Case Map for

Ross, Westerfield & Jaffe: Corporate Finance

(McGraw-Hill)

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

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

PART I: OVERVIEW

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

Chapter 2 Financial
Statements and Cash Flow Abstract
The Balance Sheet Discusses the accounting equation and defines common terms found
(HBS background note): David in the statement. Also provides an example of the balance sheets of
F. Hawkins; Jacob Cohen Coca-Cola Co., Ariba, Inc., and Safeway, Inc.
Product Number: 101108 Subjects Covered: Accounting; Balance sheets; Financial reporting
Length: 7p
Kmart Corp.: Christopher F. Describes a situation in which a company (Kmart) refinances a portion
Noe of its debt. Used to illustrate how the asset and liability sides of the
Product Number: 199017 balance sheet are linked.
Length: 10p Subjects Covered: Accounting procedures; Assets; Balance sheets;
Debt management; Discount department stores; Liability; Retail stores
The Income Statement Includes a description of the common components of the income
(HBS background note): David statement. Includes examples of the income statements of Home
F. Hawkins; Jacob Cohen Depot, Inc., Lucent Technology, Inc., Gap, Inc., and McDonald's Corp.
Product Number: 101109 and lends itself to a brief discussion regarding these companies.
Length: 6p Subjects Covered: Accounting; Financial reporting; Income
The Statement of Cash Flows Discusses the components of the statement of cash flow and its direct
(HBS background note): David and indirect format of presentation. Also briefly explains the difference
F. Hawkins; Jacob Cohen between cash and accrual accounting and provides examples of
Product Number: 101107 Standard Microsystems Corp. and Intel Corp.
Length: 8p Subjects Covered: Accounting; Cash flow; Financial reporting
Preparing and Using the Explains the concepts and procedures behind the statement of cash
Statement of Cash Flows flows. Presents an overview of the reporting objectives of this report,
(HBS background note): Robert and describes in detail the preparation of the cash flow statement
L. Simons; Antonio Davila using both the indirect method and the direct method. A complete
Product Number: 196108 numerical example is presented. Financial analysis techniques using
Length: 10p the cash flow statement are also described. A rewritten version of an
earlier note.
Subjects Covered: Accounting procedures; Capital budgeting; Cash
flow; Financial analysis; Financial ratios; Financial reporting
Statements of Cash Flows: Introduces the statement of cash flow. Contains three examples of
Three Examples: William J. multi-year statements of cash flows from three unidentified companies.
Bruns Jr.; Julie H. Hertenstein The analysis tasks include examination of cash flows, analysis of
Product Number: 193103 profitability of operations, investment policies, and financing.
Length: 8p Learning Objective: To introduce the statement of cash flows now
Teaching Note: 193173 required in the United States.
Chemalite, Inc. (B): Cash Flow Students are asked to use actual and pro forma financial statements to
Analysis: Robert L. Simons; prepare a statement of cash flows under both the direct and indirect
Antonio Davila method.
Product Number: 195130 Subjects Covered: Accounting procedures; Cash flow; Chemicals;
Length: 3p Financial analysis
Teaching Note: 198120
Sears, Roebuck and Co. vs. This case is designed to familiarize students with the use of financial
Wal-Mart Stores, Inc.: Gregory ratios. Two retailers, Sears, Roebuck and Co. and Wal-Mart Stores,
S. Miller; Christopher F. Noe Inc., have a very similar value for return on equity (ROE) in the 1997
Product Number: 101011 fiscal year. Students use the information in the case and the
Length: 18p accompanying exhibits, which include financial statements as well as
Teaching Note: 102052 disclosures regarding corporate strategies and accounting policies for
each company, to analyze the value creation process for each firm.
This case provides a good introduction regarding the combination of
such information to create a powerful tool for financial statement
analysis.
Subjects Covered: Discount department stores; Financial analysis;
Financial ratios; Financial statements; Retail stores; Return on equity
Butler Lumber Co.: Thomas R. The Butler Lumber Co. is faced with a need for increased bank
Piper financing due to its rapid sales growth and low profitability. Students
Product Number: 292013 must determine the reasons for the rising bank borrowing, estimate the
Length: 4p amount of borrowing needed, and assess the attractiveness of the
Teaching Note: 292014 loan to the bank. A rewritten version of an earlier case. Allows
students to practice ratio analysis, financial forecasting, and evaluating
financing alternatives.
Subjects Covered: Financial analysis; Financial planning;
Forecasting; Loan evaluation
Crystal Meadows of Tahoe, An introductory case in cash flow analysis and the preparation of
Inc.: William J. Bruns Jr. statements of cash flows. Based on the 1991 income statement and
Product Number: 192150 balance sheet at a ski resort company, the case provides additional
Length: 6p information which allows a student to prepare both a direct and an
Teaching Note: 193128 indirect statement of cash flows. A rewritten version of an earlier case.
Subjects Covered: Accounting policies; Cash flow; Management
accounting; Recreation
Toy World, Inc.: W. Carl Kester A shift from seasonal to level production of toys will change the
Product Number: 295073 seasonal cycle of Toy World's working capital needs and necessitate
Length: 6p new bank credit arrangements. Students must analyze the company's
Teaching Note: 297118 performance, forecast funds needs, and make a recommendation.
Learning Objective: To introduce the pattern of current assets and
cash flows in a seasonal company and provide an elementary exercise
in the construction of pro forma financial statements and estimation of
funds needs.
Chapter 3 Financial
Statements Analysis and
Long-Term Planning Abstract

PART II: VALUATION AND CAPITAL BUDGETING

Chapter 4 Discounted Cash
Flow Valuation
Abstract

Chapter 5 How to Value

Bonds and Stocks Abstract
Bond Math A set of four exercises that teach compounding interest and valuing
(Exercises): Todd Pulvino bonds.
Product Number: 201101 Learning Objective: To teach the mechanics of valuing bonds.
Length: 4p

