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Case Studies in Finance

Managing for

Corporate Value

Creation

Eighth Edition

Robert F. Bruner

Kenneth M. Eades

Michael J. Schill

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CASE STUDIES IN FINANCE: MANAGING FOR CORPORATE VALUE CREATIONS, EIGHTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2002, and 1989. 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 McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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Library of Congress Cataloging-in-Publication Data

Names: Bruner, Robert F., 1949-author. | Eades, Kenneth M., author. | Schill, Michael J., author. Title: Case studies in finance: managing for corporate value creation / Robert F. Bruner, Kenneth M. Eades,  Michael J. Schill. Description: Eighth Edition. | Dubuque, IA : McGraw-Hill Education, [2018] | Series: The McGraw-Hill/Irwin series in finance, insurance, and real estate | Revised edition of the authors’ Case studies in finance, [2014] Identifiers: LCCN 2017023496| ISBN 9781259277191 (alk. paper) | ISBN 1259277194 (alk. paper) Subjects: LCSH: Corporations—Finance—Case studies. | International business enterprises—  Finance—Case studies. Classification: LCC HG4015.5 .B78 2017 | DDC 658.15—dc23 LC record available  at https://lccn.loc.gov/2017023496

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 Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

®

https://lccn.loc.gov/2017023496
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The McGraw-Hill Education Series in Finance, Insurance, and Real Estate

FINANCIAL MANAGEMENT

Block, Hirt, and Danielsen

Foundations of Financial Management Sixteenth Edition Brealey, Myers, and Allen

Principles of Corporate Finance Twelfth Edition Brealey, Myers, and Allen

Principles of Corporate Finance, Concise Second Edition Brealey, Myers, and Marcus

Fundamentals of Corporate Finance Ninth Edition Brooks

FinGame Online 5.0 Bruner, Eades, and Schill

Case Studies in Finance: Managing for Corporate Value Creation Eighth Edition Cornett, Adair, and Nofsinger

Finance: Applications and Theory Fourth Edition Cornett, Adair, and Nofsinger

M: Finance Fourth Edition DeMello

Cases in Finance Third 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 Twelfth Edition Ross, Westerfield, Jaffe, and Jordan

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Corporate Finance Eleventh Edition Ross, Westerfield, Jaffe, and Jordan

Corporate Finance: Core Principles and Applications Fifth Edition Ross, Westerfield, and Jordan

Essentials of Corporate Finance Ninth Edition Ross, Westerfield, and Jordan

Fundamentals of Corporate Finance Twelfth Edition Shefrin

Behavioral Corporate Finance: Decisions that Create Value Second Edition INVESTMENTS

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Essentials of Investments Tenth Edition Bodie, Kane, and Marcus

Investments Eleventh Edition Hirt and Block

Fundamentals of Investment Management Tenth Edition Jordan, Miller, and Dolvin

Fundamentals of Investments: Valuation and Management Eighth Edition Stewart, Piros, and Heisler

Running Money: Professional Portfolio Management First Edition Sundaram and Das

Derivatives: Principles and Practice Second Edition Financial Institutions and Markets Rose and Hudgins

Bank Management and Financial Services Ninth Edition Rose and Marquis

Financial Institutions and Markets Eleventh Edition

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Financial Institutions Management: A Risk Management Approach Ninth Edition Saunders and Cornett

Financial Markets and Institutions Seventh Edition INTERNATIONAL FINANCE Eun and Resnick

International Financial Management Eighth Edition REAL ESTATE

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Real Estate Finance and Investments Sixteenth Edition Ling and Archer

Real Estate Principles: A Value Approach Fifth 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 Second Edition Harrington and Niehaus

Risk Management and Insurance Second Edition Kapoor, Dlabay, Hughes, and Hart

Focus on Personal Finance: An active approach to help you achieve financial literacy Sixth Edition Kapoor, Dlabay, Hughes, and Hart

Personal Finance Twelfth Edition Walker and Walker

Personal Finance: Building Your Future Second Edition

Page v

Dedication

In dedication to our wives

Barbara M. Bruner Kathy N. Eades

And to the memory of Mary Ann H. Schill

and to our children

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About the Authors

Robert F. Bruner is University Professor, Distinguished Professor of Business Administration and Charles C. Abbott Professor of Business Administration and Dean Emeritus of the Darden Graduate School 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 Harvard, Columbia, INSEAD, and IESE. Formerly he was a loan officer and investment analyst for First Chicago Corporation. He holds the B.A. degree from Yale University and the M.B.A. and D.B.A. degrees from Harvard University. Copies of his papers and essays may be obtained from his website, http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Robert-F-Bruner/ He may be reached via email at brunerr@virginia.edu.

