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Syllabus for case study in financial management Case 1 NATIONAL FABRICATORS
TEACHING OBJECTIVES The case provides students with an opportunity to undertake the following analysis: a comprehensive size-up of a firm‘s environment and competitive position; a forecast of future financing needs and sources of loan repayment; and an assessment of the key risks that a bank assumes in lending to a business with marginal performance.
STUDENT ASSIGNMENT 1. Do a size-up of the problems and opportunities facing National Fabricators. 2. What has to be done to remedy these problems or capitalize on opportunities? 3. As Mr. Kasmar, evaluate the risks that this loan request presents to the bank. 4. What short- and long-term action should Mr. Kasmar take?
Case 2 FINANCIAL PERFORMANCE OF DELL COMPUTER CORPORATION
TEACHING OBJECTIVES This case can be used in an introductory finance course to teach students ratio analysis and crosscompany comparisons. This case can also be used in a competitive strategy course with a heavy financial analysis emphasis. Furthermore, the case is also applicable for executive development programs to emphasize creating and enhancing shareholder value. The case is designed to deepen a student‘s understanding of the linkage among the balance sheet, income statement and cash flow statement. It can also be used to introduce financial ratios and to understand how ratios can be used as descriptors of a company‘s performance. STUDENT ASSIGNMENT
1 Compute the financial ratios for Dell Computer Corporation and IBM. 2 Evaluate the information presented in the exhibits to enable a comparison of companies. 3 Discuss Dell‘s competitive advantages and highlight what has enabled the company to compete and substantially out perform its competitors.
Case 3 CHEF'S TOOLKIT INC. TEACHING OBJECTIVES The case is designed as an exercise in developing projected statements for stated assumptions and data. There is little room for judgment: all basic numbers are given. The student will have to understand the connections between production, sales expectations, marketing, and credit collection and how these variables affect cash flow. STUDENT ASSIGNMENT Prepare a monthly production schedule and cash budget for the next 12 months based on the following three scenarios: (1) monthly sales assumptions of 10,000 units/month ñ monthly sales assumptions of 30,000 units/month (assume that the double cavity mould is ordered in October) (2) monthly sales assumptions of 5,000 units/month Prepare income statements and balance sheets for the three sales assumptions. As Dale Reid, would you invest in Chef‘s Toolkit? If so, under what terms?
Case 4 PALMER LIMITED TEACHING OBJECTIVES The primary objective is to provide practice in the development of projected balance sheets and income statements. Other objectives include: 1. Assessing a construction-related business. 2. Learning how loans to contractors, hold backs and mechanics‘liens work. 3. Using a cash budget to assist in structuring a loan and assessing its key risks. STUDENT ASSIGNMENT 1 Prepare a monthly cash budget outlining the firm‘s cash needs. 2 Prepare a projected balance sheet and income statement for the year ended December 31, 1999. 3 How much financing is required and when will it be repaid? 4 As Melynk, what would you do?
Case 5 COW‘S LONDON
TEACHING OBJECTIVES The case provides students with the opportunity to undertake the required analysis for a bank loan: a size-up of the firm‘s environment and competitive position; a forecast of the future financing needs; and an assessment of how the Bank can mitigate its risk through collateral and covenant requirements. The case also provides students with insights into entrepreneurial activity, specifically a start-up situation involving an MBA graduate. Emphasis is given to the marketing research completed prior to the entrepreneur decision to go ahead with the idea. Also, exposure to alternative sources of financing, specifically government-sponsored loan programs, is given. STUDENT ASSIGNMENT 1
Perform a size-up of the risks and opportunities facing the Udderlies.
2 Develop projected income statements and balance sheets for the two years ending April 30, 1996 and April 30, 1997. 3
As Paul MacNeil, how would you assess any requested loans?
Case 6 SOPHISTICATED PETITES
TEACHING OBJECTIVES The case gives students practice at: verifying financial needs through a projected income statement and balance sheet; carrying out a sensitivity analysis; performing a complete size up of are tailing operation in an uncertain economic environment; and structuring a loan.
