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Finance552ACorporatePlanningandFinancingWinter2000

RoomBLM307;T&Th;8:3010:20pm
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Instructor: LarryL.DuCharme,Ph.D.
Office:M259
Officehours: Tu&Th(3:004:00pm)andbymutualarrangement.
Officephone:5438194/5434368;Homephone:(425)6403025;email:lducharm@u.washington.edu

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TEXTS:Bruner,CaseStudiesinFinance,3dEd.,IrwinMH,1999[B]
Higgins,AnalysisforFinancialManagement,5thEd.,IrwinMH,1998[H]
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CourseInformation
Thiscoursedealswithtwoimportantissuesinthefinancialmanagementofbusinessfirms:
managingcashflowsandexternalfinancingofoperationsandcapitalinvestment.Toaddress
managementofcashflows,wewillcoverfinancialstatementanalysis,forecastingandfinancial
planning,managinggrowth,andworkingcapitalstrategies.Toaddressfinancingandinvestment
issues,wewilllookatbankingrelationshipsandotherprincipalsourcesofcapitalfor
corporationsincludingderivativesecurities.Thefocusthroughoutthecourseisonthedesign
andmanagementofafirmsfinancialstructuretherighthandsideofthebalancesheet.
ReadingassignmentsarefromtheHigginsbookorhandouts.Theyareintendedtobehelpful,
butnotnecessarilycoverallaspectsofagivensituation.Isuggestthatyourefertoan
intermediatefinancetext(e.g.,BrealeyandMyers)ifyouneedtoreviewthebasics.
Unlessindicatedotherwise,thedailyassignmentsdonotrequirethatyouhandinwrittenwork.
Duringthequarter,wewillexamineaseriesofcaseproblemswhicharetakenfromtheBruner
book(Dardencases).Existingtheoryhasrelativelylittleofpracticalvaluetosayaboutmanyof
thetopicswewillexamineinthiscourse.Therefore,thebestway(otherthanreallife
experiencewhichisquitcostly)tounderstandthenatureoftheproblemandtomasterthelogic
bywhichalternativeactionscanbeevaluatedistoexamineaseriesofpracticalproblems(cases).
CourseGrade
Gradeswillbebasedonclassparticipationandwrittenassignmentsasfollows:
Classdiscussion30%
Writtenassignments70%
PleaseseeGuidelinesforWrittenCasesattached.Therewillbenoinclassexams.
Dailyclasspreparationisessentialforobtainingthemaximumbenefitfromthiscourse.Idonot
expectyoutoalwayshavetherightanswercomingintoclass,butIdoexpectyoutobe
preparedtoparticipateinaninformedclassdiscussion.Iwantyoutolearnbydoing.Ifyou
donotattempttounderstandtheproblemsassigned,youwillnotadequatelylearnthematerial.
IfyouanticipatethatyouwillnothaveenoughtimeormotivationtodigintothematerialI
stronglyencourageyoutonottakethiscourse.Workingthecasesanddiscussingthemina
groupbeforeclassisagoodwaytobepreparedforclass.
Pleaseformastudygroup.Thiswillhelpyoutoexcelinyourschoolworkandsubsequent
businesslife/career.
Procrastinationislikeacreditcard:itsalotoffununtilyougetthebill.ChristopherParker
ver.:10/31/2016

[B]=BrunerCaseStudies;[H]=Higginstext;[HO]=handout
PART1:FinancialAnalysis,Forecasting,andBankFinancing

01/04

Introduction:TheCaseoftheUnidentifiedIndustries(attached)

01/06

FinancialAnalysis:Readings:[B]pg.xxiii;[H]pp333,Ch.2,and[HO]Ratios
TheFinancialDetective,1996([B]case#5pg.68)

