Title: CASES IN CORPORATE FINANCE Author: j-gentry Last modified by: Rebecca Mathew Created Date: 1/28/2009 9:14:00 PM Company: University of Illinois - CBA
CASES IN FINANCIAL MANAGEMENT SYLLABUS
FIN 522 Professor James A. Gentry Cases In Financial Management 343M Wohlers Hall Spring Semester 2009 333-7995 2043 BIF j- [email protected]
Office Hours: 10:30 a.m. to 11:45 a.m.
on Mon. and Wed/. or by Appointment
I. Teaching Objectives
Financial decision making cases are used to… • Create a highly interactive learning environment; • Learn about the application of financial management and credit analysis concepts; • Discover what you do not know about the practice of financial management; • Show what you have learned; • Highlight the relationships between strategic goals and the creation of firm value; • Develop techniques for interpreting a firm’s financial data and strategic plans; • Enhance your critical thinking and problem solving skills; • Expand your understanding of financial theory and its application; • Improve your listening and cooperative learning skills.
II. Learning Promises
At the end of this course your will be able to… • Think like a financial manager; • Interpret a company’s financial health by evaluating the performance of its cash flow components and financial ratios; • Create financial forecasts with different scenarios; • Justify the acceptance or rejection of a loan based on credit analysis: • Learn to interpret loan covenants and the underlying collateral; • Discover the metrics that Moody’s uses to identify credit risk changes; • Explain how management establishes a firm’s target capital structure; • Learn to measure a firm’s cost of capital components; to use Credit Risk Spreads to adjust the interest rate on debt when the D/V [Wd] makes changes up or down; and learn ROIC is a cost of capital proxy; • Discover issues that cause changes in a firm’s target capital structure; • Estimate the intrinsic value of a stock and the enterprise value of a firm and explain the strengths and shortcomings of your analyses. • Learn best practices and invaluable insights from Visiting Executives.
III. Cases and Readings
A. Cases: • Cases in Financial Management by TIS, January 2009; • Text for the Caterpillar Case [Exhibit 25 WEB], Caterpillar Case [Exhibit 27 WEB];
B. Readings: • Selected Readings for Cases in Financial Management, by James A. Gentry, Champaign, IL: Stipes Publishing, 2009. • Cash Flow Story, January 2007, by James A. Gentry [WEB] • Analysis for Financial Management, 8th Edition, by Robert C. Higgins, McGraw-Hill/Irwin, 2007. • Estimating The Intrinsic Value of a Real Company With An Integrated Financial System: A Live Case, January 2009, by James A. Gentry and Frank K. Reilly. [Exhibit 25 WEB];
IV. SYLLABUS FOR FIN 522 Spring 2009
A. Exhibits related to assignments:
• Exhibit 1. Cash Flow Statement • Exhibit 2. The Cash Flow Cycle • Exhibit 3. The Cash Conversion Cycle • Exhibit 4. Dupont System • Exhibit 5 Gentry’s Key Financial Ratios • Exhibit 6 Moody’s User’s Guide • Exhibit 7 Moody’s Key Ratios for Comparison • Exhibit 8 Porter’s Five Competitive Forces • Exhibit 9. Micro-Drive Balance Sheet • Exhibit 10. Micro-Drive Income Statement • Exhibit 11. Micro-Drive Summary Sheet • Exhibit 12. AFN-Financial Forecast • Exhibit 13. Cash Budget • Exhibit 14. Dell’s Pro-forma Balance Sheet • Exhibit 15. Dell’s Pro-forma Income Statement • Exhibit 16 Credit Risk Premiums • Exhibit 17 Equity Premiums • Exhibit 18. DuPont’s Bond Rating: Is it optimal? • Exhibit 19. Moody’s Corporate Default and Recovery Rates 1920-2008 • Exhibit 20. Estimating the Probability of Default • Exhibit 21. Moody’s Speculative Grade Liquidity Ratings Sept. 2002 • Exhibit 22. Moody’s Market Implied Ratings Description… • Exhibit 23. Financial Structure • Exhibit 24 Polaroid Financial Flexibility • Exhibit 25. Integrated Valuation System (text) • Exhibit 26. Integrated Valuation System (Exhibits) • Exhibit 27. Caterpillar Case • Exhibit 28. Caterpillar Case, xls (Exhibits). • Exhibit 29. Scorecard for Exhibit 3 results • Exhibit 30. MCI Capital Structure 1974-1983 • Exhibit 31. Analysis of MCI Convertible Bond Financing • Exhibit 32. Valuation of Gannett’s Cable Properties • Exhibit 33. Cox: Short- and Long-Term Funding • Exhibit 34. Instructions for estimating the value of Interco
