitchell; Todd Pulvino
HBS 3p 202024 B and C cases available TN available
New York, NY finance $12 million revenues 1998-1999
Strategic Capital Management, LLC is a hedge fund planning to make financial investments in Creative Computers and Ubid. Creative Computers recently sold approximately 20% of its Internet auction subsidiary, Ubid, to the public at $15 per share. Ubid's stock price closed the first day of trading at $48, giving Ubid a $439 million market capitalization. Paradoxically, the parent's stock price did not keep pace with that of its subsidiary. At the end of Ubid's first day as a public company, Creative Computers' equity value was less than the value of its stake in Ubid. The market prices implied that Creative Computers' non-Ubid assets had a value of negative $79 million. The relative prices and ownership link between Creative Computers and Ubid suggests a potential arbitrage opportunity. To
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evaluate how best to exploit this investment opportunity, Elena King, the manager of the hedge fund, must understand the risks and expected returns associated with different long and short equity positions. Teaching Purpose: To develop an understanding of how arbitrage acts to enforce the law of one price and to keep markets efficient. Also provides a venue to discuss the various real world market imperfections that can prevent arbitrageurs from immediately eliminating mispricings in equity markets. Best taught at the end of a capital markets module. Subjects: Arbitrage; Capital markets; Efficient markets; Hedging; Investment management; Spinoffs
Farallon Capital Management: Risk Arbitrage (A) Andre F. Perold Robert Howard
HBS 27p 299020 B case available
San Francisco, CA investment management 30 employees 1997-1998
Farallon Capital Management, an investment firm that specializes in risk arbitrage, has taken significant long and short positions in MCI Communications and British Telecommunications, respectively, in the belief that the proposed merger of these firms will be successfully completed. Raises the issues facing Farallon as positive and negative events relating to the merger unfold. Provides a rich institutional setting for understanding certain investment strategies involving short selling, and for understanding merger arbitrage and its function in the capital markets. Subjects: Acquisitions; Arbitrage; Investment management; Mergers; Risk management
RJR Nabisco Holdings Capital Corp.--1991 Peter Tufano
HBS 10p 292129 TN available
United States investment management 1991
An investment manager notices a large apparent discrepancy in the prices of two nearly-identical bonds issued in conjunction with a major leveraged buyout. The manager must figure out whether the instruments are mispriced relative to one another, and if so, how to capture arbitrage profits from the temporary anomaly. The case introduces students to a wide variety of instruments ranging from very simple treasury strips to P-I-K debentures. Encourages students to devise "arbitrage" positions and understand the degree to which these positions are riskless. Subjects: Bonds; Capital markets; Investment management; Leveraged buyouts; Pricing
Chapter 12 Risk, Cost of Capital, and Capital Budgeting
Cost of Capital at Ameritrade Mark Mitchell Erik Stafford
HBS 24p 201046 TN available
Omaha, NE brokerage $77 million revenues 1997
Ameritrade Holding Corp. is planning large marketing and technology investments to improve the company's competitive position in deep-discount brokerage by taking advantage of emerging economies of scale. In order to evaluate whether the strategy would generate sufficient future cash flows
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to merit the investment, Joe Ricketts, chairman and CEO of Ameritrade, would need an estimate of the project's cost of capital. There is considerable disagreement as to the correct cost of capital estimate. A research analyst pegs the cost of capital at 12%, the CFO of Ameritrade uses 15%, and some members of Ameritrade management believe that the borrowing rate of 9% is the rate by which to discount the future cash flows expected to result from the project. Teaching Purpose: A two-day case to estimate the cost of capital that Ameritrade should employ in evaluating the proposed large investments in marketing and technology. The lesson plan builds on the prior cases in the Risk & Return module. Uses the capital asset pricing model to estimate Ameritrade's cost of capital. Focus is on CAPM variables such as the risk free rate, market risk premium, and beta. Students will use regression analysis to directly calculate the beta estimates. Arguments will be made as to which comparable firms (brokerage firms or Internet firms) should be used to obtain beta estimates. Subjects: Capital budgeting; Capital costs; Capital markets; Financial services; Holding companies; Regression analysis; Valuation
Lex Service PLC: Cost of Capital W. Carl Kester; Kendall Backstrand
HBS 12p 296003
United Kingdom automotive $2.0 billion revenues 1993
The Lex Service company has grown to become a large multidivisional company with a substantial capital budget. In 1993, the board was reviewing its capital budgeting procedures. Specifically, it sought to determine the company's cost of capital and whether it should use different hurdle rates for different divisions. Teaching Purpose: To introduce practical techniques for estimating the cost of equity using CAPM, and designing discount rates appropriate for businesses of different risk. Subjects: Automotive supplies; Capital budgeting; Capital costs; United Kingdom
Pioneer Petroleum Corp. Richard S. Ruback
HBS 5p 292011 TN available
West Coast & Alaska petroleum products $15.6 billion revenues 1991
Pioneer is an integrated oil company. Its operations include exploration and development, production, transportation, and marketing. The case focuses on Pioneer's cost of capital calculations and its choice between a single company-wide cost of capital or divisional costs of capital. Provides students the opportunity to learn how to calculate a company-wide weighted average cost of capital. An appropriate measure of the cost of equity capital is presented so that students are able to challenge their understanding of key concepts by critiquing the company's measure and suggesting their own.
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Leveraged Betas and the Cost of Equity (HBS background note) Paul Asquith; David M. Mullins
HBS 11p 288036
N/A
The objective is to delineate on methodology for measuring the risk associated with financial leverage and estimating its impact on the cost of equity capital. Subjects: Capital costs; Capital structure; Equity financing
Financial Leverage, the Capital Asset Pricing Model and the Cost of Equity Capital (HBS background note) David W. Mullins Jr.
HBS 12p 280100
N/A Demonstrates how the capital asset pricing model can be used to estimate the impact of financial leverage on the cost of equity capital. The levering and unlevering of betas are illustrated. Also presents a methodology for decomposing the cost of equity into its three components--the risk-free rate, a premium for business, and a premium for financial risk. Subjects: Capital costs; Capital structure; Cost analysis; Financial management; Models; Risk assessment
Chapter 13 Corporate Financing Decisions And Efficient Capital Markets
The NASDAQ Stock Market, Inc. Andre F. Perold Austin Scee
HBS 28p 202008
New York financial services $870 million revenues 2001
NASDAQ's mission "to facilitate capital formation" is threatened by the emergence of Electronic Communication Networks, which are not as heavily regulated by the SEC. This case reviews the development of NASDAQ and it's evolution from a loose network of broker-dealers through to its proposed SuperMontage. SuperMontage is a centralized order book, where multiple parties can place orders (both buy and sell) for the stocks they wish to trade and where entire supply and demand curves can be displayed. To understand the context, students will learn about the structure of the capital markets and why it concerns regulators and investors. Teaching Purpose: Students are expected to learn about the structure of the (financial) capital markets, why it concerns regulators and investors, and the innovations that are made to increase efficiencies. Subjects: Auctions; Corporate strategy; Efficient markets; Market structure; Regulation; Stock brokers; Stock exchanges
Beta Management Co. Michael E. Edleson
HBSP 292122 5p TN available
Investment management, 1991
A manager of a small investment company has been successfully using index funds for limited market timing. Growth has allowed her to move into picking stocks. She is considering two small and highly variable listed stocks, but is concerned about the risk that these investments might add to her "portfolio." Provides a lead-in to the CAPM. Students learn about total risk, non-diversifiable or portfolio risk,
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and (CAPM) beta; calculate variability of the stocks separately, and portfolio variance with and without the stocks, to see how an extremely risky (but low-beta) stock actually reduces risk; and calculate stock betas. Subjects: Cost benefit analysis; Diversification; Efficient markets; Investment management; Portfolio management; Regression analysis; Risk assessment
The Harmonized Savings Plan at BP Amoco Luis M. Viceira
HBS 17p 201052
Chicago, IL pension fund 1999
On August 11, 1998, United States' Amoco Corp. (NYSE: AR) and the British Petroleum Co. (BP), p.l.c. (NYSE: BP), announced the BPC merger with Amoco. This deal was the largest industrial merger to date, and created the world's third-largest oil company, BP (NYSE: BP). This case focuses on the issues surrounding the integration of the employee-defined contribution plans at Amoco and the U.S. subsidiary of BP. One of them was that the pre-merger plans had very different investment structures. While Amoco had offered its employees only low-cost index funds, BP America had relied on actively managed mutual funds. The new plan, which would have more than 40,000 participants and $7 billion in assets, would have to either choose one of these approaches, or try to integrate them into one single structure. Teaching Purpose: To provide students with ample opportunities to discuss issues such as market efficiency, active versus passive (indexed) asset management, mutual fund performance evaluation, the design of private pension plans, and the mutual fund industry. Subjects: Capital markets; Efficient markets; Financial planning; Investments; Mutual funds; Pension funds; Pension plans; Performance measurement; Petroleum
Chapter 14 Long-Term Financing: An Introduction
USX Corp. Stuart C. Gilson; Jeremy Cott
HBS 20p 296050 TN available
Pittsburgh, PA steel $20 billion revenues 42,500 1990-1991
A large diversified steel and energy firm is pressured by a corporate raider to spin off its steel business in order to increase its stock price. As an alternative to the spinoff, management proposes replacing the company's common stock with two new classes of "targeted" stock that would represent separate claims against each business segment's cash flows, allowing the stock market to value each business separately (and more accurately). Teaching Purpose: The case provides an opportunity to compare alternative restructuring strategies that have the same objective (in this case, to increase the company's stock price by segmenting cash flows from its distinct businesses).