Kenneth M. Eades is Professor of Business Administration and Area Coordinator of the Finance Department of the Darden Graduate School of Business Administration at the University of Virginia. He has taught a variety of corporate finance topics including: capital structure, dividend policy, risk management, capital investments and firm valuation. His research interests are in the area of corporate finance where he has published articles in The Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and Financial Management. In addition to Case Studies in Finance, his books include The Portable MBA (Wiley 2010) Finance Interactive, a multimedia tutorial software in Finance (Irwin/McGraw-Hill 1997) and Case Studies in Financial Decision Making (Dryden Press, 1994). He has authored or co-authored over 70 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 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/Robert-F-Bruner/
mailto:brunerr@virginia.edu
http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Kenneth-M-Eades/ and he may be reached via email at eades@virginia.edu.

Michael J. Schill is 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. 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. He is the current course head for Darden’s core MBA finance course. He is the author or co-author of over 40 cases and technical notes, as well as a financial market simulation entitled Bond Trader. Prior to his doctoral work, he was a consultant with Marakon Associates in Stamford and London. 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.

http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Kenneth-M-Eades/
mailto:eades@virginia.edu
http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Michael-J-Schill/
mailto:schill@virginia.edu
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Contents

Dedication  v About the Authors  vi Contents  viii Foreword  xi Preface  xii Note to the Student: How To Study and Discuss Cases  xxiii Ethics in Finance  xxx

1  Setting Some Themes 1  Warren E. Buffett, 2015   To think like an investor   3 2  The Battle for Value, 2016: FedEx Corp. vs. United Parcel Service, Inc.   Value creation and economic

profit   23 3  Larry Puglia and the T. Rowe Price Blue Chip Growth Fund   Market efficiency   43 4  Genzyme and Relational Investors: Science and Business Collide?   Value creation, business strategy a

nd activist investors   63

2  Financial Analysis and Forecasting 5  Business Performance Evaluation: Approaches for Thoughtful Forecasting   Financial forecasting princ

iples   89 6  The Financial Detective, 2016   Financial ratio analysis   107 7  Whole Foods Market: The Deutsche Bank Report   Financial performance forecasting   113 8  Horniman Horticulture   Financial forecasting and bank financing   127 9  Guna Fibres, Ltd.   Forecasting seasonal financing needs   133

3  Estimating the Cost of Capital 10  “Best Practices” in Estimating the Cost   Estimating the cost of capital   145

of Capital: An Update 11  Roche Holdings AG: Funding the Genentech Acquisition   Cost of debt capital   173 12  H. J. Heinz: Estimating the Cost of Capital in Uncertain Times   Cost of capital for the firm   189

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13  Royal Mail plc: Cost of Capital   Cost of capital for the firm   197 14  Chestnut Foods   Cost of capital for multi-division firm   207

4  Capital Budgeting and Resource Allocation 15  Target Corporation   Multifaceted capital investment decisions   219 16  The Investment Detective   Investment criteria and discounted cash flow   239 17  Centennial Pharmaceutical Corporation   Valuation of earnout plan   241 18  Worldwide Paper Company   Analysis of an expansion investment   249 19  Fonderia del Piemonte S.p.A.   Capital investment decision   253 20  Victoria Chemicals plc (A): The Merseyside Project   Relevant cash flows   257 21  Victoria Chemicals plc (B): Merseyside and Rotterdam Projects   Mutually exclusive investment oppo

rtunities   265 22  The Procter & Gamble Company: Investment in Crest Whitestrips Advanced Seal   Scenario analysis i

n a project decision   273 23  Jacobs Division 2010   Strategic planning   285 24  University of Virginia Health System: The Long-Term Acute Care Hospital Project   Analysis of an inv

estment in a not-for-profit organization   293 25  Star River Electronics Ltd.   Capital project analysis and forecasting   303

