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Solved by verified expert:This is a new company that needs capital to survive. Three possible sources are discussed . You will have to list and discuss in detail the pros and cons of each, and then rank them in order of preference from the owners’ perspective. Your case report should also address and answer these questions:What is Purinex’s business? How would you describe its strategy? What do you think are the founders’ goals and vision for the company?What is the source of Purinex’s value? What are the firm’s technologies, and how successful could they be? What is the likelihood of that success?What is the problem facing Purinex’s CFO Gilad Harpaz? What is the urgency associated with his concerns?How do Purinex’s financing alternatives compare? How would you rank them as sources of cash in terms of their risk and potential return for Purinex? How feasible and/or attractive would it be to finance the firm’s growth with an angel round or a venture capital (VC) round? How do you assess the option to wait?How would you structure the decision among these alternatives? Are there any qualitative considerations? How do you incorporate those into your analysis?How would you choose to finance the firm’s growth? Prepare to explain the effect of your proposal on the firm’s growth, strategic direction, and dilution in the founders’ equity interest.
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Bruner
Eades
Schill
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seventh
edition
Eades
S chill
Case Studies
in Finance
managing for corporate value creation
seventh edition
MD DALIM #1218056 12/10/12 CYAN MAG YELO BLK
managing for corporate value creation
investors. At the core of almost all of the cases is a valuation task that requires students to look to
financial markets for guidance in resolving the case problem. These cases also invite students to apply
modern information technology to the analysis of managerial decisions. In the Seventh Edition, 25%
of the cases are new with many dating from 2011–2012, ensuring that your students are learning
from the most relevant and current sources.
Case Studies in Finance
Case Studies in Finance links managerial decisions to capital markets and the expectations of
Bruner
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Case Studies
in Finance
Managing for
Corporate Value
Creation
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Part One Part Title
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Case Studies in
Finance
Managing for
Corporate Value
Creation
Seventh Edition
Robert F. Bruner
Kenneth M. Eades
Michael J. Schill
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CASE STUDIES IN FINANCE: MANAGING FOR CORPORATE VALUE CREATION, SEVENTH EDITION
Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the
Americas, New York, NY, 10020. Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights
reserved. Printed in the United States of America. Previous editions © 2002, 1989, and 1975.
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Library of Congress Cataloging-in-Publication Data
Bruner, Robert F., 1949Case studies in finance : managing for corporate value creation / Robert F. Bruner, Kenneth M. Eades,
Michael J. Scholl.––Seventh Edition.
pages cm
Includes index.
ISBN-13: 978-0-07-786171-1 (alk. paper)
ISBN-10: 0-07-786171-X (alk. paper)
1. Corporations––Finance––Case studies. 2. International business enterprises––Finance––Case studies.
I. Eades, Ken M. II. Schill, Michael J. III. Title.
HG4015.5.B78 2013
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The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website
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The McGraw-Hill/Irwin Series in Finance,
Insurance and Real Estate
Stephen A. Ross
Franco Modigliani Professor of Finance and Economics
Sloan School of Management
Massachusetts Institute of Technology
Consulting Editor
FINANCIAL MANAGEMENT
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INVESTMENTS
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Page vii
Dedication
In dedication to
our wives
Barbara M. Bruner
Kathy N. Eades
Mary Ann H. Schill
and to our children
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About the Authors
Robert F. Bruner is Dean of the Darden Graduate School of Business Administration,
Distinguished Professor of Business Administration and Charles C. Abbott Professor of
Business Administration at the University of Virginia. He has taught and written in
various areas, including corporate finance, mergers and acquisitions, investing in emerging markets, innovation, and technology transfer. In addition to Case Studies in Finance,
his books include Finance Interactive, multimedia tutorial software in Finance (Irwin/
McGraw-Hill 1997), The Portable MBA (Wiley 2003), Applied Mergers and Acquisitions,
(Wiley, 2004), Deals from Hell: M&A Lessons that Rise Above the Ashes (Wiley, 2005)
and The Panic of 1907 (Wiley, 2007). He has been recognized in the United States and
Europe for his teaching and case writing. BusinessWeek magazine cited him as one of
the “masters of the MBA classroom.” He is the author or co-author of over 400 case
studies and notes. His research has been published in journals such as Financial Management, Journal of Accounting and Economics, Journal of Applied Corporate Finance,
Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and
Journal of Money, Credit, and Banking. Industrial corporations, financial institutions, and
government agencies have retained him for counsel and training. He has been on the
faculty of the Darden School since 1982, and has been a visiting professor at various
schools including Columbia, INSEAD, and IESE. Formerly he was a loan officer and
investment analyst for First Chicago Corporation. He holds the B.A. degree from Yale
University and the M.B.A. and D.B.A. degrees from Harvard University. Copies of his
papers and essays may be obtained from his website, http://www.darden.virginia.edu/
web/Faculty-Research/Directory/Full-time/Robert-F-Bruner/. He may be reached via
email at brunerr@virginia.edu.