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Subjects: Corporate governance; Cost allocation; Diversification; Incentives; Restructuring; Steel; Valuation
Telefonica de Argentina S.A. Steven R. Fenster Rajiv Gharalia
HBS 23p 292039 TN available
Argentina tele-communications $1 billion revenues 1990
Deals with the privatization of the Argentine telephone industry. Focuses on the restructuring aspect. Commercial banks owned sovereign debt of Argentina trading at a deep discount to par. The question is whether the banks should exchange their sovereign debt instruments for the common or preferred stock of Telefonica. The purpose is to evaluate a choice between poor securities valued at the point of decision by analyzing how these various securities might look in the future. Subjects: Bankruptcy; Capital structure; Currency; Financial strategy; Investment banking; Privatization; Restructuring; South America
Avon Products Jonathan Tiemann
HBS 9p 289049 TN available
New York, NY beauty products $2.5 billion sales 1988
Avon Products announced both a change in its business focus and a reduction of its dividend in June 1988. To offset the likely stock price effect of the dividend reduction, Avon announced at the same time an unusual exchange offer, under which it would take up to 25% of its common stock in exchange for an unusual preferred stock. The case traces the history of Avon from 1979-88. Requires students to evaluate Avon's efforts at diversification in the early 1980s, and to relate that effort to the company's dividend history. Also requires students to evaluate an unusual security. Suitable for first-year students or for a second-year capital markets course. Subjects: Cosmetics; Diversification; Dividends; Non-store retailing; Securities; Valuation
Chapter 15 Capital Structure: Basic Concepts and Chapter 16 Capital Structure: Limits to the Use of Debt
Debt Policy at UST, Inc. Mark Mitchell
HBS 14p 200069 TN available
Greenwich, CT tobacco $1.4 billion revenues 1999
UST, Inc. is a very profitable smokeless tobacco firm with low debt vis-a-vis other firms in the tobacco industry. The setting for the case is UST's recent decision to substantially alter its debt policy by borrowing $1 billion to finance its stock repurchase program. Teaching Purpose: Introduction to optimal capital structure with emphasis on calculation of interest tax shields. Subjects: Capital structure; Debt management; Long term financing; Taxation; Tobacco industry
Continental Carriers, Inc. W. Carl Kester TN available
HBS 5p 291080
United States trucking $1 billion revenues 1988
A U.S. trucking company is considering using debt for the first time to acquire another company. The directors of the company are divided in their opinion of the likely impact of leverage on Continental
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Carriers' performance. Their differences must be reconciled and a decision reached about whether to issue new debt or equity to fund the acquisition. Students are introduced to the impact of leverage on performance variables such as profits, growth, earnings per share, and stock price. A rewritten version of an earlier case. Subjects: Acquisitions; Capital structure; Debt management; Equity financing; Expansion; Financial analysis; Leveraged buyouts; Trucking;
Thermo Electron Corp. Carliss Y. Baldwin; Joetta Forsyth
HBS 25p 292104
Waltham, MA high tech/ thermodynamics $700 million sales 1991
George Hatsopoulos, CEO at Thermo Electron Corp., is considering whether to issue shares in a subsidiary via an initial public offering (IPO). The company has developed an unusual corporate structure in which subsidiaries fund new ventures by raising debt and equity in the capital markets, rather than through the parent company. Teaching Purpose: Valuation of a high tech venture, role of corporate headquarters in resource allocation, information gap between company and capital market, equity incentives to divisional managers, and accounting for common stock issuance. Subjects: Capital investments; Capital structure; Equity financing; Financial strategy; High technology products; Market signaling; Performance measurement; Valuation
The Loewen Group, Inc. Stuart C. Gilson Jose Camacho
HBS 24p 201062
British Columbia, Canada funeral homes $1.1 billion revenues 1998
A publicly-traded funeral home and cemetery consolidator faces imminent financial distress. The company has aggressively grown through use of debt. Restructuring the debt is potentially very costly to creditors, shareholders, suppliers, and other corporate stakeholders. Cross-border and accounting issues potentially complicate the restructuring. Teaching Purpose: To illustrate the costs of debt, financial distress, basic restructuring options, and determinants of capital structure. Subjects: Bankruptcy; Canada; Debt management; Financial analysis; Financial management; Financial strategy; Management of crises; Reorganization; Services
Diageo plc George Chacko; Peter Tufano; Joshua Musher TN available
HBS 16p 201033
United Kingdom consumer goods, food, drinks $12 billion revenues 2000
A major U.K.-based multinational is reevaluating its leverage policy as it restructures its business. The treasury team models the tradeoffs between the benefits and costs of debt financing, using Monte Carlo simulation to estimate the savings from the interest tax shields and expected financial distress costs under several sets of leverage policies. The group treasurer (CFO) must decide whether and how the simulation results should be incorporated into a recommendation to the board of directors, and more
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generally, what recommendation to make regarding the firm's leverage policy. Teaching Purpose: Introduces students to the static-tradeoff theory of capital structure, as actually implemented in a major firm. Also introduces students to the use of simulation to capture the impact of different business policies under uncertainty. Subjects: Capital structure; Consumer goods; Debt management; Financial strategy; Food; Models; United Kingdom
Acova Radiateurs Lisa Meulbroek
HBSP 295150 12p TN available
France, heating, 500 employees, 1990
In March 1990, Baring Capital Investors faced a decision about whether and how much to bid for Acova Radiateurs, a subsidiary of Source Perrier. Source Perrier had decided to sell Acova, and Baring Capital Investors thought it might make a good leveraged buyout candidate. Students have an opportunity to value Acova using the flows-to-equity technique, as well as to evaluate the merits of this technique relative to the valuation methodologies typically used by buyout firms. Subjects: Acquisitions; Capital structure; Corporate control; Divestiture; Europe; France; International business; International finance; Leveraged buyouts; Mergers & acquisitions; Project evaluation; Valuation
Drivers of Industry Financial Structure (HBS Exercise) Dwight B. Crane Indra A. Reinbergs
HBS 3p 201039 TN available
N/A Contains common-size balance sheets and financial ratios for ten companies, each representative of a different industry. Students are asked to identify the industries from the structure of the financial statements. Teaching Purpose: Gives students practice in using financial ratios and helps develop an understanding of the factors that drive the financial structure of firms. Subjects: Capital structure; Financial analysis; Financial ratios; Financial reporting
Chapter 17 Valuation and Capital Budgeting for the Levered Firm
Free Cash Flow Valuation Methods: Weighted Average Cost of Capital (WACC) and Adjusted Present Value (APV) Gregor Andrade
HBS 3p 201094
2001
A video rental store is considering home delivery services. Management attempts to value the project under different financing strategies and methods, specifically adjusted present value (APV) and weighted average cost of capital (WACC). Teaching Purpose: Shows how to implement APV and WACC and when each is appropriate. Subjects: Capital budgeting; Capital investments; Cash flow; Debt management; Financial strategy; Financing; Present value; Valuation
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Note on the Equivalency of Methods for Discounting Cash Flows William E. Fruhan Jr.
