Case Map for

Ross, Westerfield & Jaffe: Corporate Finance

(McGraw-Hill)

This map was prepared by an experienced editor at HBS Publishing, not by a teaching professor. Faculty
at Harvard Business School were not involved in analyzing the textbook or selecting the cases and
articles.

Every case map provides only a partial list of relevant items from HBS Publishing. To explore
alternatives, or for more information on the cases listed below, visit: hbsp.harvard.edu

PART I: OVERVIEW

Chapter 1 Introduction to
Corporate Finance
Policy Management Systems
Corp.: The Financial Reporting
Crisis: Amy P. Hutton
Product Number: 102013
Length: 10p
Teaching Note: 102033
Clarkson Lumber Co.: Thomas
R. Piper
Product Number: 297028
Length: 6p
Teaching Note: 297076
Abstract
Explores the challenges facing Tim Williams, the new CFO of a
publicly-traded enterprise software company, as he attempts to rebuild
his company's reputation for reliable financial reporting following a
highly visible financial reporting crisis. Armed with an understanding of
the company business model, sales cycle, and revenue recognition
policy, Williams must assess how various factors contributes to the
company's crisis, and which policies and business practices can be
changed to ensure against future financial reporting issues. Useful
early in a course on financial reporting to develop a basic framework
for the role of financial reporting and disclosure in the capital markets.
Provides opportunities for discussing key aspects of the financial
reporting system, including accrual accounting, management's
responsibility for financial reporting, and the set of generally accepted
accounting principles and audit practices that impose restrictions on
management. Additionally, highlights the roles of capital market
regulators (the SEC) and information intermediaries.
Subjects Covered: Accounting; Capital markets; Disclosure; Financial
reporting; Financial strategy; Forecasting; GAAP; SEC; Software;
Value of information
The owner of a rapidly growing retail lumber company is considering
the financial implications of continued rapid growth. The magnitude of
the company's future financing requirements must be assessed in the
context of the company's access to bank finance and/or equity
finance. Develops skills in financial analysis, financial forecasting, and
financial planning.
Learning Objective: To develop skills in financial analysis, financial
forecasting, and financial planning

Chapter 2 Financial
Statements and Cash Flow
The Balance Sheet
(HBS background note): David
F. Hawkins; Jacob Cohen
Product Number: 101108
Abstract
Discusses the accounting equation and defines common terms found
in the statement. Also provides an example of the balance sheets of
Coca-Cola Co., Ariba, Inc., and Safeway, Inc.
Subjects Covered: Accounting; Balance sheets; Financial reporting
Length: 7p
Kmart Corp.: Christopher F.
Noe
Product Number: 199017
Length: 10p
The Income Statement
(HBS background note): David
F. Hawkins; Jacob Cohen
Product Number: 101109
Length: 6p
The Statement of Cash Flows
(HBS background note): David
F. Hawkins; Jacob Cohen
Product Number: 101107
Length: 8p
Preparing and Using the
Statement of Cash Flows
(HBS background note): Robert
L. Simons; Antonio Davila
Product Number: 196108
Length: 10p
Statements of Cash Flows:
Three Examples: William J.
Bruns Jr.; Julie H. Hertenstein
Product Number: 193103
Length: 8p
Teaching Note: 193173
Chemalite, Inc. (B): Cash Flow
Analysis: Robert L. Simons;
Antonio Davila
Product Number: 195130
Length: 3p
Teaching Note: 198120
Sears, Roebuck and Co. vs.
Wal-Mart Stores, Inc.: Gregory
S. Miller; Christopher F. Noe
Product Number: 101011
Length: 18p
Teaching Note: 102052
Butler Lumber Co.: Thomas R.
Piper
Describes a situation in which a company (Kmart) refinances a portion
of its debt. Used to illustrate how the asset and liability sides of the
balance sheet are linked.
Subjects Covered: Accounting procedures; Assets; Balance sheets;
Debt management; Discount department stores; Liability; Retail stores
Includes a description of the common components of the income
statement. Includes examples of the income statements of Home
Depot, Inc., Lucent Technology, Inc., Gap, Inc., and McDonald's Corp.
and lends itself to a brief discussion regarding these companies.
Subjects Covered: Accounting; Financial reporting; Income
Discusses the components of the statement of cash flow and its direct
and indirect format of presentation. Also briefly explains the difference
between cash and accrual accounting and provides examples of
Standard Microsystems Corp. and Intel Corp.
Subjects Covered: Accounting; Cash flow; Financial reporting
Explains the concepts and procedures behind the statement of cash
flows. Presents an overview of the reporting objectives of this report,
and describes in detail the preparation of the cash flow statement
using both the indirect method and the direct method. A complete
numerical example is presented. Financial analysis techniques using
the cash flow statement are also described. A rewritten version of an
earlier note.
Subjects Covered: Accounting procedures; Capital budgeting; Cash
flow; Financial analysis; Financial ratios; Financial reporting
Introduces the statement of cash flow. Contains three examples of
multi-year statements of cash flows from three unidentified companies.
The analysis tasks include examination of cash flows, analysis of
profitability of operations, investment policies, and financing.
Learning Objective: To introduce the statement of cash flows now
required in the United States.
Students are asked to use actual and pro forma financial statements to
prepare a statement of cash flows under both the direct and indirect
method.
Subjects Covered: Accounting procedures; Cash flow; Chemicals;
Financial analysis
This case is designed to familiarize students with the use of financial
ratios. Two retailers, Sears, Roebuck and Co. and Wal-Mart Stores,
Inc., have a very similar value for return on equity (ROE) in the 1997
fiscal year. Students use the information in the case and the
accompanying exhibits, which include financial statements as well as
disclosures regarding corporate strategies and accounting policies for
each company, to analyze the value creation process for each firm.
This case provides a good introduction regarding the combination of
such information to create a powerful tool for financial statement
analysis.
Subjects Covered: Discount department stores; Financial analysis;
Financial ratios; Financial statements; Retail stores; Return on equity
The Butler Lumber Co. is faced with a need for increased bank
financing due to its rapid sales growth and low profitability. Students
Product Number: 292013
Length: 4p
Teaching Note: 292014
Crystal Meadows of Tahoe,
Inc.: William J. Bruns Jr.
Product Number: 192150
Length: 6p
Teaching Note: 193128
Toy World, Inc.: W. Carl Kester
Product Number: 295073
Length: 6p
Teaching Note: 297118
Chapter 3 Financial
Statements Analysis and
Long-Term Planning
PART II: VALUATION AND CAPITAL BUDGETING
Chapter 4 Discounted Cash
Flow Valuation
Chapter 5 How to Value
Bonds and Stocks
Bond Math
(Exercises): Todd Pulvino
Product Number: 201101
Length: 4p
Note on Valuation in Private
Equity Settings: Joshua Lerner;
John Willinge
Product Number: 297050
Length: 21p
Cougars: Scott P. Mason; Mihir
Desai
Product Number: 295006
Length: 6p
Teaching Note: 295098
Jupiter Management Co.:
must determine the reasons for the rising bank borrowing, estimate the
amount of borrowing needed, and assess the attractiveness of the
loan to the bank. A rewritten version of an earlier case. Allows
students to practice ratio analysis, financial forecasting, and evaluating
financing alternatives.
Subjects Covered: Financial analysis; Financial planning;
Forecasting; Loan evaluation
An introductory case in cash flow analysis and the preparation of
statements of cash flows. Based on the 1991 income statement and
balance sheet at a ski resort company, the case provides additional
information which allows a student to prepare both a direct and an
indirect statement of cash flows. A rewritten version of an earlier case.
Subjects Covered: Accounting policies; Cash flow; Management
accounting; Recreation
A shift from seasonal to level production of toys will change the
seasonal cycle of Toy World's working capital needs and necessitate
new bank credit arrangements. Students must analyze the company's
performance, forecast funds needs, and make a recommendation.
Learning Objective: To introduce the pattern of current assets and
cash flows in a seasonal company and provide an elementary exercise
in the construction of pro forma financial statements and estimation of
funds needs.
Abstract
Abstract
Abstract
A set of four exercises that teach compounding interest and valuing
bonds.
Learning Objective: To teach the mechanics of valuing bonds.
Discusses several ways in which venture-backed firms can be valued,
including comparables, net present value, decision-tree analysis, and
the "venture capital method."
Learning Objective: Provides an introduction to valuation of
entrepreneurial firms.
Provides an introduction to zero coupon bonds and stripping coupon
bonds. Concerns the relationship between the spot curve, the strip
curve, and the coupon curve.
Subjects Covered: Bonds; Innovation; Interest rates; Pricing
The manager of a small company growth fund considers relative
Ronald W. Moore
Product Number: 292107
Length: 24p
Teaching Note: 298023
Arbitrage in the Government
Bond Market?: Michael E.
Edleson; Peter Tufano
Product Number: 293093
Length: 9p
Teaching Note: 298023
Ford Motor Co.’s Value
Enhancement Plan (A): Andre
F. Perold
Product Number: 201079
Length: 17p
Teaching Note: 204116
B case available
Global Equity Markets: The
Case of Royal Dutch and Shell:
Kenneth A. Froot; Andre F.
Perold
Product Number: 296077
Length: 19p
Teaching Note: 201093
Dividend Policy at FPL Group,
Inc. (A): Benjamin C. Esty;
Craig F. Schreiber
Product Number: 295059
Length: 17p
Teaching Note: 296072
B case available
merits of investing in a company's convertible debt versus its common.
Subjects Covered: Investment management; Mutual funds; Portfolio
management
Documents a pricing anomaly in the large and liquid treasury bond
market. The prices of callable treasury bonds seem to be inconsistent
with the prices of noncallable treasuries and an arbitrage opportunity
appears to exist. Permits instructors to introduce the treasury market,
the concept of creating synthetic instruments, principles of arbitrage,
and institutional frictions in the bond markets.
Subjects Covered: Bonds; Capital markets; Securities analysis;
Valuation
In April 2000, Ford Motor Co. announced a shareholder Value
Enhancement Plan (VEP) to significantly recapitalize the firm's
ownership structure. Ford had accumulated $23 billion in cash
reserves and under the VEP would return as much as $10 billion of
this cash to shareholders. Students must wrestle with the following
questions: Why was Ford proposing this transaction instead of a
traditional share repurchase or a cash dividend? How did the interests
of the Ford family factor into this decision, and what did the transaction
imply about the future involvement of the family in the company? Why
was Ford distributing such a significant amount of cash at this
particular point in time? Did the distribution signal a change in the
company's appetite for making acquisitions or future capital
expenditures? If shareholders collectively elected to receive less than
$10 billion in cash, how would Ford distribute the remaining cash?
Learning Objective: To provide a rich setting in which to discuss one
of the most basic decisions corporations face: how to return cash to
shareholders. It is a vehicle for discussing corporate financial policies
and capital structure decisions, particularly as they relate to cash
dividends and share repurchases.
Royal Dutch and Shell common stocks are securities with linked cash
flow, so that the ratio of their stock prices should be fixed. In fact, the
ratio is highly variable, moving with the markets where the securities
are intensively traded. Royal Dutch trades more actively in the
Netherlands and U.S. markets, whereas Shell trades more actively in
the United States. The result is that the Royal Dutch/Shell relative
price moves positively with the Netherlands and U.S. markets and
negatively with the U.K. market. The ability to arbitrage these
disparities and their causes are major case focal points.
Learning Objective: To demonstrate how valuation is affected by the
location of trade/ownership, and why arbitrage doesn't lead to
integration of international financial markets.
A Wall Street analyst has just learned that FPL (the holding company
for Florida's largest electric utility) may cut its dividend in several days
despite a 47-year streak of consecutive dividend increases. In
response to the deregulation of the electric utility industry, FPL has
substantially revised its competitive strategy over the past several
years. The analyst must decide whether a change in dividend policy
will be a part of FPL's financial strategy. Allows students to examine
how firms set and change dividend policy. Also provides background

