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  1. 1. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Winter 2003 Professor: Leslie P. Anderson, Ph.D. Portland State University Office Email: Home Email: Phone: 725-4746 Texts: 1. Case problems in Finance, Kester, et al, 11th edition, Irwin. 2. Analysis for Financial Management, Higgins, R. C., 5th edition, Irwin. (Recommended) Course Objectives: This course extends the coverage of the topics from the Financial Management, Managerial Economics, and Financial Accounting courses and requires an in-depth analysis of important issues in finance. Furthermore, since finance cannot be separated from the other functional disciplines, the course covers complex business issues in which finance plays a dominant role. Concepts from financial theory are used to develop the framework for analysis of financial problems and these comprehensive tools are then applied to case analysis to provide defensible solutions. While specific topics such as financing and investment decisions are covered, we will also address current financial topics as they develop. For example, topics such as firm valuation, globalization of financial markets, the development and use of derivatives, changing currency values and others may be analyzed. The intent of the course is to develop a professional competence in this particular area, finance, and to understand the interrelationships between finance and the other functional areas of the firm. It will draw on principles of accounting, economics, marketing, production, statistics, and management to develop a logical, conceptual framework for use in analyzing business problems. These objectives are reached primarily through rigorous analysis of a complete spectrum of cases in which the primary focus is financial. Perhaps J.P. Morgan was right when he said: “Finance begins everything, runs everything, and ends everything.” Of course, he may have been slightly biases. Course Format: The course is first and foremost a case course. The texts will provide a basis for both theoretical and operational aspects of financial topics. Case analysis is used to develop invaluable operational insights. It is our goal to help you develop an understanding of the issues that financial managers address and how they relate to the non-financial sides of a business. 1
  2. 2. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Below, I have indicated in a general way some of the issues addressed in the case that we will analyze: I. What is the firm’s current financial condition? II. What is the firm’s financial outlook? III. How fast should a firm grow? Should it grow? Should it liquidate? What form should the growth take? Where should the growth be? IV. What assets should a firm buy, hold, or sell? V. How should a firm be financed? VI. To what financial risks, both domestic and international, is a firm exposed? VII. How should the risks to which a firm is exposed to be managed and what is the role of the financial manager in that process? Grading: Midterm 40% Final 40% Class Participation 20% 100% (Subject to possible change) Case Presentation: Each student is required to prepare each assigned case thoroughly and to be able to present their analysis and to defend their recommendations. Midterm: Your midterm exam is comprised of an in-class written case analysis. The case will include issues discussed prior to the midterm. It is preferred that you use a laptop computer to type the case analysis. If not available, we will make arrangements for you to use the lab. Maximum length: 5 typed pages, plus exhibits. Final Exam: Your final exam will be an analysis of a case. The exam will be open-note, open- book. Participation: Your class participation grade is the instructor’s subjective evaluation of the quality and timeless of each individual’s class contributions. The value of the contribution is measured in terms of analytical and evaluative quality and not in terms of quantity. Case Preparation: Complete case analysis will be required, as noted below. 2
  3. 3. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Analysis, Presentation and Discussion of Cases: It is required that all students will have analyzed and be prepared to discuss each case. Preparation for these cases requires one to apply the concepts of finance and integrated them with all relevant aspects of the case. As such, your understanding of course concepts is facilitated through the preparation of these cases. These require rigorous and complete analysis. Perspective: Please approach all issues from the point of view of the chief financial officer in the firm, using financial theory to structure and defend your analysis and recommendations. Nevertheless, be sure to recognize and to take directly into account marketing, production and where relevant, accounting issues. Case Analysis: Case analysis is required in every class session. As you analyze each case be certain to do the following: Discovery: What are the issues in the cases and which are most important. Analysis: Develop a complete and defensible analysis of each case, concentrating on the most important issues, but covering all relevant aspects of the case. Presentation: Present your rigorous analysis. Defense: Defend your analysis against any attacks. Critical Evaluation of Case Analysis and Presentations Made by Others: Identify and point out all errors, if any, in the presentations made by others. Analyze the issue or issues in question and present your own structured and defensible solution to the issues raised. Summarization and Conclusion: Present a complete statement of all the relevant issues and a definitive statement of what the firm should do. Abstract from the Specific to the General: The cases assigned are carefully selected to include the kinds of financial, and more generally, business issues that are important and recurring problems in many firms. While each case, per se, is infinitely fascinating, the real value lies in the sheer joy of discovery of the issues and the development of your ability to recognize and to solve financial problems whenever they occur and in whatever form they occur, to present your recommendations, to defend each recommendation and your set of recommendations, to convince management that they should be accepted and to manage their successful implementation. 3
