finance case study
Finance case study.
You have to do the CASE 1: WARREN BUFFETT from attachment. The case is in page 54 to 73.
In this case, you are going to do a qualitative evaluation of the decision to acquire PacifiCorp. You don’t have to do any calculations, but use the all the data and numbers given in the exhibits. Your case report should include analysis and answers to the following:
1. What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp?
2. Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range?
3. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value? As an alternative, the instructor could suggest that students perform a simple discounted cash-flow (DCF) analysis.
4. How well has Berkshire Hathaway performed? How well has it performed in the aggregate? What about its investment in MidAmerican Energy Holdings?
5. What is your assessment of Berkshire’s investments in Buffett’s Big Four: American Express, Coca-Cola, Gillette, and Wells Fargo?
6. From Warren Buffett’s perspective, what is the intrinsic value? Why is it accorded such importance? How is it estimated? What are the alternatives to intrinsic value? Why does Buffett reject them?
7. Critically assess Buffett’s investment philosophy. Be prepared to identify points where you agree and disagree with him.
8. Should Berkshire Hathaway’s shareholders endorse the acquisition of PacifiCorp?
Be sure to read the case very carefully. Read all footnotes, endnotes, tables, exhibits, etc. This requirement applies to all case studies. Try to determine what all the numbers are telling you about the valuation of the company and the purchase price.
Conditions; the case report I recommend you use the following general format.
1. Introduction: (a) to the case (b) the problem or situation (c) the people involved (when applicable). This should be a few paragraphs (as needed).
2. Analysis: Most cases will require both quantitative and qualitative analysis. You must show step by step, all formulas used, and all calculations performed. If you like, some of the details can be moved to the appendix. Spreadsheets should be uploaded as separate documents. It is not enough just to do the number crunching. You must explain and interpret all your analysis.
3. Conclusions: Some cases require you to make recommendations. You will have to justify them with the appropriate arguments and calculations. You can also write here any additional things you recommend the company should do or look at.
Case Studies in Finance links managerial decisions to capital markets and the expectations of
investors. At the core of almost all of the cases is a valuation task that requires students to look to
financial markets for guidance in resolving the case problem. These cases also invite students to apply
modern information technology to the analysis of managerial decisions. In the Seventh Edition, 25%
of the cases are new with many dating from 2011–2012, ensuring that your students are learning
from the most relevant and current sources.
Visit the Online Learning Center at www.mhhe.com/bruner7e to see a complete list of changes
to the Seventh Edition and to access study and teaching tools.
Bruner Ea des Schill
Case Studies
in Finance
managing for corporate value creation
seventh edition
Bruner
Eades
Schill Case Studies in Finance managing for corporate value creation
seventh
edition
MD DALIM #1218056 12/10/12 CYAN MAG YELO BLK
Case Studies
in Finance
Managing for
Corporate Value
Creation
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page i
ii Part One Part Title
ii
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page ii
Case Studies in
Finance
Managing for
Corporate Value
Creation
Seventh Edition
Robert F. Bruner
Kenneth M. Eades
Michael J. Schill
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page iii
CASE STUDIES IN FINANCE: MANAGING FOR CORPORATE VALUE CREATION, SEVENTH EDITION
Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the
Americas, New York, NY, 10020. Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights
reserved. Printed in the United States of America. Previous editions © 2002, 1989, and 1975.
No part of this publication may be reproduced or distributed in any form or by any means, or stored
in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies,
Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast
for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the
United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 DOC/DOC 1 0 9 8 7 6 5 4 3
ISBN 978-0-07-786171-1
MHID 0-07-786171-X
Senior Vice President, Products & Markets: Kurt L. Strand
Vice President, Content Production & Technology Services: Kimberly Meriwether David
Managing Director: Douglas Reiner
Executive Brand Manager: Charles Synovec
Developmental Editor II: Jennifer Lohn
Executive Marketing Manager: Melissa Caughlin
Editorial Coordinator: Casey Rasch
Director, Content Production: Terri Schiesl
Senior Project Manager: Lisa A. Bruflodt
Buyer: Nichole Birkenholz
Media Project Manager: Prashanthi Nadipalli
Cover Design: Studio Montage, St. Louis, MO
Cover Image: Alija/Getty Images
Typeface: 10/12 Times
Compositor: Cenveo Publisher Services
Printer: R. R. Donnelley
Library of Congress Cataloging-in-Publication Data
Bruner, Robert F., 1949-
Case studies in finance : managing for corporate value creation / Robert F. Bruner, Kenneth M. Eades,
Michael J. Scholl.––Seventh Edition.
pages cm
Includes index.
ISBN-13: 978-0-07-786171-1 (alk. paper)
ISBN-10: 0-07-786171-X (alk. paper)
1. Corporations––Finance––Case studies. 2. International business enterprises––Finance––Case studies.
I. Eades, Ken M. II. Schill, Michael J. III. Title.
HG4015.5.B78 2013
658.15––dc23 2012046392
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website
does not indicate an endorsement by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the
accuracy of the information presented at these sites.