B. Exhibits Related To Valuation
• Exhibit 1. Generalized Cash Flow Valuation Model • Exhibit 2. Dividend Valuation Model • Exhibit 3. Capital Investment Valuation Model • Exhibit 4. Dividend Valuation of a Stock • Exhibit 5. Valuation of a Stock—FCFE Approach • Exhibit 6. Valuation of a Firm—FCFF Approach
C. Case Exams: You will purchase a package of two tickets at the TIS Bookstore, one for each case. The tickets will be used to pick up each case at the Business and Economics Library (BEL) for the designated time period. Do not purchase tickets until February 16, 2009. Note the Business and Economics Library is currently scheduled to be open during the following times: Monday – Thursday -- 8:30 a.m. – 10 p.m. Friday -- 8:30 a.m. – 5:00 p.m. Saturday -- 1:00 p.m. – 5:00 p.m. Sunday -- 1:00 p.m. – 10:00 p.m.
There are three components to your grade. First, each student will complete two written case examinations during the semester. The second component is a group valuation analysis of Caterpillar Inc. Each case exam and the valuation project represent 20 percent of your total grade, for a total of 60 percent. Third, participation in case discussions will contribute 40 percent of each student’s total grade. There are two ways to earn participation points. They are: (1) contributions to class discussions and/or (2) submitting case briefs, an optional approach, that are discussed below. Team Peer Evaluations will be distributed for the Caterpillar valuation project. The peer evaluation points will be added to your class contribution points.
The examination cases will be made available in the Business and Economics Library at appropriate times during the semester. A completed case analysis shall be no more than five double- spaced typewritten pages. Exhibits are not included in the five-page limit. You will have nine (9) hours to complete the case analysis. The clock starts running when you pick up the exam in the Business and Economics Library (BEL) and ends when you submit your completed case exam.
Upon completing the case exam, you will print the following pledge on the back of your case analysis, “On my honor as a University of Illinois graduate student I have neither given nor received unauthorized aid on this exam, and I have limited the time spent on this case to eight hours”. Please carefully sign your name below the pledge, date the pledge and print your name below the pledge. Your name should NOT appear elsewhere on the paper. Please do not miss other classes when you are writing the exam.
Intrinsic Valuation of Caterpillar Inc. (CAT). The assignment is to prepare a financial forecast and then estimate and interpret the intrinsic value of Caterpillar Inc. Each valuation team will consist of two or three Fin 522 students. On April 1 Mike DeWalt, Director of Investor Relations (IR), ad Brad Halverson, Controller at Caterpillar will present background information on Caterpillar that will be valuable in preparing the financial forecast. On May 4 two case groups will present their valuation of Caterpillar and Mike DeWalt (IR) and Kevin Colgan, Treasurer at Caterpillar, will listen and comment on your assumptions, analysis and interpretations of Caterpillar’s intrinsic valuation. The highlight of this special class should be the natural learning that occurs in the exchange of ideas between the Finance 522 students and the Financial Executives from Caterpillar.