Chapter 6 Net Present Value
and Other Investment Rules
Investment Analysis and
Lockheed
TriStar: Michael E. Edleson
Product Number: 291031
Length: 6p
Teaching Note: 291032
Valuing the Option Component
of Debt and Its Relevance to
DCF-Based Valuation Methods
(HBS background note): Lisa
Meulbroek
Product Number: 201110
Length: 5p
Sellars' Market
(HBS exercise): David E. Bell
Product Number: 189001
Length: 2p
Chapter 7 Making Capital
Investment Decisions
Chapter 8 Risk Analysis, Real
Options, and Capital
Budgeting
Ocean Carriers: Erik Stafford;
Angela Chao; Kathleen S.
for examining why firms pay dividends and whether dividend policy
matters.
Learning Objective: To examine how firms set and change dividend
policy. Also provides a background for examining why firms pay
dividends and whether dividend policy matters.
Abstract
A set of five exercises in capital budgeting. Student calculates and
compares various decision criteria (including IRR and NPV) for capital
investment projects. This is an introductory case, where relevant cash
flows are provided, and the focus is on the discounting mechanics and
the decision to invest. In addition, one exercise directly probes the link
between positive NPV projects, and value added to the shareholders.
The final "exercise" is a three page mini-case analyzing Lockheed's
decision to invest in the TriStar L-1011 Airbus project. This drives
home the importance of discounting and NPV, and shows the adverse
effect of a negative NPV project on shareholder value.
Subjects Covered: Aerospace industry; Capital budgeting; Capital
investments; Present value; Project evaluation; Securities analysis
The flows-to-equity or equity cash flows valuation method is a
discounted cash flow method used to estimate the equity portion of the
capital structure. It is closely related to the venture capital/buyout
valuation method, which estimates the IRR of the stream of cash flows
accruing to equity holders. Both of these methods are likely to result in
an estimate of equity value that is too low when the firm's debt is risky
(or, equivalently, an IRR that is too high, depending on the method
used to estimate terminal value.) This note describes a method for
estimating the size of this bias, drawing upon insight from option-
pricing.
Learning Objective: Can be used in conjunction with cases involving
direct estimation of equity value, using a discounted cash flow
technique, and with cases employing the venture capital/buyout fund
valuation method.
A shop owner has limited shelf space for display of impulse purchase
products near the cash register. He must select only nine to display.
Exercise shows the relevance of opportunity cost or resource pricing.
By setting an appropriate charge for the shelf space the products self-
select for the appropriate shelves.
Subjects Covered: Linear programming; Managerial economics;
Resource allocation; Retailing; Transfer pricing
Abstract
Abstract
In January 2001, Mary Linn, VP of finance for Ocean Carriers, a
shipping company with offices in New York and Hong Kong, was
Luchs
Product Number: 202027
Length: 6p
Teaching Note: 202029
Tree Values: Richard S.
Ruback; Kathleen S. Luchs
Product Number: 201031
Length: 3p
Teaching Note: 202018
Capital Budgeting: Discounted
Cash Flow Analysis
(Exercise): Thomas R. Piper
Product Number: 298068
Length: 6p
PART III RISK
Chapter 9 Risk and Return:
Lessons from Market History
Chapter 10 Return and Risk:
The Capital-Asset Pricing
Model (CAPM)
Why Manage Risk?
(HBS background note): Peter
Tufano; Jonathan S. Headley
Product Number: 294107
Length: 6p
Lex Service PLC: Cost of
Capital: W. Carl Kester; Kendall
Backstrand
evaluating a proposed lease of a ship for a three-year period,
beginning in early 2003. The customer was eager to finalize the
contract to meet his own commitments and offered very attractive
terms. No ship in Ocean Carrier's current fleet met the customer's
requirements. Mary Linn, therefore, had to decide whether Ocean
Carriers should immediately commission a new capsize carrier that
would be completed two years hence and could be leased to the
customer.
Learning Objective: Provides the opportunity for students to make a
capital budgeting decision. The key pedagogical objective is to
develop an understanding of how discounted cash flow analysis can
be used to make investment and corporate policy decisions.
Describes two alternative tree-cutting strategies. The first is to cut all
trees that are at least 12 inches in diameter at breast height. The
second is to thin the forest by cutting less desirable trees immediately
and harvesting the crop trees later. The case presents information for
students to estimate the cash flows for each alternative. After
estimating the corresponding cash flows, students have the
opportunity to use discounted cash flow techniques to decide when to
cut trees under each strategy and to select which strategy maximizes
the value of the forest.
Subjects Covered: Capital budgeting; Cash flow; Forest products;
Present value; Valuation
Comprises seven problems that collectively allow students to work
through each type of cash flow that is encountered in capital
budgeting. The instructor can also address such issues as product
cannibalization and real options.
Learning Objective: An effective introduction to capital budgeting.
Abstract
Abstract
Conventional finance theory demonstrates that, under simplistic
assumptions, firms cannot add to shareholder value through the use of
risk management activities. Modern finance theory recently has begun
to carefully consider and examine those circumstances under which
firms can add to shareholder value. This note briefly reviews the major
ideas prevalent in both conventional and modern finance literature
regarding the potential benefits of risk management.
Learning Objective: Enables students to question the conventional
wisdom that assumes risk management activities are always beneficial
to a corporation. In addition, students will examine five specific
conditions under which financial risk management can demonstrably
add to shareholder value.
The Lex Service company has grown to become a large multidivisional
company with a substantial capital budget. In 1993, the board was
reviewing its capital budgeting procedures. Specifically, it sought to
Product Number: 296003
Length: 12p
Teaching Note: 204158
Marriott Corp.: The Cost of
Capital (Abridged): Richard S.
Ruback
Product Number: 289047
Length: 10p
Teaching Note: 298081
Concordia Electronic Systems
Test: Thomas R. Piper
Product Number: 298115
Length: 2p
Cost of Capital at Ameritrade:
Mark Mitchell; Erik Stafford
Product Number: 201046
Length: 24p
Teaching Note: 201123
New World Development Co.
Ltd.: Diversify or Focus?: Su
Han Chan; Ko Wang; Mary Ho
Product Number: HKU166
Length: 16p
Teaching Note: HKU167
determine the company's cost of capital and whether it should use
different hurdle rates for different divisions. Introduces practical
techniques for estimating the cost of equity using CAPM, and
designing discount rates appropriate for businesses of different risk.
Learning Objective: To introduce students to practical techniques for
estimating the cost of equity using CAPM and designing discount rates
appropriate for businesses with different levels of risk.
Gives students the opportunity to explore how a company uses the
Capital Asset Pricing Model (CAPM) to compute the cost of capital for
each of its divisions. The use of Weighted Average Cost of Capital
(WACC) formula and the mechanics of applying it are stressed.
Subjects Covered: Capital costs; Hotels & motels
The management of an electronics company is attempting to decide
whether to use a single hurdle rate for all projects or to move to a
system of different hurdle rates for each of its two divisions. The
divisions differ substantially in terms of risk and seem to have
substantially different costs of capital.
Learning Objective: Estimation of cost of capital based on the capital
asset pricing model.
Ameritrade Holding Corp. is planning large marketing and technology
investments to improve the company's competitive position in deep-
discount brokerage by taking advantage of emerging economies of
scale. In order to evaluate whether the strategy would generate
sufficient future cash flows to merit the investment, Joe Ricketts,
chairman and CEO of Ameritrade, would need an estimate of the
project's cost of capital. There is considerable disagreement as to the
correct cost of capital estimate. A research analyst pegs the cost of
capital at 12%, the CFO of Ameritrade uses 15%, and some members
of Ameritrade management believe that the borrowing rate of 9% is
the rate by which to discount the future cash flows expected to result
from the project.
Learning Objective: A two-day case to estimate the cost of capital
that Ameritrade should employ in evaluating the proposed large
investments in marketing and technology. The lesson plan builds on
the prior cases in the Risk & Return module. Uses the capital asset
pricing model to estimate Ameritrade's cost of capital. Focus is on
CAPM variables such as the risk free rate, market risk premium, and
beta. Students will use regression analysis to directly calculate the
beta estimates. Arguments will be made as to which comparable firms
(brokerage firms or Internet firms) should be used to obtain beta
estimates.
New World Development Co. Ltd. (NWD) was a leading conglomerate
based in Hong Kong. After more than 20 years of operations, the
group had expanded its core businesses to include property,
infrastructure, services, and telecommunications. From late 1997 to
June 2001, the stock price performance of the company had been
abysmal. Its efforts at asset disposals to reduce gearing, while making
additional investments in new businesses, confused investors.
Security analysts also blamed the company for not keeping its promise
to focus on its core business of property.