Note on Valuation in Private Discusses several ways in which venture-backed firms can be valued,
Equity Settings: Joshua Lerner; including comparables, net present value, decision-tree analysis, and
John Willinge the "venture capital method."
Product Number: 297050 Learning Objective: Provides an introduction to valuation of
Length: 21p entrepreneurial firms.
Cougars: Scott P. Mason; Mihir Provides an introduction to zero coupon bonds and stripping coupon
Desai bonds. Concerns the relationship between the spot curve, the strip
Product Number: 295006 curve, and the coupon curve.
Length: 6p Subjects Covered: Bonds; Innovation; Interest rates; Pricing
Teaching Note: 295098
Jupiter Management Co.: The manager of a small company growth fund considers relative
Ronald W. Moore merits of investing in a company's convertible debt versus its common.
Product Number: 292107 Subjects Covered: Investment management; Mutual funds; Portfolio
Length: 24p management
Teaching Note: 298023
Arbitrage in the Government Documents a pricing anomaly in the large and liquid treasury bond
Bond Market?: Michael E. market. The prices of callable treasury bonds seem to be inconsistent
Edleson; Peter Tufano with the prices of noncallable treasuries and an arbitrage opportunity
Product Number: 293093 appears to exist. Permits instructors to introduce the treasury market,
Length: 9p the concept of creating synthetic instruments, principles of arbitrage,
Teaching Note: 298023 and institutional frictions in the bond markets.
Subjects Covered: Bonds; Capital markets; Securities analysis;
Valuation
Ford Motor Co.’s Value In April 2000, Ford Motor Co. announced a shareholder Value
Enhancement Plan (A): Andre Enhancement Plan (VEP) to significantly recapitalize the firm's
F. Perold ownership structure. Ford had accumulated $23 billion in cash
Product Number: 201079 reserves and under the VEP would return as much as $10 billion of
Length: 17p this cash to shareholders. Students must wrestle with the following
Teaching Note: 204116 questions: Why was Ford proposing this transaction instead of a
B case available traditional share repurchase or a cash dividend? How did the interests
of the Ford family factor into this decision, and what did the transaction
imply about the future involvement of the family in the company? Why
was Ford distributing such a significant amount of cash at this
particular point in time? Did the distribution signal a change in the
company's appetite for making acquisitions or future capital
expenditures? If shareholders collectively elected to receive less than
$10 billion in cash, how would Ford distribute the remaining cash?
Learning Objective: To provide a rich setting in which to discuss one
of the most basic decisions corporations face: how to return cash to
shareholders. It is a vehicle for discussing corporate financial policies
and capital structure decisions, particularly as they relate to cash
dividends and share repurchases.
Global Equity Markets: The Royal Dutch and Shell common stocks are securities with linked cash
Case of Royal Dutch and Shell: flow, so that the ratio of their stock prices should be fixed. In fact, the
Kenneth A. Froot; Andre F. ratio is highly variable, moving with the markets where the securities
Perold are intensively traded. Royal Dutch trades more actively in the
Product Number: 296077 Netherlands and U.S. markets, whereas Shell trades more actively in
Length: 19p the United States. The result is that the Royal Dutch/Shell relative
Teaching Note: 201093 price moves positively with the Netherlands and U.S. markets and
negatively with the U.K. market. The ability to arbitrage these
disparities and their causes are major case focal points.
Learning Objective: To demonstrate how valuation is affected by the
location of trade/ownership, and why arbitrage doesn't lead to
integration of international financial markets.
Dividend Policy at FPL Group, A Wall Street analyst has just learned that FPL (the holding company
Inc. (A): Benjamin C. Esty; for Florida's largest electric utility) may cut its dividend in several days
Craig F. Schreiber despite a 47-year streak of consecutive dividend increases. In
Product Number: 295059 response to the deregulation of the electric utility industry, FPL has
Length: 17p substantially revised its competitive strategy over the past several
Teaching Note: 296072 years. The analyst must decide whether a change in dividend policy
B case available will be a part of FPL's financial strategy. Allows students to examine
how firms set and change dividend policy. Also provides background
 for examining why firms pay dividends and whether dividend policy
matters.
Learning Objective: To examine how firms set and change dividend
policy. Also provides a background for examining why firms pay
dividends and whether dividend policy matters.

Chapter 6 Net Present Value

and Other Investment Rules Abstract
Investment Analysis and A set of five exercises in capital budgeting. Student calculates and
Lockheed compares various decision criteria (including IRR and NPV) for capital
TriStar: Michael E. Edleson investment projects. This is an introductory case, where relevant cash
Product Number: 291031 flows are provided, and the focus is on the discounting mechanics and
Length: 6p the decision to invest. In addition, one exercise directly probes the link
Teaching Note: 291032 between positive NPV projects, and value added to the shareholders.
The final "exercise" is a three page mini-case analyzing Lockheed's
decision to invest in the TriStar L-1011 Airbus project. This drives
home the importance of discounting and NPV, and shows the adverse
effect of a negative NPV project on shareholder value.
Subjects Covered: Aerospace industry; Capital budgeting; Capital
investments; Present value; Project evaluation; Securities analysis
Valuing the Option Component The flows-to-equity or equity cash flows valuation method is a
of Debt and Its Relevance to discounted cash flow method used to estimate the equity portion of the
DCF-Based Valuation Methods capital structure. It is closely related to the venture capital/buyout
(HBS background note): Lisa valuation method, which estimates the IRR of the stream of cash flows
Meulbroek accruing to equity holders. Both of these methods are likely to result in
Product Number: 201110 an estimate of equity value that is too low when the firm's debt is risky
Length: 5p (or, equivalently, an IRR that is too high, depending on the method
used to estimate terminal value.) This note describes a method for
estimating the size of this bias, drawing upon insight from option-
pricing.
Learning Objective: Can be used in conjunction with cases involving
direct estimation of equity value, using a discounted cash flow
technique, and with cases employing the venture capital/buyout fund
valuation method.
Sellars' Market A shop owner has limited shelf space for display of impulse purchase
(HBS exercise): David E. Bell products near the cash register. He must select only nine to display.
Product Number: 189001 Exercise shows the relevance of opportunity cost or resource pricing.
Length: 2p By setting an appropriate charge for the shelf space the products self-
select for the appropriate shelves.
Subjects Covered: Linear programming; Managerial economics;
Resource allocation; Retailing; Transfer pricing

Chapter 7 Making Capital

Investment Decisions Abstract

Chapter 8 Risk Analysis, Real

Options, and Capital
Budgeting Abstract
Ocean Carriers: Erik Stafford; In January 2001, Mary Linn, VP of finance for Ocean Carriers, a
Angela Chao; Kathleen S. shipping company with offices in New York and Hong Kong, was
Luchs evaluating a proposed lease of a ship for a three-year period,
Product Number: 202027 beginning in early 2003. The customer was eager to finalize the
Length: 6p contract to meet his own commitments and offered very attractive
Teaching Note: 202029 terms. No ship in Ocean Carrier's current fleet met the customer's
requirements. Mary Linn, therefore, had to decide whether Ocean
Carriers should immediately commission a new capsize carrier that
would be completed two years hence and could be leased to the
customer.
Learning Objective: Provides the opportunity for students to make a
capital budgeting decision. The key pedagogical objective is to
develop an understanding of how discounted cash flow analysis can
be used to make investment and corporate policy decisions.
Tree Values: Richard S. Describes two alternative tree-cutting strategies. The first is to cut all
Ruback; Kathleen S. Luchs trees that are at least 12 inches in diameter at breast height. The
Product Number: 201031 second is to thin the forest by cutting less desirable trees immediately
Length: 3p and harvesting the crop trees later. The case presents information for
Teaching Note: 202018 students to estimate the cash flows for each alternative. After
estimating the corresponding cash flows, students have the
opportunity to use discounted cash flow techniques to decide when to
cut trees under each strategy and to select which strategy maximizes
the value of the forest.
Subjects Covered: Capital budgeting; Cash flow; Forest products;
Present value; Valuation
Capital Budgeting: Discounted Comprises seven problems that collectively allow students to work
Cash Flow Analysis through each type of cash flow that is encountered in capital
(Exercise): Thomas R. Piper budgeting. The instructor can also address such issues as product
Product Number: 298068 cannibalization and real options.
Length: 6p Learning Objective: An effective introduction to capital budgeting.
PART III RISK

Chapter 9 Risk and Return:

Lessons from Market History Abstract

Chapter 10 Return and Risk:

The Capital-Asset Pricing
Model (CAPM) Abstract
Why Manage Risk? Conventional finance theory demonstrates that, under simplistic
(HBS background note): Peter assumptions, firms cannot add to shareholder value through the use of
Tufano; Jonathan S. Headley risk management activities. Modern finance theory recently has begun
Product Number: 294107 to carefully consider and examine those circumstances under which
Length: 6p firms can add to shareholder value. This note briefly reviews the major
ideas prevalent in both conventional and modern finance literature
regarding the potential benefits of risk management.
Learning Objective: Enables students to question the conventional
wisdom that assumes risk management activities are always beneficial
to a corporation. In addition, students will examine five specific
conditions under which financial risk management can demonstrably
add to shareholder value.
Lex Service PLC: Cost of The Lex Service company has grown to become a large multidivisional
Capital: W. Carl Kester; Kendall company with a substantial capital budget. In 1993, the board was
Backstrand reviewing its capital budgeting procedures. Specifically, it sought to
Product Number: 296003 determine the company's cost of capital and whether it should use
Length: 12p different hurdle rates for different divisions. Introduces practical
Teaching Note: 204158 techniques for estimating the cost of equity using CAPM, and
designing discount rates appropriate for businesses of different risk.
Learning Objective: To introduce students to practical techniques for
estimating the cost of equity using CAPM and designing discount rates
appropriate for businesses with different levels of risk.
Marriott Corp.: The Cost of Gives students the opportunity to explore how a company uses the
Capital (Abridged): Richard S. Capital Asset Pricing Model (CAPM) to compute the cost of capital for
Ruback each of its divisions. The use of Weighted Average Cost of Capital
Product Number: 289047 (WACC) formula and the mechanics of applying it are stressed.
Length: 10p Subjects Covered: Capital costs; Hotels & motels
Teaching Note: 298081
Concordia Electronic Systems The management of an electronics company is attempting to decide
Test: Thomas R. Piper whether to use a single hurdle rate for all projects or to move to a
Product Number: 298115 system of different hurdle rates for each of its two divisions. The
Length: 2p divisions differ substantially in terms of risk and seem to have
substantially different costs of capital.
Learning Objective: Estimation of cost of capital based on the capital
asset pricing model.
Cost of Capital at Ameritrade: Ameritrade Holding Corp. is planning large marketing and technology
Mark Mitchell; Erik Stafford investments to improve the company's competitive position in deep-
Product Number: 201046 discount brokerage by taking advantage of emerging economies of
Length: 24p scale. In order to evaluate whether the strategy would generate
Teaching Note: 201123 sufficient future cash flows to merit the investment, Joe Ricketts,
chairman and CEO of Ameritrade, would need an estimate of the
project's cost of capital. There is considerable disagreement as to the
correct cost of capital estimate. A research analyst pegs the cost of
capital at 12%, the CFO of Ameritrade uses 15%, and some members
of Ameritrade management believe that the borrowing rate of 9% is
the rate by which to discount the future cash flows expected to result
from the project.
Learning Objective: A two-day case to estimate the cost of capital
that Ameritrade should employ in evaluating the proposed large
investments in marketing and technology. The lesson plan builds on
the prior cases in the Risk & Return module. Uses the capital asset
pricing model to estimate Ameritrade's cost of capital. Focus is on
CAPM variables such as the risk free rate, market risk premium, and
beta. Students will use regression analysis to directly calculate the
beta estimates. Arguments will be made as to which comparable firms
(brokerage firms or Internet firms) should be used to obtain beta
estimates.
New World Development Co. New World Development Co. Ltd. (NWD) was a leading conglomerate
Ltd.: Diversify or Focus?: Su based in Hong Kong. After more than 20 years of operations, the
Han Chan; Ko Wang; Mary Ho group had expanded its core businesses to include property,
Product Number: HKU166 infrastructure, services, and telecommunications. From late 1997 to
Length: 16p June 2001, the stock price performance of the company had been
Teaching Note: HKU167 abysmal. Its efforts at asset disposals to reduce gearing, while making
additional investments in new businesses, confused investors.
Security analysts also blamed the company for not keeping its promise
to focus on its core business of property.
 Learning Objective: Requires students to conduct an objective
assessment of NWD on both a divisional and a consolidated basis. It
provides sufficient information for them to compute the divisional cost
of capital using the capital asset pricing model (CAPM) and to conduct
a simple Economic Value Added (EVA) analysis.
Beta Management Co.: Michael A manager of a small investment company has been successfully
E. Edleson using index funds for limited market timing. Growth has allowed her to
Product Number: 292122 move into picking stocks. She is considering two small and highly
Length: 5p variable listed stocks, but is concerned about the risk that these
Teaching Note: 294113 investments might add to her "portfolio." Provides a lead-in to the
CAPM. Students learn about total risk, non-diversifiable or portfolio
risk, and (CAPM) beta; calculate variability of the stocks separately,
and portfolio variance with and without the stocks, to see how an
extremely risky (but low-beta) stock actually reduces risk; and
calculate stock betas.
Subjects Covered: Cost benefit analysis; Diversification; Efficient
markets; Investment management; Portfolio management; Regression
analysis; Risk assessment
Chapter 11 An Alternative
View of Risk and Return:
The Arbitrage Pricing Theory Abstract
Long-Term Capital Long-Term Capital Management, L.P. (LTCM) was in the business of
Management, L.P. (A): Andre F. engaging in trading strategies to exploit market pricing discrepancies.
Perold Because the firm employed strategies designed to make money over
Product Number: 200007 long horizons--six months to two years or more--it adopted a long-term
Length: 23p financing structure designed to allow it to withstand short-term market
B, C, and D supplemental cases fluctuations. In many of its trades, the firm was in effect a seller of
available liquidity. LTCM generally sought to hedge the risk-exposure
components of its positions that were not expected to add incremental
value to portfolio performance, and to increase the value-added
component of its risk exposures by borrowing to increase the size of
its positions. The fund's positions were diversified across many
markets. This case is set in September 1997, when, after three and a
half years of high investment returns, LTCM's fund capital had grown
to $6.7 billion. Because of the limitations imposed by available market
liquidity, LTCM was considering whether it was a prudent and
opportune moment to return capital to investors.
Learning Objective: Can be used to discuss a broad range of issues
relating to arbitrage, market efficiency, implementation of investment
strategies, liquidity shocks, risk management, financial intermediation,
investment management, hedge funds, incentives, systemic risk, and
regulation.
Strategic Capital Management, Strategic Capital Management, LLC is a hedge fund planning to make
LLC (A): Erik Stafford; Mark financial investments in Creative Computers and Ubid. Creative
Mitchell; Todd Pulvino Computers recently sold approximately 20% of its Internet auction
Product Number: 202024 subsidiary, Ubid, to the public at $15 per share. Ubid's stock price
Length: 3p closed the first day of trading at $48, giving Ubid a $439 million market
Teaching Note: 202028 capitalization. Paradoxically, the parent's stock price did not keep pace
B and C cases available with that of its subsidiary. At the end of Ubid's first day as a public
company, Creative Computers' equity value was less than the value of
its stake in Ubid. The market prices implied that Creative Computers'
 non-Ubid assets had a value of negative $79 million. The relative
prices and ownership link between Creative Computers and Ubid
suggests a potential arbitrage opportunity. To evaluate how best to
exploit this investment opportunity, Elena King, the manager of the
hedge fund, must understand the risks and expected returns
associated with different long and short equity positions.
Learning Objective: To develop an understanding of how arbitrage
acts to enforce the law of one price and to keep markets efficient. Also
provides a venue to discuss the various real world market
imperfections that can prevent arbitrageurs from immediately
eliminating mispricings in equity markets. Best taught at the end of a
capital markets module.
Farallon Capital Management: Farallon Capital Management, an investment firm that specializes in
Risk Arbitrage (A): Andre F. risk arbitrage, has taken significant long and short positions in MCI
Perold; Robert Howard Communications and British Telecommunications, respectively, in the
Product Number: 299020 belief that the proposed merger of these firms will be successfully
Length: 27p completed. Raises the issues facing Farallon as positive and negative
B case available events relating to the merger unfold. Provides a rich institutional
setting for understanding certain investment strategies involving short
selling, and for understanding merger arbitrage and its function in the
capital markets.
Subjects Covered: Acquisitions; Arbitrage; Investment management;
Mergers; Risk management
RJR Nabisco Holdings Capital An investment manager notices a large apparent discrepancy in the
Corp.--1991: Peter Tufano prices of two nearly-identical bonds issued in conjunction with a major
Product Number: 292129 leveraged buyout. The manager must figure out whether the
Length: 10p instruments are mispriced relative to one another, and if so, how to
Teaching Note: 296058 capture arbitrage profits from the temporary anomaly. The case
introduces students to a wide variety of instruments ranging from very
simple treasury strips to P-I-K debentures. Encourages students to
devise "arbitrage" positions and understand the degree to which these
positions are riskless.
Subjects Covered: Bonds; Capital markets; Investment management;
Leveraged buyouts; Pricing
Chapter 12 Risk, Cost of
Capital,
and Capital Budgeting Abstract
Cost of Capital at Ameritrade: Ameritrade Holding Corp. is planning large marketing and technology
Mark Mitchell; Erik Stafford investments to improve the company's competitive position in deep-
Product Number: 201046 discount brokerage by taking advantage of emerging economies of
Length: 24p scale. In order to evaluate whether the strategy would generate
Teaching Note: 201123 sufficient future cash flows to merit the investment, Joe Ricketts,
chairman and CEO of Ameritrade, would need an estimate of the
project's cost of capital. There is considerable disagreement as to the
correct cost of capital estimate. A research analyst pegs the cost of
capital at 12%, the CFO of Ameritrade uses 15%, and some members
of Ameritrade management believe that the borrowing rate of 9% is
the rate by which to discount the future cash flows expected to result
from the project.
Learning Objective: A two-day case to estimate the cost of capital
that Ameritrade should employ in evaluating the proposed large
 investments in marketing and technology. The lesson plan builds on
the prior cases in the Risk & Return module. Uses the capital asset
pricing model to estimate Ameritrade's cost of capital. Focus is on
CAPM variables such as the risk free rate, market risk premium, and
beta. Students will use regression analysis to directly calculate the
beta estimates. Arguments will be made as to which comparable firms
(brokerage firms or Internet firms) should be used to obtain beta
estimates.
Lex Service PLC: Cost of The Lex Service company has grown to become a large multidivisional
Capital: W. Carl Kester; Kendall company with a substantial capital budget. In 1993, the board was
Backstrand reviewing its capital budgeting procedures. Specifically, it sought to
Product Number: 296003 determine the company's cost of capital and whether it should use
Length: 12p different hurdle rates for different divisions.
Teaching Note: 204158 Learning Objective: To introduce practical techniques for estimating
the cost of equity using CAPM, and designing discount rates
appropriate for businesses of different risk.
Pioneer Petroleum Corp.: Pioneer is an integrated oil company. Its operations include
Richard S. Ruback exploration and development, production, transportation, and
Product Number: 292011 marketing. The case focuses on Pioneer's cost of capital calculations
Length: 5p and its choice between a single company-wide cost of capital or
Teaching Note: 292080 divisional costs of capital. Provides students the opportunity to learn
how to calculate a company-wide weighted average cost of capital. An
appropriate measure of the cost of equity capital is presented so that
students are able to challenge their understanding of key concepts by
critiquing the company's measure and suggesting their own
Subjects Covered: Capital budgeting; Capital costs