Participation grades. A maximum of 40 percent of your course grade is based on participation in class discussions. The quality of your class participation will be graded each day on a scale of zero to three points. The participation points will be based on the following criterion:
• 0 points No participation or observations
• ½ point Contributes relevant information and/or facts, asks critical questions concerning the discussion in class and/or the reading assignments, and responses to comments made by your classmates.
• 1 point Provides an interpretation of relevant information and/or facts that are based on analysis and, in turn, advances the discussion to other related topics;
• 2 points Develops a well supported interpretation of relevant information that is associated with good financial practices in financial management; or provides contributions that lead a discussion to a significantly higher level of thought.
• 3 points Presents a superior analysis and interpretation of the relevant information that results in a solution to the case.
You are encouraged to work independently in the initial preparation of the case. After you have completed your initial analysis, you should meet with your study group in order to challenge your ideas and thereby improve your analysis and interpretation. Finally, discussions within your study group will help you to be prepared to more effectively participate in the class discussion.
Case Briefs (optional)
Case briefs are optional. When a brief is submitted to Professor Gentry by 2 p.m. on a class day, it can contribute between ½ to 2 points to your daily participation grade. The quality of the brief determines the number of points. Professor Gentry will read the case briefs before class and return the graded briefs the next class period.
The text of the case briefs should be no longer than two double-spaced pages and address the following: (1) what is the primary problem(s) in the case; (2) what is your interpretation of your attached exhibits, and (3) what is your recommendation to management. If Exhibits are attached, please cite them in the text of the brief. Each brief must reflect your work and judgment. The case briefs will greatly help you be a more effective participant in class discussions. Answering the questions for each case that are presented in the syllabus is not considered as part of the case brief. The case questions are designed for discussions purposes.
SCHEDULE OF CLASSES
C= Cases in Strategic Financial Management R = Selected Readings for Case Problems in Finance by Gentry H = Analysis for Financial Management, 8th edition by Higgins
I. Extending Bank Credit vis-à-vis Measuring Credit Risk
Jan. 21 Organization Day--Analyzing Business Problems: The Case Method (R); Students Guidelines: Preparing a Case (R). Reading: Assessing a Company’s Future Financial Health (C); Case of Unidentified Industries (C); Other Readings: Dupont Analysis in Readings (R) and Exhibit 4 on WEB. Optional Readings in Chap. 2 in (H).
Jan. 26 Butler Lumber Company (C); “Cash Flow Story” (WEB); Exhibits for
assignments are in the Fin.522 WEB--Cash Flow Statement (Exhibit 1), Cash Flow Cycle in( R) & (Exhibit 2), Cash Conversion Cycle in (R) & Exhibit 3, DuPont Analysis in (R) & Exhibit 4. Also refer to Exhibit 5 for Key Ratios and Exhibits 6 & 7 Moody’s User’s Guide and Key Ratios for Comparison. Organize Case Study Groups.
Suggested Analysis • Prepare Butler Lumber cash flow statements for 1989 and 1990, using Exhibit in (WEB). • Assess Butler’s market position. Use Porter’s Five Competitive Forces in Exhibit 8 on WEB.
Jan. 28 Butler Lumber Company (C) (continued); Readings: Financial Statement Forecasting: The Percent of Sales Method (H), 84-97 and Sustainable Growth(H), 119-133. Optional Reading: Solving the Interest Dilemma (R); Note on Bank Loans (C);
Suggested Analysis • Prepare a proforma income statement and balance sheet for 1991 using information cited above. Another option on how to prepare profoma statements in Exhibits 9-12. • Interpret the proforma statement results.
Feb. 2 SureCut Shears Inc. (C) Questions for management • What critical assumptions did Mr. Fischer make when he prepared the forecasts shown in case Exhibits 1 and 2? Were these assumptions reasonable? • Why was SureCut Shears, Inc. unable to repay its bank loan by March 31, 1996, as originally forecast? • Has SureCut’s financial condition worsened sufficiently to cause Mr. Stewart any great concern?