5  Management of the Firm’s Equity: Dividends and Repurchases 26  Rockboro Machine Tools Corporation   Dividend payout decision   313 27  EMI Group PLC   Dividend policy   329 28  Autozone, Inc.   Dividend and stock buyback decisions   347

6  Management of the Corporate Capital Structure 29  An Introduction to Debt Policy and Value   Effects of debt tax shields   363 30  M&M Pizza   Capital structure in a frictionless market   369 31  Structuring Corporate Financial Policy: Diagnosis of Problems and Evaluation of Strategies   Concepts

in setting financial policy   373 32  California Pizza Kitchen   Optimal leverage   391 33  Dominion Resources: Cove Point   Project funding and capital structure   409 34  Nokia OYJ: Financing the WP Strategic Plan   Corporate funding alternatives   425 35  Kelly Solar   Debt financing negotiation   449 36  J. C. Penney Company   Liquidity management   453

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37  Horizon Lines, Inc.   Financial distress/restructuring/bankruptcy   467

7  Analysis of Financing Tactics: Leases, Options, and Foreign Cur rency 38  Baker Adhesives   Hedging foreign currency cash flows   483 39  Vale SA   Debt financing across borders   489 40  J&L Railroad   Risk management and hedging commodity risk   501 41  WNG Capital, LLC   Economics of lease financing   513 42  MoGen, Inc.   Convertible bond valuation and financial engineering   525

8  Valuing the Enterprise: Acquisitions and Buyouts 43  Methods of Valuation for Mergers and Acquisitions   Valuation principles   539 44  Medfield Pharmaceuticals   Valuing assets in place   559 45  American Greetings   Firm valuation in stock repurchase decision   571 46  Ferrari: The 2015 Initial Public Offering   Initial public offering valuation   583 47  Rosetta Stone: Pricing the 2009 IPO   Initial public offering valuation   603 48  Sun Microsystems   Valuing a takeover opportunity   623 49  Carter International   Acquisition valuation and financing   645 50  DuPont Corporation: Sale of Performance Coatings   Business Unit Divestiture   657 51  OutReach Networks: First Venture Round   Valuation of early stage company   679 52  Sanofi-Aventis’s Tender Offer for Genzyme   Corporate acquisition   687 53  Delphi Corporation   Corporate bankruptcy   715 54  Flinder Valves and Controls Inc.   Acquisition negotiation   731

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Foreword

As I think about developing the next generation of leaders in business and finance, I naturally reflect on my own path. My career in business has taught some profound lessons—and so did my experience at the University of Virginia’s Darden School of Business. Both life experience and school learning are critical components in the development of any leader. For that reason, I have supported wholeheartedly higher education as the path toward a promising future.

As the world keeps changing, higher education must continually adapt. Practices, processes, and business models that were once popular have faded. At the same time, the field of Finance has witnessed dramatic changes, including the advent of new valuation models, the rise of new markets and institutions, the invention of new financial instruments, the impact of new information technologies, and growing globalization. In this environment, we must think critically about the changing world, pay attention to new ideas, and adapt in sensible ways. Business schools play a critical role in the change process: theory suggests new approaches, empirical research tests them, and classroom teaching transfers knowledge. The development of new teaching materials is vital to that process.

Case studies in Finance have evolved markedly over the past 40 years. This shift reflects the revolutionary changes in markets and organization, as well as the many significant advances in theory and empirical research. Because case studies are an invaluable teaching tool, it is critical that the body of cases grows with the practice of and scholarship in Finance.

I am pleased to introduce the reader to the eighth edition of Case Studies in Finance, by Robert F. Bruner, Kenneth M. Eades, and Michael J. Schill. These professors exemplify the practice-oriented scholar who understands the economic foundations of Finance and the extensive varieties of its practice. They translate business phenomena into material that is accessible both to experienced practitioners and novices in Finance.

This book is a valuable contribution to the teaching materials available in the field of Finance. First, these cases link managerial decisions to capital markets and investor expectations. At the core of most is a valuation task that requires students to look to financial markets to resolve the problem. Second, these cases feature a wide range of contemporary and relevant problems, including examples in real and financial options, agency conflicts, financial innovation, investing in emerging markets, and corporate control. They also cover classic topics in Finance, including dividend policy, the mix of debt and equity financing, the estimation of future financial requirements, and the choice between mutually exclusive investments. Finally, these cases invite students to harness technology they will use in the workplace to develop key insights.