01/11 FinancialAnalysis:Continued
ORACLESYSTEMSCORP.([B]case#6pg.74)
1.Whatcanhistoricalincomestatements(Exh.1)andbalancesheets(Exh.2)tellyouaboutthehealth
andcurrentconditionofOracleSystems?
2.Howcanfinancialratiosextendyourunderstandingoffinancialstatements?Whatquestionsdothe
timeseriesofratiosinExh.3raise?WhatquestionsdotheratiosonpeerfirmsinExh.4and5
raise?
3.IsOracleSystemsCorp.financiallyhealthyinSeptember1990?
4.Inlightofquestion3,whatmightaccountforOraclesrecentdeclineinshareprice?
5.WhatisthesourceofintrinsicinvestmentvalueinOracle?Doesthissourceappearonthefinancial
statements?
01/13 FinancialModelingandForecasting:Reading:[H]Ch.3
TheBODYSHOPINTERNATIONALPLC([B]case#7pg.86)
Workthroughtheexercisesinthiscase,firstusingpencilandpaperandthenusingyourpersonal
computer.Thenfollowthedirectionsonthelastpageofthecasetomakethethreeyearforecastand
prepareresponsestothequestionsposed.
CheckoutmywebpagesforCasedatainexcelformat(version6orhigher).Thiscaseis
BodyShop.xlsIfyoudownloadthisfile,youwillsavetimewithdataentryandformat.
01/18 ForecastingSeasonalFinancialNeeds:Reading:[HO]NoteonBankLoans
SENGUPTAFIBERS,Ltd.([B]case#9pg.118)
1.HowdidAshokaconstructhisfinancialforecast?Usingthefinancialforecast,preparetoshowthecash
cycleofthefirm,i.e.theflowoffundsthroughtheworkingcapitalaccountsofthefirm.
2.Examinetheexhibitsinthecase.OnthebasisofAshokasforecast,howmuchdebtwillSenguptaneed
toarrangeforthecomingyear?WillSenguptabeabletorepaythelineofcreditthisyear?
3.WhydoSenguptasfinancialrequirementsvaryacrosstheyear?Whatarethekeydeterminantsof
Senguptasborrowingneeds.Exercisethespreadsheetmodeltoidentifythecriticalforecastassumptions
(i.e.,dosomesensitivityanalysiswiththespreadsheet).
4.ConsiderthefourmemosthatSharmareceived.
AssessthedesirabilityofPondicherrysrequestforcredit.Whatwillbetheeffectofthisproposalon
accountsreceivableanddebtbalancesacrosstheyear?(onestudentpresent)
Assessthedesirabilityofthelevelproductionproposal.Iflevelproductionisundertakennow,atthe
lowpointofthebusinesscycle,whatisthelikelihoodofinventorystockoutsatthepeakofthecycle?
Ifthecompanywaitstoundertakelevelproductionuntiljustafterthepeak,whatwillhappento
inventoryanddebtbalancesatthecyclicallow?(onestudentpresent)
Assesstheimpactofthenewinventorypolicyproposal.Pleasenotethattheforecastingmodel
containsacircularreferenceamongthefinancialstatements,soyoushouldsetthemodeltoiteratea
smallnumberoftimes(try15)tofindasolution.InExcelyouwoulddothisbyclickingonoptions
calculationiteration.(Hint:Purchaseswillbeapercentageofnextmonthssales,andwageswillbea
percentageofthismonthspurchases.)Whateffectwillthisschemehaveoninventoryanddebt
balances?Totestiftheeffectismaterial,reforecastthefinancialstatementsbasedonanadjustmentto
thepurchases/salesratiothatproducesthedesiredreductioninthefinalinventorybalance(inthemodel,
purchasesdrivewagesandhence,inventory).(teamofthreestudents).
HibachiChemicalsjustintimeproposal:(Hint:assumethatthisproposalwillreduce35%ofthe
firmsinventorytoabout5%ofitsformerbalance).Whatwillbetheeffectofthisproposalon
inventoryanddebtbalances?Totestiftheeffectismaterial,reforecastthefinancialstatementsbasedon
anadjustmenttothepurchases/salesratio.(teamofthreestudents).
5.Whydoesthebankrequirea30daycleanupoftheloan?Shouldthebankcontinuetowaivecompliance