• Prepare two separate cash flow statements for the 8 month period, where the beginning date is June 30, 1995 and the ending is March 31, 1996 for (1) the financial forecast in Case Exhibit 1 and 2 and (2) the actual financial statements in Case Exhibits 3 and 4. • In addition to the cash flow analysis, use cash conversion cycle (CCC) ratios to help you answer questions 2 and 3 above. • Interpret for the SureCut management the analytical insights derived from the two cash flow statements and the CCC ratio.
Feb. 4 Hampton Machine Company (C); Note on Bank Loans (C).
• Why can’t a profitable firm like Hampton repay its loan on time and why does it need more bank financing?
Suggested Analysis • Prepare a cash flow statement for the period 11/30/78 to 8/31/79. Interpret the results. See next page. • Based on the information in the case, prepare monthly cash budgets for September through December 1979, Higgins (H), pp. 101-103 , a monthly pro forma income statement and a year end balance sheet. See Exhibit 13 WEB. • Evaluate the assumptions underlying your forecasts. What developments could alter your results? • Should the bank approve Mr. Cowin’s loan request? • What is the effect of the share repurchase on Hampton’s financial performance?
Feb.9 Dell’s Working Capital (C)
• How was Dell’s working capital policy a competitive advantage? • How did Dell fund its 52 percent growth in 1996? • Assuming Dell sales grow 50 percent in 1997, how might the company fund this growth internally? • How would your answers to the preceding question change, if Dell also repurchased $500 million of common stock in 1997 and repaid its long- term debt?
• Prepare proforma income statements and balance sheets for January 1997 based on 50 percent growth in sales. See Exhibits 14 and 15 WEB. • Prepare cash flow statements for January 1996 (actual) and January 1997 (proforma) and interpret the results.
Feb. 11 Padgett Paper Products Company (C)
• What is the problem in the Padgett Paper Products Case? • Why does Padgett need a loan? How fast can it repay the loan? • What would you propose as terms for the new loan structure?
Suggested Analysis • Prepare annual cash flow statements for 1994 and 1996 and interpret your findings. • What does an analysis of case Exhibits 3 and 4 reveal about the financial health of Padgett Paper? • Interpret the proforma financial statements in case Exhibit 6.
Feb. 16 U.S. Bank of Washington (C) • Does the Redhook loan “fit” U. S. Bank of Washington? Why? • Each Case Group will be assigned to play a specific role. The roles are presented below. The first three groups will make formal presentations to the Loan Committee of the Bank. The Loan Committee will ask questions of each case group and make the final judgment as to accept or reject the proposal. Each group will present their support or objections for the project and be and be prepared to defend their position to questions from the loan committee. The four roles are: > CEO and CFO of Redhook Ale > Credit Analysts Staff at U.S. Bank Washington > European Brewery being approached for $5 million equity investment > Loan Committee at the U. S. Bank of Washington
Feb. 17-22 Case Examination 1 begins on Feb. 17 and ends Feb 22. Cases and instructions for Examination 1 may be picked up at the Business and Economics Library commencing Tuesday, Feb.17 at 8 a.m. and must be returned to the Commerce Library no later than nine (9) hours after picking up the case exam and instructions. Please arrange for adequate time to complete the case analysis before the Library closes. All case analyses must be returned by 11:59 p.m. Sunday, February 22.. Library Hours Schedule is attached.
Feb. 22 Case Examination 1 ends.
II. The Linkages between Capital Structure and Credit Risk
Feb. 23 Reading (1): “Note on the Theory Of Optimal Capital Structure” (R) • What are the important assumptions used in creating Case Exhibit 1? • What is the significance of lines 9, 10, and 13 in Case Exhibit 1? • What is the significance of lines 20 and 27 in Case Exhibit 1? • Why does line 13 equal line 27 in Case Exhibit 1? Why is this possible?