I am confident this collection will help students, scholars, and practitioners sharpen their decision-making ability, and advance the development of the next generation of leaders in Finance.

John R. Strangfeld Chairman and Chief Executive Officer Prudential Financial, Inc.

May 3, 2017 Newark, New Jersey

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Preface

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 exemplar Warren Buffett and institutions like 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.

1

2

3

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 and Diversity

All of the cases in this book are set in the year 2006 or after and 25 percent are set in 2015 or later. A substantial proportion (57 percent) of the cases and technical notes are new, or significantly updated. The mix of cases reflects the global business environment: 52 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: 31 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.

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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, 2016,” sets the nearly universal theme of this volume: the need to think like an investor. The updated case entitled, “The Battle for Value, 2016: FedEx Corp. vs. United Parcel Service, Inc.” explores the definition of business success and its connections to themes of financial management. “Larry Puglia and the T. Rowe Price Blue Chip Growth Fund,” is an updated version of cases in prior editions that explores a basic question about performance measurement: what is the right benchmark against which to evaluate success? And finally, “Genzyme and Relational Investors: Science and Business Collide?”, is a case that 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 and an activist investor is pressuring the company for change.

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, “Business Performance Evaluation: Approaches for Thoughtful Forecasting”, that provides a helpful introduction to financial statement analysis and student guidance on generating rational financial forecasts. The case, “The Financial Detective 2016”, asks students to match financial ratios of companies with

their underlying business and financial strategies. “Whole Foods Market: The Deutsche Bank Report” provides students with the opportunity to reassess the financial forecast of a research analyst in light of industry dynamics. This case can also be used an opportunity for students to hone firm valuation skills with the evaluation of the analyst’s “buy, hold, or sell” recommendation. “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, “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 an article that is a survey of “best practices” among leading firms for estimating the cost of capital during the low interest rate regime following the 2007–08 financial crisis. The cases following the survey article expose students to the 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 case that invites students to estimate the appropriate cost of debt for a massive debt offering. The case provides an introduction to the concept of estimating required returns. Two new cases ask the student to estimate the cost of capital for the firm. “H.J. Heinz: Estimating the Cost of Capital in Uncertain Times” gives students the opportunity to reassess the cost of capital following share price decline. “Royal Mail plc:Cost of Capital” affords students the challenge of critiquing a cost of capital estimate for recently privatized British postal service. The case “Chestnut Foods” requires students to consider arguments for and against risk-adjusted hurdle rates in a multi-divisional firm, as well as techniques for estimating divisional-specific cost of capital.

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4. Capital Budgeting and Resource Allocation. The focus of these cases is the evaluation of individual investment opportunities as well as the assessment of corporate capital budgets. The analytical challenges range from setting the entire capital budget for a resource-constrained firm (“Target Corporation”) to basic time value of money problems (“The Investment Detective”). 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 “Centennial Pharmaceutical Corporation” provides an introduction to discounted cash flow principles by asking the student to compare values of two earnout plans. “Worldwide Paper Company” is an updated case that serves as an introduction to estimating cash flows and calculating the NPV of an investment opportunity. “Fonderia del Piemonte S.p.A.” is a new addition to the book. Fonderia is an Italian company considering a capital investment in machinery that replaces existing equipment. The student must assess the incremental value to the company of investing in the new equipment. The Victoria Chemical cases give students cash flow estimates for a large capital investment opportunity (“Victoria Chemical plc (A): The Merseyside Project”) as asks the student to provide a careful critique of the DCF analysis. The sequel case, (“Victoria Chemical plc (B): Merseyside and Rotterdam Projects”, deepens the analysis by adding a competing and mutually exclusive investment opportunity. “The Procter and Gamble Company: Crest Whitestrips Advanced Seal” is a case that asks the student to value a new product launch but then consider the financial implications of a variety of alternative launch scenarios The

case, “Jacobs Division”, presents students an opportunity to consider the implications of strategic planning processes. “UVa Hospital System: The Long-term Acute Care Hospital Project”, is an analysis of an investment 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. “Star River Electronics Ltd” has been updated for this edition and presents the student will a range of issues that the new CEO of the company must address, including the determination of the company’s cost of capital and whether to invest in new machinery. We have used this case as an exam for the first half of the finance principles course in the MBA program.