HBS 4p 202128
N/A Uses a numerical example to demonstrate that when you discount the cash flows to capital from a project at the weighted average cost of capital, you get same net present value result as you obtain when discounting the cash flows to equity at the cost of equity. Also demonstrates why it is far easier to do a net present value calculation using the weighted average cost of capital (assuming a fixed debt ratio and market value weights) than it is to do the same calculation using the cost of equity. Subjects: Capital costs; Cash flow; Equity capital
Cross-Border Valuation (HBS background note) Kenneth A. Froot W. Carl Kester
HBS 21p 295100
N/A Provides a review of valuation techniques used to assess cross-border investments. Discusses the discounting of free cash flows with a weighted average cost of capital and the use of adjusted present value. Special concerns such as foreign-exchange risk, country risks, and international diversification are also discussed. Unlike Note on Cross-Border Valuation, this note contains no discussion of valuing real options. Subjects: Capital costs; Foreign exchange; Foreign exchange rates; International finance; Present value; Valuation
Pioneer Petroleum Corp. Richard S. Ruback TN available
HBS 5p 292011
West Coast & Alaska petroleum products $15.6 billion revenues 1991
Pioneer is an integrated oil company. Its operations include exploration and development, production, transportation, and marketing. The case focuses on Pioneer's cost of capital calculations and its choice between a single company-wide cost of capital or divisional costs of capital. Provides students the opportunity to learn how to calculate a company-wide weighted average cost of capital. An appropriate measure of the cost of equity capital is presented so that students are able to challenge their understanding of key concepts by critiquing the company's measure and suggesting their own. Subjects: Capital budgeting; Capital costs; Petroleum
Marriott Corp.: The Cost of Capital (Abridged) Richard S. Ruback
HBS 10p 289047 TN available
hotels and restaurants 1988
Gives students the opportunity to explore how a company uses the Capital Asset Pricing Model (CAPM) to compute the cost of capital for each of its divisions. The use of Weighted Average Cost of Capital (WACC) formula and the mechanics of applying it are stressed. Subjects: Capital costs; Hotels & motels
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Chapter 18 Dividend Policy: Why Does It Matter?
Avon Products Jonathan Tiemann
HBS 9p 289049 TN available
New York, NY beauty products $2.5 billion sales 1988
Avon Products announced both a change in its business focus and a reduction of its dividend in June 1988. To offset the likely stock price effect of the dividend reduction, Avon announced at the same time an unusual exchange offer, under which it would take up to 25% of its common stock in exchange for an unusual preferred stock. The case traces the history of Avon from 1979-88. Requires students to evaluate Avon's efforts at diversification in the early 1980s, and to relate that effort to the company's dividend history. Also requires students to evaluate an unusual security. Suitable for first-year students or for a second-year capital markets course. Subjects: Cosmetics; Diversification; Dividends; Non-store retailing; Securities; Valuation
Dividend Policy at FPL Group, Inc. (A) Benjamin C. Esty Craig F. Schreiber
HBS 17p 295059 B case available TN available
Florida electric utility $5.3 billion revenues 1994
A Wall Street analyst has just learned that FPL (the holding company for Florida's largest electric utility) may cut its dividend in several days despite a 47-year streak of consecutive dividend increases. In response to the deregulation of the electric utility industry, FPL has substantially revised its competitive strategy over the past several years. The analyst must decide whether a change in dividend policy will be a part of FPL's financial strategy in this deregulated environment. Teaching Purpose: Allows students to examine how firms set and change dividend policy. Also provides a background for examining why firms pay dividends and whether dividend policy matters. Subjects: Corporate strategy; Deregulation; Dividends; Electric power; Financial strategy; Securities analysis
Brown Group, Inc.: The Dividend Decision Joseph L. Bower
HBS 15p 396265
St. Louis, MO shoe retailing 1995
In 1995, the Board of Directors of Brown Group, Inc. was confronted with a dilemma: over a decade of strategic restructuring, the board had maintained a steady dividend. Now the restructuring was complete, but a collapse of the U.S. retail scene hurt sales and profits. Was the strategy still valid? Cash flow from restructuring was over. Should the dividend be cut? Wouldn't that reflect on the strategy? Teaching Purpose: To provide a basis for discussing the relationship between corporate financial policies and strategic management. In particular, to examine the role of Wall Street and shareholders. Subjects: Board of directors; Corporate strategy; Dividends; Restructuring; Retailing
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Murray Ohio Manufacturing Co. Krishna G. Palepu
HBS 27p 187178 TN available
Brentwood, TN bicycles and power mowers $384 million sales 1985
After a record year in 1983, Murray Ohio's earnings declined in 1984. The company was faced with competition from cheap imports and was experiencing declining margins. Students are asked to analyze the company's 1984 financial statements and predict whether there is likely to be a change in the dividend policy. Subjects: Competition; Dividends; Financial analysis; Manufacturing
Ford Motor Co.'s Value Enhancement Plan (A) Andre F. Perold
HBS 17p 201079 B case available
Dearborn, MI automobiles $162 billion revenues 2000
In April 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to significantly recapitalize the firm's ownership structure. Ford had accumulated $23 billion in cash reserves and under the VEP would return as much as $10 billion of this cash to shareholders. In exchange for each share currently held, the plan would give stockholders one new share plus the choice of receiving $20 either in cash or additional new Ford common shares. Shareholders electing to receive cash would be taxed on these distributions at capital gain rates. Among other things, the plan provided a means for the Ford family to obtain liquidity without having to dilute their 40% voting interest (even though they own only 5% of the shares outstanding.) Students must wrestle with the following questions: Why was Ford proposing this transaction instead of a traditional share repurchase or a cash dividend? How did the interests of the Ford family factor into this decision, and what did the transaction imply about the future involvement of the family in the company? Why was Ford distributing such a significant amount of cash at this particular point in time? Did the distribution signal a change in the company's appetite for making acquisitions or future capital expenditures? If shareholders collectively elected to receive less than $10 billion in cash, how would Ford distribute the remaining cash? Teaching Purpose: Provides a rich setting in which to discuss one of the most basic decisions corporations face: how to return cash to shareholders. It is a vehicle for discussing corporate financial policies and capital structure decisions--particularly as they relate to cash dividends and share repurchases--in a context where corporate control questions and the interests of multiple constituencies must be understood. Subjects: Automobile industry; Capital structure; Cash flow; Dividends; Financial strategy; Stockholders; Stocks; Taxation
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Chapter 19 Issuing Securities to the Public
Kendle International, Inc. Dwight B. Crane Paul W. Marshall Indra A. Reinbergs
HBS 25p 200033 TN available
Cincinnati, OH contract research $13 million revenues 1997
Candace Kendle and Christopher Bergen, the CEO and COO of Kendle International, Inc., are reviewing ways to finance the growth of their privately-owned company. Kendle is a contract research organization that conducts clinical drug trials for pharmaceutical and biotechnology companies. To compete more effectively, Kendle plans to grow through international acquisitions. It is now time to decide whether to go ahead with a full program of two European acquisitions, a large debt financing through Nationsbank, and an initial public offering to repay the debt and provide cash for future acquisitions. The falling stock prices of Kendle's competitors add pressure to the situation. Teaching purpose: To develop skills in designing and implementing an integrated financial and acquisition strategy. Subjects: Acquisitions; Bank loans; Entrepreneurial finance; Financing; Growth strategy; IPO; Pharmaceuticals industry; Stock offerings
Tom.com--2000 Su Han Chan Ko Wang Mary Ho
U. of Hong Kong 20p HKU124 TN available
Hong Kong technology start-up 2000
On February 18, 2000, month-old Internet startup, Tom.com, began its initial public offering and would open for trading on March 1 on Hong Kong's Growth Enterprise Market. The Internet company, majority-owned by Mr. Li Ka-shing's Cheung Kong Holdings and Hutchison Whampoa, planned to catch the frenzy that Hong Kong's investors had for new Internet stocks. The huge demand for Tom.com shares raised Internet frenzy in Hong Kong to new levels reminiscent of the red chip fever of 1997. Many of the retail investors had no idea what the company did but were betting on the IPO being a winner largely because of Mr. Li's clout with China. In this case, the student is asked to serve as an investment advisor to a retail investor considering subscribing to Tom.com's IPO. The student will provide an analysis of the risks and opportunities of investing in Tom.com and make a recommendation on whether the client should buy Tom.com's shares at the offer price. Teaching Purpose: Intended to highlight the complexity of pricing Internet stocks that rarely have much of a track record for investors to study and the irrational investing behavior of Hong Kong's small investors.Subjects: Asia; Internet; IPO; Stock offerings; Technology
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W.R. Hambrecht + Co.: OpenIPO Andre F. Perold; Gunjan Bhow
HBS 18p 200019
San Francisco, CA finance 100 1999