Kenneth M. Eades is Professor of Business Administration and Area Coordinator of the
Finance Department of the Darden Graduate School of Business Administration at the
University of Virginia. He has taught a variety of corporate finance topics including: capital
structure, dividend policy, risk management, capital investments and firm valuation. His
research interests are in the area of corporate finance where he has published articles in The
Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative
Analysis, and Financial Management. In addition to Case Studies in Finance, his books
include The Portable MBA (Wiley 2010) Finance Interactive, a multimedia tutorial software
in Finance (Irwin/McGraw-Hill 1997) and Case Studies in Financial Decision Making (Dryden Press, 1994). He has written numerous case studies as well as a web-based, interactive
tutorial on the pricing of financial derivatives. He has received the Wachovia Award for
Excellence in Teaching Materials and the Wachovia Award for Excellence in Research. Mr.
Eades is active in executive education programs at the Darden School and has served as a
consultant to a number of corporations and institutions; including many commercial banks
and investment banks; Fortune 500 companies and the Internal Revenue Service. Prior to
joining Darden in 1988, Professor Eades was a member of the faculties at The University
viii
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Page ix
About the Authors
ix
of Michigan and the Kellogg School of Management at Northwestern University. He has a
B.S. from the University of Kentucky and Ph.D. from Purdue University. His website is
http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Kenneth-MEades/ and he may be reached via email at eades@virginia.edu.
Michael J. Schill is Associate Professor of Business Administration of the Darden
Graduate School of Business Administration at the University of Virginia where he
teaches corporate finance and investments. His research spans empirical questions in
corporate finance, investments, and international finance. He is the author of
numerous articles that have been published in leading finance journals such as Journal
of Business, Journal of Finance, Journal of Financial Economics, and Review of
Financial Studies, and cited by major media outlets such as The Wall Street Journal.
Some of his recent research projects investigate the market pricing of firm growth and
the corporate gains to foreign stock exchange listing or foreign currency borrowing.
He has been on the faculty of the Darden School since 2001 and was previously with
the University of California, Riverside, as well as a visiting professor at Cambridge
and Melbourne. Prior to his doctoral work, he was a management consultant with
Marakon Associates in Stamford and London. He continues to be active in consulting and executive education for major corporations. He received a B.S. degree from
Brigham Young University, an M.B.A. from INSEAD, and a Ph.D. from University
of Washington. More details are available from his website, http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/ Michael-J-Schill/. He may be reached
via email at schill@virginia.edu.
ix
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Page x
Contents
Dedication vii
About the Authors viii
Contents x
Foreword xiii
Preface xiv
Note to the Student: How To Study and Discuss Cases xxv
Ethics in Finance xxxii
1
Setting Some Themes
1.
2.
3.
4.
5.
Warren E. Buffett, 2005
Bill Miller and Value Trust
Ben & Jerry’s Homemade
The Battle for Value, 2004: FedEx Corp. vs.
United Parcel Service, Inc.
Genzyme and Relational Investors: Science
and Business Collide?
2
To think like an investor
Market efficiency
Value creation and governance
Value creation and economic profit
3
23
39
53
Value creation, business strategy and activist investors
75
Financial Analysis and Forecasting
6.
7.
8.
9.
10.
11.
12.
The Thoughtful Forecaster
The Financial Detective, 2005
Krispy Kreme Doughnuts, Inc.
The Body Shop International PLC 2001:
An Introduction to Financial Modeling
Value Line Publishing: October 2002
Horniman Horticulture
Guna Fibres, Ltd.
3
Forecasting principles
Ratio analysis
Financial statement analysis
Introduction to forecasting
101
119
125
143
Financial ratios and forecasting
Analysis of growth and bank financing
Forecasting seasonal financing needs
161
175
181
Estimating the cost of capital
193
Cost of debt capital
219
Cost of capital for the firm
Business segments and risk-return tradeoffs
Project specific risk-return
235
243
257
Estimating the Cost of Capital
13.
14.
15.
16.
17.
x
“Best Practices” in Estimating the Cost
of Capital: Survey and Synthesis”
Roche Holdings AG: Funding the Genentech
Acquisition
Nike, Inc.: Cost of Capital
Teletech Corporation, 2005
The Boeing 7E7
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Contents
4
xi
Capital Budgeting and Resource Allocation
18.
19.
20.
21
22.
23
24.
25
26.
27.
28.
The Investment Detective
Worldwide Paper Company
Target Corporation
Aurora Textile Company
Compass Records
The Procter and Gamble Company:
Investment in Crest Whitestrips Advanced
Seal
Victoria Chemicals plc (A):
The Merseyside Project
Victoria Chemicals plc (B): The Merseyside
and Rotterdam Projects
Star River Electronics Ltd.