Leveraged Betas and the Cost The objective is to delineate on methodology for measuring the risk
of Equity associated with financial leverage and estimating its impact on the
(HBS background note): Paul cost of equity capital.
Asquith; David M. Mullins Subjects Covered: Capital costs; Capital structure; Equity financing
Product Number: 288036
Length: 11p
Financial Leverage, the Capital
Demonstrates how the capital asset pricing model can be used to
Asset Pricing Model and the estimate the impact of financial leverage on the cost of equity capital.
Cost of Equity Capital The levering and unlevering of betas are illustrated. Also presents a
(HBS background note): David methodology for decomposing the cost of equity into its three
W. Mullins Jr. components--the risk-free rate, a premium for business, and a
Product Number: 280100 premium for financial risk.
Length: 12p Subjects Covered: Capital costs; Capital structure; Cost analysis;
Financial management; Models; Risk assessment
PART IV: CAPITAL STRUCTURE AND DIVIDEND POLICY
Chapter 13 Corporate
Financing Decisions
And Efficient Capital Markets Abstract
The NASDAQ Stock Market, NASDAQ's mission "to facilitate capital formation" is threatened by the
Inc.: Andre F. Perold; Austin emergence of Electronic Communication Networks, which are not as
Scee heavily regulated by the SEC. This case reviews the development of
Product Number: 202008 NASDAQ and it's evolution from a loose network of broker-dealers
Length: 28p through to its proposed SuperMontage. SuperMontage is a centralized
order book, where multiple parties can place orders (both buy and sell)
 for the stocks they wish to trade and where entire supply and demand
curves can be displayed. To understand the context, students will
learn about the structure of the capital markets and why it concerns
regulators and investors.
Learning Objective: Students are expected to learn about the
structure of the (financial) capital markets, why it concerns regulators
and investors, and the innovations that are made to increase
efficiencies.
Beta Management Co.: Michael A manager of a small investment company has been successfully
E. Edleson using index funds for limited market timing. Growth has allowed her to
Product Number: 292122 move into picking stocks. She is considering two small and highly
Length: 5p variable listed stocks, but is concerned about the risk that these
Teaching Note: 294113 investments might add to her "portfolio." Provides a lead-in to the
CAPM. Students learn about total risk, non-diversifiable or portfolio
risk, and (CAPM) beta; calculate variability of the stocks separately,
and portfolio variance with and without the stocks, to see how an
extremely risky (but low-beta) stock actually reduces risk; and
calculate stock betas.
Subjects Covered: Cost benefit analysis; Diversification; Efficient
markets; Investment management; Portfolio management; Regression
analysis; Risk assessment
The Harmonized Savings Plan On August 11, 1998, United States' Amoco Corp. (NYSE: AR) and the
at BP Amoco: Luis M. Viceira British Petroleum Co. (BP), p.l.c. (NYSE: BP), announced the BPC
Product Number: 201052 merger with Amoco. This deal was the largest industrial merger to
Length: 17p date, and created the world's third-largest oil company, BP (NYSE:
Teaching Note: 206121 BP). This case focuses on the issues surrounding the integration of
the employee-defined contribution plans at Amoco and the U.S.
subsidiary of BP. One of them was that the pre-merger plans had very
different investment structures. While Amoco had offered its
employees only low-cost index funds, BP America had relied on
actively managed mutual funds. The new plan, which would have
more than 40,000 participants and $7 billion in assets, would have to
either choose one of these approaches, or try to integrate them into
one single structure.
Learning Objective: To provide students with ample opportunities to
discuss issues such as market efficiency, active versus passive
(indexed) asset management, mutual fund performance evaluation,
the design of private pension plans, and the mutual fund industry.