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5. Management of the Firm’s Equity: Dividends and Repurchases. This module seeks to develop practical principles about dividend policy and share repurchases by drawing on concepts about dividend irrelevance, signaling, investor clienteles, bonding, and agency costs. The first case, “Rockboro Machine Tools Corporation”, is set in 2015 and 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, “EMI Group PLC”, is new to this edition and features a struggling music producer in the U.K. confronted with whether it should continue to pay a dividend despite the profit pressures it is facing. And finally, “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. Following a technical note, “An Introduction to Debt Policy and Value”, is a new case, “M&M Pizza”, which explores the debt-equity choice within a perfect capital market environment—a capital market with full information and no costs of trading. This case provides an engaging environment for students to confront fundamental financial policy theory. “California Pizza Kitchen”, is a real world analog to “M&M Pizza” as it addresses the classic dilemma entailed in optimizing the use of debt tax shields and providing financial flexibility for a national restaurant chain. The next four cases are all new to the book. “Dominion Resources: Cove Point” presents the student with the challenge of financing a large new project without creating substantial disruption to the firm’s capital structure polices. The “Nokia OYJ: Financing the WP Strategic Plan” presents a similar theme as management has taken a new strategic direction and must make financing decisions that are cost effective, but also preserve financial flexibility going forward. “Kelly Solar” concerns a start-up that needs new funds for investment, but already has a significant amount of debt on the books that needs to be renegotiated before new investors will find their investment to be attractive. The case, “JC Penney Company”, presents a large retail chain that is facing widespread performance challenges and needs to raise funds to offset the steadily declining cash balance that will eventually create a liquidity crisis for the company. The last case is “Horizon Lines, Inc.” The case is about a company facing default on a debt covenant that will prompt the need for either Chapter 11 protection or a voluntary financial restructuring.

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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, the first case, “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. “Vale SA” is new to this edition and is a Brazilian mining company that must choose between debt financing denominated in U.S. dollars, euros or British pounds. The 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. “WNG Capital, LLC” is a new case about a company that owns older aircraft that it leases to airlines as an alternative to the airline buying new aircraft. “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.

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 six new cases in this module and five cases from the previous edition. The “Medfield Pharmaceuticals” introduces students to firm valuation with the reality of considering the difference between the value of firm assets in place and the value of firm growth opportunities in the context of a takeover offer for a pharmaceutical company. The case also includes important ethical considerations. “American Greetings” was in the prior edition and provides a straightforward firm valuation in the context of a repurchase decision and is designed to be an introduction to firm valuation. The new case “Ferrari: The 2015 Initial Public Offering”, presents students the opportunity to value the legendary automotive company, and consider how to determine appropriate company comparables for a firm that is both an auto manufacturer and a luxury brand. The case, “Rosetta Stone: Pricing the 2009 IPO”, provides an alternative IPO valuation case with additional focus on valuation with market multiples. “Sun Microsystems” is also returning from the previous edition and presents a traditional takeover valuation case with opportunities to evaluate merger synergies and cost of capital implications. The next five cases are all new to this edition. “Carter International” involves assessing the correct price to offer to acquire another hotel company. “DuPont Corporation: Sale of Performance Coatings” asks the student to assess the economics of divesting a business unit that is not meeting the strategic objectives of the firm. “Sanofi-Aventis’s Tender Offer for Genzyme” is a sequel to the “Genzyme and Relational Investors: Science and Business Collide?” in which Genzyme’s CEO must decide whether to accept a tender offer to acquire Genzyme. “Delphi Corporation” features a large auto parts company that has been in Chapter 11 bankruptcy for two years. The student must decide in the role of a non-secured lender whether to vote to approve the Plan of Reorganization to emerge from Chapter 11.

And finally, the module features a merger negotiation exercise (“Flinder Valves and Controls Inc.”) that provides an engaging venue for investigating the distribution of value in a merger negotiation. 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.