Reading (2) : “Credit Risk Premiums” by Jim Gentry, Exhibit 16 WEB. • How do you measure Credit Risk Premiums (CRP)? • How stable are the credit risk premiums (CRP)? • What causes changes in the CRPs , i.e., credit risk spreads?
Reading (3): “The Equity Premium in 100 Textbooks” by Pablo Fernandez, Exhibit 17 WEB. • How do you measure the equity premium or market risk premium (MRP)? • How stable is the equity premium over time? • What are the four equity premium concepts? • What are the most important conclusions associated with equity premiums? • Is there any relationship between credit risk premiums and equity premiums?
Introduction to DuPont Case
Feb. 25 Case Assignment for the day: E. I. du Pont de Nemours and Company (1983) (C); • Why should a company have a target debt ratio? • Why did Du Pont abandon its AAA debt-rating policy? What were the consequences? What is the role of bond ratings? • What bond rating would Du Pont receive under each alternative in Case Exhibit 8 for 1987? How would Du Pont’s financial performance, financing needs, access to capital and financial risk differ under the two alternative debt policies? • What capital structure policy should Du Pont adopt? What are the key issues? • How should a company determine its appropriate capital structure? a. What impact does leverage have on a firm’s prospects and performance? b. What problems arise from employing too much debt? too little debt? c. What indications does a firma have that its leverage is too high? too low? d. What competitive strategy issues arise in establishing capital structure policy? e. Do industry differences affect capital structure policy?
Suggested Analysis • DuPont’s Bond Ratings: Is it Optimal? (Exhibit 18 WEB)
Mar 2-9 Readings from Moody’s Credit Risk Research
Mar 2. “Moody’s Corporate Default and Recovery Rates, 1920-2008” Exhibit 19 WEB. • Introduction pp.1-6 • Rating Accuracy Metrics pp. 6-7 Interpret Moody’s Exhibits 6- 7 • Estimating Probability of Default Exhibit 20 WEB [Assignment] • Corporate Default and Recovery Rates Moody’s pp. 8-14, Interpret Moody’s Exhibit 14 and compare results to Moody’s Exhibits 15 and 16 • Moody’s Exhibit 24 Annual Issuer-Weighted Default Rates 1920 -2008 Interpret the results—insights in Great Depression Years (1929-1939) “Moody’s Speculative Grade Liquidity Rating” Exhibit 21 WEB • What are SGL Ratings? • Interpret the equation on page 3 • Interpret SGL 1-SGL 4 on page 4
Mar. 4. Readings based on Moody’s Credit Risk Research “Moody’s Market Implied Ratings Description, Methodology. And Analytical Applications”. Exhibit 22 WEB • What are Implied Ratings? • What are the key components used in estimating Implied Ratings? • Assignment: Answer “Frequently Asked Questions” on page 37.
“Moody’s Financial MetricsTM Key Ratios By Ratings and Industry’ Exhibit 7 WEB
Mar. 9 Presentation by Executive from Moody’s • Prepare questions from Readings in Exhibits 19-22
Mar. 11 Financial Structure • Structuring Corporate Financial Policy: Diagnosis of Problems and Evaluation of Strategies by Robert F. Bruner (C) • What are the components of financial structure? Why are they important? • Using Bruner’s methods for diagnosing a firm’s financial policy, what are critical insights concerning Caterpillar’s (CAT) financial structure? CAT financial structure is presented in 2008 Form 10K in the CAT website. Exhibit 23 WEB provides a framework for analyzing CAT’s financial structure. Also use Bruner’s FRICT model to analyze CAT’s financial structure. See Exhibit 7 WEB for Moody’s key industry ratios for comparative data; http://finance.yahoo.com and other available sources. • Professor Gentry will provide additional information on CAT.