Chapter 14 Long-Term
Financing: An Introduction Abstract
USX Corp.: Stuart C. Gilson; A large diversified steel and energy firm is pressured by a corporate
Jeremy Cott raider to spin off its steel business in order to increase its stock price.
Product Number: 296050 As an alternative to the spinoff, management proposes replacing the
Length: 20p company's common stock with two new classes of "targeted" stock
Teaching Note: 298085 that would represent separate claims against each business segment's
cash flows, allowing the stock market to value each business
separately (and more accurately).
Learning Objective: The case provides an opportunity to compare
alternative restructuring strategies that have the same objective (in this
case, to increase the company's stock price by segmenting cash flows
 from its distinct businesses).
Telefonica de Argentina S.A. : Deals with the privatization of the Argentine telephone industry.
Steven R. Fenster; Rajiv Focuses on the restructuring aspect. Commercial banks owned
Gharalia sovereign debt of Argentina trading at a deep discount to par. The
Product Number: 292039 question is whether the banks should exchange their sovereign debt
Length: 23p instruments for the common or preferred stock of Telefonica. The
Teaching Note: 294015 purpose is to evaluate a choice between poor securities valued at the
point of decision by analyzing how these various securities might look
in the future.
Subjects Covered: Bankruptcy; Capital structure; Currency; Financial
strategy; Investment banking; Privatization; Restructuring; South
America
Avon Products: Jonathan Avon Products announced both a change in its business focus and a
Tiemann reduction of its dividend in June 1988. To offset the likely stock price
Product Number: 289049 effect of the dividend reduction, Avon announced at the same time an
unusual exchange offer, under which it would take up to 25% of its
Length: 9p common stock in exchange for an unusual preferred stock. The case
Teaching Note: 290004 & traces the history of Avon from 1979-88. Requires students to evaluate
292059 Avon's efforts at diversification in the early 1980s, and to relate that
effort to the company's dividend history. Also requires students to
evaluate an unusual security. Suitable for first-year students or for a
second-year capital markets course.
Subjects Covered: Cosmetics; Diversification; Dividends; Non-store
retailing; Securities; Valuation
Chapter 15 Capital Structure:
Basic Concepts
and
Chapter 16 Capital Structure:
Limits to the Use of Debt Abstract
Debt Policy at UST, Inc.: Mark UST, Inc. is a very profitable smokeless tobacco firm with low debt vis-
Mitchell a-vis other firms in the tobacco industry. The setting for the case is
Product Number: 200069 UST's recent decision to substantially alter its debt policy by borrowing
Length: 14p $1 billion to finance its stock repurchase program.
Teaching Note: 201002 Learning Objective: Introduction to optimal capital structure with
emphasis on calculation of interest tax shields.

Continental Carriers, Inc.: W. A U.S. trucking company is considering using debt for the first time to
Carl Kester acquire another company. The directors of the company are divided in
Product Number: 291080 their opinion of the likely impact of leverage on Continental Carriers'
Length: 5p performance. Their differences must be reconciled and a decision
Teaching Note: 292050 reached about whether to issue new debt or equity to fund the
acquisition. Students are introduced to the impact of leverage on
performance variables such as profits, growth, earnings per share, and
stock price. A rewritten version of an earlier case.
Subjects Covered: Acquisitions; Capital structure; Debt management;
Equity financing; Expansion; Financial analysis; Leveraged buyouts;
Trucking;
Thermo Electron Corp.: Carliss George Hatsopoulos, CEO at Thermo Electron Corp., is considering
Y. Baldwin; Joetta Forsyth whether to issue shares in a subsidiary via an initial public offering
Product Number: 292104 (IPO). The company has developed an unusual corporate structure in
Length: 25p which subsidiaries fund new ventures by raising debt and equity in the
capital markets, rather than through the parent company.
Learning Objective: Valuation of a high tech venture, role of
corporate headquarters in resource allocation, information gap
between company and capital market, equity incentives to divisional
managers, and accounting for common stock issuance.
The Loewen Group, Inc.: Stuart A publicly-traded funeral home and cemetery consolidator faces
C. Gilson; Jose Camacho imminent financial distress. The company has aggressively grown
Product Number: 201062 through use of debt. Restructuring the debt is potentially very costly to
Length: 24p creditors, shareholders, suppliers, and other corporate stakeholders.
Cross-border and accounting issues potentially complicate the
restructuring.
Learning Objective: To illustrate the costs of debt, financial distress,
basic restructuring options, and determinants of capital structure.
Diageo plc: George Chacko; A major U.K.-based multinational is reevaluating its leverage policy as
Peter Tufano; Joshua Musher it restructures its business. The treasury team models the tradeoffs
Product Number: 201033 between the benefits and costs of debt financing, using Monte Carlo
Length: 16p simulation to estimate the savings from the interest tax shields and
Teaching Note: 201117 expected financial distress costs under several sets of leverage
policies. The group treasurer (CFO) must decide whether and how the
simulation results should be incorporated into a recommendation to
the board of directors, and more generally, what recommendation to
make regarding the firm's leverage policy.
Learning Objective: Introduces students to the static-tradeoff theory
of capital structure, as actually implemented in a major firm. Also
introduces students to the use of simulation to capture the impact of
different business policies under uncertainty.
Acova Radiateurs: Lisa In March 1990, Baring Capital Investors faced a decision about
Meulbroek whether and how much to bid for Acova Radiateurs, a subsidiary of
Product Number: 295150 Source Perrier. Source Perrier had decided to sell Acova, and Baring
Length: 12p Capital Investors thought it might make a good leveraged buyout
Teaching Note: 200003 candidate. Students have an opportunity to value Acova using the
flows-to-equity technique, as well as to evaluate the merits of this
technique relative to the valuation methodologies typically used by
buyout firms.
Learning Objective: To give students an opportunity to value Acova
using the flows-to-equity technique, as well as to evaluate the merits of
this technique relative to the valuation methodologies typically used by
buyout firms.
Drivers of Industry Financial Contains common-size balance sheets and financial ratios for ten
Structure companies, each representative of a different industry. Students are
(HBS Exercise): Dwight B. asked to identify the industries from the structure of the financial
Crane; Indra A. Reinbergs statements.
Product Number: 201039 Learning Objective: Gives students practice in using financial ratios
Length: 3p and helps develop an understanding of the factors that drive the
Teaching Note: 201049 financial structure of firms.
Chapter 17 Valuation and
Capital Budgeting
for the Levered Firm Abstract
Sampa Video, Inc.: Gregor A video rental store is considering home delivery services.
Andrade Management attempts to value the project under different financing
Product Number: 201094 strategies and methods, specifically adjusted present value (APV) and
Length: 3p weighted average cost of capital (WACC).
Teaching Note: 204125 Learning Objective: Shows how to implement APV and WACC and
when each is appropriate.