Beta Management Co.: Michael
E. Edleson
Product Number: 292122
Length: 5p
Teaching Note: 294113
Chapter 11 An Alternative
View of Risk and Return:
The Arbitrage Pricing Theory
Long-Term Capital
Management, L.P. (A): Andre F.
Perold
Product Number: 200007
Length: 23p
B, C, and D supplemental cases
available
Strategic Capital Management,
LLC (A): Erik Stafford; Mark
Mitchell; Todd Pulvino
Product Number: 202024
Length: 3p
Teaching Note: 202028
B and C cases available
Learning Objective: Requires students to conduct an objective
assessment of NWD on both a divisional and a consolidated basis. It
provides sufficient information for them to compute the divisional cost
of capital using the capital asset pricing model (CAPM) and to conduct
a simple Economic Value Added (EVA) analysis.
A manager of a small investment company has been successfully
using index funds for limited market timing. Growth has allowed her to
move into picking stocks. She is considering two small and highly
variable listed stocks, but is concerned about the risk that these
investments might add to her "portfolio." Provides a lead-in to the
CAPM. Students learn about total risk, non-diversifiable or portfolio
risk, and (CAPM) beta; calculate variability of the stocks separately,
and portfolio variance with and without the stocks, to see how an
extremely risky (but low-beta) stock actually reduces risk; and
calculate stock betas.
Subjects Covered: Cost benefit analysis; Diversification; Efficient
markets; Investment management; Portfolio management; Regression
analysis; Risk assessment
Abstract
Long-Term Capital Management, L.P. (LTCM) was in the business of
engaging in trading strategies to exploit market pricing discrepancies.
Because the firm employed strategies designed to make money over
long horizons--six months to two years or more--it adopted a long-term
financing structure designed to allow it to withstand short-term market
fluctuations. In many of its trades, the firm was in effect a seller of
liquidity. LTCM generally sought to hedge the risk-exposure
components of its positions that were not expected to add incremental
value to portfolio performance, and to increase the value-added
component of its risk exposures by borrowing to increase the size of
its positions. The fund's positions were diversified across many
markets. This case is set in September 1997, when, after three and a
half years of high investment returns, LTCM's fund capital had grown
to $6.7 billion. Because of the limitations imposed by available market
liquidity, LTCM was considering whether it was a prudent and
opportune moment to return capital to investors.
Learning Objective: Can be used to discuss a broad range of issues
relating to arbitrage, market efficiency, implementation of investment
strategies, liquidity shocks, risk management, financial intermediation,
investment management, hedge funds, incentives, systemic risk, and
regulation.
Strategic Capital Management, LLC is a hedge fund planning to make
financial investments in Creative Computers and Ubid. Creative
Computers recently sold approximately 20% of its Internet auction
subsidiary, Ubid, to the public at $15 per share. Ubid's stock price
closed the first day of trading at $48, giving Ubid a $439 million market
capitalization. Paradoxically, the parent's stock price did not keep pace
with that of its subsidiary. At the end of Ubid's first day as a public
company, Creative Computers' equity value was less than the value of
its stake in Ubid. The market prices implied that Creative Computers'

Farallon Capital Management:
Risk Arbitrage (A): Andre F.
Perold; Robert Howard
Product Number: 299020
Length: 27p
B case available
RJR Nabisco Holdings Capital
Corp.--1991: Peter Tufano
Product Number: 292129
Length: 10p
Teaching Note: 296058
Chapter 12 Risk, Cost of
Capital,
and Capital Budgeting
Cost of Capital at Ameritrade:
Mark Mitchell; Erik Stafford
Product Number: 201046
Length: 24p
Teaching Note: 201123
non-Ubid assets had a value of negative $79 million. The relative
prices and ownership link between Creative Computers and Ubid
suggests a potential arbitrage opportunity. To evaluate how best to
exploit this investment opportunity, Elena King, the manager of the
hedge fund, must understand the risks and expected returns
associated with different long and short equity positions.
Learning Objective: To develop an understanding of how arbitrage
acts to enforce the law of one price and to keep markets efficient. Also
provides a venue to discuss the various real world market
imperfections that can prevent arbitrageurs from immediately
eliminating mispricings in equity markets. Best taught at the end of a
capital markets module.
Farallon Capital Management, an investment firm that specializes in
risk arbitrage, has taken significant long and short positions in MCI
Communications and British Telecommunications, respectively, in the
belief that the proposed merger of these firms will be successfully
completed. Raises the issues facing Farallon as positive and negative
events relating to the merger unfold. Provides a rich institutional
setting for understanding certain investment strategies involving short
selling, and for understanding merger arbitrage and its function in the
capital markets.
Subjects Covered: Acquisitions; Arbitrage; Investment management;
Mergers; Risk management
An investment manager notices a large apparent discrepancy in the
prices of two nearly-identical bonds issued in conjunction with a major
leveraged buyout. The manager must figure out whether the
instruments are mispriced relative to one another, and if so, how to
capture arbitrage profits from the temporary anomaly. The case
introduces students to a wide variety of instruments ranging from very
simple treasury strips to P-I-K debentures. Encourages students to
devise "arbitrage" positions and understand the degree to which these
positions are riskless.
Subjects Covered: Bonds; Capital markets; Investment management;
Leveraged buyouts; Pricing
Abstract
Ameritrade Holding Corp. is planning large marketing and technology
investments to improve the company's competitive position in deep-
discount brokerage by taking advantage of emerging economies of
scale. In order to evaluate whether the strategy would generate
sufficient future cash flows to merit the investment, Joe Ricketts,
chairman and CEO of Ameritrade, would need an estimate of the
project's cost of capital. There is considerable disagreement as to the
correct cost of capital estimate. A research analyst pegs the cost of
capital at 12%, the CFO of Ameritrade uses 15%, and some members
of Ameritrade management believe that the borrowing rate of 9% is
the rate by which to discount the future cash flows expected to result
from the project.
Learning Objective: A two-day case to estimate the cost of capital
that Ameritrade should employ in evaluating the proposed large

Lex Service PLC: Cost of
Capital: W. Carl Kester; Kendall
Backstrand
Product Number: 296003
Length: 12p
Teaching Note: 204158
Pioneer Petroleum Corp.:
Richard S. Ruback
Product Number: 292011
Length: 5p
Teaching Note: 292080
Leveraged Betas and the Cost
of Equity
(HBS background note): Paul
Asquith; David M. Mullins
Product Number: 288036
Length: 11p
Financial Leverage, the Capital
Asset Pricing Model and the
Cost of Equity Capital
(HBS background note): David methodology for decomposing the cost of equity into its three
W. Mullins Jr.
Product Number: 280100
Length: 12p
PART IV: CAPITAL STRUCTURE AND DIVIDEND POLICY
Chapter 13 Corporate
Financing Decisions
And Efficient Capital Markets
The NASDAQ Stock Market,
Inc.: Andre F. Perold; Austin emergence of Electronic Communication Networks, which are not as
Scee
Product Number: 202008
Length: 28p
investments in marketing and technology. The lesson plan builds on
the prior cases in the Risk & Return module. Uses the capital asset
pricing model to estimate Ameritrade's cost of capital. Focus is on
CAPM variables such as the risk free rate, market risk premium, and
beta. Students will use regression analysis to directly calculate the
beta estimates. Arguments will be made as to which comparable firms
(brokerage firms or Internet firms) should be used to obtain beta
estimates.
The Lex Service company has grown to become a large multidivisional
company with a substantial capital budget. In 1993, the board was
reviewing its capital budgeting procedures. Specifically, it sought to
determine the company's cost of capital and whether it should use
different hurdle rates for different divisions.
Learning Objective: To introduce practical techniques for estimating
the cost of equity using CAPM, and designing discount rates
appropriate for businesses of different risk.
Pioneer is an integrated oil company. Its operations include
exploration and development, production, transportation, and
marketing. The case focuses on Pioneer's cost of capital calculations
and its choice between a single company-wide cost of capital or
divisional costs of capital. Provides students the opportunity to learn
how to calculate a company-wide weighted average cost of capital. An
appropriate measure of the cost of equity capital is presented so that
students are able to challenge their understanding of key concepts by
critiquing the company's measure and suggesting their own
Subjects Covered: Capital budgeting; Capital costs
The objective is to delineate on methodology for measuring the risk
associated with financial leverage and estimating its impact on the
cost of equity capital.
Subjects Covered: Capital costs; Capital structure; Equity financing
Demonstrates how the capital asset pricing model can be used to
estimate the impact of financial leverage on the cost of equity capital.
The levering and unlevering of betas are illustrated. Also presents a
components--the risk-free rate, a premium for business, and a
premium for financial risk.
Subjects Covered: Capital costs; Capital structure; Cost analysis;
Financial management; Models; Risk assessment
Abstract
NASDAQ's mission "to facilitate capital formation" is threatened by the
heavily regulated by the SEC. This case reviews the development of
NASDAQ and it's evolution from a loose network of broker-dealers
through to its proposed SuperMontage. SuperMontage is a centralized
order book, where multiple parties can place orders (both buy and sell)