www.mhhe.com
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page iv
The McGraw-Hill/Irwin Series in Finance,
Insurance and Real Estate
Stephen A. Ross
Franco Modigliani Professor of Finance and Economics
Sloan School of Management
Massachusetts Institute of Technology
Consulting Editor
FINANCIAL MANAGEMENT
Block, Hirt, and Danielsen
Foundations of Financial Management
Fourteenth Edition
Brealey, Myers, and Allen
Principles of Corporate Finance
Eleventh Edition
Brealey, Myers, and Allen
Principles of Corporate Finance, Concise
Second Edition
Brealey, Myers, and Marcus
Fundamentals of Corporate Finance
Seventh Edition
Brooks
FinGame Online 5.0
Bruner, Eades, and Schill
Case Studies in Finance: Managing for
Corporate Value Creation
Seventh Edition
Cornett, Adair, and Nofsinger
Finance: Applications and Theory
Second Edition
Cornett, Adair, and Nofsinger
M: Finance
Second Edition
DeMello
Cases in Finance
Second Edition
Grinblatt (editor)
Stephen A. Ross, Mentor: Influence
through Generations
Grinblatt and Titman
Financial Markets and Corporate Strategy
Second Edition
Higgins
Analysis for Financial Management
Tenth Edition
Kellison
Theory of Interest
Third Edition
Ross, Westerfield, and Jaffe
Corporate Finance
Tenth Edition
Ross, Westerfield, Jaffe, and Jordan
Corporate Finance: Core Principles
and Applications
Third Edition
Ross, Westerfield, and Jordan
Essentials of Corporate Finance
Eighth Edition
Ross, Westerfield, and Jordan
Fundamentals of Corporate Finance
Tenth Edition
Shefrin
Behavioral Corporate Finance: Decisions
that Create Value
First Edition
White
Financial Analysis with an
Electronic Calculator
Sixth Edition
bru6171X_fm_i-l.qxd 12/18/12 5:52 PM Page v
INVESTMENTS
INTERNATIONAL FINANCE
Bodie, Kane, and Marcus
Essentials of Investments
Ninth Edition
Bodie, Kane, and Marcus
Investments
Ninth Edition
Hirt and Block
Fundamentals of Investment
Management
Tenth Edition
Jordan, Miller, and Dolvin
Fundamentals of Investments:
Valuation and Management
Sixth Edition
Stewart, Piros, and Heisler
Running Money: Professional
Portfolio Management
First Edition
Sundaram and Das
Derivatives: Principles and Practice
First Edition
FINANCIAL INSTITUTIONS AND MARKETS
Rose and Hudgins
Bank Management and
Financial Services
Ninth Edition
Rose and Marquis
Financial Institutions and Markets
Eleventh Edition
Saunders and Cornett
Financial Institutions Management: A
Risk Management Approach
Seventh Edition
Saunders and Cornett
Financial Markets and Institutions
Fifth Edition
Eun and Resnick
International Financial
Management
Sixth Edition
REAL ESTATE
Brueggeman and Fisher
Real Estate Finance and Investments
Fourteenth Edition
Ling and Archer
Real Estate Principles: A Value
Approach
Fourth Edition
FINANCIAL PLANNING AND INSURANCE
Allen, Melone, Rosenbloom,
and Mahoney
Retirement Plans: 401(k)s, IRAs,
and Other Deferred Compensation Approaches
Tenth Edition
Altfest
Personal Financial Planning
First Edition
Harrington and Niehaus
Risk Management and Insurance
Second Edition
Kapoor, Dlabay, and Hughes
Focus on Personal Finance: An
Active Approach to Help You Develop
Successful Financial Skills
Fourth Edition
Kapoor, Dlabay, and Hughes
Personal Finance
Tenth Edition
Walker and Walker
Personal Finance: Building
Your Future
First Edition
bru6171X_fm_i-l.qxd 12/18/12 5:52 PM Page vi
vii
In dedication to
our wives
Barbara M. Bruner
Kathy N. Eades
Mary Ann H. Schill
and to our children
Dedication
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page vii
Robert F. Bruner is Dean of the Darden Graduate School of Business Administration,
Distinguished Professor of Business Administration and Charles C. Abbott Professor of
Business Administration at the University of Virginia. He has taught and written in
various areas, including corporate finance, mergers and acquisitions, investing in emerging
markets, innovation, and technology transfer. In addition to Case Studies in Finance,
his books include Finance Interactive, multimedia tutorial software in Finance (Irwin/
McGraw-Hill 1997), The Portable MBA (Wiley 2003), Applied Mergers and Acquisitions,
(Wiley, 2004), Deals from Hell: M&A Lessons that Rise Above the Ashes (Wiley, 2005)
and The Panic of 1907 (Wiley, 2007). He has been recognized in the United States and
Europe for his teaching and case writing. BusinessWeek magazine cited him as one of
the “masters of the MBA classroom.” He is the author or co-author of over 400 case
studies and notes. His research has been published in journals such as Financial Management,
Journal of Accounting and Economics, Journal of Applied Corporate Finance,
Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and
Journal of Money, Credit, and Banking. Industrial corporations, financial institutions, and
government agencies have retained him for counsel and training. He has been on the
faculty of the Darden School since 1982, and has been a visiting professor at various
schools including Columbia, INSEAD, and IESE. Formerly he was a loan officer and
investment analyst for First Chicago Corporation. He holds the B.A. degree from Yale
University and the M.B.A. and D.B.A. degrees from Harvard University. Copies of his
papers and essays may be obtained from his website, http://www.darden.virginia.edu/
web/Faculty-Research/Directory/Full-time/Robert-F-Bruner/. He may be reached via
email at brunerr@virginia.edu.
About the Authors
Kenneth M. Eades is Professor of Business Administration and Area Coordinator of the
Finance Department of the Darden Graduate School of Business Administration at the
University of Virginia. He has taught a variety of corporate finance topics including: capital
structure, dividend policy, risk management, capital investments and firm valuation. His
research interests are in the area of corporate finance where he has published articles in The
Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative
Analysis, and Financial Management. In addition to Case Studies in Finance, his books
include The Portable MBA (Wiley 2010) Finance Interactive, a multimedia tutorial software
in Finance (Irwin/McGraw-Hill 1997) and Case Studies in Financial Decision Making (Dryden
Press, 1994). He has written numerous case studies as well as a web-based, interactive
tutorial on the pricing of financial derivatives. He has received the Wachovia Award for
Excellence in Teaching Materials and the Wachovia Award for Excellence in Research. Mr.
