Fin 4413

Finance 725Spring 2006 J. E. Hodder Corporation Finance Course Schedule Tuesday, January 17Introduction Thursday, January 19Clarkson beat Comp whatsoever disciplineNote on Financial Analysis a. How is the social clubs m superstartary performance? (Examineap propriate monetary ratios. ) b. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? c. How has Mr. Clarkson met the funding needs of the company during the boundary 1993 with 1995? Has the financial strength of Clarkson Lumber improved or deterio come ind? d. How sweet is it to take trade discounts?Tuesday, January 24Clarkson Lumber Company (continued) Reading a. Note on Financial prognostic b. Note on bevel Loans a. How much of a bestow impart Mr. Clarkson need to finance the judge expansion in gross revenue to $5. 5 million in 1996 and to take all the trade discounts? (Prep be a interpreted income statement for 1996 and a pro forma balance sheet as of December 31, 1996. ) b. A s Mr. Clarksons financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and plans for additional debt backing? . As the banker, would you approve Mr. Clarksons impart request and if so, what conditions would you put on the loan? Thursday, January 26SureCut clip, Inc. a. Evaluate SureCuts financial performance use standard ratios. b. Why brookt SureCut repay its loan on time? In addressing this question, you may find it ingestionful to construct a sources and social functions statement for the block June 30, 1995 March 31, 1996. Tuesday, January 31SureCut Shears (continued) a. What actions would you suggest that SureCut take in order to address its financial problems? If Mr.Stewart agrees to a loan extension and your recommendations argon implemented, when will SureCut be able to repay the loan in to the full? b. Would you, as Mr. Stewart, agree to a loan extension? What conditions or terms would you require? c. comparability t he constitution of the financial problems facing SureCut with those of Clarkson Lumber. Thursday, February 2Advanced Technologies, Inc. sheath composure 1 Due a. In a volatile industry much(prenominal) as semiconductor equipment manufacturing, how useful is recollective-term financial planning? b. What are the key characteristics of ATIs grocerys and operating policies?How do these characteristics influence the companys financial structure? c. Has Mr. Michaels done a good art of financial planning? What mend of possible conditions would place ATI under the greatest financing blackjack, and how great would that pressure be? d. Should ATI swop equity in 1998, thereby bringing its financial structure to a greater extent in line with those of its main competitors? Tuesday, February 7Continental Carriers, Inc. a. How is the companys financial performance? (Examineappropriate financial ratios. ) b. Given the reputation of CCIs business, how much debt can it support? . What are the respective be of the contrary financing alternatives suggested? Thursday, February 9Continental Carriers (continued) a. What information does the EBIT chart (Exhibit 3) provide? What inferences can we draw from it? b. What are the qualitative advantages and disadvantages of each of the forms of financing under consideration? c. How should the erudition of Midland Freight be financed, taking into history the explicit equals of the different alternatives as hale as different relevant considerations? Tuesday, February 14Debt Policy at UST Inc . a.From the persuasion of a bondholder, what are the prime attributes and business risks for UST? b. Why is UST considering a leveraged recapitalization after such a long history of conservative debt form _or_ system of government? c. Estimate the incremental takings on USTs value if the broad(a) $1 billion recapitalization is implemented immediately (January 1, 1999). Assume a 38% tax roam and arrant(a) debt. Also analyze, vi a a pro forma income statement, whether UST will be able to make interest payments. d. Would UST be punter off with a different initial debt level? Should it adjust the debt level through time? e.Will the recapitalization thwart USTs ability to nurse its long history of dividend payments? Thursday, February 16No Class Meeting A make-up session is tentatively scheduled for 700 PM on Thursday February 2nd. The topic will be a apprize review of Capital Structure Theory. Tuesday, February 21Stone Container Corporation (A) a. Compare Roger Stones ontogenesis and financial strategies with those of his predecessors. b. Examine the sensitivity of Stone Containers earnings and hard currency head for the hills to the paper and liner carte set cycle. Assume sales volume of 7. 