STUDENT ASSIGNMENT 1
Perform a size up of the risks and opportunities facing Sophisticated Petites.
2 Create a projected income statement and balance sheet for the year ended December 31, 1990, based on the assumption that the expansion takes place. 3
As Ann Moore, what would you do about the requested loan?
Case 7 LONDON SKI CLUB TEACHING OBJECTIVES 1. Prepare a projected income statement and balance sheet; 2. Assess the risks of a loan to a not-for-profit ski club; and 3. Structure a loan deal. STUDENT ASSIGNMENT 1. As Paulette Root, do an assessment of the risks and opportunities presented by the London Ski Club account. 2. Would you make the loan? 3. If not, what action is required, and if so, structure the deal.
Case 8 PEAK ROOFING COMPANY TEACHING OBJECTIVES 1. Size up a business, 2. Prepare projected financial statements, and 3. Structure both a term and an operating loan. STUDENT ASSIGNMENT 1 As Dillabaugh, perform a size-up of Peak Roofing. 2 Create annual projected income statements and balance sheets for Peak Roofing for the twoyear period ending December 31, 2001. 3 Based on your size-up and projections, does it makes sense to do business with this client? 4 Propose a deal that meets the needs of both the bank and the client.
Case 9 SRI OFFICE PRODUCTS INC. TEACHING OBJECTIVES This case involves credit management. The student is given financial statements for the distribution company and a technique the company uses to establish credit limits. Information is available about SRI«s experience with the distributor, the difficulties associated with changing distributors, and other relevant information. Students must decide what to do. STUDENT ASSIGNMENT What action would you take with respect to the Macdonald Stationery and Office Supplies Ltd. account and the distribution of SRI products in Atlantic Canada?
Case 10 ALFRED BROOKS MENSWEAR LIMITED
TEACHING OBJECTIVES This case is designed to take on the perspective of the corporation, or the bank supplying funds to the corporation, or both. From the standpoint of the corporation’s CFO, the case introduces students to the financial management implications for a firm that both imports and exports goods. Some ideas in the case include: identifying the amount and duration of a firm's working capital needs; managing foreign currency exposure; managing the risks of offshore purchasing and selling; and structuring a working capital loan. From the standpoint of the bank, students should assess the opportunities and risks presented by a client that is importing and exporting. Some issues of interest to the banker include: identifying the client's needs; identifying what bank products (letters of credit, credit investigation, documentary collections, currency options, forward contracts) are suited to meeting those needs; and ensuring that the package suggested for the client represents acceptable risk and return to the bank.
STUDENT ASSIGNMENT 1 As Harry Lagerfeld, identify the amount, timing and currency of ABM's funding needs for the coming year. 2 What risks are introduced by the proposed large sale to Sutton's? What are some means the firm could use to manage these risks? 3 What risks and problems are introduced by the proposed large purchase of semi-finished suits from the Hong Kong supplier? What are some means the firm could use to manage these problems and risks? 4 What problems are introduced because of the proposed sales to Italy? What are some means the firm could use to manage these problems? 5 From the perspective of the Confederation Bank, put together a complete loan and financial services package that would be acceptable to both the client and the bank including such features as amounts, rates, collateral security, and monitoring requirements.
Case 11 ADVANCE TECHNOLOGIES INC. TEACHING OBJECTIVES This introductory case will allow students to: (1) understand and quantify the risks (income and cash flow) associated with exchange rate fluctuations; (2) understand some of the factors that affect exchange rates; and (3) understand some of the instruments available to manage this risk, including puts, calls and forward contracts.”At the money” and zero cost collars are also discussed. The ideal background before undertaking this case is to read a chapter of a basic text that discusses currency options and forward contracts as well as the key determinants of exchange rates. It would also be helpful if students had some knowledge of accounting for foreign exchange transactions. STUDENT ASSIGNMENT 1
Explain why Harrison is concerned about currency exchange rate fluctuations.