OpenIPO is a new mechanism for pricing and distributing initial public offerings. The system, which is based on a Dutch auction, represents an attempt by the investment bank W.R. Hambrecht + Co. to change the manner in which IPOs are underwritten. The case provides a setting in which to discuss the existing set of institutional arrangements relating to the underwriting of IPOs, including the well-known phenomenon of the initial-day spike in price. Also provides a vehicle for discussing the informational efficiency of stock prices and the role of intermediaries and markets in providing investors with company-specific information. Can be used to talk about the issues raised by electronic trading and the distribution of securities over the Internet to relatively uninformed individuals. Subjects: Capital markets; Electronic commerce; Investment banking; Investment management; IPO; Stock exchanges; Stock offerings; Underwriting
A Note on the Initial Public Offering Process Joshua Lerner
HBS 6p 200018
N/A Provides an overview of the going public process. Subjects: Entrepreneurial finance; Equity financing; Financial strategy; IPO; Venture capital
Buenos Aires Embotelladora S.A. (BAESA): A South American Restructuring Stuart C. Gilson Gustavo A. Herrero
HBS 27p 202009
Buenos Aires, Argentina, Brazil soft-drink beverage manufacturing & distribution $700 million revenues 1998
In 1998, BAESA, PepsiCo's largest bottler and distributor outside North America, experienced severe financial difficulty and had to restructure its debt and business operations to avoid bankruptcy or liquidation. Based in Argentina, with operations throughout South America, the company had for years been a spectacular success story and media darling, until it undertook an ill-fated expansion in Brazil. The company's debt was owed to banks and financial institutions in South America, Asia, Europe, and the United States. In addition, the company had $60 million of publicly traded bonds, much of them held by U.S. investors. The restructuring was the largest and most complicated undertaking of its kind ever taken in South America. In addition to negotiating with its bankers and making a public exchange offer for its bonds, the company made a massive common stock rights offering to its shareholders, giving them the opportunity to purchase new stock in the company. It also considered filing a "prepackaged" Chapter 11 bankruptcy in the United States to pressure U.S. bondholders to go along with the plan. The negotiations were greatly complicated by differences in the bankruptcy laws of Argentina, Brazil, and the
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United States. Teaching Purpose: To illustrate how distressed companies choose between formal legal bankruptcy and informal out-of-court restructuring as alternative strategies for restructuring their debt. Also shows how an "exchange offer" can be used to restructure widely held public bonds. The company's attempt to use a common stock rights offering also provides a real-world example of the "underinvestment problem" in corporate finance. Finally, shows what kinds of factors (conflicts among different countries' bankruptcy laws, inter-creditor conflicts, information problems, etc.) can complicate, and potentially disrupt, a debt restructuring. Subjects: Acquisitions; Bankruptcy; Beverages; Financial management; Multinational corporations; Reorganization; Restructuring; South America; Valuation
General Property Trust Peter Tufano; John C. Handley
HBS 11p 299098
Australia real estate trust $AS 110 million net income 1994
In 1994 General Property Trust, an Australian property investment trust, was anticipating future cash needs beyond those that the Trust could fund with internal cash flows. The managers of the Trust were considering a novel financing structure whereby it would sell call options on the Trust's units. The options' structure made it likely that they would be exercised, and therefore investors would choose to buy the Trust's units. The managers had to determine the appropriateness of this funding scheme in light of the Trust's alternatives and evaluate the proposed pricing of the options that would be offered via a rights offering. Teaching Purpose: Allows the instructor to discuss the application of cash-flow hedging, to examine the use of equity-financing strategy, to introduce students to rights offerings, and to apply derivative-pricing techniques to value a complex equity derivative. Subjects: Derivatives; Financing; Hedging; Options; Real estate; Real estate investment; Risk management; Trusts
A Note on Angel Financing Paul A. Gompers
HBS 11p 298083
N/A Discusses the economics of the private equity market and recent efforts by the U.S. Small Business Administration to promote greater angel financing. Subjects: Capital markets; Entrepreneurial finance; Financing
Chapter 20 Long-Term Debt
Debt Policy at UST, Inc. Mark Mitchell
HBS 14p 200069 TN available
Greenwich, CT tobacco $1.4 billion revenues 1999
UST, Inc. is a very profitable smokeless tobacco firm with low debt vis-a-vis other firms in the tobacco industry. The setting for the case is UST's recent decision to substantially alter its debt policy by borrowing $1 billion to finance its stock repurchase
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program. Teaching Purpose: Introduction to optimal capital structure with emphasis on calculation of interest tax shields. Subjects: Capital structure; Debt management; Long term financing; Taxation; Tobacco industry
Cox Communications, Inc.--1999 George Chacko; Peter Tufano
HBS 18p 201003 TN available
Atlanta, GA communications $1.8 billion revenues 1999
Covers the decision of how much external financing a firm needs and what securities the firm should issue to raise this financing. Cox Communications is a major player in the cable industry, which is consolidating due to technological changes/capabilities brought about by the Internet. The corporate treasury of Cox Communications needs to decide how much external financing is necessary to finance a series of intra-industry acquisitions that Cox has recently undertaken. The choices are plain-vanilla equity, debt, asset sales, and a new equity-linked derivative known as FELINE PRIDES, offered by Merrill Lynch. The treasurer and his team must make this decision facing the usual market constraints. There are also some special constraints including the need to maintain financial flexibility for further acquisitions and the need to limit the dilution of Cox's largest shareholder, who owns nearly 70% of the firm. Teaching Purpose: How to make long- and short-term financing decisions, taking into account specific business conditions and risk. Subjects: Capital structure; Communications industry; Debt management; Innovation; Long term financing; Securities; Short term financing
First Capital Holdings Corp. Stuart C. Gilson Harry DeAngelo Linda DeAngelo
HBS 19p 296032 TN available
Boston, MA/Los Angeles, CA life insurance $2 billion revenues 1991
The manager of a money-management firm considers whether to invest in the securities of a large, financially troubled, California-based life insurance holding company that holds 40% of its assets in high-yield junk bonds. Over the past year, the value of its junk bond portfolio has declined significantly. The insurer is seeking a large infusion of capital from its largest (28%) shareholder--a New York-based investment bank--that is experiencing financial difficulties of its own. Within the last month, another large California-based insurance company that also invested heavily in junk bonds is seized by regulators following a "run on the bank" by concerned policyholders, and the State Insurance Commissioner has publicly announced his intention to "crack down" on abuses in the insurance industry. Teaching Purpose: To evaluate the risks and rewards associated with investing in the financial claims of distressed companies; to understand the factors that
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give rise to a "bank run" on a bank or insurance company; to analyze regulators' incentives to seize a troubled financial institution; and to weigh the pros and cons of mark-to-market accounting by regulated financial service firms. Subjects: Bankruptcy; Insurance; Regulated industries; Securities analysis; Valuation
Cougars Scott P. Mason Mihir Desai
HBS 6p 295006 TN available
N/A Provides an introduction to zero coupon bonds and stripping coupon bonds. Concerns the relationship between the spot curve, the strip curve, and the coupon curve. Subjects: Bonds; Innovation; Interest rates; Pricing
Chapter 21 Leasing
Financing PPL Corp.'s Growth Strategy Benjamin C. Esty Carrie Ferman
HBS 25p 202045
United States utilities $5.7 billion revenues 2001
PPL Corp., an electric utility in Pennsylvania, needs to finance $1 billion of peaking plants as part of its new growth strategy. In February 2001, Steve May, director of finance for PPL's Global Division, is responsible for recommending a finance plan. After considering all the options, May decides that a synthetic lease is the best option, but he must decide whether to recommend a traditional or a limited recourse synthetic lease and how to structure the specific terms. The limited synthetic lease, in contrast to the traditional structure, requires a smaller corporate guarantee on the assets and has greater off-credit treatment, which is important given the company's growth strategy and limited debt capacity. However, finding investors willing to accept greater project risk will cost more and take more time. The timing is an important issue for May. Teaching Purpose: 1) Shows how corporate financial managers today must be familiar with and ready to use a wide range of financing techniques, including corporate finance (bank loans and corporate bonds), project finance, asset securitization, and leasing; 2) describes various leasing structures (operating leases, capital leases, leveraged leases, and synthetic leases) and the motivations for using them; and 3) explores the advantages and disadvantages of two kinds of synthetic leases--the traditional and the limited recourse--and asks students to select the more appropriate one given PPL's high-growth strategy. Subjects: Accounting standards; Buy or lease decisions; Deregulation; Earnings; Financial strategy; Leasing; Project finance; Utilities
Off-Balance Sheet Leases in the Restaurant
HBS 15p 101033
United States restaurant 1999
Amid mounting concern by credit agencies about off-balance sheet liabilities, an analyst for one of the leading credit-rating agencies has been asked to
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Industry Amy P. Hutton Paul M. Healy Jacob Cohen