Eades is active in executive education programs at the Darden School and has served as a
consultant to a number of corporations and institutions; including many commercial banks
and investment banks; Fortune 500 companies and the Internal Revenue Service. Prior to
joining Darden in 1988, Professor Eades was a member of the faculties at The University
viii
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page viii
ix
of Michigan and the Kellogg School of Management at Northwestern University. He has a
B.S. from the University of Kentucky and Ph.D. from Purdue University. His website is
http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Kenneth-MEades/
and he may be reached via email at eades@virginia.edu.
Michael J. Schill is Associate Professor of Business Administration of the Darden
Graduate School of Business Administration at the University of Virginia where he
teaches corporate finance and investments. His research spans empirical questions in
corporate finance, investments, and international finance. He is the author of
numerous articles that have been published in leading finance journals such as Journal
of Business, Journal of Finance, Journal of Financial Economics, and Review of
Financial Studies, and cited by major media outlets such as The Wall Street Journal.
Some of his recent research projects investigate the market pricing of firm growth and
the corporate gains to foreign stock exchange listing or foreign currency borrowing.
He has been on the faculty of the Darden School since 2001 and was previously with
the University of California, Riverside, as well as a visiting professor at Cambridge
and Melbourne. Prior to his doctoral work, he was a management consultant with
Marakon Associates in Stamford and London. He continues to be active in consulting
and executive education for major corporations. He received a B.S. degree from
Brigham Young University, an M.B.A. from INSEAD, and a Ph.D. from University
of Washington. More details are available from his website, http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/
Michael-J-Schill/. He may be reached
via email at schill@virginia.edu.
About the Authors ix
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page ix
3
2
1
Dedication vii
About the Authors viii
Contents x
Foreword xiii
Preface xiv
Note to the Student: How To Study and Discuss Cases xxv
Ethics in Finance xxxii
Setting Some Themes
1. Warren E. Buffett, 2005 To think like an investor 3
2. Bill Miller and Value Trust Market efficiency 23
3. Ben & Jerry’s Homemade Value creation and governance 39
4. The Battle for Value, 2004: FedEx Corp. vs. Value creation and economic profit 53
United Parcel Service, Inc.
5. Genzyme and Relational Investors: Science Value creation, business strategy and activist investors 75
and Business Collide?
Financial Analysis and Forecasting
6. The Thoughtful Forecaster Forecasting principles 101
7. The Financial Detective, 2005 Ratio analysis 119
8. Krispy Kreme Doughnuts, Inc. Financial statement analysis 125
9. The Body Shop International PLC 2001: Introduction to forecasting 143
An Introduction to Financial Modeling
10. Value Line Publishing: October 2002 Financial ratios and forecasting 161
11. Horniman Horticulture Analysis of growth and bank financing 175
12. Guna Fibres, Ltd. Forecasting seasonal financing needs 181
Estimating the Cost of Capital
13. “Best Practices” in Estimating the Cost Estimating the cost of capital 193
of Capital: Survey and Synthesis”
14. Roche Holdings AG: Funding the Genentech Cost of debt capital 219
Acquisition
15. Nike, Inc.: Cost of Capital Cost of capital for the firm 235
16. Teletech Corporation, 2005 Business segments and risk-return tradeoffs 243
17. The Boeing 7E7 Project specific risk-return 257
x
Contents
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page x
4
5
7
6
Capital Budgeting and Resource Allocation
18. The Investment Detective Investment criteria and discounted cash flow 283
19. Worldwide Paper Company Analysis of an expansion investment 285
20. Target Corporation Multifaceted capital investment decisions 289
21 Aurora Textile Company Analysis of an investment in a declining industry 311
22. Compass Records Analysis of working capital investment 323
23 The Procter and Gamble Company: Scenario analysis in a project decision 337
Investment in Crest Whitestrips Advanced
Seal
24. Victoria Chemicals plc (A): Relevant cash flows 349
The Merseyside Project
25 Victoria Chemicals plc (B): The Merseyside Mutually exclusive investment opportunities 357
and Rotterdam Projects
26. Star River Electronics Ltd. Capital project analysis and forecasting 365
27. The Jacobs Division 2010 Strategic planning 373
28. University of Virginia Health System: Analysis of an investment in a not-for-profit 381
The Long-Term Acute Care Hospital organization
Project
Management of the Firm’s Equity: Dividends and Repurchases
29. Gainesboro Machine Tools Corporation Dividend payout decision 393
30. AutoZone, Inc. Dividend and stock buyback decisions 409
Management of the Corporate Capital Structure
31. An Introduction to Debt Policy and Value Effects of debt tax shields 425
32. Structuring Corporate Financial Policy: Concepts in setting financial policy 431
Diagnosis of Problems and Evaluation
of Strategies
33. California Pizza Kitchen Optimal leverage 449
34. The Wm. Wrigley Jr. Company: Capital Leveraged restructuring 467
Structure, Valuation, and Cost of Capital
35. Deluxe Corporation Financial flexibility 479
36. Horizon Lines, Inc. Bankruptcy/restructuring 497
Analysis of Financing Tactics: Leases, Options, and Foreign Currency
37. Carrefour S.A. Currency risk management 513
38. Baker Adhesives Hedging foreign currency cash flows 523
39. J&L Railroad Risk management and hedging commodity risk 529
40. Primus Automation Division, 2002 Economics of lease financing 541
41. MoGen, Inc. Convertible bond valuation and financial engineering 553
Contents xi
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xi
8
Valuing the Enterprise: Acquisitions and Buyouts
42. Methods of Valuation for Mergers Valuation principles 569
and Acquisitions
43. American Greetings Firm valuation in stock repurchase decision 589
44. Arcadian Microarray Technologies, Inc. Evaluating terminal values 599
45. JetBlue Airways IPO Valuation Initial public offering valuation 617
46. Rosetta Stone: Pricing the 2009 IPO Initial public offering valuation 635
47. The Timken Company Financing an acquisition 655
48. Sun Microsystems Valuing a takeover opportunity 671
49. Hershey Foods Corporation: Bitter Corporate governance influence 693
Times in a Sweet Place
50. Flinder Valves and Controls Inc. Valuing the enterprise for sale 715
51. Palamon Capital Partners/TeamSystem Valuing a private equity investment 727
S.p.A.