Beta Management Co.: Michael
E. Edleson
Product Number: 292122
Length: 5p
Teaching Note: 294113
The Harmonized Savings Plan
at BP Amoco: Luis M. Viceira
Product Number: 201052
Length: 17p
Teaching Note: 206121
Chapter 14 Long-Term
Financing: An Introduction
USX Corp.: Stuart C. Gilson;
Jeremy Cott
Product Number: 296050
Length: 20p
Teaching Note: 298085
for the stocks they wish to trade and where entire supply and demand
curves can be displayed. To understand the context, students will
learn about the structure of the capital markets and why it concerns
regulators and investors.
Learning Objective: Students are expected to learn about the
structure of the (financial) capital markets, why it concerns regulators
and investors, and the innovations that are made to increase
efficiencies.
A manager of a small investment company has been successfully
using index funds for limited market timing. Growth has allowed her to
move into picking stocks. She is considering two small and highly
variable listed stocks, but is concerned about the risk that these
investments might add to her "portfolio." Provides a lead-in to the
CAPM. Students learn about total risk, non-diversifiable or portfolio
risk, and (CAPM) beta; calculate variability of the stocks separately,
and portfolio variance with and without the stocks, to see how an
extremely risky (but low-beta) stock actually reduces risk; and
calculate stock betas.
Subjects Covered: Cost benefit analysis; Diversification; Efficient
markets; Investment management; Portfolio management; Regression
analysis; Risk assessment
On August 11, 1998, United States' Amoco Corp. (NYSE: AR) and the
British Petroleum Co. (BP), p.l.c. (NYSE: BP), announced the BPC
merger with Amoco. This deal was the largest industrial merger to
date, and created the world's third-largest oil company, BP (NYSE:
BP). This case focuses on the issues surrounding the integration of
the employee-defined contribution plans at Amoco and the U.S.
subsidiary of BP. One of them was that the pre-merger plans had very
different investment structures. While Amoco had offered its
employees only low-cost index funds, BP America had relied on
actively managed mutual funds. The new plan, which would have
more than 40,000 participants and $7 billion in assets, would have to
either choose one of these approaches, or try to integrate them into
one single structure.
Learning Objective: To provide students with ample opportunities to
discuss issues such as market efficiency, active versus passive
(indexed) asset management, mutual fund performance evaluation,
the design of private pension plans, and the mutual fund industry.
Abstract
A large diversified steel and energy firm is pressured by a corporate
raider to spin off its steel business in order to increase its stock price.
As an alternative to the spinoff, management proposes replacing the
company's common stock with two new classes of "targeted" stock
that would represent separate claims against each business segment's
cash flows, allowing the stock market to value each business
separately (and more accurately).
Learning Objective: The case provides an opportunity to compare
alternative restructuring strategies that have the same objective (in this
case, to increase the company's stock price by segmenting cash flows

Telefonica de Argentina S.A. :
Steven R. Fenster; Rajiv
Gharalia
Product Number: 292039
Length: 23p
Teaching Note: 294015
Avon Products: Jonathan
Tiemann
Product Number: 289049
Length: 9p
Teaching Note: 290004 &
292059
Chapter 15 Capital Structure:
Basic Concepts
and
Chapter 16 Capital Structure:
Limits to the Use of Debt
Debt Policy at UST, Inc.: Mark
Mitchell
Product Number: 200069
Length: 14p
Teaching Note: 201002
Continental Carriers, Inc.: W.
Carl Kester
Product Number: 291080
Length: 5p
Teaching Note: 292050
Thermo Electron Corp.: Carliss
Y. Baldwin; Joetta Forsyth
from its distinct businesses).
Deals with the privatization of the Argentine telephone industry.
Focuses on the restructuring aspect. Commercial banks owned
sovereign debt of Argentina trading at a deep discount to par. The
question is whether the banks should exchange their sovereign debt
instruments for the common or preferred stock of Telefonica. The
purpose is to evaluate a choice between poor securities valued at the
point of decision by analyzing how these various securities might look
in the future.
Subjects Covered: Bankruptcy; Capital structure; Currency; Financial
strategy; Investment banking; Privatization; Restructuring; South
America
Avon Products announced both a change in its business focus and a
reduction of its dividend in June 1988. To offset the likely stock price
effect of the dividend reduction, Avon announced at the same time an
unusual exchange offer, under which it would take up to 25% of its
common stock in exchange for an unusual preferred stock. The case
traces the history of Avon from 1979-88. Requires students to evaluate
Avon's efforts at diversification in the early 1980s, and to relate that
effort to the company's dividend history. Also requires students to
evaluate an unusual security. Suitable for first-year students or for a
second-year capital markets course.
Subjects Covered: Cosmetics; Diversification; Dividends; Non-store
retailing; Securities; Valuation
Abstract
UST, Inc. is a very profitable smokeless tobacco firm with low debt vis-
a-vis other firms in the tobacco industry. The setting for the case is
UST's recent decision to substantially alter its debt policy by borrowing
$1 billion to finance its stock repurchase program.
Learning Objective: Introduction to optimal capital structure with
emphasis on calculation of interest tax shields.
A U.S. trucking company is considering using debt for the first time to
acquire another company. The directors of the company are divided in
their opinion of the likely impact of leverage on Continental Carriers'
performance. Their differences must be reconciled and a decision
reached about whether to issue new debt or equity to fund the
acquisition. Students are introduced to the impact of leverage on
performance variables such as profits, growth, earnings per share, and
stock price. A rewritten version of an earlier case.
Subjects Covered: Acquisitions; Capital structure; Debt management;
Equity financing; Expansion; Financial analysis; Leveraged buyouts;
Trucking;
George Hatsopoulos, CEO at Thermo Electron Corp., is considering
whether to issue shares in a subsidiary via an initial public offering
Product Number: 292104
Length: 25p
The Loewen Group, Inc.: Stuart
C. Gilson; Jose Camacho
Product Number: 201062
Length: 24p
Diageo plc: George Chacko;
Peter Tufano; Joshua Musher
Product Number: 201033
Length: 16p
Teaching Note: 201117
Acova Radiateurs: Lisa
Meulbroek
Product Number: 295150
Length: 12p
Teaching Note: 200003
Drivers of Industry Financial
Structure
(HBS Exercise): Dwight B.
Crane; Indra A. Reinbergs
Product Number: 201039
Length: 3p
Teaching Note: 201049
Chapter 17 Valuation and
Capital Budgeting
for the Levered Firm
Sampa Video, Inc.: Gregor
(IPO). The company has developed an unusual corporate structure in
which subsidiaries fund new ventures by raising debt and equity in the
capital markets, rather than through the parent company.
Learning Objective: Valuation of a high tech venture, role of
corporate headquarters in resource allocation, information gap
between company and capital market, equity incentives to divisional
managers, and accounting for common stock issuance.
A publicly-traded funeral home and cemetery consolidator faces
imminent financial distress. The company has aggressively grown
through use of debt. Restructuring the debt is potentially very costly to
creditors, shareholders, suppliers, and other corporate stakeholders.
Cross-border and accounting issues potentially complicate the
restructuring.
Learning Objective: To illustrate the costs of debt, financial distress,
basic restructuring options, and determinants of capital structure.
A major U.K.-based multinational is reevaluating its leverage policy as
it restructures its business. The treasury team models the tradeoffs
between the benefits and costs of debt financing, using Monte Carlo
simulation to estimate the savings from the interest tax shields and
expected financial distress costs under several sets of leverage
policies. The group treasurer (CFO) must decide whether and how the
simulation results should be incorporated into a recommendation to
the board of directors, and more generally, what recommendation to
make regarding the firm's leverage policy.
Learning Objective: Introduces students to the static-tradeoff theory
of capital structure, as actually implemented in a major firm. Also
introduces students to the use of simulation to capture the impact of
different business policies under uncertainty.
In March 1990, Baring Capital Investors faced a decision about
whether and how much to bid for Acova Radiateurs, a subsidiary of
Source Perrier. Source Perrier had decided to sell Acova, and Baring
Capital Investors thought it might make a good leveraged buyout
candidate. Students have an opportunity to value Acova using the
flows-to-equity technique, as well as to evaluate the merits of this
technique relative to the valuation methodologies typically used by
buyout firms.
Learning Objective: To give students an opportunity to value Acova
using the flows-to-equity technique, as well as to evaluate the merits of
this technique relative to the valuation methodologies typically used by
buyout firms.
Contains common-size balance sheets and financial ratios for ten
companies, each representative of a different industry. Students are
asked to identify the industries from the structure of the financial
statements.
Learning Objective: Gives students practice in using financial ratios
and helps develop an understanding of the factors that drive the
financial structure of firms.
Abstract
A video rental store is considering home delivery services.
Andrade
Product Number: 201094
Length: 3p
Teaching Note: 204125
Note on the Equivalency of
Methods for Discounting Cash
Flows: William E. Fruhan Jr.
Product Number: 202128
Length: 4p
Cross-Border Valuation
(HBS background note):
Kenneth A. Froot; W. Carl
Kester
Product Number: 295100
Length: 21p
Pioneer Petroleum Corp.:
Richard S. Ruback
Product Number: 292011
Length: 5p
Teaching Note: 292080
Marriott Corp.: The Cost of
Capital (Abridged): Richard S.
Ruback
Product Number: 289047
Length: 10p
Teaching Note: 298081
Chapter 18 Dividends and
Other Payouts
Avon Products: Jonathan
Tiemann
Product Number: 289049
Length: 9p
Teaching Note: 290004 &
292059
Management attempts to value the project under different financing
strategies and methods, specifically adjusted present value (APV) and
weighted average cost of capital (WACC).
Learning Objective: Shows how to implement APV and WACC and
when each is appropriate.
Uses a numerical example to demonstrate that when you discount the
cash flows to capital from a project at the weighted average cost of
capital, you get same net present value result as you obtain when
discounting the cash flows to equity at the cost of equity. Also
demonstrates why it is far easier to do a net present value calculation
using the weighted average cost of capital (assuming a fixed debt ratio
and market value weights) than it is to do the same calculation using
the cost of equity.
Subjects Covered: Capital costs; Cash flow; Equity capital
Provides a review of valuation techniques used to assess cross-border
investments. Discusses the discounting of free cash flows with a
weighted average cost of capital and the use of adjusted present
value. Special concerns such as foreign-exchange risk, country risks,
and international diversification are also discussed. Unlike Note on
Cross-Border Valuation, this note contains no discussion of valuing
real options.
Subjects Covered: Capital costs; Foreign exchange; Foreign
exchange rates; International finance; Present value; Valuation
Pioneer is an integrated oil company. Its operations include
exploration and development, production, transportation, and
marketing. The case focuses on Pioneer's cost of capital calculations
and its choice between a single company-wide cost of capital or
divisional costs of capital. Provides students the opportunity to learn
how to calculate a company-wide weighted average cost of capital. An
appropriate measure of the cost of equity capital is presented so that
students are able to challenge their understanding of key concepts by
critiquing the company's measure and suggesting their own.
Subjects Covered: Capital budgeting; Capital costs; Petroleum
Gives students the opportunity to explore how a company uses the
Capital Asset Pricing Model (CAPM) to compute the cost of capital for
each of its divisions. The use of Weighted Average Cost of Capital
(WACC) formula and the mechanics of applying it are stressed.
Subjects Covered: Capital costs; Hotels & motels
Abstract
Avon Products announced both a change in its business focus and a
reduction of its dividend in June 1988. To offset the likely stock price
effect of the dividend reduction, Avon announced at the same time an
unusual exchange offer, under which it would take up to 25% of its
common stock in exchange for an unusual preferred stock. The case
traces the history of Avon from 1979-88. Requires students to evaluate