make a presentation about off-balance sheet liabilities, the strategic analysis behind leasing versus purchasing property, and accounting for leases. Subjects: Financial ratios; Financial statements; Leasing; Restaurants
Kmart, Inc. and Builders Square Lisa Meulbroek Jonathan Barnett
HBS 25p 200044 TN available
United States building supplies retailing $2.5 billion revenues 1997
In 1997, Kmart received an offer from retail buyout specialists Leonard Green & Partners for the purchase of its ailing 162-store home improvement chain, Builders Square. Green's offer included a $10 million cash payment, a warrant to purchase a 28% stake in the new entity in the future, and the assumption of approximately $1.5 billion in non-cancelable Builders Square lease obligations. Kmart would remain contingently liable for the lease payments if the new entity were to fail. In the midst of the fiercely competitive home improvement retail industry, the questions posed include: 1) what is the value of the Builders Square subsidiary? 2) is the Green offer a good deal for Kmart? and 3) should Kmart accept the offer or hold out for a higher offer or additional buyers? Teaching Purpose: To incorporate off-balance-sheet financing of operating lease guarantees into a valuation exercise (using multiples and the APV approach) focused on a money-losing subsidiary. Subjects: Building materials industry; Capital structure; Corporate reorganization; Debt management; Discount department stores; Divestiture; Leasing; Liability; Options; Restructuring; Valuation
A Note on the Venture Leasing Industry Joshua Lerner
HBS 13p 294069
N/A Provides an overview of venture leasing, an innovative financing mechanism that resembles both venture equity investments and bank lending. Subjects: Entrepreneurial finance; Financial planning; Leasing; Venture capital
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Aloha Airlines, Inc.: A Leasing Decision George G.C. Parker
Stanford GSB 15p F240
United States airline
Discusses the decision of whether to lease or buy aircraft at Aloha Airlines in Hawaii. Subjects: Airlines; Capital budgeting; Capital costs; Financing; Leasing
Chapter 22 Options and Corporate Finance: Basic Concepts And Chapter 23 Options and Corporate Finance: Extensions and Applications
Cephalon, Inc. Peter Tufano Geoffrey Verter Markus F. Mullarkey
HBS 298116 18p
United States, biotech, 1997
In early 1997, Cephalon, Inc. awaited an FDA panel's decision on whether its drug, Myotrophin, would be approved. If the drug was approved, the firm might need substantial additional funds to commercialize the drug as well as to buy back rights to it (which had been sold earlier to finance its development). The firm's CFO is considering a variety of financing strategies, including buying call options on the firm's own stock and paying for these options by issuing shares at the current time. Introduces students to the use of equity derivatives as part of a risk management strategy, examines the application of cash-flow hedging in a corporate context, and examines the pricing of a derivative security with large jump risk. Subjects: Biotechnology; Derivatives; Financial strategy; Hedging; Options; Risk management
Keller Fund’s Option Investment Strategies W. Carl Kester
HBS 295096 5p TN available
North America, investment, 1994
A closed-end mutual fund's decision to study option trading provides an opportunity to study the profit profile and pricing of multiple option investment strategies (e.g., buy a call, buy a put, write a call, buy stock-write call, etc.). This case is designed to provide students with an introduction to option pricing. Subjects: Derivatives; Investment management; Mutual funds; Option pricing; Risk management; Securities
Arundel Partners: The Sequel Project Timothy A. Luehrman; William A. Teichner
HBS 292140 19p TN available
California, movies, 1992
A group of investors is considering buying the sequel rights for a portfolio of feature films. They need to determine how much to offer to pay and how to structure a contract with one or more major U.S. film studios. The case contains cash flow estimates for all major films released in the United States during 1989. These data are used to generate estimates of the value of sequel rights prior to the first film's release. Designed to introduce students to real options and techniques for valuing them. It clearly illustrates the power of option pricing techniques for certain types of capital budgeting problems. Also
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illustrates the practical limitations of such techniques. Subjects: Capital budgeting; Decision trees; Entertainment industry; Option pricing; Real options; Securities analysis; Uncertainty
Chapter 24 Warrants and Convertibles
Goldman, Sachs & Co.: Nikkei Put Warrants--1989 Peter Tufano
HBS 16p 292113 TN available
Global investment banking 1989
Japanese financial institutions' willingness to sell put options on the Nikkei Stock Average provides investment banks with the raw material from which to create a security that would allow U.S. investors to bet on falls in the Japanese Stock Market. The investment bank that seeks to create this new product must decide how to design, produce (hedge), and price the options (Nikkei Put Warrants). Highlights the global nature of new product development in the securities market and provides opportunities for students to make and critique the key decisions involved in creating this new product. Students must consider the costs of production, the preferences of consumers, competitive dynamics, and the pricing of substitutes for the new product. Subjects: Capital markets; Hedging; Investment banking; Product design; Product introduction; Securities
Coca-Cola Harmless Warrants Scott P. Mason; Mihir Desai
HBS 4p 295007 TN available
United States beverages Fortune 500
Underscores the arbitrage implicit in the pricing of a complex unit of debt and warrants issued by the Coca-Cola Co. Subjects: Beverages; Bonds; Innovation; Pricing
GetConnected Jay O. Light Dan J. Green
HBS 17p 201010
Boston, MA, telecommunica-tions 2 employees 1999
An embryonic Internet-based telecom marketing firm considers its first (seed) round of funding. They are choosing between a fixed price round and a discounted convertible round. Teaching Purpose: To discuss fixed price vs. floating price seed financing. Subjects: Financing; Internet marketing; Telecommunications; Venture capital
Jupiter Management Co. Ronald W. Moore
HBS 24p 292107 TN available
United States money management small
The manager of a small company growth fund considers relative merits of investing in a company's convertible debt versus its common. Subjects: Investment management; Mutual funds; Portfolio management
Chapter 25 Derivatives and Hedging Risk
Introduction to Derivative Instruments (HBS background note) W. Carl Kester Kendall
HBS 23p 295141
N/A Provides an elementary introduction to three major classes of derivative instruments: options, forwards and futures, and swaps. Subjects: Commodity markets; Derivatives; Securities
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Backstrand Futures on the Mexican Peso Kenneth A. Froot Matthew McBrady; Mark Seasholes
HBS 296004 22p
Mexico/U.S., financial services, 1995
The Chicago Mercantile Exchange needs to decide how to design, and whether and when to introduce, a futures contract on the Mexican peso. Subjects: Commodity markets; Country analysis; Foreign exchange rates; International finance; Mexico; Money; Money markets
Alcoma: The Strategic Use of Frozen Concentrated Orange Juice Futures Ray A. Goldberg Phil Herndon Kate Morris
HBS 595029 40p
Global, orange juice, 1994
Increases in orange tree production led to an orange juice surplus. How does one manage price risk in the orange juice industry under these conditions? Subjects: Agribusiness; Commodity markets; Hedging; Risk management
Interest Rate Derivatives (HBS background note) Peter Tufano; Jonathan S. Headley
HBS 11p 294095 TN available
N/A Introduces and explains the six major interest rate derivative products: swaps, forward rate agreements, Eurodollar futures, bond options, caps/floors/collars, and swap options. Teaching Purpose: Provides students with an introductory knowledge of the basic interest rate derivative instruments used in the market today. It will walk students through both the cash flows involved and the institutional differences between each of the instruments. Subjects: Bonds; Capital markets; Derivatives; Interest rates
Risk Management at Apache Lisa Meulbroek Puja Malhotra
HBS 24p 201113 TN available
United States oil & gas exploration 2001
After initiating a hedging strategy, Apache Corp. is interested in revisiting its decision to determine if hedging is value-adding. This case investigates how the company initially decided to hedge against commodity price risk and how it implemented its hedging practice. Also examines when financial theory argues hedging is value-adding. Teaching Purpose: To determine when a company should hedge. Subjects: Commodities; Commodity markets; Futures; Hedging; Options; Risk management
Chapter 26 Corporate Financial Models and Long-Term Planning
Financing PPL Corp.'s Growth Strategy Benjamin C. Esty Carrie Ferman
HBS 25p 202045
United States utilities $5.7 billion revenues 2001
PPL Corp., an electric utility in Pennsylvania, needs to finance $1 billion of peaking plants as part of its new growth strategy. In February 2001, Steve May, director of finance for PPL's Global Division, is responsible for recommending a finance plan. After considering all the options, May decides that a synthetic lease is the best option, but he must decide whether to recommend a traditional or a limited recourse synthetic lease and how to structure the specific terms. The timing is an important issue for
Harvard Business School Publishing
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May. Teaching Purpose: 1) Shows how corporate financial managers today must be familiar with and ready to use a wide range of financing techniques, including corporate finance (bank loans and corporate bonds), project finance, asset securitization, and leasing; 2) describes various leasing structures (operating leases, capital leases, leveraged leases, and synthetic leases) and the motivations for using them; and 3) explores the advantages and disadvantages of two kinds of synthetic leases--the traditional and the limited recourse--and asks students to select the more appropriate one given PPL's high-growth strategy. Subjects: Accounting standards; Buy or lease decisions; Deregulation; Earnings; Financial strategy; Leasing; Project finance; Utilities