52. Purinex, Inc. Financing the early-stage firm 745
53. Medfield Pharmaceuticals Valuing strategic alternatives 755
xii Contents
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xii
xiii
The half-decade from 2008 to 2013 forced a series of “teachable moments” into the consciousness of
leaders in both business and government. More such moments may be in the offing, given the unresolved
issues stemming from the global financial crisis. What lessons shall we draw from these moments? And
how shall we teach the lessons so that the next generation of leaders can implement wiser policies?
One theme implicit in most critiques and policy recommendations of this period entails the consequences
of financial illiteracy. At few other times in financial history have we seen so strong an affirmation
of Derek Bok’s famous argument, “If you think education is expensive, try ignorance.” The
actions and behavior of consumers, investors, financial intermediaries, and regulators suggest ignorance
(naïve or otherwise) of such basic financial concepts as time value of money, risk-adjusted returns, cost
of capital, capital adequacy, solvency, optionality, capital market efficiency, and so on. If ignorance is
bliss, teachers of finance face a delirious world.
Now more than ever, the case method of teaching corporate finance is critical to meeting the
diverse educational challenges of our day. The cases presented in this volume address the richness of
the problems that practitioners face and help to develop the student in three critical areas:
• Knowledge. The conceptual and computational building blocks of finance are the necessary foundation
for professional competence. The cases in this volume afford solid practice with the breadth
and depth of this foundational knowledge. And they link the practical application of tools and concepts
to a contextual setting for analysis. Such real-world linkage is an important advantage of case
studies over textbook problem sets.
• Skills. Case studies demand decisions and recommendations. Too many analysts are content to
calculate or estimate without helping a decision-maker fully understand the implications of the
analysis. By placing the student in the position of the decision-maker, the case study promotes
confidence and competence in making decisions. Furthermore, class discussions of cases promote
skills in communication, selling and defending ideas, giving feedback, negotiating, and getting results
through teamwork—these are social skills that are best learned in face-to-face engagement.
• Attributes of character. Popular outrage over the crisis focused on shady ethics. The duty of agents,
diligence in the execution of professional responsibilities, breaches of trust, the temptations of selfdealing,
and outright fraud intrude into retrospective assessments of what might otherwise be dry and
technical analyses of the last decade. It is no longer possible or desirable to teach finance as a purely
technical subject devoid of ethical considerations. Ultimately, teaching is a moral act: by choosing
worthy problems, modeling behavior, and challenging the thinking of students, the teacher strengthens
students in ways that are vitally important for the future of society. The case method builds attributes
of character such as work ethic and persistence; empathy for classmates and decision-makers;
social awareness of the consequences of decisions and the challenging context for decision-makers;
and accountability for one’s work. When students are challenged orally to explain their work, the
ensuing discussion reveals the moral dilemmas that confront the decision maker. At the core of
transformational teaching with cases is growth in integrity. As Aristotle said, “Character is destiny,” a
truism readily apparent in the ruinous aftermath of the global financial crisis.
As with the sixth edition of this book, I must commend my colleagues, Kenneth Eades and
Michael Schill, who brought this seventh edition to the public. They are accomplished scholars in
Finance and masterful teachers—above all, they are devoted to the quality of the learning experience
for students. Their efforts in preparing this volume will enrich the learning for countless students and
help teachers world-wide to rise to the various challenges of the post-crisis world.
Robert F. Bruner
Dean and Charles C. Abbott Professor of Business Administration
Distinguished Professor of Business Administration
Darden Graduate School of Business Administration
University of Virginia
Charlottesville, Virginia
October 8, 2012
Foreword
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xiii
xiv
The inexplicable is all around us. So is the incomprehensible. So is the unintelligible. Interviewing Babe
Ruth* in 1928, I put it to him “People come and ask what’s your system for hitting home runs—that
so?” “Yes,” said the Babe, “and all I can tell ‘em is I pick a good one and sock it. I get back to the
dugout and they ask me what it was I hit and I tell ‘em I don’t know except it looked good.”
—Carl Sandburg†
Managers are not confronted with problems that are independent of each other, but with dynamic
situations that consist of complex systems of changing problems that interact with each other. I call
such situations messes . . . Managers do not solve problems: they manage messes.
—Russell Ackoff‡
Orientation of the Book
Practitioners tell us that much in finance is inexplicable, incomprehensible, and unintelligible.
Like Babe Ruth, their explanations for their actions often amount to “I pick
a good one and sock it.” Fortunately for a rising generation of practitioners, tools and
concepts of Modern Finance provide a language and approach for excellent performance.