Note on the Equivalency of Uses a numerical example to demonstrate that when you discount the
Methods for Discounting Cash cash flows to capital from a project at the weighted average cost of
Flows: William E. Fruhan Jr. capital, you get same net present value result as you obtain when
Product Number: 202128 discounting the cash flows to equity at the cost of equity. Also
Length: 4p demonstrates why it is far easier to do a net present value calculation
using the weighted average cost of capital (assuming a fixed debt ratio
and market value weights) than it is to do the same calculation using
the cost of equity.
Subjects Covered: Capital costs; Cash flow; Equity capital
Cross-Border Valuation Provides a review of valuation techniques used to assess cross-border
(HBS background note): investments. Discusses the discounting of free cash flows with a
Kenneth A. Froot; W. Carl weighted average cost of capital and the use of adjusted present
Kester value. Special concerns such as foreign-exchange risk, country risks,
Product Number: 295100 and international diversification are also discussed. Unlike Note on
Length: 21p Cross-Border Valuation, this note contains no discussion of valuing
real options.
Subjects Covered: Capital costs; Foreign exchange; Foreign
exchange rates; International finance; Present value; Valuation
Pioneer Petroleum Corp.: Pioneer is an integrated oil company. Its operations include
Richard S. Ruback exploration and development, production, transportation, and
Product Number: 292011 marketing. The case focuses on Pioneer's cost of capital calculations
Length: 5p and its choice between a single company-wide cost of capital or
Teaching Note: 292080 divisional costs of capital. Provides students the opportunity to learn
how to calculate a company-wide weighted average cost of capital. An
appropriate measure of the cost of equity capital is presented so that
students are able to challenge their understanding of key concepts by
critiquing the company's measure and suggesting their own.
Subjects Covered: Capital budgeting; Capital costs; Petroleum
Marriott Corp.: The Cost of Gives students the opportunity to explore how a company uses the
Capital (Abridged): Richard S. Capital Asset Pricing Model (CAPM) to compute the cost of capital for
Ruback each of its divisions. The use of Weighted Average Cost of Capital
Product Number: 289047 (WACC) formula and the mechanics of applying it are stressed.
Length: 10p Subjects Covered: Capital costs; Hotels & motels
Teaching Note: 298081

Chapter 18 Dividends and

Other Payouts Abstract
Avon Products: Jonathan Avon Products announced both a change in its business focus and a
Tiemann reduction of its dividend in June 1988. To offset the likely stock price
Product Number: 289049 effect of the dividend reduction, Avon announced at the same time an
Length: 9p unusual exchange offer, under which it would take up to 25% of its
Teaching Note: 290004 & common stock in exchange for an unusual preferred stock. The case
292059 traces the history of Avon from 1979-88. Requires students to evaluate
 Avon's efforts at diversification in the early 1980s, and to relate that
effort to the company's dividend history. Also requires students to
evaluate an unusual security. Suitable for first-year students or for a
second-year capital markets course.
Subjects Covered: Cosmetics; Diversification; Dividends; Non-store
retailing; Securities; Valuation
Dividend Policy at FPL Group, A Wall Street analyst has just learned that FPL (the holding company
Inc. (A): Benjamin C. Esty; for Florida's largest electric utility) may cut its dividend in several days
Craig F. Schreiber despite a 47-year streak of consecutive dividend increases. In
Product Number: 295059 response to the deregulation of the electric utility industry, FPL has
Length: 17p substantially revised its competitive strategy over the past several
Teaching Note: 296072 years. The analyst must decide whether a change in dividend policy
B case available will be a part of FPL's financial strategy in this deregulated
environment.
Learning Objective: Allows students to examine how firms set and
change dividend policy. Also provides a background for examining
why firms pay dividends and whether dividend policy matters.
Murray Ohio Manufacturing Co.: After a record year in 1983, Murray Ohio's earnings declined in 1984.
Krishna G. Palepu The company was faced with competition from cheap imports and was
Product Number: 187178 experiencing declining margins. Students are asked to analyze the
Length: 27p company's 1984 financial statements and predict whether there is
Teaching Note: 190198 likely to be a change in the dividend policy.
Subjects Covered: Competition; Dividends; Financial analysis;
Manufacturing
Ford Motor Co.'s Value In April 2000, Ford Motor Co. announced a shareholder Value
Enhancement Plan (A): Andre Enhancement Plan (VEP) to significantly recapitalize the firm's
F. Perold ownership structure. Ford had accumulated $23 billion in cash
Product Number: 201079 reserves and under the VEP would return as much as $10 billion of
Length: 17p this cash to shareholders. In exchange for each share currently held,
Teaching Note: 204116 the plan would give stockholders one new share plus the choice of
B case available receiving $20 either in cash or additional new Ford common shares.
Shareholders electing to receive cash would be taxed on these
distributions at capital gain rates. Among other things, the plan
provided a means for the Ford family to obtain liquidity without having
to dilute their 40% voting interest (even though they own only 5% of
the shares outstanding.) Students must wrestle with the following
questions: Why was Ford proposing this transaction instead of a
traditional share repurchase or a cash dividend? How did the interests
of the Ford family factor into this decision, and what did the transaction
imply about the future involvement of the family in the company? Why
was Ford distributing such a significant amount of cash at this
particular point in time? Did the distribution signal a change in the
company's appetite for making acquisitions or future capital
expenditures? If shareholders collectively elected to receive less than
$10 billion in cash, how would Ford distribute the remaining cash?
Learning Objective: Provides a rich setting in which to discuss one of
the most basic decisions corporations face: how to return cash to
shareholders. It is a vehicle for discussing corporate financial policies
and capital structure decisions--particularly as they relate to cash
dividends and share repurchases--in a context where corporate control
questions and the interests of multiple constituencies must be
 understood.

