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◎ 2000 SOuth‐
WeStern′ a part Of Cengage Learning
16
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that hc had rcad an articlc in his pr()た ssionaliOurnal about a
divcrscお
od company struggling with
thc issue of divisional hurdle ratcs The articlc noted that thc
restaurant industry tends to have dcbt
rati()s of about 70 pcrccnt,which arc about twicc that ol:thc
othcr maOr di宙
sions Thc coinpany
dccidcd to use a 70 perccnt dcbt ratio for its rcstaurant
division,colllparcd to 40 percent f()r its frozcn
f()ods division,so that colnparability、 vith stand― alone
compctitOrs could bc achievcd_Thc articlc ibr―
ther pointcd()utthat Zcnith Stccl Corporation's Equipincnt Lcasc
Financing Division also has a high
dcbt ratio(abOut 80 pcrccnt dcbt,as opposcd to 42 pcrcent ror its
othcr divisions)In bOth Situa―
tions,thc colllpanies indicatcd that thcy could rclllain
colnpctitive only il'thcir divislons could ibl―
lo、v industl‐ y practice l:or capital structurcヽ VhCn
calculating hurdlc ratcs
Vヽhen John linishcd hiS discussion of dcbt ratios for

rcstaurants and cquiplllcnt lcasing,
Yolanda Trcbblc notcd that both thc restaurant and cquipmcnt
lcasing industrics havc bccn cxperi―
cncing financial dificulties ヽヽ
/ithin thc past qual‐ tcr,thc financial press had reportcd lost
carnings
and drops in thc bond ratings for scveral colllpanics in thcsc
industrics ShC thcn suggcstcd that
thcir problcmslnight havc becn compoundcd by ovcl・
―CXpansion rcsulting fronl using unrcalisticaHy
lo、v hurdic ratcs OthCrs agrcedヽ vith hCr point,butthe issuc
ol'usillg divisional capital stl‐
ucttlrcs、vas
not rcsolvcd alld nccdCd to be disCusscd l｀urthcr
FoHowing the mecting,Betty dccidcd t()lbcus on Ways ol｀
accountingお
r individual pr● CCt
risk Shc nlct、 vith cmployccs in various opcrations of thc
Company and discovercd thatlnostindi―
vidual prqiCCtS arc parts oflargcr processcs Also,thc rcsults of
a givcn capital pr●
ect arc highly scn―
sitivc to lllarkct and production conditions f()r thc product.The
cxpel‐
ienccd opcrating pcrsonncI

wcrc nlore conndcnt about the prQicCtCd Cash■ ows for solttC
pr●
CCtS than for othcrs They nlcn―
ti()ncd that solllC prlDlcctS arc silnply riskicr than othcrs
AIso,」
ohn reportcd that solllC Opcrating pcr
sonncl havc bcttcr“ track records"in brecasting cash nows than
othcrs Thcrerorc,」
。hn attusts
pr(り cct cash llows bascd on post audit results of individual
lllanagcr's previous pr(pJects
Vヽith this
init)rmation in lnind,Betty concludcd that any systcin
accounting for individual prQiCCt risk would
ncccssarily bc solllcヽ Vhat arbitl・ ary and illlprccise Hoヽ
ノCVCr,shc belicvcs that risk nccds to bc incor―
poratcd into thc analysis br extrcmcly largc pr● ccts,particularly
thosc invol宙
ng cntircly new tcch
nologics or product lines.In thesc cascs,Bctty thinks that
ly10ntc Carlo silnulation or sccnario
analysis should bc uscd to gencrate risk and rcturn
characteristics oFthc prqicct HOWCVcr,she
bclicvcs that thc costs WOuld outwcigh thc bcnents Ofthcsc
approachcs ibrillost pr●
cctS,espe