The aim of this book is to illustrate and exercise the application of these tools
and concepts in a messy world.
Focus on Value
The subtitle of this book is Managing for Corporate Value Creation. Economics
teaches us that value creation should be an enduring focus of concern because value
is the foundation of survival and prosperity of the enterprise. The focus on value also
helps managers understand the impact of the firm on the world around it. These cases
harness and exercise this economic view of the firm. It is the special province of
finance to highlight value as a legitimate concern for managers. The cases in this book
exercise valuation analysis over a wide range of assets, debt, equities, and options,
and a wide range of perspectives, such as investor, creditor, and manager.
Linkage to Capital Markets
An important premise of these cases is that managers should take cues from the capital
markets. The cases in this volume help the student learn to look at the capital
markets in four ways. First, they illustrate important players in the capital markets
such as individual exemplars like Warren Buffett and Bill Miller and institutions like
Preface
*George Herman “Babe” Ruth (1895–1948) was one of the most famous players in the history of American
baseball, leading the league in home runs for 10 straight seasons, setting a record of 60 home runs in one
season, and hitting 714 home runs in his career. Ruth was also known as the “Sultan of Swat.”
†Carl Sandburg, “Notes for Preface,” in Harvest Poems (New York: Harcourt Brace Jovanovich, 1960), p.11.
‡Russell Ackoff, “The Future of Operational Research is Past,” Journal of Operational Research Society, 30, 1
(Pergamon Press, Ltd., 1979): 93–104.
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xiv
investment banks, commercial banks, rating agencies, hedge funds, merger arbitrageurs,
private equity firms, lessors of industrial equipment, and so on. Second, they
exercise the students’ abilities to interpret capital market conditions across the economic
cycle. Third, they explore the design of financial securities, and illuminate the
use of exotic instruments in support of corporate policy. Finally, they help students
understand the implications of transparency of the firm to investors, and the impact
of news about the firm in an efficient market.
Respect for the Administrative Point of View
The real world is messy. Information is incomplete, arrives late, or is reported with
error. The motivations of counterparties are ambiguous. Resources often fall short.
These cases illustrate the immense practicality of finance theory in sorting out the
issues facing managers, assessing alternatives, and illuminating the effects of any particular
choice. A number of the cases in this book present practical ethical dilemmas
or moral hazards facing managers—indeed, this edition features a chapter, “Ethics in
Finance” right at the beginning, where ethics belongs. Most of the cases (and teaching
plans in the associated instructor’s manual) call for action plans rather than mere
analyses or descriptions of a problem.
Contemporaneity
All of the cases in this book are set in the year 2000 or after and 40 percent are set
in 2006 or later. A substantial proportion (25 percent) of these cases and technical
notes are new, or significantly updated. The mix of cases reflects the global business
environment: 45 percent of the cases in this book are set outside the United States,
or have strong cross-border elements. Finally the blend of cases continues to reflect
the growing role of women in managerial ranks: 28 percent of the cases present
women as key protagonists and decision-makers. Generally, these cases reflect the
increasingly diverse world of business participants.
Plan of the Book
The cases may be taught in many different combinations. The sequence indicated by
the table of contents corresponds to course designs used at Darden. Each cluster of cases
in the Table of Contents suggests a concept module, with a particular orientation.
1. Setting Some Themes. These cases introduce basic concepts of value creation,
assessment of performance against a capital market benchmark, and capital market
efficiency that reappear throughout a case course. The numerical analysis required of
the student is relatively light. The synthesis of case facts into an important framework
or perspective is the main challenge. The case, “Warren E. Buffett, 2005,” sets the
nearly universal theme of this volume: the need to think like an investor. “Bill Miller
and Value Trust,” explores a basic question about performance measurement: what is
the right benchmark against which to evaluate success? “Ben & Jerry’s Homemade,
Inc.” invites a consideration of “value” and the ways to measure it. The case entitled,
“The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.” uses
Preface xv
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xv
“economic profit” (or EVA®) to explore the origins of value creation and destruction,
and its competitive implications for the future. A new case, “Genzyme and Relational
Investors: Science and Business Collide?”, poses the dilemma of managing a public
company when the objectives of the shareholders are not always easily aligned with
the long-term objectives of the company.
2. Financial Analysis and Forecasting. In this section, students are introduced to
the crucial skills of financial-statement analysis, break-even analysis, ratio
analysis, and financial statement forecasting. The section starts with a note, “The
Thoughtful Forecaster”, that provides a helpful introduction to financial statement
analysis and student guidance on generating rational financial forecasts.
The case, “Value Line Publishing: October 2002”, provides students an exposure
to financial modeling with electronic spreadsheets. “Horniman Horticulture” uses
a financial model to build intuition for the relevancy of corporate cash flow and
the financial effects of firm growth. The case, “Krispy Kreme Doughnuts, Inc.,”
confronts issues regarding the quality of reported financial results. “Guna Fibres”
asks the students to consider a variety of working capital decisions, including the
impact of seasonal demand upon financing needs. Other cases address issues in
the analysis of working-capital management, and credit analysis.
3. Estimating the Cost of Capital. This module begins with a discussion of “best
practices” among leading firms. The cases exercise skills in estimating the cost of
capital for firms and their business segments. The cases aim to exercise and solidify
students’ mastery of the capital asset pricing model, the dividend-growth model,
and the weighted average cost of capital formula. “Roche Holdings AG: Funding
the Genentech Acquisition” is a new case that invites students to estimate the
appropriate cost of debt in the largest debt issuance in history. The case provides an
introduction to the concept of estimating required returns. “Nike, Inc.: Cost of
Capital” presents an introductory exercise in the estimation of the weighted
average cost of capital. “Teletech Corporation, 2005,” explores the implications of
mean-variance analysis to business segments within a firm, and gives a useful
foundation for discussing value-additivity. “The Boeing 7E7,” presents a dramatic
exercise in the estimation of a discount rate for a major corporate project.