withthiscovenant?
6.WhatarethethreemostimportantactionsorpoliciesthatSharmashouldtake?WhatshouldSharmasay
tothebank?Whatshouldshesaytootherstakeholders(e.g.,customersandemployees)?
DatainExcelformatisavailableonmywebpagesonmyCaseDatapage.Downloadingthisfilewillsave
youtimewithdataentry.
01/20 GrowthandBankFinancing:Reading:[H]Chapter4
PADGETTPAPERPRODUCTSCO.([B]case#8pg.102)
1.Asabanker,howwouldyouevaluatePadgettsstrategyandfinancialperformancetodate?
2.WhyshouldFrancisLibris,thebanker,seektostructurePadgettsloanonamoreorderlybasis?
3.WhydoesPadgettneedaloan?HowfastcanPadgettrepaytheloan?
4.WhatshouldLibrisproposeastermsforthenewloanstructure?
01/25 GrowthandBankFinancing:continued
MERRILLELECTRONICS(A)([B]case#11pg.144)
WRITTENASSIGNMENT::46pagesplusexhibits,20%
YouareanindependentconsultantandyourjobistoprepareawrittenreportforPatriciaMerrill.Inthis
reportyoushouldaddressthefollowingthreeissues:
1.Anassessmentoftheperformanceofthecompanyoverthepast18months.Whataresome
positivepointsandweakpointsofitsperformance?Howcouldthisbeimproved?Lookatthe
cashflowsofthecompany.Whatweretheprincipalsourcesandusesofcash?
2.Futurefinancialneeds:HowmuchcashwillMerrillneedifitssalestargetsaremeetandthefirm
continuestobemanagedasithasbeeninthepast?HowfastcanMerrillgrowwithoutadditional
equityinvestment?Whatchangesdoyousuggestwithrespecttothefirmsoperationsthatmight
reducethefirmsneedforfinancing?
3.Merrillsfinancingstrategy:HowshouldPatriciaMerrilldealwiththebank?Whatactionsshould
betakentodealwiththefirmsfinancingrequirements?Includeaforecastofthefirmsoperations
thatmightbepresentedtothefirmsbankerswithaproposalforfinancingarrangements.
AcomputermodelforproformaprojectionsisinLotus123formatonmywebpages.
PleasenotethatMerillborrowsfromthebankatarateofprime+1.5%.InMay,theFedpushedthe
primeratedownfrom10%to8.5%inanattempttosupportaweakeningeconomy.Thecurrent
expectationisforfurtherreductionsininterestrates.
InterestRateRiskManagement:Reading:[H]Chapter5
[HO]InterestRateSwapsandTheRiseofRisk
ManagementandCorporateRiskManagement
MERITMARINECORPORATION[HO]
1.WhatareMeritsexternalfundsrequirementsfor198588?WhyshouldMeritbeconcernedabout
interestraterisk?
2.Howwelldoeseachfinancingalternativemeettherequirements?
3.Whichistheleastcostlyalternative?(Hint:lookatthecostsofthetotalfinancingpackages.)
4.Arethealternativescomparableintermsofinterestrateriskexposure?
5.WhichalternativewouldbethemostprofitableforOmniBank?
6.IfyouwereGinnyShields,whatwouldyourecommendtoJohnMerit?