cially in vicw ofthc highly su匈 cct市 e naturc ofthc cstinlalon
proccss that WOuld havc to bc usedお
r
the probability data.
As an alternativc,Betty decided tO rccommcnd thal divisi()nal
managcrs classi″
aH rCqucsts
for hnding into cithcr high― risk,avcragc risk,and low― risk
groups High-1・
isk prQicctS WOuld bc
cvttluatcd at a hurdle ratc l l tiincs thc d市 isional ratci
avcragc―
risk pr● ectS WOuld bc cvaluatcd at
thc di宙 sional ratc;and low― risk prqicctS WOuld be cvaluated
at a hurdlc ratc 0 9 timcS thC d市
i―
sional ratc ヽヽ′hen this was discusscd at thc ncxt group
lllccting,thc lllcinbcrs agrecd that thc proce―
durc、vas arbitrary but rcasonablc,and most of thc group felt
that gcncral risk grouping、
/as bcttcr
than thc currcnt proccdure
Just bcf()rc hcr final rcport、 vas duc,Betty、 vas reassigned to
an emcrgcncy situation rcgard―
ing thc loss ofthc company's mlor cuStOmcrin Japan You have
bcen aSSigncd lo takc ovcrthc task

of complcting thc repol‐t and dcfcnding it beFore the group
BCf()rc shc le負、
you vノ ci‐c ablc to spcnd
a day becollling ihnliliar、 vith the capital budgcting situation
and rcvicヽ
vcd Betty's notcs.She lllcn―
tioncd that shc rcmaincd con宙 nCCd that capital budgcing
mustinvolvc iudglncnt as wcll as quanti―
tativc analy scs Currcntly,the capital budgcting proccss iS aS
foHoヽ
/s:(1)Onc hurdlc ratc iS uscd
throughout thc cntirc corporation;(2)NPVs,IRRs,MIRRs,and
paybacks arc calculatcd:and(3)
thcse quantitative data arc used,along with such qualitativc
factors as``whatthc pr●
eCt dOCsお r
our strategic position in thc markct,"in making thc final“
acccpt,rclect,or dcた
r"dccision Bctty
clllphasizcd that this gcncral proccdurc should be rctaincd,but
that the quantitative inputs uscd in thc
final dccision would be bcttCr if difた rential nsk― acllustcd
discount ratcs wcre uscd Shc wanted t()
makc surc that you cxplaincd thc nccd for differcntial nsk
aliustmCnts and how thCy impact llrm

@ 2OOO South-Western, a part of Cengage Learning
18
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Explarn the rationale behind using beta as a rneasure of risk.
Compute thc citmpany's beta
basecl on thc divisional bctas and colnpare it with that provided
by Valucline and Merrill
Lynch. Explain some of the inconsistencies that can be ftrund in
reportcd betas. Do historical
betas provide good measures of the future riskiness of flrlrs (or
divisions)'/
Using the cornputed beta, ijnd the cost of equity, the weighted
averagc cost of capital
(WACC), and thc hurdle rate lor the cornpany. Discuss the
negativc irnpact of the added prc-
mium to the cost ol'capital.
Compute the cost of ecluity ttrr each of the company's
divisions. Then. c()lnpute the WACC
ancl the hurdle rates fbr each division, assurning that all
divisions use a 42 percent dcbt ratitl.
Do you agree with Betty concerning the capital structure issue'l
Discuss several arguments
that Betty can use to help.justily using the cornpany rather than
divisional capital structure to
determinc WACC.
How would your thinking about the capital structure decision be
afl'ected if:
a. E,ach division raised its own debt; that is, il the divisions
werc sct up as wholly owned
subsidiaries. which then issued their own debt'l (ln tact.

Northern Forcst Products raises
dcbt capital at the corporate level, and headquarters then makes
lunds available to the
various divisions).
b. Divisions issued their own debt, but the corporation
guaranteed the divisional debt'l
Now assume that proiects are identified within divisions as
being high risk, average risk. or
low risk.
a. What hurdle rates would bc assigned [o proiects in the three
risk categories tbr the com-
pany and within each division'l
b. Hgw crtrnlbrtable are you with the l.l and 0.9 proiect risk-
adiustment t'actors'l Is there a
theoretical tbundation ibr the sizc ttl'these ad-iustments'l
Bctty's analysis requires estimated betas fbr NFP's five
divisions. Suppose she did not lbel
comfbrtable with beta analysis. Could divisional (and project)
hurdle rates be established
using total risk analysis? Il'so, describe how this rnight be done.
(Hint: The risk of divisions
(and projects) can be viewed on a stand-alone basis or on a
within-firrn basis. which treats
the firm as a portfblio of assets.)
Supposethat.dcspitethehighercostof capitaltbrriskyprojects(l.l
timesdivisionalcost),
the Plastic Products Division rnade relatively heavf
investt.nents in prtr.iects deemed to be
more risky than average. What ettbct would this have on the
firrn's corporate beta and over-