5 million tons per course of instruction and a 35% bare(a) tax rate.What would be the effect of a $50 per ton determine increase? Is such an industry-wide impairment increase plausible? c. What should be Stone Containers financial priorities in 1993? d. Of the financing alternatives described in the case, which would be in the best interests of Stones plow overlapholders? Which would be in the best interests of its high-yield debt holders? Which would be prefer by its bank creditors? Thursday, February 23Stone Container Corporation (continued) Case Submission 2 Due Tuesday, February 28. Pioneer oil colour Corporation a.Does Pioneer venture its overall merged weighted average approach of capital correctly? b. When evaluating projects and allocating coronation funds among divisions, should Pioneer use a single corporate toll of capital or three-fold divisional vault rates? If multiple rates are utilise, how should they be determined? c. Should all projects within a single division use the same hurdle rate? If not, how should different standards be determined? Thursday, March 2Marriott Corporation The comprise of Capital (Abridged) a. Are the quartet components of Marriotts fina ncial outline consistent with its yield objective? b.Why does Marriott use divisional hurdle rates preferably of either a company-wide rate or project-specific rates? c. Estimate the WACC for Marriott as a whole. What risk-free rate and risk premium did you use in estimating the embody of equity? How did you cadency the firms cost of debt? Tuesday, March 7Marriott Corporation (continued) a. Estimate the cost of equity, cost of debt, and WACC for Marriotts lodging and its restaurant divisions. b. What is the cost of capital for Marriotts contract run division? How can you estimate that divisions equity cost without publicly traded same companies?Thursday, March 9Pressco, Inc. (1985) a. What is the mesh topology Present Value (NPV) of the mechanical drying equipment investment opportunity (as of December 1985) contain a 12% cost of capital for Paperco? Assume the rumored sunrise(prenominal) tax proposal is not enacted and the new equipment is installed in December 1986. b. What is the NPV of the investment project assuming that the new tax proposals are enacted, the new drying equipment is installed in December 1986, and Paperco signs a ski binding leverage contract soon enough to be eligible for the 8% Investment Tax point of reference and the use of ACRS depreciation? . Ms. Rogers knows that Papercos management incorporated a 6% universal inflation assumption into its overall cost of capital estimate. She also knows Papercos management felt that fuel costs would remain unchanged through 1990 and then rise at 6% per year thereafter. How much, if at all, would the use of this information change the projects NPV estimate? Spring Break Tuesday, March 21. E. I. du Pont de Nemours and Co. Titanium Dioxide a. What are Du Ponts warlike advantages in the Titanium Dioxide market place as of 1972? How permanent or defensible are they?What moldiness Du Pont do to retain its competitive advantages in the future? b. Given the forecasts provided in the case, estimate the incremental capital flows associated with Du Ponts growth strategy and its maintain strategy for the Titanium Dioxide market. How much risk and uncertainty surround these future cash flows? c. How might competitors respond to Du Ponts choice of either strategy? What other factors should Du Pont consider in making this finish? Which strategy do you recommend? Thursday, March 23. Wilmington Tap and clog a. Are the inflation assumptions used in the cash flow projections onsistent with the implicit inflation assumption in a 20% hurdle rate? b. Critically estimate the sales forecasts for Wilmington, its competitors, and the market as a whole. Why does adjoin 7 indicate a declining market share for Wilmington? Why are other competitors growing more chop-chop than Wilmington? c. Is it reasonable to assume that the ambition will not purchase new technology grinders (either Icahn or one of the apparent German alternatives)? If kinda you assume that Wilmingtons competit ors purchase modern grinders, how should the sales forecast be circumscribed? d.What are possible implications of the high quality taps produced on the Icahn (or similar) machines for unit sales projections and possible price differentials? e. Are there other aspects of the cash flow estimates which should be questioned? Tuesday, March 28Wilmington Tap and Die (Continued) Case Submission 3 Due Thursday, March 30Interco a. Assess Intercos financial performance. Why is the company a takeover shoot for? b. As a member of Intercos board are you persuaded by the premiums give analytic thinking (exhibit 10) and the comparable proceedings analysis (exhibit 11)? c.How does Wasserstein Perellas estimated valuation range of $68 $80 per common share for Interco result from the assumptions in exhibit 12? As a member of Intercos board, which of