Cases in Corporate Finance

1

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

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.

D.  Grading Policies:

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?

Suggested Analysis

·  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?

Suggested Analysis

·  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?