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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 eighth edition represents a substantial and significant change from the seventh edition. This edition offers 31 new or significantly updated cases and technical notes, which represents 57 percent of

the book. 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 2006 or later and 25 percent are set in 2015 or later. Several of the favorite “classic” cases from the first seven editions are available online from McGraw-Hill such that instructors who adopt this edition may copy these older cases for classroom use. These materials can be find at www.mhhe.com/bescases8e. All cases and teaching notes have been edited to sharpen the opportunities for student analysis.

Supplements

The case studies in this volume are supported by various resources that help make student engagement a success:

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

A guide to the novice on case preparation, “Note to the Student: How to Study and Discuss Cases” in this volume.

All of the cases in this book are accompanied by a full teaching note that contains suggested student study questions, a hypothetical teaching plan, and a prototypical finished case analysis. In addition, the cases also have spreadsheet files that support student and instructor preparation of the cases. These materials are available to all instructors at the book’s website at www.mhhe.com/bescases8e. Also at the book’s website is an instructor’s resource manual that facilitates the use of these materials in a standard course by providing resources on how to design a case course and how the cases fit together.

Two of the cases provide student counterparty roles for two negotiation exercises. The teaching materials present 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.

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. This title is available through Create, McGraw-Hill Education’s on-demand and custom publishing system. Ask your learning technology representative for more details.

http://www.mhhe.com/bescases8e
http://www.mhhe.com/bescases8e
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Bodily, Karl-Adam Bonnier, Susan Chaplinsky, John Colley, Bob Conroy, Mark Eaker, Rich 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 Mayo Center for Asset Management, the L. White Matthews Fund for Finance Casewriting, the Batten Institute, Columbia Business School, INSEAD, the University of Melbourne and the University of Virginia’s McIntire School of Commerce.

Colleagues at other schools provided worthy insights and encouragement toward the development of the eight 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

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

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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

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, Florida

Richard Ruback, Harvard

Jim Schallheim, Utah

Art Selander, Southern Methodist

Israel Shaked, Boston

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Dennis Sheehan, Penn State

J.B. Silvers, Case Western

Betty Simkins, Oklahoma State

Luke Sparvero, Texas

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

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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

Research Assistants working under our direction have helped gather data and prepare drafts. Research assistants who contributed to various cases in this and previous editions include Darren Berry, Chris Blankenship, Justin Brenner, Anna Buchanan, Anne Campbell, Drew Chambers, Sean Carr, Jessica Chan, Jenny Craddock, Lucas Doe, Jake Dubois, Brett Durick, David Eichler, Ali Erarac, Shachar Eyal, Rick Green, Daniel Hake, Dennis Hall, Jerry Halpin, Peter Hennessy, Dot Kelly, Vladimir Kolcin, Nili Mehta, Casey Opitz, Katarina Paddack, Suprajj Papireddy, Thien Pham, Chad Rynbrandt, John Sherwood, Elizabeth Shumadine, Janelle Sirleaf, Jane Sommers-Kelly, Don Stevenson, Carla Stiassni, Sanjay Vakharia, Larry Weatherford, and Steve Wilus. We have supervised numerous others in the development of individual cases—those worthy contributors are recognized in the first footnote of each case.

A busy professor soon learns the wisdom in the adage, “Many hands make work light.” we are very grateful to the staff of the Darden School for its support in this project. Excellent editorial assistance at Darden was provided by the staff of Darden Business Publishing and the Darden Case Collection. We specifically thank Leslie Mullin (Senior Editor) and Margaret Ebin, Lucinda Ewing and Debbie O’Brien (Editors). Ginny Fisher gave stalwart secretarial support. Valuable library research support was given by Karen Marsh King and Susan Norrisey. The patience, care, and dedication of these people are richly appreciated.

At McGraw-Hill, Chuck Synovec has served as Brand Manager for this book. Melissa Leick was the project manager, and Jennifer Upton served as Product Developer for this edition. Our thanks extend to those who helped us on prior editions as well, including Mike Junior, who originally recruited Bob Bruner to do this project, and Michele Janicek.

Of all the contributors, our wives, Barbara M. Bruner, Kathy N. Eades, and Mary Ann H. Schill as well as our children have endured great sacrifices as the result of our work on this book. As Milton said, “They also serve who only stand and wait.” Development of this eighth edition would not have been possible without their fond patience.