those assumptions would you have questioned? d. How would you advise the Interco board on the $70 per share offer? Tuesday, April 4Bougainville Po wer Station ReadingBrealey & Myers, Chapter 19 OR Ross, Westerfield, & Jaffe, Chapter 17 a. What are the determine of loan subsidies on the English and Japanese bids? b. What are the Present set for the Interest Tax Shields on each bid? . Is 100% debt optimal for the power station equipment purchase? If not, how should the bid evaluations be familiarised? d. What is the appropriate discount rate for evaluating the Base Case NPV? Thursday, April 6Southport Minerals Inc. a. What are the pros and cons of the approaches suggested in the case for evaluating the Firstburg pouch? What are the advantages of APV compared with the approaches in the case? b. How would you estimate an unlevered cost of equity for this project? c. How should anticipated inflation be incorporated in the project evaluation? . Are there any assumptions regarding projected cash flows or loan repayments that you feel are either overly optimistic or overly pessimistic? Tuesday, April 11Southport Minerals (continued ) Case Submission 4 Due Thursday, April 13 extract price and rattling Options I ReadingBrealey & Myers, Chapters 20-22 OR Ross, Westerfield, & Jaffe, Chapters 22 and 23 Tuesday, April 18Option Pricing and Real Options II Thursday, April 20Option Pricing and Real Options III Tuesday, April 25Wire Tel a.Estimate the value of the low generation harvest-feast utilize APV. How much of that value is due to financing with the secured bank loan? b. What is the effect of the being able to sell the manufacturing equipment for $4 million in year three if demand for the low generation phones is low? c. What must be the minimum value of the growth election represented by the second generation product in order to justify starting Wire Tel? Thursday, April 27MW Petroleum Corporation (A) a. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco?What sources of value most plausibly account for the difference between emptor and seller? b. Value all the MW r eserves using APV. Is your estimate more likely to be bias high or low? What are the sources of bias? c. How would you structure an analysis of MW as a portfolio of additions-in-place and options? d. pore on proved undeveloped reserves, what is the strike price for the embedded option? What are the current asset value, volatility, and other input parameters needed for an option valuation? Tuesday, May 2MW Petroleum Corporation (continued) Case Submission 5 Due Thursday, May 4Course follow-upFin 4413Finance 725Spring 2006 J. E. Hodder Corporation Finance Course Schedule Tuesday, January 17Introduction Thursday, January 19Clarkson Lumber Company ReadingNote on Financial Analysis a. How is the companys financial performance? (Examineappropriate financial ratios. ) b. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? c. How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or deteriorated? d. How attractive is it to take trade discounts?Tuesday, January 24Clarkson Lumber Company (continued) Reading a. Note on Financial Forecasting b. Note on Bank Loans a. How much of a loan will Mr. Clarkson need to finance the expected expansion in sales to $5. 5 million in 1996 and to take all the trade discounts? (Prepare a projected income statement for 1996 and a pro forma balance sheet as of December 31, 1996. ) b. As Mr. Clarksons financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and plans for additional debt financing? . As the banker, would you approve Mr. Clarksons loan request and if so, what conditions would you put on the loan? Thursday, January 26SureCut Shears, Inc. a. Evaluate SureCuts financial performance using standard ratios. b. Why cant SureCut repay its loan on time? In addressing this question, you may find it useful to construct a sources and uses statement for the peri od June 30, 1995 March 31, 1996. Tuesday, January 31SureCut Shears (continued) a. What actions would you recommend that SureCut take in order to address its financial problems? If Mr.Stewart agrees to a loan extension and your recommendations are implemented, when will SureCut be able to repay the loan in full? b. Would you, as Mr. Stewart, agree to a loan extension? What conditions or terms would you require? c. Compare the nature of the financial problems facing SureCut with those of Clarkson Lumber. Thursday, February 2Advanced Technologies, Inc. Case Submission 1 Due a. In a volatile industry such as semiconductor equipment manufacturing, how useful is long-term financial planning? b. What are the key characteristics of ATIs markets and operating policies?How do these characteristics influence the companys financial structure? c. Has Mr. Michaels done a good job of financial planning? What set