4. Capital Budgeting and Resource Allocation. The focus of these cases is the
evaluation of investment opportunities and entire capital budgets. The analytical
challenges range from simple time value of money problems (“The Investment
Detective”) to setting the entire capital budget for a resource-constrained firm
(“Target Corporation”). Key issues in this module include the estimation of Free
Cash Flows, the comparison of various investment criteria (NPV, IRR, payback,
and equivalent annuities), the treatment of issues in mutually exclusive investments,
and capital budgeting under rationing. This module features several new
cases. The first is “The Procter and Gamble Company: Crest Whitestrips Advanced
Seal”, which asks the student to value a new product launch but then consider
the financial implications of a variety of alternative launch scenarios. The
second new case, “Jacobs Division”, presents students an opportunity to consider
the implications of strategic planning processes. And finally, “UVa Hospital
System: The Long-term Acute Care Hospital Project”, is an analysis of investment
xvi Preface
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xvi
decision within a not-for-profit environment. In addition to forecasting and
valuing the project’s cash flows, students must assess whether NPV and IRR are
appropriate metrics for an organization that does not have stockholders.
5. Management of the Firm’s Equity: Dividends and Repurchases. This module
seeks to develop practical principles about dividend policy and share issues by
drawing on concepts about dividend irrelevance, signaling, investor clienteles, bonding,
and agency costs. The first case, “Gainesboro Machine Tools Corporation”,
concerns a company that is changing its business strategy and considering a change
in its dividend policy. The case serves as a comprehensive introduction to corporate
financial policy and themes in managing the right side of the balance sheet. The second
case is new to this edition. “AutoZone, Inc.” is a leading auto parts retailer that
has been repurchasing shares over many years. The case serves as an excellent example
of how share repurchases impact the balance sheet and presents the student
with the challenge of assessing the impact upon the company’s stock price.
6. Management of the Corporate Capital Structure. The problem of setting
capital structure targets is introduced in this module. Prominent issues are the
use and creation of debt tax shields, the role of industry economics and technology,
the influence of corporate competitive strategy, the tradeoffs between debt
policy, dividend policy, and investment goals, and the avoidance of costs of
distress. The case, “California Pizza Kitchen,” addresses the classic dilemma
entailed in optimizing the use of debt tax shields and providing financial
flexibility—this theme is extended in another case, “Deluxe Corporation” that
asks how much flexibility a firm needs. “Horizon Lines, Inc.” is a new case
about a company facing default on a debt covenant that will prompt the need for
either Chapter 11 protection or a voluntary financial restructuring.
7. Analysis of Financing Tactics: Leases, Options, and Foreign Currency. While
the preceding module is concerned with setting debt targets, this module
addresses a range of tactics a firm might use to pursue those targets, hedge risk,
and exploit market opportunities. Included are domestic and international debt
offerings, leases, currency hedges, warrants, and convertibles. With these cases,
students will exercise techniques in securities valuation, including the use of
option-pricing theory. For example, “Baker Adhesives” explores the concept of
exchange-rate risk and the management of that risk with a forward-contract hedge
and a money-market hedge. “MoGen, Inc” presents the pricing challenges associated
with a convertible bond as well as a complex hedging strategy to change the
conversion price of the convertible through the purchase of options and issuance
of warrants. A new case, “J&L Railroad”, presents a commodity risk problem for
which students are asked to propose a specific hedging strategy using financial
contracts offered on the open market or from a commercial bank.
8. Valuing the Enterprise: Acquisitions and Buyouts. This module begins with
an extensive introduction to firm valuation in the note “Methods of Valuation:
Mergers and Acquisitions.” The focus of the note includes valuation using DCF
and multiples. This edition features four new cases in this module. The first new
case, “American Greetings”, is provides a straightforward firm valuation in the
context of a repurchase decision and is designed to be an introduction to firm
Preface xvii
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xvii
xviii Preface
valuation. The second new case is “Rosetta Stone: Pricing the 2009 IPO”,
provides an alternative IPO valuation case to the JetBlue case with additional
focus on valuation with market multiples. “Sun Microsystems” is the third new
addition to the module and presents traditional takeover valuation case with
opportunities to evaluate merger synergies and cost of capital implications.
Several of the cases demand an analysis that spans several stakeholders. For
example, “Hershey Foods Corporation,” presents the high profile story of when
the Hershey Trust Company put Hershey Foods up for sale. The case raises a
number of challenging valuation and governance issues. “The Timken Company”
deals with an acquisition that requires the student to conduct a challenging valuation
analysis of Torrington as well as develop a financing strategy for the deal.
The module also features a merger negotiation exercise (“Flinder Valves and
Controls Inc.”) that provides an engaging venue for investigating the distribution
of joint value in a merger negotiation. Thus, the comprehensive nature of cases in
this module makes them excellent vehicles for end-of-course classes, student
term papers, and/or presentations by teams of students.
This edition offers a number of cases that give insights about investing or financing
decisions in emerging markets. These include “Guna Fibres Ltd.,” “Star River Electronics
Ltd.,” and “Baker Adhesives.”
Summary of Changes for this Edition
The seventh edition represents a substantial change from the sixth edition.
