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Butler Lumber Company 1. Why does Mr. Butler have to borrow so much money to support this profitable business? 2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3. 6 million) 3. As Mr. Butler’s financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan?
Toy World 1. What factors could Mr. McClintock consider in deciding whether or not to adopt the level production plan? 2. What savings would be involved? 3. Estimate the amount of added funds required and the timing of the needs under level production. Prepare pro forma income statements and balance sheets (rather than cash budget) to make this estimate. Ignore interest expense in making these estimates. 4. Compare the liabilities patterns feasible under the alternative production plans. What implications do their differences have for the risk assumed by the various parties?
Hampton Machine Tool 1. Why can’t a profitable firm like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978 and August 1979 contributed to this situation? 2. Based on the information in the case, prepare a projected cash budget for the four months September through December 1979, a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979. 3. Review the results of your forecast. Do the cash budgets and the pro forma financial statements yield the same results? Why? 4.
Critically evaluate the assumptions on which your forecasts are based. What developments could alter your results? Is Mr. Cowins correct in his belief that Hampton can repay the loan in December? 5. What action should Mr. Eckwood take on Mr. Cowins’ loan request? What are the major risks associated with the proposed loan? What other alternatives does Mr. Eckwood have, and what are their pros and cons? What would you do? 6. Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of this repurchase on Hampton’s financial performance?
Critically assess Hampton’s dividend policy. Do you agree with Mr. Cowins’ proposal to pay a substantial dividend in December? Marriott Corporation (Cost of Capital) 1. Are the four components of Marriott’s financial strategy consistent with its growth objective? 2. How does Marriott use its estimate of its cost of capital? Does this make sense? 3. What is the weighted average cost of capital for Marriott Corporation? a. What risk-free rate and risk premium did you use to calculate the cost of equity? b. How did you measure Marriott’s cost of debt? 4. What type of investments would you value using Marriott’s WACC? 5.
If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? 6. What is the cost of capital for the lodging and restaurant divisions of Marriott? a. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers? b. How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why? c. How did you measure the beta of each division? 7. What is the cost of capital for Marriott’s contract services division?
How can you estimate its equity costs without publicly traded comparable companies? Dividend Policy of FPL Group 1. Why do firms pay dividends? What, in general, are the advantages and disadvantages of paying cash dividends? 2. What are the most important issues confronting the FPL Group in May 1994? 3. From FPL’s perspective, is the current payout ratio appropriate? Would a higher payout ratio be more appropriate? A lower payout ratio? 4. From an investor’s perspective, is FPL’s payout ratio appropriate? 5. As Kate Stark, what would you recommend regarding investment in FPL’s stock ??? buy, sell, or hold?
Marriott Corporation (Event Risk) 1. Why is Marriott’s chief financial officer proposing Project Chariot? 2. Is the proposed restructuring consistent with management’s responsibilities? 3. The case describes two conceptions of managers’ fiduciary duty (p. 9). Which do you favor: the shareholder conception or the corporate conception? Does your stance make a difference in this case? 4. Should Mr. Marriott recommend the proposed restructuring to the board? ? Star River Electronics, Ltd. 1. Please assess the current financial health and recent financial performance of the company.
What strengths and/or weaknesses would you highlight to Adeline Koh? 2. Please forecast the financial statements of the firm for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? 3. What are the “key driver” assumptions of the firm’s future financial performance? What are the managerial implications of these key drivers? That is, what aspects of the firm’s activities should Koh especially focus on? 4. What is Star River’s weighted average cost of capital (WACC)? What methods did you use to estimate the WACC?
What key assumptions especially influence WACC? 5. What are the free cash flows of the packaging-machine investment? Should Koh approve the investment? Compania de Telefonos de Chile 1. Was Compania de Telefonos de Chile (CTC) helped or hindered by the Bond Group’s ownership after privatization? In light of the competing offers by other interested buyers, did it make sense for Chile to have selected Bond Group’s bid at the time of privatization? 2. What are CTC’s external funding needs for the next three years? The next seven? What are its most viable sources of financing over the same period? 3.