Dividend Policy at FPL Group,
Inc. (A): Benjamin C. Esty;
Craig F. Schreiber
Product Number: 295059
Length: 17p
Teaching Note: 296072
B case available
Murray Ohio Manufacturing Co.:
Krishna G. Palepu
Product Number: 187178
Length: 27p
Teaching Note: 190198
Ford Motor Co.'s Value
Enhancement Plan (A): Andre
F. Perold
Product Number: 201079
Length: 17p
Teaching Note: 204116
B case available
Avon's efforts at diversification in the early 1980s, and to relate that
effort to the company's dividend history. Also requires students to
evaluate an unusual security. Suitable for first-year students or for a
second-year capital markets course.
Subjects Covered: Cosmetics; Diversification; Dividends; Non-store
retailing; Securities; Valuation
A Wall Street analyst has just learned that FPL (the holding company
for Florida's largest electric utility) may cut its dividend in several days
despite a 47-year streak of consecutive dividend increases. In
response to the deregulation of the electric utility industry, FPL has
substantially revised its competitive strategy over the past several
years. The analyst must decide whether a change in dividend policy
will be a part of FPL's financial strategy in this deregulated
environment.
Learning Objective: Allows students to examine how firms set and
change dividend policy. Also provides a background for examining
why firms pay dividends and whether dividend policy matters.
After a record year in 1983, Murray Ohio's earnings declined in 1984.
The company was faced with competition from cheap imports and was
experiencing declining margins. Students are asked to analyze the
company's 1984 financial statements and predict whether there is
likely to be a change in the dividend policy.
Subjects Covered: Competition; Dividends; Financial analysis;
Manufacturing
In April 2000, Ford Motor Co. announced a shareholder Value
Enhancement Plan (VEP) to significantly recapitalize the firm's
ownership structure. Ford had accumulated $23 billion in cash
reserves and under the VEP would return as much as $10 billion of
this cash to shareholders. In exchange for each share currently held,
the plan would give stockholders one new share plus the choice of
receiving $20 either in cash or additional new Ford common shares.
Shareholders electing to receive cash would be taxed on these
distributions at capital gain rates. Among other things, the plan
provided a means for the Ford family to obtain liquidity without having
to dilute their 40% voting interest (even though they own only 5% of
the shares outstanding.) Students must wrestle with the following
questions: Why was Ford proposing this transaction instead of a
traditional share repurchase or a cash dividend? How did the interests
of the Ford family factor into this decision, and what did the transaction
imply about the future involvement of the family in the company? Why
was Ford distributing such a significant amount of cash at this
particular point in time? Did the distribution signal a change in the
company's appetite for making acquisitions or future capital
expenditures? If shareholders collectively elected to receive less than
$10 billion in cash, how would Ford distribute the remaining cash?
Learning Objective: Provides a rich setting in which to discuss one of
the most basic decisions corporations face: how to return cash to
shareholders. It is a vehicle for discussing corporate financial policies
and capital structure decisions--particularly as they relate to cash
dividends and share repurchases--in a context where corporate control
questions and the interests of multiple constituencies must be

PART V: LONG-TERM FINANCING
Chapter 19 Issuing Securities
to the Public
Kendle International, Inc.:
Dwight B. Crane; Paul W.
Marshall; Indra A. Reinbergs
Product Number: 200033
Length: 25p
Teaching Note: 201014
Tom.com--2000: Su Han Chan;
Ko Wang; Mary Ho
Product Number: HKU124
Length: 20p
Teaching Note: HKU125
W.R. Hambrecht + Co.:
OpenIPO: Andre F. Perold;
Gunjan Bhow
Product Number: 200019
Length: 18p
understood.
Abstract
Candace Kendle and Christopher Bergen, the CEO and COO of
Kendle International, Inc., are reviewing ways to finance the growth of
their privately-owned company. Kendle is a contract research
organization that conducts clinical drug trials for pharmaceutical and
biotechnology companies. To compete more effectively, Kendle plans
to grow through international acquisitions. It is now time to decide
whether to go ahead with a full program of two European acquisitions,
a large debt financing through Nationsbank, and an initial public
offering to repay the debt and provide cash for future acquisitions. The
falling stock prices of Kendle's competitors add pressure to the
situation.
Learning Objective: To develop skills in designing and implementing
an integrated financial and acquisition strategy.
On February 18, 2000, month-old Internet startup, Tom.com, began its
initial public offering and would open for trading on March 1 on Hong
Kong's Growth Enterprise Market. The Internet company, majority-
owned by Mr. Li Ka-shing's Cheung Kong Holdings and Hutchison
Whampoa, planned to catch the frenzy that Hong Kong's investors had
for new Internet stocks. The huge demand for Tom.com shares raised
Internet frenzy in Hong Kong to new levels reminiscent of the red chip
fever of 1997. Many of the retail investors had no idea what the
company did but were betting on the IPO being a winner largely
because of Mr. Li's clout with China. In this case, the student is asked
to serve as an investment advisor to a retail investor considering
subscribing to Tom.com's IPO. The student will provide an analysis of
the risks and opportunities of investing in Tom.com and make a
recommendation on whether the client should buy Tom.com's shares
at the offer price.
Learning Objective: Intended to highlight the complexity of pricing
Internet stocks that rarely have much of a track record for investors to
study and the irrational investing behavior of Hong Kong's small
investors.
OpenIPO is a new mechanism for pricing and distributing initial public
offerings. The system, which is based on a Dutch auction, represents
an attempt by the investment bank W.R. Hambrecht + Co. to change
the manner in which IPOs are underwritten. The case provides a
setting in which to discuss the existing set of institutional
arrangements relating to the underwriting of IPOs, including the well-
known phenomenon of the initial-day spike in price. Also provides a
vehicle for discussing the informational efficiency of stock prices and
the role of intermediaries and markets in providing investors with
company-specific information. Can be used to talk about the issues
raised by electronic trading and the distribution of securities over the
Internet to relatively uninformed individuals.