Be Our Guest, Inc. Dwight B. Crane Penny Joseph
HBS 13p 299001 TN available
Boston, MA equipment rental $2,650,000 revenues Case 1994-1997
Be Our Guest is a rapidly growing equipment rental company with substantial seasonality in its revenues and profits. In the spring of 1998, the senior management team is reviewing its financial plans in preparation for a meeting with the company's bank. The case provides an opportunity to forecast financial needs and consider the appropriate structure and amount of bank borrowing. Subjects: Banking; Financial analysis; Financial planning; Financing; Small business
Advanced Technologies, Inc. Thomas R. Piper
HBS 8p 299042
United States semiconductor $605 million revenues 1997
The CEO of a semiconductor equipment manufacturer is assessing the financial forecasts and financing plan prepared by the chief financial officer. Continued rapid growth will create substantial financing pressures, especially if profitability fails to recover and/or if a major, unexpected economic downturn occurs. Subjects: Debt management; Financial analysis; Financial management; Financial planning; Semiconductors
The Vanguard Group, Inc.--1998 Andre F. Perold
HBS 24p 299002
Pennsylvania mutual fund 1998
Since the beginning of 1997, Vanguard's assets under management have increased more than 60% from $240 billion to almost $400 billion, making it second in market share only to Fidelity Investments. Vanguard views this success as another vindication of its low-cost strategy of no-load funds, small expense ratios, candid client communication, high quality service, and predictable performance. But the organization also is mindful of the unprecedented changes occurring in the financial services industry. Financial institutions have been rapidly consolidating, and technology--especially the Internet--is dramatically altering the creation, pricing, and delivery of financial services. Vanguard
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has to carefully consider its future, and faces key decisions such as expanding its range of products and offering asset management services in other countries. Teaching Purpose: To understand the importance of cost savings and service in investment management and the demand for mutual fund products and competition within the mutual fund industry. Subjects: Financial planning; Investment management; Mutual funds; Service management; Strategic planning
Kentucky Steel Corp. W. Carl Kester
HBS 14p 294094
United States steel $1.13 billion revenues 1991
A regional steel minimill producer must finance a major capital expenditure program. The company's vice president of finance must forecast external funds needs, determine an appropriate capital structure, and recommend a financing plan for the next three years. Financing alternatives include bank credit, privately placed notes, and equity. Subjects: Capital structure; Debt management; Financial planning; Financial strategy; Financing; Long term financing; Steel
Note on Financial Programming Over Long Horizons Timothy A. Luehrman
HBS 10p 294087 TN available
N/A Introduces students to financial programming as a way to incorporate concepts and tools from modern corporate finance theory into a framework for managing over long horizons. Particular attention is paid to corporate capital budgeting and investment processes. Subjects: Capital budgeting; Capital investments; Financial management; Financial planning; Financial strategy; Long term financing
Chapter 27 Short-Term Finance and Planning
Cash Management Practices in Small Companies (HBS background note) H. Kent Bowen Andrew R. Jassy Laurence E. Katz Kevin Kelly Baltej Kochar
HBS 8p 699047
N/A Most small business managers claim that cash management is their leading concern. Often walking a tightrope between growth and illiquidity, small business managers face different cash management challenges than their counterparts in larger companies. Compared to larger firms, small businesses often have under-staffed and under-trained accounting staffs, volatile cash flows dependent on a single product line, limited access to new capital, and a significant share of their net worth tied up in working capital. These limitations are often compounded by management's focus on growth, which can put additional pressure on the cash management system by increasing net working capital requirements. Teaching Purpose: To provide managers with a broader universe of specific techniques used by small businesses to manage cash. Uses the following three-part model of cash management systems for a discussion of best
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practices: 1) cash cycle policies and tactics, 2) forecasting and preview processes, and 3) organizational design and incentive systems. Subjects: Accounts payable; Accounts receivable; Cash management; Forecasting; Small business
Dell's Working Capital Richard S. Ruback ; Aldo Sesia
HBS 7p 201029 TN available
Round Rock, TX high technology Fortune 500 1997
Dell Computer Corp. manufactures, sells, and services personal computers. The company markets its computers directly to its customers and builds computers after receiving a customer order. This build-to-order model enables Dell to have much smaller investment in working capital than its competitors. It also enables Dell to more fully enjoy the benefits of reduction in component prices and to introduce new products more quickly. Dell has grown quickly and has been able to finance that growth internally by its efficient use of working capital and its profitability. This case highlights the importance of working capital management in a rapidly growing firm. Subjects: Capital; Computer industry; Financial management
Dynashears, Inc. Thomas R. Piper
HBS 8p 292017 TN available
United States industrial shears $26 million revenues 1991
A senior loan officer is reviewing the recent performance of a company that has failed to repay its loan as scheduled. The failure results from a cyclical downturn in sales, coupled with a lag in cutting back production. Inventory risk is minimal. Teaching objective: Practice in financial analysis and in understanding the impact of business cycle on durable goods companies. Also an opportunity to evaluate the situation from a lender's perspective. Subjects: Financial analysis; Financial planning; Loan evaluation; Tools
Toy World, Inc. W. Carl Kester
HBS 6p 295073 TN available
United States toys $10 million revenues 1994
A shift from seasonal to level production of toys will change the seasonal cycle of Toy World's working capital needs and necessitate new bank credit arrangements. Students must analyze the company's performance, forecast funds needs, and make a recommendation. Teaching Purpose: To introduce the pattern of current assets and cash flows in a seasonal company and provide an elementary exercise in the construction of pro forma financial statements and estimation of funds needs. Subjects: Financing; Inventory management; Production planning; Production scheduling; Risk management; Toy industry
Chapter 28 Cash Management
Cash Management Practices in
HBS 8p 699047
N/A Most small business managers claim that cash management is their leading concern. Often walking a tightrope between growth and illiquidity, small
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Small Companies (HBS background note) H. Kent Bowen Andrew R. Jassy Laurence E. Katz Kevin Kelly Baltej Kochar
business managers face different cash management challenges than their counterparts in larger companies. Compared to larger firms, small businesses often have under-staffed and under-trained accounting staffs, volatile cash flows dependent on a single product line, limited access to new capital, and a significant share of their net worth tied up in working capital. These limitations are often compounded by management's focus on growth, which can put additional pressure on the cash management system by increasing net working capital requirements. Teaching Purpose: To provide managers with a broader universe of specific techniques used by small businesses to manage cash. Uses the following three-part model of cash management systems for a discussion of best practices: 1) cash cycle policies and tactics, 2) forecasting and preview processes, and 3) organizational design and incentive systems. Subjects: Accounts payable; Accounts receivable; Cash management; Forecasting; Small business
Chapter 29 Credit Management
First American Bank: Credit Default Swaps George Chacko Eli Peter Strick
HBS 18p 203033
New York, NY banking 2002
Discusses a bank's ability to manage its credit exposure to a particular client using credit default swaps. Teaching Purpose: To give students basic understanding of credit risk and credit derivative mechanics. Subjects: Asset management; Banks; Credit; Derivatives; Financial instruments; Financing; Risk; Securities markets
Collateralized Loan Obligations and the Bistro Trust Kenneth A. Froot Ivan Farman
HBS 27p 299016
United States financial $10 billion revenues 1998
Examines a large bank trying to protect itself from the risks and capital requirement created by its loan portfolio. Considers a variety of ways available to the firm to offload the risks. Teaching Purpose: Credit risk management. Subjects: Banking; Credit; Financial strategy; Loan evaluation; Risk management
Wiegandt GmbH Cologne Dwight B. Crane Mathew Mateo Millett
HBS 8p 298159
Germany furniture sales
The credit department of Wiegandt, a furniture manufacturer, is evaluating the financial condition of two stores that retail the company's furniture. Teaching Purpose: Provides an opportunity to teach basic financial analysis and to discuss the trade credit policy of companies. Subjects: Credit; Financial analysis; Financial management; Furniture; Germany; Profitability analysis
SureCut Shears, Inc. W. Carl Kester
HBS 8p 297013 TN available
United States manufacturing $30 million revenues 1996
A bank loan officer must determine whether to waive convenants and extend terms on a line of credit granted to SureCut Shears. At issue is whether the inability of SureCut to pay down its line of credit is
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due to a temporary cyclical downturn or other long-term financial problems. Teaching Purpose: To expose students to the impact of a cyclical downturn on financial performance, and to provide practice in modeling business cycles in pro forma forecasts. Subjects: Banking; Credit; Forecasting; Pro forma financial statements; Recessions
Chapter 30 Mergers and Acquisitions
Provident Life and Accident Insurance: The Acquisition of Paul Revere Mihir Desai Mark Veblen Frank Williamson