2 Calculate Advance‘s foreign exchange exposure and assess the impact on cash flow and income of a weakening Canadian dollar. 3 Do you believe, based on the limited information provided in the newspaper article and case, that the dollar will fall or rise? 4
Evaluate the costs and benefits of the alternative hedging strategies presented in the case.
As Harrison, what would you do to hedge against foreign exchange risk? Why?
Case 12 SPENCER HALL (A)
TEACHING OBJECTIVES Students are introduced to interest rate risk management through the use of financial markets. Through this, students are exposed to derivative securities such as CAPs, Caps and Collars. Ultimately, students are introduced to an analytical framework that aids decision makers when choosing between hedging vehicles.
STUDENT ASSIGNMENT 1 Why would the Board of Directors of Spencer Hall choose to finance the expansion using short-term rates? What are the problems with such a strategy? 2
In a perfect world, how should the expansion be financed? Why?
3 As Stu Finlayson, which hedging vehicle would you use and why? What factors would you consider in the choice?
Case 13 BORDERS HOTEL CORP.
TEACHING OBJECTIVES The case is designed to be the first long-term financing case for students. Sensitivity, EBIT and risk analyses are required. The limits to sensitivity analysis are established, as are the financing choices. The case introduces the impact of debt and preferred stock financing on the level and variation of common stock returns.
STUDENT ASSIGNMENT 1 Prepare an estimate of the beginning balance sheet for Borders Hotel for each of the financing proposals. Treat all stock issue and stock compensation as organization costs. 2 What are the earnings before interest and taxes (EBIT), assuming 100 per cent occupancy? 75 percent occupancy? and 50 percent occupancy? 3
What is the impact of each financing proposal on the earnings available to Daniels?
How attractive would each of the financing proposals be to outside investors?
How attractive are the financing proposals to Daniels?
What action would you take as Daniels?
Case 14 ROCKY MOUNTAIN HIGH SKI RESORT
TEACHING OBJECTIVES The case is designed to enhance students’ understanding of the process a chief financial officer (CFO) goes through when making capital structure decisions. The financing options are established. Students must develop decision-making criteria and do a comparative analysis of the four options. The case also provides an opportunity to review the following concepts: EPS, P/E multiple, risk/return trade off and financial leverage. STUDENT ASSIGNMENT 1 Calculate RMH‘s net income and earnings per share for fiscal 1994 for each of the four alternatives. 2
What other factors should be considered in evaluating the financing alternatives?
As Christine Hayes, what would you recommend to the board of directors?
Case 15 TELUS: THE COST OF CAPITAL
TEACHING OBJECTIVES The purpose of this case is to provide an opportunity for the students to: review the concept of cost of capital; review historical data on risk premiums; develop a process for estimating the various components of the cost of capital; and determine the corporate cost of capital.
1. Compute the cost of capital for Telus Corporation. 2. How would you recommend that Telus should employ this cost of capital?
Case 16 SCOTT'S HOSPITALITY INC. – EVA
TEACHING OBJECTIVES (1) The limitations of some of the traditional financial measures of performance, (2) The concepts underlying the EVA approach and how EVA is calculated, and (3) How EVA can be applied to an actual company to assist in making asset management, capital structure management, divestiture and compensation decisions. STUDENT ASSIGNMENT 1
Evaluate Scott‘s historical financial performance.
2 Review the EVA of each division through a segmented valuation. Are the three divisions EVA positive? Negative? Calculate the market value added (MVA) for the company? 3 What level must net operating profit after tax (NOPAT) reach in each negative situation for the division to be EVA positive? Does this seem attainable? 4
Based on the results you have so far, what would you do with each of the divisions?
Case 17 UNIHOST CORPORATION TEACHING OBJECTIVES The purpose of this case is to provide the students with an understanding of how financial decisions impact the overall strategy of a firm. Additionally, this case provides the students with an understanding of the public financing process and a brief introduction of alternative methodologies for raising capital in the public markets. The Unihost case also provides the opportunity to discuss high yield debt and how it fits into a company‘s corporate and financial structureandhowfinancialcovenantswillimpactthecompany‘soperationsinthefuture. STUDENT ASSIGNMENT
Determine UniHost‘s financing requirements over the next three years. If Unihost needs to raise outside capital, how should it proceed with its next issue? With the one after that? What are the key factors affecting your decisions? As part of your analysis you should identify the most appropriate maturity and covenant structures for the debt alternatives.