01/27

PART2:LongtermFinancingStrategies
02/01 FinancialFlexibilityandBondRatings:Reading:[H]Ch.6
POLAROIDCORPORATION([B]case#28pg.364)
1.WhatarethemainobjectivesofthedebtpolicythatRalphNorwoodmustrecommendtoPolaroids
boardofdirectors?
2.BasedoncaseExhibit9,howmuchdebtcouldPolaroidborrowateachbondrating?
3.DoyouagreewithHudsonGuarantysviewthatequityinvestorsareindifferenttotheincreases
acrosstheinvestmentgradedebtcategories?
4.IsPolaroidscurrentmaturitystructureofdebtappropriate?Whyorwhynot?
5.IfyouwereRalphNorwood,whatrecommendationswouldyoumaketotheCEOandboard
regarding:
targetbondrating,
levelofflexibilityorreserves,
mixofdebtandequity,and
maturitystructureofdebt.
02/03 Debt/EquityFinancing:Reading:[H]Ch6;[HO]ChoosingtheRightMix
ROSARIOACEROS.A.([B]case#29pg.384)
1.WhyisPabloEsteconsideringobtaininglongtermcapital?
2.Howwillthetwofinancingalternativesaffecttheperformanceofthefirm?(refertoExhs.611incase)
3.Whatarethemainrisksthatthefirmfaces?Undersomereasonabledownsidescenario,couldRosario
Acerocontinuetoservicethedebt?
4.Fromthefirmsstandpoint,arethetermsofthenotesandwarrantspackagecompetitive/attractive?
5.Wouldanofferingpriceof$9.00persharebefair?
6.WhatcourseofactionshouldEsteadopt?Identifythetradeoffsbetweenthetwoalternativesby
considering:Flexibility,Risk,Income,Control,andTiming.
02/08 FinancingtheEarlyStageHighGrowthFirm:
PLANETCOPIAS&IMAGEM([B]case#30pg.402)
WRITTENASSIGNMENT20%57pagesplusexhibits;Teamsof34
Youareanadvisortothethreefounders.Yourassignmentistoprepareareporttothemdealingwiththe
issuesraisedinthecase.Youneedtoconsiderthefoundersgoals,visionandstrategyforPlanet.What
possibleconstraintsarethereforachievingtheirgoals?Basedonyourevaluationofthesituation,provide
specificrecommendationsforthefuturefinancingofthecompany.Whatconcernsarethefounderslikelyto
haveregardingyourrecommendations?NotethataextensiveevaluationofinfeasiblealternativesisNOT
necessary.
Onmywebpages,isanExcelformatspreadsheetthatcontainsthemodelsusedtopreparetheforecast
exhibitsinthecase.Pleasefeelfreetomodifythemindevelopingyourreport(i.e.,youarenotboundby
theresultsifyourhavegoodreasontoexplorealternatives).Someerrorsintheprintedcaseexhibit7have
beencorrectedinthespreadsheet.
DividendPolicy:Readings:[HO]TheDividendPuzzleandSupplementalNote:TheDividend
DecisionandFinancingPolicy.
NORTHBOROMACHINETOOLSCORPORATION([B]case#23pg.294)
1.AfterreviewingTheDividendDecisionandFinancingPolicy,whatareyourconclusionsregarding
Northborosdividendpolicy?
2.Howmightafirmfundanincreaseddividendpayout?WhatisNorthborowillingtovaryandwhat
remainsfixedasamatterofpolicy?
3.HowdoyouexpectNorthborosprovidersofcapitaltoreactifNorthborodeclaresadividendin
1992?Overwhatrangeofpayoutswillthesereactionsexist?
4.WhatshouldChristineOlsonrecommendtotheboardofdirectors,re:longrundividendpolicyfor
Northboro?Whatabouttheadvertisingandnamechange?

02/10

02/15

5
IntroductiontoOptions:Readings:[HO]BeyondDebtandEquity:OptionsandCorporateFinance.

02/17 ConvertibleBonds:
BOSTONCHICKEN,INC.([B]case#33pg.455)
WRITTENASSIGNMENT24pagesplusexhibits10%;Individualreport
CompleteC.K.Paosninetasks.Asabackgroundtodoingthetasks,considerthefollowingquestions:
1.WhyisBostonChickenissuingconvertiblebondssosoonafteritsinitialpublicoffering?
2.Whataretheadvantagesofconvertibledebtrelativetostraightdebtandtocommonstockissues?
3.Isthevaluationofthebondverysensitivetothevolatilityassumptions(estimates)?
4.Trytosolveforthevolatilityimplicitintheredemptionoption.Doestheimplicitvolatility
seemreasonable?