This edition offers 13 new or significantly updated cases in this edition, or 25 percent
of the total. In the interest of presenting a fresh and contemporary collection, older cases
have been updated and/or replaced with new case situations such that all the cases are set
in 2000 or later and 40 percent are set in 2006 or later. Several of the favorite “classic”
cases from the first six editions are available online from Irwin/McGraw-Hill, from where
instructors who adopt this edition may copy them for classroom use. All cases and teaching
notes have been edited to sharpen the opportunities for student analysis.
The book continues with a strong international aspect (24 of the cases, 45 percent,
are set outside the United States or feature significant cross-border issues). Also, the
collection continues to feature female decision-makers and protagonists prominently
(15, or 28 percent, of the cases).
Supplements
The case studies in this volume are supported by various resources that help make
student engagement a success:
• Spreadsheet files support student and instructor preparation of the cases. They are
located on the book’s website at www.mhhe.com/bruner7e
• A guide to the novice on case preparation, “Note to the Student: How to Study
and Discuss Cases” in this volume.
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xviii
Preface xix
• The instructor’s resource manual provides counterparty roles for two negotiation
exercises and also presents detailed discussions of case outcomes, one of which is
designed to be used as second class period for the case. These supplemental materials
can significantly extend student learning and expand the opportunities for
classroom discussion.
• An instructor’s resource manual of about 800 pages in length containing teaching
notes for each case. Each teaching note includes suggested assignment questions,
a hypothetical teaching plan, and a prototypical finished case analysis.
• Website addresses in many of the teaching notes. These provide a convenient avenue
for updates on the performance of undisguised companies appearing in the book.
• Notes in the instructor’s manual on how to design a case method course, on using
computers with cases, and on preparing to teach a case.
• A companion book by Robert Bruner titled, Socrates’ Muse: Reflections on Excellence
in Case Discussion Leadership (Irwin/McGraw-Hill, 2002), is available to
instructors who adopt the book for classroom use. This book offers useful tips on
case method teaching.
• Several “classic” cases and their associated teaching notes were among the most
popular and durable cases in previous editions of Case Studies in Finance.
Instructors adopting this volume for classroom use may request permission to
reproduce them for their courses.
Acknowledgments
This book would not be possible without the contributions of many other people. Colleagues
at Darden who have taught, co-authored, contributed to, or commented on these
cases are Brandt Allen, Yiorgos Allayannis, Sam Bodily, Karl-Adam Bonnier, Susan
Chaplinsky, John Colley, Bob Conroy, Mark Eaker, Richard Evans, Bob Fair, Paul Farris,
Jim Freeland, Sherwood Frey, Bob Harris, Jared Harris, Mark Haskins, Michael Ho,
Marc Lipson, Elena Loutskina, Pedro Matos, Matt McBrady, Charles Meiburg, Jud Reis,
William Sihler and Robert Spekman. We are grateful for their collegiality and for the
support for our casewriting efforts from the Darden School Foundation, the L. White
Matthews Fund for Finance Casewriting, the Batten Institute, the Citicorp Global Scholars
Program, Columbia Business School, INSEAD, and the University of Melbourne.
Colleagues at other schools provided worthy insights and encouragement toward
the development of the seven editions of Case Studies in Finance. We are grateful to
the following persons (listed with the schools with which they were associated at the
time of our correspondence or work with them):
Michael Adler, Columbia
Raj Aggarwal, John Carroll
Turki Alshimmiri, Kuwait Univ.
Ed Altman, NYU
James Ang, Florida State
Paul Asquith, M.I.T.
Bob Barnett, North Carolina State
Geert Bekaert, Stanford
Michael Berry, James Madison
Randy Billingsley, VPI&SU
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xix
xx Preface
Gary Blemaster, Georgetown
Rick Boebel, Univ. Otago, New Zealand
Oyvind Bohren, BI, Norway
John Boquist, Indiana
Michael Brennan, UCLA
Duke Bristow, UCLA
Ed Burmeister, Duke
Kirt Butler, Michigan State
Don Chance, VPI&SU
Andrew Chen, Southern Methodist
Barbara J. Childs, Univ. of Texas at Austin
C. Roland Christensen, Harvard
Thomas E. Copeland, McKinsey
Jean Dermine, INSEAD
Michael Dooley, UVA Law
Barry Doyle, University of San Francisco
Bernard Dumas, INSEAD
Craig Dunbar, Western Ontario
Peter Eisemann, Georgia State
Javier Estrada, IESE
Ben Esty, Harvard
Thomas H. Eyssell, Missouri