What is an American Depository Receipt (ADR)? In general, why might U. S. investors wish to own an ADR? 4. How effectively can the U. S. ADR market meet CTC’s financing needs for the next three to five years? How attractive would CTC’s ADRs be for an American investor? 5. As Sr. Garcia, what financing strategy would you propose for CTC? What would be your first step in implementing that strategy? Paginas Amarelas 1. What is the valuation problem here? In what currency are the cash flows denominated? In what currency should the discount rate be denominated? Be sure you understand Exhibits 1, 2, 3, and 4 of the case. . In this case, why doesn’t J. P. Morgan discount local cash flows at a local required rate of return? In fact, why not use that approach generally? 3. To complete the estimation of a required rate of return, what other effects should we incorporate into our standard weighted average cost of capital (WACC) and capital asset pricing model formulas? 4. Please estimate required rates of return for the cash flows originating in Argentina, Brazil, and Chile. 5. Please estimate a long-term perpetual growth rate for the businesses in Argentina, Brazil, and Chile. 6.
Based on your answers to questions 4 and 5, and referring to Exhibits 2, 3, and 4, what is a reasonable range of value for Brasil Investimentos’ “yellow pages” business? What key assumptions underlie your suggested value range? Walnut Venture Associates (D): RSB Deal Terms 1. What do you think the investors are trying to accomplish? 2. What is a reasonable valuation for RBS in June 1998? 3. Assume that in five years RBS is liquidated for $3 million. If the deal proposed in the term sheet is accepted, who will receive the $3 million? If RBS is liquidated for $10 million, or $30 million in five years, who will receive the money? . What proposed terms do you find most troubling and why? What would you try to renegotiate, and what might you be willing to give up to get what you want? ? Radio One, Inc. 1. Why does Radio One want to acquire the 12 urban stations from Clear Channel Communications in the top 50 markets along with the nine stations in Charlotte, NC, Augusta, GA, and Indianapolis, ID? What are the benefits and risks? 2. What price should Radio One offer based on a discounted cash flow analysis? Are the cash flow projections reasonable? 3. What price should Radio One offer based on a transaction and trading multiples analysis? . Assuming that Radio One’s stock price is 30X BCF, can it offer as much as 30X BCF for the new stations? 5. What should Radio One offer for the new stations? Shurgard Self-Storage: Expansion to Europe 1. What is your assessment of Shurgard and the self-storage business? 2. How has Shurgard performed in Europe to date? Will self-storage turn out to be a successful business in Europe? 3. What is your view of the firm’s expansion plans in Europe? Is it realistic to plan for 133 to 170 stores by 2003? What challenges/opportunities will Shurgard’s management face? 4.
The consortium is proposing to invest 122 million Euros of equity by 2003 in return for 43. 3% ownership. Is this a fair valuation? A detailed evaluation of this real estate business is quite complicated, but one way to get a rough estimate of the valuation is to use the two steps below: a. Case Exhibit 8C (Exhibit TN-1) provides a pro forma income statement for the “minimum plan” in which 133 stores would be built by 2003. Assuming no new stores were built after 2003 and that all these stores reached steady state profits in the next year or two, what would the consolidated EBITDA be for Europe? See Exhibit 8B for an estimate of mature store margins. ) b. Under these assumptions, what is a reasonable value to project for Shurgard Europe? Is 43. 3% ownership reasonable for the consortium? 5. Review the terms and conditions, such as board membership, proposed by the consortium? Are these reasonable from the perspective of Shurgard? 6. Would you advise Shurgard to go ahead with the expansion plan and proposed financing? Kendle International Inc. 1. How does the CRO business work? How is Kendle doing? 2. What strategic choices does Kendle face?
Can it survive as a privately owned domestic company or does it need to become a much bigger firm with operations outside the US? 3. Should Candace Kendle and Christopher Bergen consider selling their firm to another company in early 1997? How does the potential sales price of the firm compare to its underlying economic value as a stand-alone firm? 4. Do the acquisitions of U-Gene and gmi make sense? Are the proposed deals priced fairly? 5. What strategy would you recommend? Proceed with both acquisitions now or do one followed by an initial public offering (IPO) and the second acquisition later?