all cost of capital? How long would it take 1br the cff'ects ol
these relatively risky invest-
nlcnts to show up in the corporate beta as reported by brokers
and investrnent advisory
services'l
Compute the Payback, IRR, MIRR. and NPV fbr the example
cash flows. Discuss how the
risk adjustments attect the acceptability of the pro.ic'ct.
How do the Payback, IRR. MIRR. and NPV change if the
additional premium is reduced to
2 percentage points or to 0'?
Northcrn Frtrest Products uses an incentive-based
cclmpensation plan fbr its uppcr mcnage-
ment pcrsonnel.
6
7
9.
10.
@ 2000 South-Western, a part of Cengage Learning
20
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FINAL GROUP PAPER
Critical Analysis Paper: Comparative Analysis of Cross Cultural
Leadership & Business Principles
Throughout your academic career, you'll be asked to write
papers in which you compare and contrast many things and to
research management theories, political figures, scientific
processes, and so on. In your careers as business professionals
and leaders, you will conduct a comparative analysis in many
forms when decision-making about alternative systems,
processes, etc…
There are different forms of comparative analysis. In one form,
you may be constructing an argument or building a case for A or
B. In a "classic" compare-and-contrast papers, you weigh or
discuss A and B equally, as two similar things that have crucial
differences (two pesticides with different effects on the

environment) or two similar things that have crucial differences,
yet turn out to have surprising commonalities (two politicians
with vastly different world views who voice unexpectedly
similar perspectives on healthcare equality).
In this course, International Business you will be writing a
“classic” comparative analysis paper in which you will compare
and contrast selected elements or sub- systems of a country’s
business structure & practices with those of a US businesses.
1. Select a country for comparison to the US. This may be a
country that we explored during a class session or one in which
you have a particular interest in. You must also select a
business within the country to profile in your classical
comparison
2. The complete assessment of an entire country’s business
structure not feasible for the scope of this assignment. Thus,
you will select a minimum of 5 factors in the country’s business
structure that you will compare to the same factors in the US.
There are a number of factors that explain business performance
in any country and many of these we have discussed in class.
The following are examples of factors that can be selected for
the basis of comparison, but are not limited to. You should use
the business / organization in which you selected to demonstrate
your comparison to the countries
Comparison Factors (Examples)
· Economic and Political Outlook (government structure,
employment, imports vs exports, governance, healthcare,
stability of the economy, laws …)
· Business Landscape – competitive structure, primary
industries, labor force, regulations, sourcing, taxes, wages
· Resources and work culture - professionals (education and
supply), technology, facilities, compensation and benefits, work
life balance, organizational cultural, training and professional
development, retirement and other benefits, unions vs non
unions
· Social and Cultural issues – relationship of culture and
business behaviors, ethical codes of conduct, communication

and interpersonal styles, beliefs and values, the role of family,
sustainability, corporate social responsibility, gender roles,
religion and business
3 Analyze the Factors Carefully – Do your research and make
sure you have a good understanding of the selected country’s
factors that you have chosen to compare to the US; and those
factors in the US. It is important to use more than one credible
source for your information and data on each factor
4) This is a group exercise to be completed as a comprehensive
final paper to the class. It is to be completed in the most
professional manor to include the following:
· 8-10 page written paper (APA Format)
· Including an executive summary
· PPT presentation as a group during last week of class.
· All group members to be active
· Instructor will require peer-group evaluations at the end of the
final project

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