02/22 EffectsofDebtTaxShields:Readings:[H]pg.252&339342
AnIntroductiontoDebtPolicyandValue([B]case#26pp.348352)
02/24 FinancialFlexibilityandBenefitsofTaxShield:
TONKACORPORATION[HO]
1.HowmuchbusinessriskdoesTonkaface?
2.Howmuchpotentialvalue,ifany,canTonkacreateforitsshareholdersateachofthelevelsofdebt?
3.Howwouldleveragingupaffectthecompanystaxes?
4.Howwouldthecapitalmarketsreacttoadecisionbythecompanytoincreasetheuseofdebtinits
capitalstructure?
5.WhatcapitalstructuredoyouthinkisappropriateforTonka?Why?
6.Whatarealternativetacticsforleveragingup?
7.WhatargumentswouldyoumaketopersuadeTonkasmanagementtoadoptyourrecommendation?

02/29 ReorganizationinFinancialDistress:
CALEDONIANNEWSPAPERSLTD.([B]case#42pg.644)
1.Whathappened?Didthetermsoftheloanprovideprotectionfromtheproblemsthatemerged?
2.Whatarethestrengthsandweaknessesofthetwonewrestructuringproposals?Whatisthevalue
ofEagleAmericanBanksinterestinCaledonianundereachoftheproposals?
3.WhatactionwouldyourecommendforIanSterling?
03/02 Financial&BusinessStrategy:Work:[B]Case50,pp.832849
THEHOMEDEPOT,INC.([B]case#51pg.850)
1.WhatisTheHomeDepotsbusinessandcompetitivestrategy?Whatistheirfinancialpolicy?Are
theycompatibleordotheyconflict?
2.Caseexhibit6predictsthatthecompanywillneed$1.46billioninnewexternalfinancingoverthe
next5years.Whatisdrivingthisrequirement?Whatrisksandkeyassumptionscould
significantlyaffectthefinancingrequirements?
3.Whatdoyourecommendforfinancingfundsneededduringthenext12months?Isthis
recommendationconsistentwiththefirmspaststrategy?Ifyourrecommendationisnot
consistentwithpaststrategy,thenjustifyyourrecommendation.
4.Atthetimeofthecase,HomeDepotsstockpricewasinthelow$50s.Doesthisseemlikeafair
price?
5.IwillcallonsomeonetoupdatetheclassonHomeDepotsperformancesince1991.Youcanlook
atValueLinedataorsearchtheweb(www.homedepot.com;andEDGARfilings).

03/07 FinancingtheTurnaroundCompany:
MASSIVEPOWERDESIGNCORPORATION([B]case#54pg.933)
WRITTENASSIGNMENT:46pagesplusexhibits20%TeamReports(34studentsonateam)
Recommendaplanofaction(inparticular,aprogramoffinancingtransactionstomeettheneedoverthe
entireforecastperiod)forRandandRhodes.Makeyourrecommendationasdetailedaspossible(i.e.,
suggestterms,timingandamountsofanytransaction).Inmakingyourrecommendationsconsiderthe
following:
1.HasMPDCrecoveredfromitsdistress?
2.Whataresomeofyourargumentsforandagainstconglomeratediversification?Howwellhasthis
workedforMPDCinthepast?Howwellisitexpectedtowork?Whatconcernsdoyoubringtothe
attentionofRandandRhodes?
3.WhatisthevalueofMPDC?FromanaccountingstandpointisntMPDCinsolvent?Whatmight
explainthedifferencebetweenbookvalueofequityandyourestimateofmarketvalue?
4.WhatproblemsandopportunitiesdoyouobserveinthewaythatMPDChasbeenfinancingitself?
ShouldMPDCfinanceitsforthcomingexternalfundsneedinthesamemannerasthepast?
5.IsMPDCworthyofaBcreditrating?Whatconcernswouldpotentialinvestorsorcreditorshavefor
Messrs.ReadandRhodes?

Themodelanddatawhichgeneratedexhibits1214isavailableonmywebpageinExcelformat.Iexpect
youtousethemodeltocompleteasensitivityanalysisoffuturefinancingneed,andtovaluethecompany
usingtheDCFapproach.

Iwillfrequentlyleavemessagesforstudentsonmywebpage:
http://faculty.washington.edu/lducharm/Fin552/F552msg.htm
FromthissiteyoucanlinktodatainExcelformatforselectedcases.
theExcelfileswillsaveondatainputtime.

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