The Jacobs Division 2010
University of Virginia Health System:
The Long-Term Acute Care Hospital
Project
5
6
Investment criteria and discounted cash flow
Analysis of an expansion investment
Multifaceted capital investment decisions
Analysis of an investment in a declining industry
Analysis of working capital investment
Scenario analysis in a project decision
283
285
289
311
323
337
Relevant cash flows
349
Mutually exclusive investment opportunities
357
Capital project analysis and forecasting
Strategic planning
Analysis of an investment in a not-for-profit
organization
365
373
381
Management of the Firm’s Equity: Dividends and Repurchases
29.
30.
Gainesboro Machine Tools Corporation
AutoZone, Inc.
Dividend payout decision
Dividend and stock buyback decisions
393
409
Management of the Corporate Capital Structure
31.
32.
33.
34.
35.
36.
An Introduction to Debt Policy and Value
Structuring Corporate Financial Policy:
Diagnosis of Problems and Evaluation
of Strategies
California Pizza Kitchen
The Wm. Wrigley Jr. Company: Capital
Structure, Valuation, and Cost of Capital
Deluxe Corporation
Horizon Lines, Inc.
7
Effects of debt tax shields
Concepts in setting financial policy
425
431
Optimal leverage
Leveraged restructuring
449
467
Financial flexibility
Bankruptcy/restructuring
479
497
Analysis of Financing Tactics: Leases, Options, and Foreign Currency
37.
38.
39.
40.
41.
Carrefour S.A.
Baker Adhesives
J&L Railroad
Primus Automation Division, 2002
MoGen, Inc.
Currency risk management
Hedging foreign currency cash flows
Risk management and hedging commodity risk
Economics of lease financing
Convertible bond valuation and financial engineering
513
523
529
541
553
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Contents
8
Valuing the Enterprise: Acquisitions and Buyouts
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
Methods of Valuation for Mergers
and Acquisitions
American Greetings
Arcadian Microarray Technologies, Inc.
JetBlue Airways IPO Valuation
Rosetta Stone: Pricing the 2009 IPO
The Timken Company
Sun Microsystems
Hershey Foods Corporation: Bitter
Times in a Sweet Place
Flinder Valves and Controls Inc.
Palamon Capital Partners/TeamSystem
S.p.A.
Purinex, Inc.
Medfield Pharmaceuticals
Valuation principles
569
Firm valuation in stock repurchase decision
Evaluating terminal values
Initial public offering valuation
Initial public offering valuation
Financing an acquisition
Valuing a takeover opportunity
Corporate governance influence
589
599
617
635
655
671
693
Valuing the enterprise for sale
Valuing a private equity investment
715
727
Financing the early-stage firm
Valuing strategic alternatives
745
755
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Page xiii
Foreword
The half-decade from 2008 to 2013 forced a series of “teachable moments” into the consciousness of
leaders in both business and government. More such moments may be in the offing, given the unresolved
issues stemming from the global financial crisis. What lessons shall we draw from these moments? And
how shall we teach the lessons so that the next generation of leaders can implement wiser policies?
One theme implicit in most critiques and policy recommendations of this period entails the consequences of financial illiteracy. At few other times in financial history have we seen so strong an affirmation of Derek Bok’s famous argument, “If you think education is expensive, try ignorance.” The
actions and behavior of consumers, investors, financial intermediaries, and regulators suggest ignorance
(naïve or otherwise) of such basic financial concepts as time value of money, risk-adjusted returns, cost
of capital, capital adequacy, solvency, optionality, capital market efficiency, and so on. If ignorance is
bliss, teachers of finance face a delirious world.
Now more than ever, the case method of teaching corporate finance is critical to meeting the
diverse educational challenges of our day. The cases presented in this volume address the richness of
the problems that practitioners face and help to develop the student in three critical areas:
•
Knowledge. The conceptual and computational building blocks of finance are the necessary foundation for professional competence. The cases in this volume afford solid practice with the breadth
and depth of this foundational knowledge. And they link the practical application of tools and concepts to a contextual setting for analysis. Such real-world linkage is an important advantage of case
studies over textbook problem sets.
•
Skills. Case studies demand decisions and recommendations. Too many analysts are content to
calculate or estimate without helping a decision-maker fully understand the implications of the
analysis. By placing the student in the position of the decision-maker, the case study promotes
confidence and competence in making decisions. Furthermore, class discussions of cases promote
skills in communication, selling and defending ideas, giving feedback, negotiating, and getting results through teamwork—these are social skills that are best learned in face-to-face engagement.
•
Attributes of character. Popular outrage over the crisis focused on shady ethics. The duty of agents,
diligence in the execution of professional responsibilities, breaches of trust, the temptations of selfdealing, and outright fraud intrude into retrospecti …
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