Mar. 16 Polaroid Corporation 1996 1. What are the main objectives of the debt policy that Ralph Norwood must recommend to Polaroid’s board of directors? 2. What financing requirements do you foresee for the firm in the coming years? What are the risks associated with Polaroid’s business and strategy? In your view, what firms are Polaroid’s peer firms? 3. Drawing on the case’s financial ratios in Exhibit 9, how much debt could Polaroid borrow at each rating level? What EBIT coverage ratios would result from the borrowings implied in each rating category? 4. Using Hudson Guaranty’s estimates of the costs of debt and equity in case Exhibit 11, which rating category has the lowest overall cost of funds? Do you agree with Hudson Guaranty’s view that equity investors are indifferent to the increases in financial risk across that investment grade debt categories? 5. Is Polaroid’s current maturity structure of debt appropriate? Why? 6. What should Ralph Norwood recommend regarding: • The target bond rating? (Exhibit 24) • The level of flexibility or reserves? (Exhibit 24) • The mix of debt and equity? • The maturity structure of debt? • Any other issues you believe should be brought to the attention of the CEO and Board?
Issue CAT Form 10K at end of class.
III. A Live Case Valuation Experience
Mar. 18 Reading: Estimating the Intrinsic Value of a Real Company with an Integrated Financial Management System: A Live Case, Exhibits 25 & 26 on WEB; Refer to CAT Form 10K 2008. Key pages provided on Mar. 16. • Read the manuscript and study the structure of the Integrated Financial Management System (IFMS) in Figure 1. • The objective is to estimate intrinsic value of Caterpillar generated by the IFMS. • An important question is: if CAT experiences a pro-forma shortage in financing, i.e., Assets > Liabilities + Equity, what will be the financing options used in the IFMS. The first option in the IFMS is to use short term debt financing until the maximum book debt/total book interest debt + equity is reached. If more financing is needed any excess cash is drawn down to zero and finally, if a cash shortfall continues the IFMS will sell shares of common stock • However, the most important question related to CAT’s financial strategy is what should management do when the financial forecast creates excess cash, i.e., Liabilities + Equity > Assets. The first option is to decide what percentage of the excess cash should be used to repurchase shares of the company’s common stock, i.e., between 1% and 100%. The second option is to maintain a percentage of the excess cash in a separate account called excess and the third option is to retire debt. . • Read case in Exhibit 27 WEB. • Prepare a five year forecast of CAT’s income statements and balance sheets in Exhibit 28 WEB using the share repurchase model. Use Appendix 2 as a guide to prepare inputs. Please limit your work to preparing proforma statements and interpreting the results presented in case Exhibits 1, 1a and 2. • What are the most important operating assumptions in preparing CAT’s financial forecast of the income statements and the balance sheet? • Carefully justify the crucial assumptions used in preparing the proforma income statement and balance sheet. • Interpret the data in case Exhibits 1 and 1a and interpret the affect on FCFE, FCFD and FCFF shown in case Exhibit 2. • Prepare questions and muddy thoughts on what you do not understand.
Mar. 21 –29 Spring Break
Mar. 30 Integrated Financial Management System (IFMS) [continued]] • Estimate CAT’s target capital structure, wd (book value of Vd /(Vd + Ve) and ws is 1- wd, and the related costs of capital for debt ( kd) and (1-t)) and market value of equity (ks). Interpret the proforma results in Exhibit 1,1a, 2 and 3. Refer to Exhibit 17 WEB, Financial Structure. • Compare and Interpret the Exhibit3 results for FCFE, FCFD and FCFF. See Exhibit 29 WEB for a form designed for comparative analysis. • What are the most important differences and similarities created among various scenarios? • Prepare questions and muddy thoughts on what you do not understand. • Calculate the implied terminal growth rates in Exhibit 4and compare to the estimated terminal growth rate in Exhibit 3. Why did the implied terminal growth rate in Exhibit 4 differ from the terminal growth rate in Exhibit 3? • Calculate the implied terminal growth rate in Exhibit 5 and compare to the implied terminal growth rate in Exhibit 4 and the estimated terminal growth rate in Exhibit 3. What are the explanations for the differences? • Prepare questions on what you do not understand. • Each case study group should develop thoughtful questions for Mike DeWalt and Brad Halverson, visiting financial executives from Caterpillar, that focus on the preparation of the proforma statements in the estimating the intrinsic value of Caterpillar. Please submit to Professor Gentry via email no later than March 30.