All these acknowledgments notwithstanding, responsibility for these materials is ours. We welcome suggestions for their enhancement. Please let us know of your experience with these cases, either through McGraw-Hill/Irwin, or at the coordinates given below.

Robert F. Bruner University Professor

Distinguished Professor of Business Administration Dean Emeritus of the Darden School of Business Darden Graduate School of Business University of Virginia brunerr@virginia.edu

Kenneth M. Eades Professor of Business Administration Darden Graduate School of Business University of Virginia eades@virginia.edu

Michael J. Schill Professor of Business Administration Darden Graduate School of Business University of Virginia schill@virginia.edu

Individual copies of all the Darden cases in this and previous editions may be obtained promptly from McGraw- Hill/Irwin’s Create (http://create.mcgraw-hill.com) or from Darden Business Publishing (telephone: 800-246- 3367; https://store.darden.virginia.edu/). Proceeds from these case sales support case writing efforts. Please respect the copyrights on these materials.

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mailto:brunerr@virginia.edu
mailto:eades@virginia.edu
mailto:schill@virginia.edu
http://create.mcgraw-hill.com
https://store.darden.virginia.edu/
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Note to the Student: How to Study and Discuss Casess

“Get a good idea and stay with it. Dog it and work at it until it’s done, and done right.”   —Walt Disney

You enroll in a “case method” course, pick up the book of case studies or the stack of loose-leaf cases, and get ready for the first class meeting. If this is your first experience with case discussions, the odds are that you are clueless and a little anxious about how to prepare for this course. That’s fairly normal but something you should try to break through quickly in order to gain the maximum from your studies. Quick breakthroughs come from a combination of good attitude, good “infrastructure,” and good execution—this note offers some tips.

Good Attitude Students learn best that which they teach themselves. Passive and mindless learning is ephemeral. Active and mindful learning simply sticks. The case method makes learning sticky by placing you in situations that require invention of tools and concepts in your own terms. The most successful case students share a set of characteristics that drive self-teaching:

1. Personal initiative, self-reliance. Case studies rarely suggest how to proceed. Professors are more like guides on a long hike: they can’t carry you, but they can show you the way. You must arrive at the destination under your own power. You must figure out the case on your own. To teach yourself means that you must sort ideas out in ways that make sense to you, personally. To teach yourself is to give yourself two gifts: the idea you are trying to learn, and greater self-confidence in your own ability to master the world.

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2. Curiosity, a zest for exploration as an end in itself. Richard P. Feynman, who won the Nobel Prize in Physics in 1965, was once asked whether his key discovery was worth it. He replied, “. . . [the Nobel Prize is] a pain in the . . . I don’t like honors . . . The prize is the pleasure of finding the thing out, the kick in the discovery, the observation that other people use it [my work]—those are the real things, the honors are unreal to me.”1

3. A willingness to take risks. Risk-taking is at the heart of all learning. Usually one learns more from failures than successes. The banker, Walter Wriston, once said, “Good judgment comes from experience. Experience comes from bad judgment.”

4. Patience and persistence. Case studies are messy, a realistic reflection of the fact that managers don’t manage problems, they manage messes. Initially, reaching a solution will seem to be the major challenge. But once you reach a solution, you may discover other possible solutions, and face the choice among the best alternatives.

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5. An orientation to community and discussion. Much of the power of the case method derives from a willingness to talk with others about your ideas and/or your points of confusion. This is one of the paradoxes of the case method: you must teach yourself, but not in a vacuum. The poet, T.S. Eliot, said, “there is no life not lived in community.” Talking seems like such an inefficient method of sorting through the case, but if exploration is an end in itself then talking is the only way. Furthermore, talking is an excellent means of testing

Good Infrastructure “Infrastructure” consists of all the resources that the case student can call upon. Some of this is simply given to you by the professor: case studies, assignment questions, supporting references to textbooks or articles, and computer data or models. But you can go much farther to help yourself. Consider these steps:

your own mastery of ideas, of rooting out points of confusion, and generally, of preparing you for professional life.