HBS 21p 202044 TN available
Chatanooga, TN insurance $2,555 million revenues 1996
Provident Life & Accident Insurance Co. has made an initial bid to acquire a primary competitor, Paul Revere, from conglomerate, Textron. The due diligence process uncovers a significant block of problematic disability insurance policies. Provident is forced to assess the negative impact of this discovery on its initial valuation and revise its bid. In the process, the divergent views of the evolution of these policies by the bidder and seller have to be translated through discounted cash flow analysis into appropriate bid prices. Finally, this DCF analysis, in combination with multiples analysis, is used in negotiations with Textron and public shareholders. Teaching Purpose: Provides a platform for: 1) introducing students to the insurance industry by examining how insurers pool risks, incorporate asymmetric information in pricing and designing their policies, manage these risks by investing assets over time, and how this industry reports financial results to investors; 2) demonstrating discounted cash flow analysis and multiples analysis in the insurance industry; and 3) discussing negotiation dynamics in an M&A situation involving a large majority shareholder and a minority public float and divergent views of future expected cash flows. Subjects: Accounting; Corporate control; Financial management; Insurance; Mergers & acquisitions; Valuation
PepsiCo's Bid for Quaker Oats (A) Carliss Y. Baldwin; Leonid Soudakov
HBS 25p 801458
United States beverage and food $20 billion revenues 2000
Throughout 1999, PepsiCo closely tracked several potential strategic acquisitions. In the fall of 2000, it appeared that the right moment for an equity-financed acquisition had arrived. At this time, PepsiCo management decided to initiate confidential discussions with The Quaker Oats Co. about a potential business combination. Gatorade, a key brand in Quaker's portfolio, had long been on PepsiCo's wish list, but PepsiCo's managers, led by CEO Roger Enrico and CFO Indra Nooyi, were committed to upholding the value of PepsiCo's shares and, as a result, were determined not to pay too much for
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Quaker. This case provides information that allows students: 1) to assess the value of Quaker's businesses, 2) to estimate potential synergies associated with a Pepsi-Quaker merger, and 3) to come up with an effective negotiation strategy. Teaching Purpose: Valuation of a multidivisional business in support of an M&A bid, structuring a stock-for-stock offer, and negotiation of the acquisition of a public company. Subjects: Bids; Brands; Mergers & acquisitions; Stock exchanges; Valuation
Radio One, Inc. Richard S. Ruback; Pauline Fischer
HBS 15p 201025 TN available
Washington, DC radio $81.7 million revenues 1999
Radio One (NYSE: ROIA and RIOAK), the largest radio group targeting African-Americans in the country, had the opportunity to acquire 12 urban stations in the top 50 markets from Clear Channel Communications, Inc. (NYSE: CCU) in the winter of 2000. The stations were being sold by Clear Channel Communications, Inc. to obtain Federal Communications Commission (FCC) approval for its acquisition of AMFM, Inc. (NYSE: AFM). Radio One was also negotiating the acquisition of nine stations in Charlotte, NC; Augusta, GA; and Indianapolis, ID. The proposed acquisitions would double the size of Radio One. The case focuses on the strategic and financial evaluation of the proposed acquisitions. Teaching Purpose: Provides students the opportunity to forecast the cash flows associated with the proposed acquisitions and to value those projections using discounted cash flows as well as transaction and trading multiples. Subjects: Acquisitions; Broadcasting industry; Mergers; Present value; Valuation
PPL Group Dwight B. Crane Penny Joseph
HBS 15p 200001
Toronto, Canada marketing services $10 million revenues 1998
The CEO is considering the sale of his privately owned company to a publicly traded company as a way of obtaining capital and putting his assets in a more liquid form. Teaching Purpose: Discussion of methods to finance growth of a smaller company. Subjects: Canada; Entrepreneurial finance; Financing; Mergers & acquisitions; Small business
The Acquisition of Consolidated Rail Corp. (A) Benjamin C. Esty Mathew Mateo Millett
HBS 17p 298006 B case available TN available
United States railroad $19 billion 1996-1997
On October 15, 1996, Virginia-based CSX Corp. and Pennsylvania-based Consolidated Rail Corp. (Conrail), the first and third largest railroads in the Eastern United States, announced their intent to merge in a friendly deal worth $8.3 billion. This deal was part of an industry-wide trend toward consolidation and promised to change the competitive dynamics of the Eastern rail market. Students, as shareholders, must decide whether to tender shares into the front-end of a two-tiered acquisition offer. To make this decision, they must
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value Conrail as an acquisition target and understand the structure of CSX's offer. Teaching Purpose: Provides an opportunity to value a large-scale acquisition using comparable transactions and discounted merger synergies. In addition, it illustrates the mechanics of a two-tiered offer and provides a vehicle to discuss various anti-takeover provisions including poison pills, lock-up options, break-up fees, and no-talk clauses. Subjects: Acquisitions; Auctions; Competitive bidding; Corporate control; Deregulation; Game theory; Mergers; Railroads; Valuation
Microsoft/Intuit William E. Fruhan Jr.
HBS 20p 295121 TN available
United States computer software Fortune 500 $4 billion revenues
Microsoft Corp. proposes to acquire Intuit Corp. The case examines the strategic fit and the price proposed to complete the transaction. Teaching Purpose: Valuation and implementing a business strategy. Subjects: Acquisitions; Mergers; Software; Valuation
Chapter 31 Financial Distress
The Loewen Group, Inc. Stuart C. Gilson; Jose Camacho
HBS 24p 201062
British Columbia, Canada funeral homes $1.1 billion revenues 1998-1999
A publicly-traded funeral home and cemetery consolidator faces imminent financial distress. The company has aggressively grown through use of debt. Restructuring the debt is potentially very costly to creditors, shareholders, suppliers, and other corporate stakeholders. Cross-border and accounting issues potentially complicate the restructuring. Teaching Purpose: To illustrate the costs of debt, financial distress, basic restructuring options, and determinants of capital structure. Subjects: Bankruptcy; Canada; Debt management; Financial analysis; Financial management; Financial strategy; Management of crises; Reorganization; Services
Iridium LLC Benjamin C. Esty Fuaad A. Qureshi William Olsen
HBS 21p 200039 TN available
United States, Global, tele- communications 1,000 employees 1990-1999
Part of a module on financing large projects in the elective curriculum course entitled "Large-Scale Investment." Set in August 1999, just after Iridium, a global communications firm, declared bankruptcy. While the case describes Iridium's creation, development, and commercial launch, it concentrates primarily on the firm's financial strategy and execution as it raised more than $5 billion of capital. Describes the specific securities Iridium issued, the sequence in which it issued them, and the firm's financial performance prior to bankruptcy. Using analyst forecasts, students can value the firm prior to bankruptcy, but will recognize how difficult it is to value technology start-ups given the uncertainty in demand. Teaching Purpose: Intended to challenge existing theories of capital structure: is Iridium's
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Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
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target capital structure of 60% debt optimal? Helps students understand the benefits and limitations of issuing different kinds of securities (e.g. cash-pay vs. zero coupon bonds, bank debt vs. public bonds, etc.) and the complexity of sequencing different kinds of securities. The overall objective is to help students understand the relevant issues in financing large, greenfield projects.Subjects: Bankruptcy; Capital investments; Capital structure; Project finance; Telecommunications; Valuation
TWA: The Second Bankruptcy Mary E. Barth Nese Yildiz
Stanford GSB 25p A178
Global/United States Airline Large 1995
In May 1995, about 19 months after emerging from the Chapter 11 bankruptcy it filed in 1993, Trans World Airlines issued a proxy statement to seek the consent of its shareholders and certain creditors for another debt restructuring plan. The prospectus contained two plans of financial organization: one for an out-of-court restructuring, and the other for a "prepackaged" Chapter 11 bankruptcy. The exchange offers in the two plans were virtually identical, but the prepackaged restructuring plan required a lower acceptance rate. Under the plan, the creditors of TWA would forgive a substantial amount of the company's debt in exchange for stock, other equity instruments, and revised terms on remaining debt. The creditors would own about 70% of the reorganized company and the common shareholders, mostly employees, would see their stake in the airline shrink to about 30% from 45%. Adam Chandler, a holder of TWA's 8% secured notes, read the proxy with interest. He needed to decide how to cast his vote--for or against the troubled carrier's reorganization proposals. Was TWA worth more as a going concern than it would be if its assets were liquidated? What were its assets really worth? Would the company's performance match management's projections? Would TWA's financial results be sufficient to support an increased equity valuation post bankruptcy, or should Chandler try to thwart the deal in the hopes of obtaining a larger debt component to his restructured claim? Subjects: Airlines; Bankruptcy; Debt management; Reorganization
Infinity Carpets, Inc. Thomas R. Piper Ronald W. Moore
HBS 14p 299014
United States carpet manufacture mid-size $55 million revenues 1990
A turnaround expert must determine whether a firm in distress is worth more as a going concern than its liquidation value. If so, the finances of the firm must be restructured consistent with the bargaining power of the holders of the various securities. The restructuring requires a delay in principal repayment, rate concessions, and a debt-for-equity swap.