of possible conditions would place ATI under the greatest financing pressure, and how great would that pressure be? d. Should ATI sell equity in 1998, thereby bringing its financial structure more in line with those of its main competitors? Tuesday, February 7Continental Carriers, Inc. a. How is the companys financial performance? (Examineappropriate financial ratios. ) b. Given the nature of CCIs business, how much debt can it support? . What are the respective costs of the different financing alternatives suggested? Thursday, February 9Continental Carriers (continued) a. What information does the EBIT chart (Exhibit 3) provide? What inferences can we draw from it? b. What are the qualitative advantages and disadvantages of each of the forms of financing under consideration? c. How should the acquisition of Midland Freight be financed, taking into account the explicit costs of the different alternatives as well as other relevant considerations? Tuesday, February 14Debt Policy at UST Inc . a.From the perspective of a bondholder, what are the primary attributes and b usiness risks for UST? b. Why is UST considering a leveraged recapitalization after such a long history of conservative debt policy? c. Estimate the incremental effect on USTs value if the entire $1 billion recapitalization is implemented immediately (January 1, 1999). Assume a 38% tax rate and perpetual debt. Also analyze, via a pro forma income statement, whether UST will be able to make interest payments. d. Would UST be better off with a different initial debt level? Should it adjust the debt level through time? e.Will the recapitalization hamper USTs ability to maintain its long history of dividend payments? Thursday, February 16No Class Meeting A make-up session is tentatively scheduled for 700 PM on Thursday February 2nd. The topic will be a brief review of Capital Structure Theory. Tuesday, February 21Stone Container Corporation (A) a. Compare Roger Stones growth and financial strategies with those of his predecessors. b. Examine the sensitivity of Stone Containers earnings and cash flow to the paper and linerboard pricing cycle. Assume sales volume of 7. 5 million tons per year and a 35% marginal tax rate.What would be the effect of a $50 per ton price increase? Is such an industry-wide price increase plausible? c. What should be Stone Containers financial priorities in 1993? d. Of the financing alternatives described in the case, which would be in the best interests of Stones shareholders? Which would be in the best interests of its high-yield debt holders? Which would be favored by its bank creditors? Thursday, February 23Stone Container Corporation (continued) Case Submission 2 Due Tuesday, February 28. Pioneer Petroleum Corporation a.Does Pioneer estimate its overall corporate weighted average cost of capital correctly? b. When evaluating projects and allocating investment funds among divisions, should Pioneer use a single corporate cost of capital or multiple divisional hurdle rates? If multiple rates are used, how should they be determined? c. S hould all projects within a single division use the same hurdle rate? If not, how should different standards be determined? Thursday, March 2Marriott Corporation The Cost of Capital (Abridged) a. Are the four components of Marriotts financial strategy consistent with its growth objective? b.Why does Marriott use divisional hurdle rates instead of either a company-wide rate or project-specific rates? c. Estimate the WACC for Marriott as a whole. What risk-free rate and risk premium did you use in estimating the cost of equity? How did you measure the firms cost of debt? Tuesday, March 7Marriott Corporation (continued) a. Estimate the cost of equity, cost of debt, and WACC for Marriotts lodging and its restaurant divisions. b. What is the cost of capital for Marriotts contract services division? How can you estimate that divisions equity costs without publicly traded comparable companies?Thursday, March 9Pressco, Inc. (1985) a. What is the Net Present Value (NPV) of the mechanical dry ing equipment investment opportunity (as of December 1985) assuming a 12% cost of capital for Paperco? Assume the rumored new tax proposal is not enacted and the new equipment is installed in December 1986. b. What is the NPV of the investment project assuming that the new tax proposals are enacted, the new drying equipment is installed in December 1986, and Paperco signs a binding purchase contract soon enough to be eligible for the 8% Investment Tax Credit and the use of ACRS depreciation? . Ms. Rogers knows that Papercos management incorporated a 6% general inflation assumption into its overall cost of capital estimate. She also knows Papercos management felt that fuel costs would remain unchanged through 1990 and then rise at 6% per year