Case 18 THE T. EATON COMPANY LIMITED'S INITIAL PUBLIC OFFERING
TEACHING OBJECTIVES This case is intended to introduce students to the IPO process, in the context of a turnaround company that is trying to raise capital during an unprecedentedly strong bull-run in North American equity markets. The case presents a firm that owns one of best known retails brands in Canada, but is making the difficult transition from being a closely held family firm that was nearly bankrupt trying to be—everything to everyone“, to a widely held and profitable corporation positioned in the under-served—moderate-better“ market segment. On the analytical side, the case can be used to show the importance of comparable companies analysis as a basis for the capitalized earnings (P/E) method and the capitalized earnings before interest, taxation, depreciation and amortization (EBITDA) method of valuing an IPO. The case can also demonstrate that qualitative assessments of—how much the market will bear“ playa vital role in the choice of the P/E and EBITDA multiples ultimately employed in the valuation of the company‘s equity.
STUDENT ASSIGNMENT 1 Assess the appropriateness of the timing of the Eaton‘s IPO. As a potential investor, what is your assessment of the prospects of the Eaton‘s IPO and of Eaton‘s in general? 2 What valuation method appears to be the most appropriate in this situation? What method would you use to value Eaton‘s? 3 Determine the value of Eaton‘s equity. 4 As Mary Vitug, what share price would you recommend to Sandra Schumacher? How many shares would you issue? What other recommendations would you make?
Case 19 HUANENG POWER INTERNATIONAL INC. RAISING CAPITAL IN GLOBAL MARKETS
TEACHING OBJECTIVES This case is designed to be used in either: an introductory finance course where students have had some exposure to cost of capital and time value of money concepts, or in a global environment of business-type course where the emphasis is on the investment climate in a country and how that climate affects business decisions and risk. Specifically, the case is intended to provide an opportunity for students to:
(1) Learn about China and its political, economic, social and technological (PEST) environment (2) Learn about global and Asian capital markets, cross-listing shares internationally. STUDENT ASSIGNMENT You have been hired by a large U.S. institutional investor considering purchasing HPI stock. Provide an analysis of the PRC, the power industry, key success factors, and HPI‘s strengths and weaknesses. What benefits are there to a non-U.S. firm listing on a U.S. exchange? Are there other alternatives that HPI should have considered? 1 Was the chosen issue price for HPI a reasonable value? Present your recommendation on whether, where, how and why HPI should have proceeded with the issue. 2
As an institutional investor, would you have bought stock in this company?
Case 20 PEPSICO CHANGCHUN JOINT VENTURE: CAPITAL EXPENDITURE ANALYSIS
TEACHING OBJECTIVES This case could be used as an introduction to capital budgeting techniques such as NPV and IRR . It also provides students with an opportunity to use the financial projection information and develop a basic financial model on a joint venture project. Students can then use the model to develop sensitivity analysis. This case also provides an opportunity to explore topics such as cost of capital and terminal value. The unique setting of this case can also be used as an introduction to joint ventures , a popular form of foreign direct investments in developing countries such as the People‘s Republic of China.
STUDENT ASSIGNMENT 1 Use the information in the case to construct two sets of NPV and IRR analysis on the proposed Changchun bottling joint venture: one set excluding the concentrate sales, the other set including the concentrate sales. Based on the results, what would be your decision on the proposed Changchun joint venture? 2 Comment on the financial projections that PepsiCo used in its capital budgeting exercise, especially the NOPBT Cap, foreign exchange rate projection and the discount rate. 3 What differences might there be as to how the PRC partners do the analysis (or look at the future cash flows) versus PepsiCo?