A Note on the Initial Public
Offering Process: Joshua
Lerner
Product Number: 200018
Length: 6p
Buenos Aires Embotelladora
S.A. (BAESA): A South
American Restructuring: Stuart
C. Gilson; Gustavo A. Herrero
Product Number: 202009
Length: 27p
General Property Trust: Peter
Tufano; John C. Handley
Product Number: 299098
Length: 11p
Subjects Covered: Capital markets; Electronic commerce;
Investment banking; Investment management; IPO; Stock exchanges;
Stock offerings; Underwriting
Provides an overview of the going public process.
Subjects Covered: Entrepreneurial finance; Equity financing;
Financial strategy; IPO; Venture capital
In 1998, BAESA, PepsiCo's largest bottler and distributor outside
North America, experienced severe financial difficulty and had to
restructure its debt and business operations to avoid bankruptcy or
liquidation. Based in Argentina, with operations throughout South
America, the company had for years been a spectacular success story
and media darling, until it undertook an ill-fated expansion in Brazil.
The company's debt was owed to banks and financial institutions in
South America, Asia, Europe, and the United States. In addition, the
company had $60 million of publicly traded bonds, much of them held
by U.S. investors. The restructuring was the largest and most
complicated undertaking of its kind ever taken in South America. In
addition to negotiating with its bankers and making a public exchange
offer for its bonds, the company made a massive common stock rights
offering to its shareholders, giving them the opportunity to purchase
new stock in the company. It also considered filing a "prepackaged"
Chapter 11 bankruptcy in the United States to pressure U.S.
bondholders to go along with the plan. The negotiations were greatly
complicated by differences in the bankruptcy laws of Argentina, Brazil,
and the United States.
Learning Objective: To illustrate how distressed companies choose
between formal legal bankruptcy and informal out-of-court
restructuring as alternative strategies for restructuring their debt. Also
shows how an "exchange offer" can be used to restructure widely held
public bonds. The company's attempt to use a common stock rights
offering also provides a real-world example of the "underinvestment
problem" in corporate finance. Finally, shows what kinds of factors
(conflicts among different countries' bankruptcy laws, inter-creditor
conflicts, information problems, etc.) can complicate, and potentially
disrupt, a debt restructuring.
In 1994 General Property Trust, an Australian property investment
trust, was anticipating future cash needs beyond those that the Trust
could fund with internal cash flows. The managers of the Trust were
considering a novel financing structure whereby it would sell call
options on the Trust's units. The options' structure made it likely that
they would be exercised, and therefore investors would choose to buy
the Trust's units. The managers had to determine the appropriateness
of this funding scheme in light of the Trust's alternatives and evaluate
the proposed pricing of the options that would be offered via a rights
offering.
Learning Objective: Allows the instructor to discuss the application of
cash-flow hedging, to examine the use of equity-financing strategy, to
introduce students to rights offerings, and to apply derivative-pricing
techniques to value a complex equity derivative.
A Note on Angel Financing:
Paul A. Gompers
Product Number: 298083
Length: 11p
Chapter 20 Long-Term Debt
Debt Policy at UST, Inc.: Mark
Mitchell
Product Number: 200069
Length: 14p
Teaching Note: 201002
Cox Communications, Inc.--
1999: George Chacko; Peter
Tufano
Product Number: 201003
Length: 18p
Teaching Note: 201116
First Capital Holdings Corp.:
Stuart C. Gilson; Harry
DeAngelo; Linda DeAngelo
Product Number: 296032
Length: 19p
Teaching Note: 296095
Cougars: Scott P. Mason; Mihir
Desai
Product Number: 295006
Discusses the economics of the private equity market and recent
efforts by the U.S. Small Business Administration to promote greater
angel financing.
Subjects Covered: Capital markets; Entrepreneurial finance;
Financing
Abstract
UST, Inc. is a very profitable smokeless tobacco firm with low debt vis-
a-vis other firms in the tobacco industry. The setting for the case is
UST's recent decision to substantially alter its debt policy by borrowing
$1 billion to finance its stock repurchase program.
Learning Objective: Introduction to optimal capital structure with
emphasis on calculation of interest tax shields.
Covers the decision of how much external financing a firm needs and
what securities the firm should issue to raise this financing. Cox
Communications is a major player in the cable industry, which is
consolidating due to technological changes/capabilities brought about
by the Internet. The corporate treasury of Cox Communications needs
to decide how much external financing is necessary to finance a series
of intra-industry acquisitions that Cox has recently undertaken. The
choices are plain-vanilla equity, debt, asset sales, and a new equity-
linked derivative known as FELINE PRIDES, offered by Merrill Lynch.
The treasurer and his team must make this decision facing the usual
market constraints. There are also some special constraints including
the need to maintain financial flexibility for further acquisitions and the
need to limit the dilution of Cox's largest shareholder, who owns nearly
70% of the firm.
Learning Objective: How to make long- and short-term financing
decisions, taking into account specific business conditions and risk.
The manager of a money-management firm considers whether to
invest in the securities of a large, financially troubled, California-based
life insurance holding company that holds 40% of its assets in high-
yield junk bonds. Over the past year, the value of its junk bond
portfolio has declined significantly. The insurer is seeking a large
infusion of capital from its largest (28%) shareholder--a New York-
based investment bank--that is experiencing financial difficulties of its
own. Within the last month, another large California-based insurance
company that also invested heavily in junk bonds is seized by
regulators following a "run on the bank" by concerned policyholders,
and the State Insurance Commissioner has publicly announced his
intention to "crack down" on abuses in the insurance industry.
Learning Objective: To evaluate the risks and rewards associated
with investing in the financial claims of distressed companies; to
understand the factors that give rise to a "bank run" on a bank or
insurance company; to analyze regulators' incentives to seize a
troubled financial institution; and to weigh the pros and cons of mark-
to-market accounting by regulated financial service firms.
Provides an introduction to zero coupon bonds and stripping coupon
bonds. Concerns the relationship between the spot curve, the strip
curve, and the coupon curve.
Length: 6p
Teaching Note: 295098
Chapter 21 Leasing
Financing PPL Corp.'s Growth
Strategy: Benjamin C. Esty;
Carrie Ferman
Product Number: 202045
Length: 25p
Teaching Note: 204046
Off-Balance Sheet Leases in
the Restaurant Industry: Amy P.
Hutton; Paul M. Healy; Jacob
Cohen
Product Number: 101033
Length: 15p
Kmart, Inc. and Builders
Square: Lisa Meulbroek
Jonathan Barnett
Product Number: 200044
Length: 25p
Teaching Note: 202083
A Note on the Venture Leasing
Industry: Joshua Lerner
Product Number: 294069
Subjects Covered: Bonds; Innovation; Interest rates; Pricing
Abstract
PPL Corp., an electric utility in Pennsylvania, needs to finance $1
billion of peaking plants as part of its new growth strategy. In February
2001, Steve May, director of finance for PPL's Global Division, is
responsible for recommending a finance plan. After considering all the
options, May decides that a synthetic lease is the best option, but he
must decide whether to recommend a traditional or a limited recourse
synthetic lease and how to structure the specific terms. The limited
synthetic lease, in contrast to the traditional structure, requires a
smaller corporate guarantee on the assets and has greater off-credit
treatment, which is important given the company's growth strategy and
limited debt capacity. However, finding investors willing to accept
greater project risk will cost more and take more time. The timing is an
important issue for May.
Learning Objective: 1) Shows how corporate financial managers
today must be familiar with and ready to use a wide range of financing
techniques, including corporate finance (bank loans and corporate
bonds), project finance, asset securitization, and leasing; 2) describes
various leasing structures (operating leases, capital leases, leveraged
leases, and synthetic leases) and the motivations for using them; and
3) explores the advantages and disadvantages of two kinds of
synthetic leases--the traditional and the limited recourse--and asks
students to select the more appropriate one given PPL's high-growth
strategy.
Amid mounting concern by credit agencies about off-balance sheet
liabilities, an analyst for one of the leading credit-rating agencies has
been asked to make a presentation about off-balance sheet liabilities,
the strategic analysis behind leasing versus purchasing property, and
accounting for leases.
Subjects Covered: Financial ratios; Financial statements; Leasing;
Restaurants
In 1997, Kmart received an offer from retail buyout specialists Leonard
Green & Partners for the purchase of its ailing 162-store home
improvement chain, Builders Square. Green's offer included a $10 million
cash payment, a warrant to purchase a 28% stake in the new entity in the
future, and the assumption of approximately $1.5 billion in non-cancelable
Builders Square lease obligations. Kmart would remain contingently liable
for the lease payments if the new entity were to fail. In the midst of the
fiercely competitive home improvement retail industry, the questions
posed include: 1) what is the value of the Builders Square subsidiary? 2)
is the Green offer a good deal for Kmart? and 3) should Kmart accept the
offer or hold out for a higher offer or additional buyers?
Learning Objective: To incorporate off-balance-sheet financing of
operating lease guarantees into a valuation exercise (using multiples and
the APV approach) focused on a money-losing subsidiary.
Provides an overview of venture leasing, an innovative financing
mechanism that resembles both venture equity investments and bank
lending.
Length: 13p
Aloha Airlines, Inc.: A Leasing Discusses the decision of whether to lease or buy aircraft at Aloha
Decision: George G.C. Parker
Product Number: F240
Length: 15p
PART VI: OPTIONS, FUTURES, AND CORPORATE FINANCE
Chapter 22 Options and
Corporate Finance
And
Chapter 23 Options and
Corporate Finance:
Extensions and Applications
Cephalon, Inc.: Peter Tufano;
Geoffrey Verter; Markus F.
Mullarkey
Product Number: 298116
Length: 18p
Keller Fund’s Option Investment A closed-end mutual fund's decision to study option trading provides
Strategies: W. Carl Kester
Product Number: 295096
Length: 5p
Teaching Note: 298013
Arundel Partners: The Sequel
Project: Timothy A. Luehrman;
William A. Teichner
Product Number: 292140
Length: 19p
Teaching Note: 295118
Chapter 24 Warrants and
Convertibles
Goldman, Sachs & Co.: Nikkei
Put Warrants--1989: Peter
Tufano
Subjects Covered: Entrepreneurial finance; Financial planning;
Leasing; Venture capital
Airlines in Hawaii.
Subjects Covered: Airlines; Capital budgeting; Capital costs;
Financing; Leasing
Abstract
In early 1997, Cephalon, Inc. awaited an FDA panel's decision on
whether its drug, Myotrophin, would be approved. If the drug was
approved, the firm might need substantial additional funds to
commercialize the drug as well as to buy back rights to it (which had
been sold earlier to finance its development). The firm's CFO is
considering a variety of financing strategies, including buying call
options on the firm's own stock and paying for these options by issuing
shares at the current time.
Learning Objective: To introduce students to the use of equity
derivatives as part of a risk management strategy, examines the
application of cash-flow hedging in a corporate context, and examines
the pricing of a derivative security with large jump risk.
an opportunity to study the profit profile and pricing of multiple option
investment strategies (e.g., buy a call, buy a put, write a call, buy
stock-write call, etc.). This case is designed to provide students with
an introduction to option pricing.
Subjects Covered: Derivatives; Investment management; Mutual
funds; Option pricing; Risk management; Securities
A group of investors is considering buying the sequel rights for a
portfolio of feature films. They need to determine how much to offer to
pay and how to structure a contract with one or more major U.S. film
studios. The case contains cash flow estimates for all major films
released in the United States during 1989. These data are used to
generate estimates of the value of sequel rights prior to the first film's
release. Designed to introduce students to real options and techniques
for valuing them. It clearly illustrates the power of option pricing
techniques for certain types of capital budgeting problems. Also
illustrates the practical limitations of such techniques.
Subjects Covered: Capital budgeting; Decision trees; Entertainment
industry; Option pricing; Real options; Securities analysis; Uncertainty
Abstract
Japanese financial institutions' willingness to sell put options on the
Nikkei Stock Average provides investment banks with the raw material
from which to create a security that would allow U.S. investors to bet on
Product Number: 292113
Length: 16p
Teaching Note: 296067
Coca-Cola Harmless Warrants:
Scott P. Mason; Mihir Desai
Product Number: 295007
Length: 4p
Teaching Note: 295099
GetConnected: Jay O. Light;
Dan J. Green
Product Number: 201010
Length: 17p
Jupiter Management Co.:
Ronald W. Moore
Product Number: 292107
Length: 24p
Teaching Note: 298023
Chapter 25 Derivatives and
Hedging Risk
Introduction to Derivative
Instruments
(HBS background note): W. Carl
Kester; Kendall Backstrand
Product Number: 295141
Length: 23p
Futures on the Mexican Peso:
Kenneth A. Froot; Matthew
McBrady; Mark Seasholes
Product Number: 296004
Length: 22p
Alcoma: The Strategic Use of
Frozen Concentrated Orange
Juice Futures: Ray A. Goldberg;
Phil Herndon; Kate Morris
Product Number: 595029
Length: 40p
Interest Rate Derivatives
(HBS background note): Peter
Tufano; Jonathan S. Headley
Product Number: 294095
Length: 11p
Teaching Note: 296063
falls in the Japanese Stock Market. The investment bank that seeks to
create this new product must decide how to design, produce (hedge),
and price the options (Nikkei Put Warrants). Highlights the global nature
of new product development in the securities market and provides
opportunities for students to make and critique the key decisions
involved in creating this new product. Students must consider the costs
of production, the preferences of consumers, competitive dynamics, and
the pricing of substitutes for the new product.
Subjects Covered: Capital markets; Hedging; Investment banking;
Product design; Product introduction; Securities
Underscores the arbitrage implicit in the pricing of a complex unit of
debt and warrants issued by the Coca-Cola Co.
Subjects Covered: Beverages; Bonds; Innovation; Pricing
An embryonic Internet-based telecom marketing firm considers its first
(seed) round of funding. They are choosing between a fixed price
round and a discounted convertible round.
Learning Objective: To discuss fixed price vs. floating price seed
financing.
The manager of a small company growth fund considers relative
merits of investing in a company's convertible debt versus its common.
Subjects Covered: Investment management; Mutual funds; Portfolio
management
Abstract
Provides an elementary introduction to three major classes of
derivative instruments: options, forwards and futures, and swaps.
Subjects Covered: Commodity markets; Derivatives; Securities
The Chicago Mercantile Exchange needs to decide how to design, and
whether and when to introduce, a futures contract on the Mexican
peso.
Subjects Covered: Commodity markets; Country analysis; Foreign
exchange rates; International finance; Mexico; Money; Money markets
Increases in orange tree production led to an orange juice surplus.
How does one manage price risk in the orange juice industry under
these conditions?
Subjects Covered: Agribusiness; Commodity markets; Hedging; Risk
management
Introduces and explains the six major interest rate derivative products:
swaps, forward rate agreements, Eurodollar futures, bond options,
caps/floors/collars, and swap options.
Learning Objective: Provides students with an introductory
knowledge of the basic interest rate derivative instruments used in the
market today. It will walk students through both the cash flows