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Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
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Teaching Purpose: Restructuring of firms in financial distress. Subjects: Bankruptcy; Debt management; Restructuring; Valuation
Bankruptcy and Restructuring at Marvel Entertainment Group Benjamin C. Esty Jason S. Auerbach
HBS 18p 298059 TN available
United States media $800 million revenues 1997
Marvel Entertainment Group is the leading comic book publisher in the country with superheros like Spider-Man, The Incredible Hulk, The X-Men, and Captain America. It is also one of the leading manufacturers of sports and entertainment trading cards under the Fleer and Sky Box brand names. In the mid 1990s, it experienced sharp declines in both businesses causing it to file for bankruptcy in December 1996. This case is set in late January 1997, shortly after Marvel filed its reorganization plan with the bankruptcy court and approximately one month before creditors will have to vote on the plan at the confirmation hearing. Pits two of the most prominent raiders of the 1980s against each other for control of the company. On one side is Ronald Perelman, who controls Marvel through his MacAndrews & Forbes holding company. On the other side is Carl Icahn, who controls 25% of Marvel's public debt. Icahn and the other bondholders must decide whether to accept Perelman's plan, to reject it in favor of their own plan, or to sell their bonds before the confirmation hearing. Perelman must decide whether to change the plan in response to the debtholders threats or to wait and see what happens at the hearing. Teaching Purpose: This case has four objectives: 1) Provides an opportunity to value a Chapter 11 restructuring plan; 2) illustrates debtholder/equityholder incentive conflicts in a distress setting; 3) raises the issue of whether insider-trader in debt instruments, specifically junior debt in a distress situation, should be illegal; and 4) illustrates the role played by vulture investors in Chapter 11 restructurings. A rewritten version of another case. Subjects: Bankruptcy; Corporate governance; Entertainment industry; Liquidation; Restructuring; Valuation
Sunbeam Oster Co., Inc. Steven R. Fenster Paul J. Reiferson
HBS 23p 291052 TN available
Pennsylvania consumer products $1 billion revenues 1989-1990
Japonica Partners, an investment firm, is trying to determine whether there is any unseen value in Sunbeam Oster Co., Inc., a Chapter 11 debtor. If there is, Japonica must consider the means by which they can acquire control of a company in Chapter 11. Subjects: Acquisitions; Appliances; Bankruptcy; Consumer goods; Household products; Liquidation; Reorganization
Chapter 32 International Corporate Finance
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Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
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Foreign Direct Investment (HBS background note) Laura Alfaro Esteban Clavell
HBS 10p 703018
N/A Briefly reviews motivations and trends behind foreign direct investment and multinational corporations as well as the policy debate that surrounds them. Subjects: Business government relations; Economic development; Foreign exchange; Government policy; International banking; International finance; Investments; Multinational corporations; Policy making
Malaysia: Capital and Control Rawi Abdelal Laura Alfaro
HBS 31p 702040 TN available
Malaysia government 1997-2002
On September 1, 1998 the government of Malaysia imposed currency and capital controls in response to the financial crisis that had swept Asia. The controls sparked an enormous controversy in the world of international finance. Some celebrated the controls for insulating the Malaysian economy from the unstable international financial system. Others criticized the controls for trapping investors and allowing the government to protect the interests of "cronies." This debate also raised the central question about the future of the international financial architecture: What is the appropriate balance between financial market freedom and government discretion in the management of the global economy? Teaching Purpose: The political economy of capital controls in Malaysia during the Asian financial crisis. Subjects: Asia; Business government relations; Country analysis; Economic development; Emerging markets; Government policy; International banking; International finance
CSFB's China Unicom Incident Michael J. Enright ; Vincent Mak
U. of Hong Kong 20p HKU187 TN available
China investment banking 2001
In August 2001, Credit Suisse First Boston (CSFB), a major international investment bank, was removed from the foreign underwriting team that would handle a pending share offering for China Unicom Group Ltd., the second largest telecommunications company in the Chinese Mainland. Only two months earlier, CSFB was designated to deal with the U.S. portion of that offering. However, after the bank hosted overseas investment "road shows" attended by senior government officials from Taiwan (including the finance minister), it was officially dropped from the China Unicom underwriter list. The incident provoked criticism from governments in the United States and Taiwan and widespread activity in investment banking circles as several other banks dropped plans to host road shows for Taiwan. Teaching Purpose: To teach how business decisions may become caught up in political difficulties and how companies need to formulate strategies and policies to address such issues. Subjects: Asia; Business government relations;
Harvard Business School Publishing
Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
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China; International finance; Investment banking; Politics; Strategy formulation
JAFCO American Ventures, Inc.: Building a Venture Capital Firm Walter Kuemmerle Chad Ellis
HBS 22p 899099 TN available
United States, Japan venture capital $200 million revenues 1997
Describes the second attempt at entry of JAFCO, a large Japanese venture capital firm, into the U.S. venture capital market. The U.S. subsidiary, JAFCO America Ventures, is in the midst of a challenging turnaround. Going forward, the U.S. subsidiary's leadership needs to make a number of important decisions regarding investment focus, deal flow generation, compensation, and cooperation with the Japanese parent company. Teaching Purpose: Introduction to venture capital operations, strategy and focus of venture capital firms, and managing global private equity firms. Subjects: Entrepreneurial finance; Foreign investment; Incentives; International entrprnl finance; International finance; International operations; Japan; Venture capital
The Chad-Cameroon Petroleum Development and Pipeline Project (A) Benjamin C. Esty Carrie Ferman
HBS 22p 202010 B case available TN available
Chad and Cameroon petroleum $1.2 billion 2000
On June 6, 2000, the World Bank's and IFC's board of directors was scheduled to vote on whether to approve funding for the $4 billion Chad-Cameroon Petroleum Development and Pipeline project. Although the project presented a unique opportunity to alleviate poverty in Chad, one of the poorest countries in the world, Chad had a president who had been described as a "warlord" and a history of civil war and oppression. This case describes the project, the setting, and the World Bank's reasons for participating in the deal--mainly an opportunity to alleviate poverty, enforce environmental standards, and minimize the impact on indigenous people. Also describes the very public and very ardent opposition to the project's environmental, social, and revenue management policies. Faced with a high-risk, but potentially high-return opportunity to improve conditions in Chad, students, as the directors, must decide whether to approve funding for the deal. Teaching Purpose: Illustrates not only the complexity of negotiating very large deals between public and private entities, but also the opportunity inherent in large-scale investment. Students must assess whether the benefits received by the host countries are commensurate with the risks they bear. This discussion raises critical ethical issues related to investment in development countries. With regard to project finance, the case illustrates the difference between project and corporate finance and shows that risk sharing and risk mitigation are motivations for using project finance. Subjects: Africa; Cost
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Case Map for Ross, Westerfield & Jaffe: Corporate Finance, 6th Edition
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benefit analysis; Economic development; Emerging markets; Ethics; International finance; Petroleum industry; Project finance
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