thereafter. How much, if at all, would the use of this information change the projects NPV estimate? Spring Break Tuesday, March 21. E. I. du Pont de Nemours and Co. Titanium Dioxide a. What are Du Ponts competitive advantages in the Titanium D ioxide market as of 1972? How permanent or defensible are they?What must Du Pont do to retain its competitive advantages in the future? b. Given the forecasts provided in the case, estimate the incremental cash flows associated with Du Ponts growth strategy and its maintain strategy for the Titanium Dioxide market. How much risk and uncertainty surround these future cash flows? c. How might competitors respond to Du Ponts choice of either strategy? What other factors should Du Pont consider in making this decision? Which strategy do you recommend? Thursday, March 23. Wilmington Tap and Die a. Are the inflation assumptions used in the cash flow projections onsistent with the implicit inflation assumption in a 20% hurdle rate? b. Critically evaluate the sales forecasts for Wilmington, its competitors, and the market as a whole. Why does exhibit 7 indicate a declining market share for Wilmington? Why are other competitors growing more rapidly than Wilmington? c. Is it reasonable to ass ume that the competition will not purchase new technology grinders (either Icahn or one of the apparent German alternatives)? If instead you assume that Wilmingtons competitors purchase modern grinders, how should the sales forecast be modified? d.What are possible implications of the higher quality taps produced on the Icahn (or similar) machines for unit sales projections and possible pricing differentials? e. Are there other aspects of the cash flow estimates which should be questioned? Tuesday, March 28Wilmington Tap and Die (Continued) Case Submission 3 Due Thursday, March 30Interco a. Assess Intercos financial performance. Why is the company a takeover target? b. As a member of Intercos board are you persuaded by the premiums paid analysis (exhibit 10) and the comparable transactions analysis (exhibit 11)? c.How does Wasserstein Perellas estimated valuation range of $68 $80 per common share for Interco result from the assumptions in exhibit 12? As a member of Intercos board, which of those assumptions would you have questioned? d. How would you advise the Interco board on the $70 per share offer? Tuesday, April 4Bougainville Power Station ReadingBrealey & Myers, Chapter 19 OR Ross, Westerfield, & Jaffe, Chapter 17 a. What are the values of loan subsidies on the English and Japanese bids? b. What are the Present Values for the Interest Tax Shields on each bid? . Is 100% debt optimal for the power station equipment purchase? If not, how should the bid evaluations be adjusted? d. What is the appropriate discount rate for evaluating the Base Case NPV? Thursday, April 6Southport Minerals Inc. a. What are the pros and cons of the approaches suggested in the case for evaluating the Firstburg Project? What are the advantages of APV compared with the approaches in the case? b. How would you estimate an unlevered cost of equity for this project? c. How should anticipated inflation be incorporated in the project evaluation? . Are there any assumptions regarding pr ojected cash flows or loan repayments that you feel are either overly optimistic or overly pessimistic? Tuesday, April 11Southport Minerals (continued) Case Submission 4 Due Thursday, April 13Option Pricing and Real Options I ReadingBrealey & Myers, Chapters 20-22 OR Ross, Westerfield, & Jaffe, Chapters 22 and 23 Tuesday, April 18Option Pricing and Real Options II Thursday, April 20Option Pricing and Real Options III Tuesday, April 25Wire Tel a.Estimate the value of the first generation product using APV. How much of that value is due to financing with the secured bank loan? b. What is the effect of the being able to sell the manufacturing equipment for $4 million in year three if demand for the first generation phones is low? c. What must be the minimum value of the growth option represented by the second generation product in order to justify starting Wire Tel? Thursday, April 27MW Petroleum Corporation (A) a. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco?What sources of value most plausibly account for the difference between buyer and seller? b. Value all the MW reserves using APV. Is your estimate more likely to be biased high or low? What are the sources of bias? c. How would you structure an analysis of MW as a portfolio of assets-in-place and options? d. Focusing on proved undeveloped reserves, what is the strike price for the embedded option? What are the current asset value, volatility, and other input parameters needed for an option valuation? Tuesday, May 2MW Petroleum Corporation (continued) Case Submission 5 Due Thursday, May 4Course Review