Risk Management at Apache:
Lisa Meulbroek; Puja Malhotra revisiting its decision to determine if hedging is value-adding. This
Product Number: 201113
Length: 24p
Teaching Note: 202019
PART VII: SHORT-TERM FINANCE
Chapter 26 Short-Term
Finance and Planning
Cash Management Practices in
Small Companies
(HBS background note): H.
Kent Bowen; Andrew R. Jassy;
Laurence E. Katz; Kevin Kelly;
Baltej Kochar
Product Number: 699047
Length: 8p
Dell's Working Capital: Richard
S. Ruback; Aldo Sesia
Product Number: 201029
Length: 7p
Teaching Note: 201017
Dynashears, Inc.: Thomas R.
Piper
Product Number: 292017
Length: 8p
Teaching Note: 292018
Toy World, Inc.: W. Carl Kester
involved and the institutional differences between each of the
instruments.
After initiating a hedging strategy, Apache Corp. is interested in
case investigates how the company initially decided to hedge against
commodity price risk and how it implemented its hedging practice.
Also examines when financial theory argues hedging is value-adding.
Learning Objective: To determine when a company should hedge.
Abstract
Most small business managers claim that cash management is their
leading concern. Often walking a tightrope between growth and
illiquidity, small business managers face different cash management
challenges than their counterparts in larger companies. Compared to
larger firms, small businesses often have under-staffed and under-
trained accounting staffs, volatile cash flows dependent on a single
product line, limited access to new capital, and a significant share of
their net worth tied up in working capital. These limitations are often
compounded by management's focus on growth, which can put
additional pressure on the cash management system by increasing net
working capital requirements.
Learning Objective: To provide managers with a broader universe of
specific techniques used by small businesses to manage cash. Uses
the following three-part model of cash management systems for a
discussion of best practices: 1) cash cycle policies and tactics, 2)
forecasting and preview processes, and 3) organizational design and
incentive systems.
Dell Computer Corp. manufactures, sells, and services personal
computers. The company markets its computers directly to its
customers and builds computers after receiving a customer order. This
build-to-order model enables Dell to have much smaller investment in
working capital than its competitors. It also enables Dell to more fully
enjoy the benefits of reduction in component prices and to introduce
new products more quickly. Dell has grown quickly and has been able
to finance that growth internally by its efficient use of working capital
and its profitability. This case highlights the importance of working
capital management in a rapidly growing firm.
Subjects Covered: Capital; Computer industry; Financial
management
A senior loan officer is reviewing the recent performance of a company
that has failed to repay its loan as scheduled. The failure results from
a cyclical downturn in sales, coupled with a lag in cutting back
production. Inventory risk is minimal. Teaching objective: Practice in
financial analysis and in understanding the impact of business cycle
on durable goods companies. Also an opportunity to evaluate the
situation from a lender's perspective.
Subjects Covered: Financial analysis; Financial planning; Loan
evaluation; Tools
A shift from seasonal to level production of toys will change the
Product Number: 295073
Length: 6p
Teaching Note: 297118
Chapter 27 Cash Management
Cash Management Practices in
Small Companies
(HBS background note): H.
Kent Bowen; Andrew R. Jassy;
Laurence E. Katz; Kevin Kelly;
Baltej Kochar
Product Number: 699047
Length: 8p
Chapter 28 Credit
Management
First American Bank: Credit
Default Swaps: George Chacko;
Eli Peter Strick
Product Number: 203033
Length: 18p
Teaching Note: 203101
Collateralized Loan Obligations
and the Bistro Trust: Kenneth A.
Froot; Ivan Farman
Product Number: 299016
Length: 27p
Wiegandt GmbH Cologne:
Dwight B. Crane; Mathew
Mateo Millett
Product Number: 298159
Length: 8p
SureCut Shears, Inc.: W. Carl
Kester
Product Number: 297013
Length: 8p
Teaching Note: 297079
seasonal cycle of Toy World's working capital needs and necessitate
new bank credit arrangements. Students must analyze the company's
performance, forecast funds needs, and make a recommendation.
Learning Objective: To introduce the pattern of current assets and
cash flows in a seasonal company and provide an elementary exercise
in the construction of pro forma financial statements and estimation of
funds needs.
Abstract
Most small business managers claim that cash management is their
leading concern. Often walking a tightrope between growth and
illiquidity, small business managers face different cash management
challenges than their counterparts in larger companies. Compared to
larger firms, small businesses often have under-staffed and under-
trained accounting staffs, volatile cash flows dependent on a single
product line, limited access to new capital, and a significant share of
their net worth tied up in working capital. These limitations are often
compounded by management's focus on growth, which can put
additional pressure on the cash management system by increasing net
working capital requirements.
Learning Objective: To provide managers with a broader universe of
specific techniques used by small businesses to manage cash. Uses
the following three-part model of cash management systems for a
discussion of best practices: 1) cash cycle policies and tactics, 2)
forecasting and preview processes, and 3) organizational design and
incentive systems.
Abstract
Discusses a bank's ability to manage its credit exposure to a particular
client using credit default swaps.
Learning Objective: To give students basic understanding of credit
risk and credit derivative mechanics.
Examines a large bank trying to protect itself from the risks and capital
requirement created by its loan portfolio. Considers a variety of ways
available to the firm to offload the risks.
Learning Objective: Credit risk management.
The credit department of Wiegandt, a furniture manufacturer, is
evaluating the financial condition of two stores that retail the
company's furniture.
Learning Objective: Provides an opportunity to teach basic financial
analysis and to discuss the trade credit policy of companies.
A bank loan officer must determine whether to waive convenants and
extend terms on a line of credit granted to SureCut Shears. At issue is
whether the inability of SureCut to pay down its line of credit is due to
a temporary cyclical downturn or other long-term financial problems.
Learning Objective: To expose students to the impact of a cyclical
downturn on financial performance, and to provide practice in

PART VIII: SPECIAL TOPICS
Chapter 29 Mergers and
Acquisitions
Provident Life and Accident
Insurance: The Acquisition of
Paul Revere: Mihir Desai; Mark
Veblen; Frank Williamson
Product Number: 202044
Length: 21p
Teaching Note: 202046
PepsiCo's Bid for Quaker Oats
(A): Carliss Y. Baldwin; Leonid
Soudakov
Product Number: 801458
Length: 25p
Radio One, Inc.: Richard S.
Ruback; Pauline Fischer
Product Number: 201025
Length: 15p
Teaching Note: 201027
modeling business cycles in pro forma forecasts.
Abstract
Provident Life & Accident Insurance Co. has made an initial bid to
acquire a primary competitor, Paul Revere, from conglomerate,
Textron. The due diligence process uncovers a significant block of
problematic disability insurance policies. Provident is forced to assess
the negative impact of this discovery on its initial valuation and revise
its bid. In the process, the divergent views of the evolution of these
policies by the bidder and seller have to be translated through
discounted cash flow analysis into appropriate bid prices. Finally, this
DCF analysis, in combination with multiples analysis, is used in
negotiations with Textron and public shareholders.
Learning Objective: Provides a platform for: 1) introducing students
to the insurance industry by examining how insurers pool risks,
incorporate asymmetric information in pricing and designing their
policies, manage these risks by investing assets over time, and how
this industry reports financial results to investors; 2) demonstrating
discounted cash flow analysis and multiples analysis in the insurance
industry; and 3) discussing negotiation dynamics in an M&A situation
involving a large majority shareholder and a minority public float and
divergent views of future expected cash flows.
Throughout 1999, PepsiCo closely tracked several potential strategic
acquisitions. In the fall of 2000, it appeared that the right moment for an
equity-financed acquisition had arrived. At this time, PepsiCo
management decided to initiate confidential discussions with The
Quaker Oats Co. about a potential business combination. Gatorade, a
key brand in Quaker's portfolio, had long been on PepsiCo's wish list,
but PepsiCo's managers, led by CEO Roger Enrico and CFO Indra
Nooyi, were committed to upholding the value of PepsiCo's shares and,
as a result, were determined not to pay too much for Quaker. This case
provides information that allows students: 1) to assess the value of
Quaker's businesses, 2) to estimate potential synergies associated with
a Pepsi-Quaker merger, and 3) to come up with an effective negotiation
strategy.
Learning Objective: Valuation of a multidivisional business in support
of an M&A bid, structuring a stock-for-stock offer, and negotiation of the
acquisition of a public company.
Radio One (NYSE: ROIA and RIOAK), the largest radio group
targeting African-Americans in the country, had the opportunity to
acquire 12 urban stations in the top 50 markets from Clear Channel
Communications, Inc. (NYSE: CCU) in the winter of 2000. The stations
were being sold by Clear Channel Communications, Inc. to obtain
Federal Communications Commission (FCC) approval for its
acquisition of AMFM, Inc. (NYSE: AFM). Radio One was also
negotiating the acquisition of nine stations in Charlotte, NC; Augusta,
GA; and Indianapolis, ID. The proposed acquisitions would double the
size of Radio One. The case focuses on the strategic and financial
evaluation of the proposed acquisitions.