Pablo Fernandez, IESE
Kenneth Ferris, Thunderbird
John Finnerty, Fordham
Joseph Finnerty, Illinois
Steve Foerster, Western Ontario
Günther Franke, Konstanz
Bill Fulmer, George Mason
Louis Gagnon, Queens
Dan Galai, Jerusalem
Jim Gentry, Illinois
Stuart Gilson, Harvard
Robert Glauber, Harvard
Mustafa Gultekin, North Carolina
Benton Gup, Alabama
Jim Haltiner, William & Mary
Rob Hansen, VPI&SU
Philippe Haspeslagh, INSEAD
Gabriel Hawawini, INSEAD
Pekka Hietala, INSEAD
Rocky Higgins, Washington
Pierre Hillion, INSEAD
Laurie Simon Hodrick, Columbia
John Hund, Texas
Daniel Indro, Kent State
Thomas Jackson, UVA Law
Pradeep Jalan, Regina
Michael Jensen, Harvard
Sreeni Kamma, Indiana
Steven Kaplan, Chicago
Andrew Karolyi, Western Ontario
James Kehr, Miami Univ. Ohio
Kathryn Kelm, Emporia State
Carl Kester, Harvard
Naveen Khanna, Michigan State
Herwig Langohr, INSEAD
Dan Laughhunn, Duke
Ken Lehn, Pittsburgh
Saul Levmore, UVA Law
Wilbur Lewellen, Purdue
Scott Linn, Oklahoma
Dennis Logue, Dartmouth
Paul Mahoney, UVA Law
Paul Malatesta, Washington
Wesley Marple, Northeastern
Felicia Marston, UVA (McIntire)
John Martin, Texas
Ronald Masulis, Vanderbilt
John McConnell, Purdue
Richard McEnally, North Carolina
Catherine McDonough, Babson
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xx
Wayne Mikkelson, Oregon
Michael Moffett, Thunderbird
Nancy Mohan, Dayton
Ed Moses, Rollins
Charles Moyer, Wake Forest
David W. Mullins, Jr., Harvard
James T. Murphy, Tulane
Chris Muscarella, Penn State
Robert Nachtmann, Pittsburgh
Tom C. Nelson, University of Colorado
Ben Nunnally, UNC-Charlotte
Robert Parrino, Texas (Austin)
Luis Pereiro, Universidad Torcuato
di Tella
Pamela Peterson, Florida State
Larry Pettit, Virginia (McIntire)
Tom Piper, Harvard
Gordon Philips, Maryland
John Pringle, North Carolina
Ahmad Rahnema, IESE
Al Rappaport, Northwestern
Allen Rappaport, Northern Iowa
Raghu Rau, Purdue
David Ravenscraft, North Carolina
Henry B. Reiling, Harvard
Lee Remmers, INSEAD
Jay Ritter, Michigan
Richard Ruback, Harvard
Jim Schallheim, Utah
Art Selander, Southern Methodist
Israel Shaked, Boston
Dennis Sheehan, Penn State
J.B. Silvers, Case Western
Betty Simkins, Oklahoma State
Luke Sparvero, Texas
Preface xxi
Richard Stapleton, Lancaster
Laura Starks, Texas
Jerry Stevens, Richmond
John Strong, William & Mary
Marti Subrahmanyam, NYU
Anant Sundaram, Thunderbird
Rick Swasey, Northeastern
Bob Taggart, Boston College
Udin Tanuddin, Univ. Surabaya,
Indonesia
Anjan Thakor, Indiana
Thomas Thibodeau, Southern Methodist
Clifford Thies, Shenandoah Univ.
James G. Tompkins, Kenesaw State
Walter Torous, UCLA
Max Torres, IESE
Nick Travlos, Boston College
Lenos Trigeorgis, Cyprus
George Tsetsekos, Drexel
Peter Tufano, Harvard
James Van Horne, Stanford
Nick Varaiya, San Diego State
Theo Vermaelen, INSEAD
Michael Vetsuypens, Southern Methodist
Claude Viallet, INSEAD
Ingo Walter, NYU
Sam Weaver, Lehigh
J.F. Weston, UCLA
Peter Williamson, Dartmouth
Brent Wilson, Brigham Young
Kent Womack, Dartmouth
Karen Wruck, Ohio State
Fred Yeager, St. Louis
Betty Yobaccio, Framingham State
Marc Zenner, North Carolina
bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xxi
xxii Preface
Tom Adams, Rosetta Stone
Norm Bartczak, Center for Financial
Strategy
Bo Brookby, First Wachovia
Alison Brown, Compass Records
W.L. Lyons Brown, Brown-Forman
Bliss Williams Browne, First Chicago
George Bruns, BankBoston
Ian Buckley, Henderson Investors
Ned Case, General Motors
Phil Clough, ABS Capital
Daniel Cohrs, Marriott
David Crosby, Johnson & Johnson
Jinx Dennett, BankBoston
Barbara Dering, Bank of New York
Ty Eggemeyer, McKinsey
Geoffrey Elliott, Morgan Stanley
Glenn Eisenberg, The Timken Company
Louis Elson, Palamon Capital Partners
Christine Eosco, BankBoston
Larry Fitzgerald, UVA Health System
Catherine Friedman, Morgan Stanley
Carl Frischkorn, Threshold Sports
Carrie Galeotafiore, Value Line
Publishing
Charles Griffith, AlliedSignal
Ian Harvey, BankBoston
David Herter, Fleet Boston
Christopher Howe, Kleinwort Benson
Paul Hunn, Manufacturers Hanover
Kristen Huntley, Morgan Stanley
James Gelly, General Motors
Ed Giera, General Motors
Betsy Hatfield, Bank Boston
Denis Hamboyan, Bank Boston
John Hulbert, Target Corp.
Thomas Jasper, Salomon Brothers
Andrew Kalotay, Salomon Brothers
Lisa Levine, Equipment Leasing
Mary Lou Kelley, McKinsey
Francesco Kestenholz, UBS
Daniel Lentz, Procter and Gamble
Eric Linnes, Kleinwort Benson
Peter Lynch, Fidelity Investments
Dar Maanavi, Merrill Lynch
Mary McDaniel, SNL Securities
Jean McTighe, BankBoston
Frank McTigue, McTigue Associates
David Meyer, J.P. Morgan
Michael Melloy, Planet
Jeanne Mockard, Putnam Investments
Pascal Montiero de Barros, Planet
Lin Morison, BankBoston
John Muleta, PSINet
Dennis Neumann, Bank of New York
John Newcomb, BankBoston
Ralph Norwood, Polaroid
Marni Gislason Obernauer, J.P. Morgan