PART V: LONG-TERM FINANCING

Chapter 19 Issuing Securities

to the Public Abstract
Kendle International, Inc.: Candace Kendle and Christopher Bergen, the CEO and COO of
Dwight B. Crane; Paul W. Kendle International, Inc., are reviewing ways to finance the growth of
Marshall; Indra A. Reinbergs their privately-owned company. Kendle is a contract research
Product Number: 200033 organization that conducts clinical drug trials for pharmaceutical and
Length: 25p biotechnology companies. To compete more effectively, Kendle plans
Teaching Note: 201014 to grow through international acquisitions. It is now time to decide
whether to go ahead with a full program of two European acquisitions,
a large debt financing through Nationsbank, and an initial public
offering to repay the debt and provide cash for future acquisitions. The
falling stock prices of Kendle's competitors add pressure to the
situation.
Learning Objective: To develop skills in designing and implementing
an integrated financial and acquisition strategy.
Tom.com--2000: Su Han Chan; On February 18, 2000, month-old Internet startup, Tom.com, began its
Ko Wang; Mary Ho initial public offering and would open for trading on March 1 on Hong
Product Number: HKU124 Kong's Growth Enterprise Market. The Internet company, majority-
Length: 20p owned by Mr. Li Ka-shing's Cheung Kong Holdings and Hutchison
Teaching Note: HKU125 Whampoa, planned to catch the frenzy that Hong Kong's investors had
for new Internet stocks. The huge demand for Tom.com shares raised
Internet frenzy in Hong Kong to new levels reminiscent of the red chip
fever of 1997. Many of the retail investors had no idea what the
company did but were betting on the IPO being a winner largely
because of Mr. Li's clout with China. In this case, the student is asked
to serve as an investment advisor to a retail investor considering
subscribing to Tom.com's IPO. The student will provide an analysis of
the risks and opportunities of investing in Tom.com and make a
recommendation on whether the client should buy Tom.com's shares
at the offer price.
Learning Objective: Intended to highlight the complexity of pricing
Internet stocks that rarely have much of a track record for investors to
study and the irrational investing behavior of Hong Kong's small
investors.

W.R. Hambrecht + Co.: OpenIPO is a new mechanism for pricing and distributing initial public
OpenIPO: Andre F. Perold; offerings. The system, which is based on a Dutch auction, represents
Gunjan Bhow an attempt by the investment bank W.R. Hambrecht + Co. to change
Product Number: 200019 the manner in which IPOs are underwritten. The case provides a
Length: 18p setting in which to discuss the existing set of institutional
arrangements relating to the underwriting of IPOs, including the well-
known phenomenon of the initial-day spike in price. Also provides a
vehicle for discussing the informational efficiency of stock prices and
the role of intermediaries and markets in providing investors with
company-specific information. Can be used to talk about the issues
raised by electronic trading and the distribution of securities over the
Internet to relatively uninformed individuals.
 Subjects Covered: Capital markets; Electronic commerce;
Investment banking; Investment management; IPO; Stock exchanges;
Stock offerings; Underwriting
A Note on the Initial Public Provides an overview of the going public process.
Offering Process: Joshua Subjects Covered: Entrepreneurial finance; Equity financing;
Lerner Financial strategy; IPO; Venture capital
Product Number: 200018
Length: 6p
Buenos Aires Embotelladora In 1998, BAESA, PepsiCo's largest bottler and distributor outside
S.A. (BAESA): A South North America, experienced severe financial difficulty and had to
American Restructuring: Stuart restructure its debt and business operations to avoid bankruptcy or
C. Gilson; Gustavo A. Herrero liquidation. Based in Argentina, with operations throughout South
Product Number: 202009 America, the company had for years been a spectacular success story
Length: 27p and media darling, until it undertook an ill-fated expansion in Brazil.
The company's debt was owed to banks and financial institutions in
South America, Asia, Europe, and the United States. In addition, the
company had $60 million of publicly traded bonds, much of them held
by U.S. investors. The restructuring was the largest and most
complicated undertaking of its kind ever taken in South America. In
addition to negotiating with its bankers and making a public exchange
offer for its bonds, the company made a massive common stock rights
offering to its shareholders, giving them the opportunity to purchase
new stock in the company. It also considered filing a "prepackaged"
Chapter 11 bankruptcy in the United States to pressure U.S.
bondholders to go along with the plan. The negotiations were greatly
complicated by differences in the bankruptcy laws of Argentina, Brazil,
and the United States.
Learning Objective: To illustrate how distressed companies choose
between formal legal bankruptcy and informal out-of-court
restructuring as alternative strategies for restructuring their debt. Also
shows how an "exchange offer" can be used to restructure widely held
public bonds. The company's attempt to use a common stock rights
offering also provides a real-world example of the "underinvestment
problem" in corporate finance. Finally, shows what kinds of factors
(conflicts among different countries' bankruptcy laws, inter-creditor
conflicts, information problems, etc.) can complicate, and potentially
disrupt, a debt restructuring.
General Property Trust: Peter In 1994 General Property Trust, an Australian property investment
Tufano; John C. Handley trust, was anticipating future cash needs beyond those that the Trust
Product Number: 299098 could fund with internal cash flows. The managers of the Trust were
Length: 11p considering a novel financing structure whereby it would sell call
options on the Trust's units. The options' structure made it likely that
they would be exercised, and therefore investors would choose to buy
the Trust's units. The managers had to determine the appropriateness
of this funding scheme in light of the Trust's alternatives and evaluate
the proposed pricing of the options that would be offered via a rights
offering.
Learning Objective: Allows the instructor to discuss the application of
cash-flow hedging, to examine the use of equity-financing strategy, to
introduce students to rights offerings, and to apply derivative-pricing
techniques to value a complex equity derivative.
A Note on Angel Financing: Discusses the economics of the private equity market and recent
Paul A. Gompers efforts by the U.S. Small Business Administration to promote greater
Product Number: 298083 angel financing.
Length: 11p Subjects Covered: Capital markets; Entrepreneurial finance;
Financing

Chapter 20 Long-Term Debt Abstract

Debt Policy at UST, Inc.: Mark UST, Inc. is a very profitable smokeless tobacco firm with low debt vis-
Mitchell a-vis other firms in the tobacco industry. The setting for the case is
Product Number: 200069 UST's recent decision to substantially alter its debt policy by borrowing
Length: 14p $1 billion to finance its stock repurchase program.
Teaching Note: 201002 Learning Objective: Introduction to optimal capital structure with
emphasis on calculation of interest tax shields.
Cox Communications, Inc.-- Covers the decision of how much external financing a firm needs and
1999: George Chacko; Peter what securities the firm should issue to raise this financing. Cox
Tufano Communications is a major player in the cable industry, which is
Product Number: 201003 consolidating due to technological changes/capabilities brought about
Length: 18p by the Internet. The corporate treasury of Cox Communications needs
Teaching Note: 201116 to decide how much external financing is necessary to finance a series
of intra-industry acquisitions that Cox has recently undertaken. The
choices are plain-vanilla equity, debt, asset sales, and a new equity-
linked derivative known as FELINE PRIDES, offered by Merrill Lynch.
The treasurer and his team must make this decision facing the usual
market constraints. There are also some special constraints including
the need to maintain financial flexibility for further acquisitions and the
need to limit the dilution of Cox's largest shareholder, who owns nearly
70% of the firm.
Learning Objective: How to make long- and short-term financing
decisions, taking into account specific business conditions and risk.
First Capital Holdings Corp.: The manager of a money-management firm considers whether to
Stuart C. Gilson; Harry invest in the securities of a large, financially troubled, California-based
DeAngelo; Linda DeAngelo life insurance holding company that holds 40% of its assets in high-
Product Number: 296032 yield junk bonds. Over the past year, the value of its junk bond
Length: 19p portfolio has declined significantly. The insurer is seeking a large
Teaching Note: 296095 infusion of capital from its largest (28%) shareholder--a New York-
based investment bank--that is experiencing financial difficulties of its
own. Within the last month, another large California-based insurance
company that also invested heavily in junk bonds is seized by
regulators following a "run on the bank" by concerned policyholders,
and the State Insurance Commissioner has publicly announced his
intention to "crack down" on abuses in the insurance industry.
Learning Objective: To evaluate the risks and rewards associated
with investing in the financial claims of distressed companies; to
understand the factors that give rise to a "bank run" on a bank or
insurance company; to analyze regulators' incentives to seize a
troubled financial institution; and to weigh the pros and cons of mark-
to-market accounting by regulated financial service firms.
Cougars: Scott P. Mason; Mihir Provides an introduction to zero coupon bonds and stripping coupon
Desai bonds. Concerns the relationship between the spot curve, the strip
Product Number: 295006 curve, and the coupon curve.
Length: 6p Subjects Covered: Bonds; Innovation; Interest rates; Pricing
Teaching Note: 295098