The Acquisition of Consolidated
Rail Corp. (A): Benjamin C.
Esty; Mathew Mateo Millett
Product Number: 298006
Length: 17p
Teaching Note: 298087
B case available
Microsoft/Intuit: William E.
Fruhan Jr.
Product Number: 295121
Length: 20p
Teaching Note: 297087
Chapter 30 Financial Distress
The Loewen Group, Inc.: Stuart
C. Gilson; Jose Camacho
Product Number: 201062
Length: 24p
Iridium LLC: Benjamin C. Esty;
Fuaad A. Qureshi; William
Olsen
Product Number: 200039
Length: 21p
Teaching Note: 200050
Learning Objective: Provides students the opportunity to forecast the
cash flows associated with the proposed acquisitions and to value
those projections using discounted cash flows as well as transaction
and trading multiples.
On October 15, 1996, Virginia-based CSX Corp. and Pennsylvania-
based Consolidated Rail Corp. (Conrail), the first and third largest
railroads in the Eastern United States, announced their intent to merge
in a friendly deal worth $8.3 billion. This deal was part of an industry-
wide trend toward consolidation and promised to change the
competitive dynamics of the Eastern rail market. Students, as
shareholders, must decide whether to tender shares into the front-end
of a two-tiered acquisition offer. To make this decision, they must
value Conrail as an acquisition target and understand the structure of
CSX's offer.
Learning Objective: Provides an opportunity to value a large-scale
acquisition using comparable transactions and discounted merger
synergies. In addition, it illustrates the mechanics of a two-tiered offer
and provides a vehicle to discuss various anti-takeover provisions
including poison pills, lock-up options, break-up fees, and no-talk
clauses.
Microsoft Corp. proposes to acquire Intuit Corp. The case examines the
strategic fit and the price proposed to complete the transaction.
Learning Objective: Valuation and implementing a business strategy.
Abstract
A publicly-traded funeral home and cemetery consolidator faces
imminent financial distress. The company has aggressively grown
through use of debt. Restructuring the debt is potentially very costly to
creditors, shareholders, suppliers, and other corporate stakeholders.
Cross-border and accounting issues potentially complicate the
restructuring.
Learning Objective: To illustrate the costs of debt, financial distress,
basic restructuring options, and determinants of capital structure.
Part of a module on financing large projects in the elective curriculum
course entitled "Large-Scale Investment." Set in August 1999, just
after Iridium, a global communications firm, declared bankruptcy.
While the case describes Iridium's creation, development, and
commercial launch, it concentrates primarily on the firm's financial
strategy and execution as it raised more than $5 billion of capital.
Describes the specific securities Iridium issued, the sequence in which
it issued them, and the firm's financial performance prior to
bankruptcy. Using analyst forecasts, students can value the firm prior
to bankruptcy, but will recognize how difficult it is to value technology
start-ups given the uncertainty in demand.
Learning Objective: Intended to challenge existing theories of capital
structure: is Iridium's target capital structure of 60% debt optimal?
Helps students understand the benefits and limitations of issuing
different kinds of securities (e.g. cash-pay vs. zero coupon bonds,
bank debt vs. public bonds, etc.) and the complexity of sequencing

TWA: The Second Bankruptcy:
Mary E. Barth; Nese Yildiz
Product Number: A178
Length: 25p
Infinity Carpets, Inc.: Thomas R.
Piper; Ronald W. Moore
Product Number: 299014
Length: 14p
Bankruptcy and Restructuring at
Marvel Entertainment Group:
Benjamin C. Esty; Jason S.
Auerbach
Product Number: 298059
Length: 18p
Teaching Note: 298028
different kinds of securities. The overall objective is to help students
understand the relevant issues in financing large, greenfield projects.
In May 1995, about 19 months after emerging from the Chapter 11
bankruptcy it filed in 1993, Trans World Airlines issued a proxy
statement to seek the consent of its shareholders and certain creditors
for another debt restructuring plan. The prospectus contained two
plans of financial organization: one for an out-of-court restructuring,
and the other for a "prepackaged" Chapter 11 bankruptcy. The
exchange offers in the two plans were virtually identical, but the
prepackaged restructuring plan required a lower acceptance rate.
Under the plan, the creditors of TWA would forgive a substantial
amount of the company's debt in exchange for stock, other equity
instruments, and revised terms on remaining debt. The creditors would
own about 70% of the reorganized company and the common
shareholders, mostly employees, would see their stake in the airline
shrink to about 30% from 45%. Adam Chandler, a holder of TWA's 8%
secured notes, read the proxy with interest. He needed to decide how
to cast his vote--for or against the troubled carrier's reorganization
proposals. Was TWA worth more as a going concern than it would be
if its assets were liquidated? What were its assets really worth? Would
the company's performance match management's projections? Would
TWA's financial results be sufficient to support an increased equity
valuation post bankruptcy, or should Chandler try to thwart the deal in
the hopes of obtaining a larger debt component to his restructured
claim?
Subjects Covered: Airlines; Bankruptcy; Debt management;
Reorganization
A turnaround expert must determine whether a firm in distress is worth
more as a going concern than its liquidation value. If so, the finances
of the firm must be restructured consistent with the bargaining power
of the holders of the various securities. The restructuring requires a
delay in principal repayment, rate concessions, and a debt-for-equity
swap.
Learning Objective: Restructuring of firms in financial distress.
Marvel Entertainment Group is the leading comic book publisher in the
country with superheros like Spider-Man, The Incredible Hulk, The X-
Men, and Captain America. It is also one of the leading manufacturers
of sports and entertainment trading cards under the Fleer and Sky Box
brand names. In the mid 1990s, it experienced sharp declines in both
businesses causing it to file for bankruptcy in December 1996. This
case is set in late January 1997, shortly after Marvel filed its
reorganization plan with the bankruptcy court and approximately one
month before creditors will have to vote on the plan at the confirmation
hearing. Pits two of the most prominent raiders of the 1980s against
each other for control of the company. On one side is Ronald
Perelman, who controls Marvel through his MacAndrews & Forbes
holding company. On the other side is Carl Icahn, who controls 25% of
Marvel's public debt. Icahn and the other bondholders must decide
whether to accept Perelman's plan, to reject it in favor of their own
plan, or to sell their bonds before the confirmation hearing. Perelman
must decide whether to change the plan in response to the

Sunbeam Oster Co., Inc.:
Steven R. Fenster; Paul J.
Reiferson
Product Number: 291052
Length: 23p
Teaching Note: 293046
Chapter 31 International
Corporate Finance
Foreign Direct Investment
(HBS background note): Laura
Alfaro; Esteban Clavell
Product Number: 703018
Length: 10p
Malaysia: Capital and Control:
Rawi Abdelal; Laura Alfaro
Product Number: 702040
Length: 31p
Teaching Note: 703020
CSFB's China Unicom Incident:
Michael J. Enright ; Vincent Mak
Product Number: HKU187
Length: 20p
Teaching Note: HKU217
debtholders threats or to wait and see what happens at the hearing.
Learning Objective: This case has four objectives: 1) Provides an
opportunity to value a Chapter 11 restructuring plan; 2) illustrates
debtholder/equityholder incentive conflicts in a distress setting; 3)
raises the issue of whether insider-trader in debt instruments,
specifically junior debt in a distress situation, should be illegal; and 4)
illustrates the role played by vulture investors in Chapter 11
restructurings. A rewritten version of another case.
Japonica Partners, an investment firm, is trying to determine whether
there is any unseen value in Sunbeam Oster Co., Inc., a Chapter 11
debtor. If there is, Japonica must consider the means by which they
can acquire control of a company in Chapter 11.
Subjects Covered: Acquisitions; Appliances; Bankruptcy; Consumer
goods; Household products; Liquidation; Reorganization
Abstract
Briefly reviews motivations and trends behind foreign direct investment
and multinational corporations as well as the policy debate that
surrounds them.
Subjects Covered: Business government relations; Economic
development; Foreign exchange; Government policy; International
banking; International finance; Investments; Multinational corporations;
Policy making
On September 1, 1998 the government of Malaysia imposed currency
and capital controls in response to the financial crisis that had swept
Asia. The controls sparked an enormous controversy in the world of
international finance. Some celebrated the controls for insulating the
Malaysian economy from the unstable international financial system.
Others criticized the controls for trapping investors and allowing the
government to protect the interests of "cronies." This debate also
raised the central question about the future of the international
financial architecture: What is the appropriate balance between
financial market freedom and government discretion in the
management of the global economy?
Learning Objective: The political economy of capital controls in
Malaysia during the Asian financial crisis.
In August 2001, Credit Suisse First Boston (CSFB), a major
international investment bank, was removed from the foreign
underwriting team that would handle a pending share offering for
China Unicom Group Ltd., the second largest telecommunications
company in the Chinese Mainland. Only two months earlier, CSFB
was designated to deal with the U.S. portion of that offering. However,
after the bank hosted overseas investment "road shows" attended by
senior government officials from Taiwan (including the finance
minister), it was officially dropped from the China Unicom underwriter
list. The incident provoked criticism from governments in the United
States and Taiwan and widespread activity in investment banking
circles as several other banks dropped plans to host road shows for
Taiwan.
Learning Objective: To teach how business decisions may become

JAFCO American Ventures,
Inc.: Building a Venture Capital
Firm: Walter Kuemmerle; Chad
Ellis
Product Number: 899099
Length: 22p
Teaching Note: 899305
The Chad-Cameroon Petroleum
Development and Pipeline
Project (A): Benjamin C. Esty
Carrie Ferman
Product Number: 202010
Length: 22p
Teaching Note: 202032
B case available
caught up in political difficulties and how companies need to formulate
strategies and policies to address such issues.
Describes the second attempt at entry of JAFCO, a large Japanese
venture capital firm, into the U.S. venture capital market. The U.S.
subsidiary, JAFCO America Ventures, is in the midst of a challenging
turnaround. Going forward, the U.S. subsidiary's leadership needs to
make a number of important decisions regarding investment focus,
deal flow generation, compensation, and cooperation with the
Japanese parent company.
Learning Objective: Introduction to venture capital operations,
strategy and focus of venture capital firms, and managing global
private equity firms.
On June 6, 2000, the World Bank's and IFC's board of directors was
scheduled to vote on whether to approve funding for the $4 billion
Chad-Cameroon Petroleum Development and Pipeline project.
Although the project presented a unique opportunity to alleviate
poverty in Chad, one of the poorest countries in the world, Chad had a
president who had been described as a "warlord" and a history of civil
war and oppression. This case describes the project, the setting, and
the World Bank's reasons for participating in the deal--mainly an
opportunity to alleviate poverty, enforce environmental standards, and
minimize the impact on indigenous people. Also describes the very
public and very ardent opposition to the project's environmental,
social, and revenue management policies. Faced with a high-risk, but
potentially high-return opportunity to improve conditions in Chad,
students, as the directors, must decide whether to approve funding for
the deal.
Learning Objective: Illustrates not only the complexity of negotiating
very large deals between public and private entities, but also the
opportunity inherent in large-scale investment. Students must assess
whether the benefits received by the host countries are commensurate
with the risks they bear. This discussion raises critical ethical issues
related to investment in development countries. With regard to project
finance, the case illustrates the difference between project and
corporate finance and shows that risk sharing and risk mitigation are
motivations for using project finance.