Apr. 1 “ Live Case Presentations” by two visiting financial executives from Caterpillar—Mike DeWalt, Director of Investor Relations, Brad Halverson, Controller. • Mike DeWalt and Brad Halverson will present a 20-30 minute strategic overview of Caterpillar. Additionally, based on your questions, they will provide background information that will be useful in preparing inputs for the financial forecast of Caterpillar. • For comparative ratios refer to Exhibit 7. • Each case group should develop questions seeking input information that will be useful in preparing the proforma statements for your Caterpillar, and submit to Professor Gentry • See April 9 Assignment.
Apr. 6 MCI Communications Corporation (1983) (C) • How did MCI choose to finance itself as shown in Case Exhibit 6? • What is the likely level of MCI’s financing needs during the next few years? Suggested Analysis • Calculate the book and market value of MCI capital structure components in Exhibit 30. Interpret the patterns you observe in Exhibit 30. • Interpret the Analysis of MCI Convertible Financing Decisions in Exhibit 31
April. 8 MCI Communications Corporation (1983) (C) [continued] • Based upon your interpretation of the outlook for MCI and the competitive and regulatory evolution of the industry, recommend a capital structure policy for MCI and defend your proposal. • Given four financial alternatives, which would you recommend to MCI? • Handout distributed in order for each case study group to schedule an appointments with Professor Gentry to discuss the first draft of the valuation project. • See April 9 assignment for submitting first draft of Exhibits 1-6.
Apr. 9 Review of Caterpillar IFMS Valuation Project • Each group should submit a first draft of Exhibits 1 – 6 of its Caterpillar valuation project to Professor Gentry by 10 p.m. April 9. Professor Gentry will meet with each group on either the afternoon of April 9 or during the day on April 10. The objectives of the meeting will be to review the first draft of Exhibit 1-6 and to answer your questions and concerns. On April 8, a schedule will be distributed in class in order for your case group to arrange a meeting to discuss the first draft your group’s valuation project with Professor Gentry.
Apr. 13 Cox Communication, Inc. 1999 (C)
• What changes are occurring in the cable industry? Recently why has Cox Communications, Inc. (CCI) undertaken so many acquisitions? • What is the valuation of the Gannett project? See Exhibit 32. • Assuming that the Gannett acquisition goes through at $2.7 billion, what are CCI’s short-term and long-term external financing needs?
Apr. 15 Cox Communication, Inc., 1999 (C) (continued) • What constraints does CCI face in meeting these financing needs? • What are the financing choices available to CCI? What are the costs and benefits of each choice? • What are FELINE PRIDES securities and how area they structured to provide the benefits of both equity and debt? How would FELINE PRIDES create value for CCI?
Apr. 20 Capital Structure Readings • “How to Choose a Capital Structure: Navigating the Debt-Equity Decision” , by Anil Shivdasani and Marc Zenner, Journal of Applied Corporate Finance, 26-35 (R). • Other Readings to be provided
Apr. 22 Interco (C); (H) 328-352. • Interpret Interco’s financial performance. • Why is Interco the target of a hostile takeover? • What are your interpretations of the Board of Directors in case Exhibit 1? • As a member of Interco’s board are you persuaded by the premiums paid in case Exhibit 10 or the comparable transactions analysis in case Exhibit 11? Why?