6. Trust in the process. The learnings from a case-method course are impressive. They arrive cumulatively over time. In many cases, the learnings continue well after the course has finished. Occasionally, these learnings hit you with the force of a tsunami. But generally, the learnings creep in quietly, but powerfully, like the tide. After the case course, you will look back and see that your thinking, mastery, and appreciation have changed dramatically. The key point is that you should not measure the success of your progress on the basis of any single case discussion. Trust that in the cumulative work over many cases you will gain the mastery you seek.

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1. Find a quiet place to study. Spend at least 90 minutes there for each case study. Each case has subtleties to it, which you will miss unless you can concentrate. After two or three visits, your quiet place will take on the attributes of a habit: you will slip into a working attitude more easily. Be sure to spend enough time in the quiet place to give yourself a chance to really engage the case.

2. Access a business dictionary. If you are new to business and finance, some of the terms will seem foreign; if English is not your first language, many of the terms will seem foreign if not bizarre. Get into the habit of looking up terms that you don’t know. The benefit of this becomes cumulative. You can find good definitions online.

3. Skim the business news each day; read a substantive business magazine or blog regularly; follow the markets. Reading a newspaper or magazine helps build a context for the case study you are trying to solve at the moment, and helps you make connections between the case study and current events. The terminology of business and finance that you see in the publications helps reinforce your use of the dictionary, and hastens your mastery of terms you will see in the cases. Your learning by reading business periodicals is cumulative. Some students choose to follow a good business news website on the Internet. These have the virtue of being inexpensive and efficient, but they tend to screen too much. Having the printed publication in your hands, and leafing through it, helps the process of discovery, which is the whole point of the exercise.

4. Learn the basics of spreadsheet modeling on a computer. Many case studies now have supporting data available for analysis in spreadsheet files, such as Microsoft Excel. Analyzing the data on a computer rather than by hand both speeds up your work, and extends your reach.

5. Form a study group. The ideas in many cases are deep; the analysis can get complex. You will learn more, and perform better in class participation by discussing the cases together in a learning team before you come to class. Your team should devote an average of an hour to each case. High performance teams show a number of common attributes:

a. Members commit to the success of the team.

b. The team plans ahead, leaving time for contingencies.

c. The team meets regularly.

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Good Execution Good attitude and infrastructure must be employed properly—and one needs good execution. The extent to which a student learns depends on how the case study is approached. What can one do to gain the maximum from the study of these cases?

d. Team members show up for meetings and are prepared to contribute.

e. There may or may not be a formal leader, but assignments are clear. Team members meet their assigned obligations.

6. Get to know your professor. In the case method, students inevitably learn more from one another than from the instructor. But the teacher is part of the learning infrastructure too: a resource to be used wisely. Never troll for answers in advance of a case discussion. Do your homework; use classmates and learning teams to clear up most questions so that you can focus on the meatiest issues with the teacher. Be very organized and focused about what you would like to discuss. Remember that teachers like to learn too: if you reveal a new insight about a case or bring a clipping about a related issue in current events, the professor and student both gain from their time together. Ultimately, the best payoff to the professor is the “aha” in the student’s eyes when he or she masters an idea.

1. Reading the case. The very first time you read any case, look for the forest not the trees. This requires that your first reading be quick. Do not begin taking notes on the first round; instead, read the case like a magazine article. The first few paragraphs of a well-constructed case usually say something about the problem—read those carefully. Then quickly read the rest of the case, seeking mainly a sense of the scope of the problems, and what information the case contains to help resolve them. Leaf through the exhibits, looking for what information they hold, rather than for any analytical insights. At the conclusion of the first pass, read any supporting articles or notes that your instructor may have recommended.

2. Getting into the case situation. Develop your “awareness.” With the broader perspective in mind, the second and more detailed reading will be more productive. The reason is that as you now encounter details, your mind will be able to organize them in some useful fashion rather than inventorying them randomly. Making linkages among case details is necessary toward solving the case. At this point you can take the notes that will set up your analysis. The most successful students project themselves into the position of the decision-maker because this perspective helps them link case details as well as develop a stand on the case problem. Assignment questions may help you do this; but it is a good idea to get into the habit of doing it yourself. Here are the kinds of questions you might try to answer in preparing every case:

a. Who are the protagonists in the case? Who must take action on the problem? What do they have at stake? What pressures are they under?