  4. 4. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Week 1 January 8th 2003 Discussion Topics: • Overview • Financial & Pro-Forma Analysis • Working Capital Issues Objectives: • To understand the role of finance in the business environment; • To be able to prepare a pro-forma forecast of the income statement and balance sheet; • To be able to determine the financial outlook for the firm; • To begin to understand decisions involving cash, accounts receivable and inventory; • To be able to determine financing requirements associated with growth; • To recognize the relationship between strategic planning, growth, and financial performance. Textbook Readings: (Read prior to class) *Higgins: Chapters 1, 2, 3 and 6 *The Higgins book is recommended. If you elect not to purchase that book please read the comparable chapters, if needed, in your financial management text. Case Text (CT) All case text readings must be completed prior to class Assessing Future Financial health (CT) pp1-15 General Mill’s Annual Report & Comparable Company Data (CT) pp 16-57 Note on Bank Loans (CT) Clarkton Lumber Co. pp 57-61 Assignment: General Mills: Answer the following: 1. Now do you assess General Mill’s current performance and its financial condition? 2. How does General Mills compare to other companies in its industry? 3. What did you learn about General Mills’ strategy form reading the Annual Report? 4. Do you think GM will be able to achieve the financial goals and growth targets set in the Letter to Shareholders in the Annual Report? Are the goals internally consistent? Assessing a Company’s Future Financial Health 1. Practice using ratios and trends in ratios 2. Identify the various companies 4
  5. 5. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Week 2 January 15th 2003 Case Topic; Managing Growth Case 1: US Bank of Washington Case 2: Advanced Medical Technology Discussion Topics: • Financing decision of the Firm • Is there an optimal use of debt? • Sources of Financing – what are they and how to choose among the available alternatives Objectives: • To be able to evaluate financing requirements associated with growth; • To recognize the relationship between strategic planning, growth and financial performance; • To identify sources of funds available to a firm; • To understand how the choice of specific financing sources affects firm value and risk; • To appreciate the difficulties in raising capital for small companies. Textbook Readings: (Read prior to class) Higgins: Chapters 4 and 5 and review Chapter 6 Case Text (CT) Readings: Note on Bank Loans (CT): Review 5
  6. 6. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Week 3 January 22nd 2003 Case Topic: Financing Decisions Case 1: Massey-Ferguson Case 2: MCI Communications (see note below) Discussion Topics: • Capital Budgeting • The Cost of Capital – how to measure the cost of raising investment capital from a firm’s perspective; • How to relate financial risk to the cost of raising funds; • Valuation – discounted cash flow methodology Objectives: • To identify sources of funds available to a firm; • To understand how the choice of specific financing sources affects firm risk and the cost of raising capital; • To introduce the concept of discounted cash flows, a primary tool of financial analysis. Textbook Readings: (Read prior to class) Higgins: Chapter 7 and review Chapter 6 Case Text (CT) Readings: Diversification, the Capital Asset Pricing Model, and the Cost of Capital (CT) Leveraged Betas (CT) MCI Note: Assume in your analysis that MCI had the following alternatives available in the Spring of 1983: A. $500 million of 12 ½%, 20 your subordinated debentures. B. $400 million of common stock C-1. $600 million of 7 5/8%, 20 year convertible subordinated debentures, conversion price of $54.00/share, conversion ratio of 18.52 shares. C-2. $1 billion: Units consisting of a $1,000 face value 7 ½%, 10 year subordinated debenture and 18.18 warrants with exercise price of $55.00/share to expire in 5 years: warrants are callable. 6
  7. 7. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Week 4 January 29th 2003 Case Topic: Cost of Capital Case 1: Pioneer Petroleum Case 2: Marriott Corporation: The Cost of Capital Topics: • What is the cost of capital to a firm in an uncertain world in which capital can be derived from a variety of sources ranging all the way from pure debt to pure equity with an almost infinite variety in between? Objectives: • To ensure a fundamental understanding of the operational relevant aspects of cost of capital issues. MID-TERM: Written Case Case Text (CT) or Notebook (N) Readings: “Diversification”, the Capital Asset Pricing Model and the Cost of Capital (CT) 7
  8. 8. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Week 5 February 5th 2003 Case Topic: Investment Decisions Case 1: The Super Project Case 2: Economy Shipping Company (See note below) Case 3: MSDI – ALCARA de Henares, Spain (Introduction in Week 5, continued in Week 6) Discussion Topic: • Valuation: Real Assets and Financial Objectives: • To understand how to analyze the investment decisions of a firm; • To be able to extend the capital budgeting framework to firm level analysis • To understand that almost any firm decision involving changes in cash flow and/or risk can be analyzed within a discounted cash flow framework. Textbook Readings: (Read prior to class) Higgins: Chapter 8 and 9 Case Text (CT) Readings: Note on Fundamental Parity Conditions (CT) MCI Note: Should the Conway be rehabilitated or the diesel boat be purchased? Assumptions: 1. Straight line depreciation (to simplify calculations); 2. Diesel boat, if acquired, would be sold at end of year 20; 3. Parts inventory for diesel is depreciated over 25 years; 4. For tax purposes, diesel hull depreciated over 25 years and engines over 10 years; 5. Book cost of the Conway, including rehabilitation costs, would be depreciated over 20 years; 6. The $32,500 residual value of the diesel in year 20 assumes no engine overhall in year 20. 8
  9. 9. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Week 6 February 12th 2003 Case Topics: Asset/Firm Valuation Case 1: MSDI – ALCARA de Henares, Spain Case 2: American Chemical Discussion Topic: • Valuation, Derivative Instruments, and Risk Management Techniques including hedging against foreign exchange (FX) risks. • To provide an understanding of asset and firm valuation and of derivative based risk management techniques. Objectives: • To provide an understanding of asset and firm valuation and of derivative based risk management techniques. Textbook Readings: (Read prior to class) Higgins; Review Chapter 9 Case Text (CT) Readings: Derivative Instruments (CT) 9
  10. 10. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT The assignments for weeks 7, 8, and 9 will be given in the 6th week. A determination will be made by then of your individual and, perhaps, collective strengths, weaknesses (if any), special interests and current topics. 10
  11. 11. FINANCE 565 CASE PROBLEMS IN FINANCE AND BUSINESS MANAGEMENT Week 10 March 19th 2003 Due: Case write up or analysis of a current issue Final Exam: Open Book, Open Note analysis of a comprehensive case. 11