Apr. 27 Interco (C) continued: • Compute the estimated value of Interco based on instructions in Exhibit 34. Use the 1988 sales data in Exhibits 8 as the foundation for the sales forecast. And use the terminal multipliers in Exhibit 12 for estimating the value of Interco. See instructions in Exhibit 34, WEB. • Wasserstein, Perella & Co. established a valuation range of $68-$80 per share for Interco. Show that this valuation range is based on the assumptions presented in case Exhibit 12. Are the assumptions realistic? • What is your advice to the Interco Board concerning the $70 per share offer?
April 28. An electronic draft of your Caterpillar intrinsic valuation analysis will be submitted to Professor Gentry in 343M Wohlers Hall by no later than 4 p.m. Also please plan an electronic presentation that you can further develop if your valuation paper is selected for presentation on May 4. On April 30 I will select two case study groups to present their intrinsic valuation analysis to the class on May 4. Please plan to present an electronic version of your proposed presentation to the class on May4.
Apr. 29 Final Revisions of the Caterpillar Financial Forecast • Refer to Exhibits 5,7,8,19 and 28 to aid in preparation for final revisions • Make revisions to the Caterpillar financial forecast for the income statement and balance sheet. • Prepare solid justifications for each of the assumptions used in the proforma income statements and the balance sheets. • Review the stability and credibility of the FCFF. FCFE and FCFD listed at the top of Exhibits 1A. Make necessary adjustments. • Review the stability and credibility of the wd and we in Exhibit 1A and the percent increase in the items listed in Exhibit 1A. Make necessary adjustments. • Review the stability and credibility of the Working Capital, Net Investment Flow, FCFE, FCFD and FCFF in Exhibit 2. Make necessary adjustments. • Prepare and justify the assumed target wd and ws, and kd and ks used in Exhibits 3 and 4. • What are the WACC in Exhibit 3 and 4? Are they justifiable? Make adjust if necessary. • Interpret the FCFE, FCFD and FCFF in Exhibit 3. What is the enterprise value of CAT, and its debt and equity? Are they justifiable? • Insert the correct values in Solver in order to calculate the implied terminal growth rate of FCFF shown in Exhibit 4. Is the implied TV growth rate justifiable when compared to the TV growth rate in Exhibit 3? • Compare TV implied growth rates in Exhibit 5 with TV implied growth rate in Exhibit 4. What do you discover? • What is the wd and we used in Exhibit 5 • What is the WACC used in Exhibit
May 4 Group Presentations of Valuation Analysis of Caterpillar
based on the Integrated Financial Management System. • Case Group Presentation: Each presenting group should prepare valuation forecasts of Caterpillar based on most likely case scenarios. A worst case scenario could be used to support your most likely case. Plan to present to the class an interpretation of your most likely estimate of the intrinsic value of Caterpillar Corporation. • Mike DeWalt and Kevin Colgan, Treasurer, will be present to listen to and comment on your assumptions, analysis and interpretations of your intrinsic valuation of Caterpillar.
Examples of questions you should be prepared to discuss. • Are the growth rate of sales, cost of sales/sales and SGA/Sales too optimistic for 2009-2013 period? • Can CAT reduce it operating costs during the period 2009-2013? • What capital investment strategies appear to add the most value 2009- 2013? • Should Caterpillar management pursue a strategy of repurchasing its common stock shares? • How realistic are our assumptions for a target capital structure [Wd and Ws] and costs of debt and equity capital? • Was the terminal growth rate(s) realistic? • How realistic are our estimates of the intrinsic value of Caterpillar? • What big item did we not include in our financial forecast?
May 6 An Overview of Finance 522 and a Look into the Future
May 7 Reading Day
May 8-15 Final Examination occurs during for this period.
Cases for the final examination and instructions may be picked up any time after 8 a.m. on Friday, May 8 and returned to the Business and Economics Library no later than nine (9) hours, after the time you sign for the case. All exams must be returned before 5:00 p.m., Friday, May 15, 2008.