Chapter 21 Leasing Abstract

Financing PPL Corp.'s Growth PPL Corp., an electric utility in Pennsylvania, needs to finance $1
Strategy: Benjamin C. Esty; billion of peaking plants as part of its new growth strategy. In February
Carrie Ferman 2001, Steve May, director of finance for PPL's Global Division, is
Product Number: 202045 responsible for recommending a finance plan. After considering all the
Length: 25p options, May decides that a synthetic lease is the best option, but he
Teaching Note: 204046 must decide whether to recommend a traditional or a limited recourse
synthetic lease and how to structure the specific terms. The limited
synthetic lease, in contrast to the traditional structure, requires a
smaller corporate guarantee on the assets and has greater off-credit
treatment, which is important given the company's growth strategy and
limited debt capacity. However, finding investors willing to accept
greater project risk will cost more and take more time. The timing is an
important issue for May.
Learning Objective: 1) Shows how corporate financial managers
today must be familiar with and ready to use a wide range of financing
techniques, including corporate finance (bank loans and corporate
bonds), project finance, asset securitization, and leasing; 2) describes
various leasing structures (operating leases, capital leases, leveraged
leases, and synthetic leases) and the motivations for using them; and
3) explores the advantages and disadvantages of two kinds of
synthetic leases--the traditional and the limited recourse--and asks
students to select the more appropriate one given PPL's high-growth
strategy.
Off-Balance Sheet Leases in Amid mounting concern by credit agencies about off-balance sheet
the Restaurant Industry: Amy P. liabilities, an analyst for one of the leading credit-rating agencies has
Hutton; Paul M. Healy; Jacob been asked to make a presentation about off-balance sheet liabilities,
Cohen the strategic analysis behind leasing versus purchasing property, and
Product Number: 101033 accounting for leases.
Length: 15p Subjects Covered: Financial ratios; Financial statements; Leasing;
Restaurants
Kmart, Inc. and Builders In 1997, Kmart received an offer from retail buyout specialists Leonard
Square: Lisa Meulbroek Green & Partners for the purchase of its ailing 162-store home
Jonathan Barnett improvement chain, Builders Square. Green's offer included a $10 million
Product Number: 200044 cash payment, a warrant to purchase a 28% stake in the new entity in the
Length: 25p future, and the assumption of approximately $1.5 billion in non-cancelable
Teaching Note: 202083 Builders Square lease obligations. Kmart would remain contingently liable
for the lease payments if the new entity were to fail. In the midst of the
fiercely competitive home improvement retail industry, the questions
posed include: 1) what is the value of the Builders Square subsidiary? 2)
is the Green offer a good deal for Kmart? and 3) should Kmart accept the
offer or hold out for a higher offer or additional buyers?
Learning Objective: To incorporate off-balance-sheet financing of
operating lease guarantees into a valuation exercise (using multiples and
the APV approach) focused on a money-losing subsidiary.
A Note on the Venture Leasing Provides an overview of venture leasing, an innovative financing
Industry: Joshua Lerner mechanism that resembles both venture equity investments and bank
Product Number: 294069 lending.
Length: 13p Subjects Covered: Entrepreneurial finance; Financial planning;
Leasing; Venture capital

Aloha Airlines, Inc.: A Leasing Discusses the decision of whether to lease or buy aircraft at Aloha
Decision: George G.C. Parker Airlines in Hawaii.
Product Number: F240 Subjects Covered: Airlines; Capital budgeting; Capital costs;
Length: 15p Financing; Leasing
PART VI: OPTIONS, FUTURES, AND CORPORATE FINANCE
Chapter 22 Options and
Corporate Finance
And
Chapter 23 Options and
Corporate Finance:
Extensions and Applications Abstract
Cephalon, Inc.: Peter Tufano; In early 1997, Cephalon, Inc. awaited an FDA panel's decision on
Geoffrey Verter; Markus F. whether its drug, Myotrophin, would be approved. If the drug was
Mullarkey approved, the firm might need substantial additional funds to
Product Number: 298116 commercialize the drug as well as to buy back rights to it (which had
Length: 18p been sold earlier to finance its development). The firm's CFO is
considering a variety of financing strategies, including buying call
options on the firm's own stock and paying for these options by issuing
shares at the current time.
Learning Objective: To introduce students to the use of equity
derivatives as part of a risk management strategy, examines the
application of cash-flow hedging in a corporate context, and examines
the pricing of a derivative security with large jump risk.
Keller Fund’s Option Investment A closed-end mutual fund's decision to study option trading provides
Strategies: W. Carl Kester an opportunity to study the profit profile and pricing of multiple option
Product Number: 295096 investment strategies (e.g., buy a call, buy a put, write a call, buy
Length: 5p stock-write call, etc.). This case is designed to provide students with
Teaching Note: 298013 an introduction to option pricing.
Subjects Covered: Derivatives; Investment management; Mutual
funds; Option pricing; Risk management; Securities
Arundel Partners: The Sequel A group of investors is considering buying the sequel rights for a
Project: Timothy A. Luehrman; portfolio of feature films. They need to determine how much to offer to
William A. Teichner pay and how to structure a contract with one or more major U.S. film
Product Number: 292140 studios. The case contains cash flow estimates for all major films
Length: 19p released in the United States during 1989. These data are used to
Teaching Note: 295118 generate estimates of the value of sequel rights prior to the first film's
release. Designed to introduce students to real options and techniques
for valuing them. It clearly illustrates the power of option pricing
techniques for certain types of capital budgeting problems. Also
illustrates the practical limitations of such techniques.
Subjects Covered: Capital budgeting; Decision trees; Entertainment
industry; Option pricing; Real options; Securities analysis; Uncertainty

Chapter 24 Warrants and

Convertibles Abstract
Goldman, Sachs & Co.: Nikkei Japanese financial institutions' willingness to sell put options on the
Put Warrants--1989: Peter Nikkei Stock Average provides investment banks with the raw material
Tufano from which to create a security that would allow U.S. investors to bet on
Product Number: 292113 falls in the Japanese Stock Market. The investment bank that seeks to
Length: 16p create this new product must decide how to design, produce (hedge),
Teaching Note: 296067 and price the options (Nikkei Put Warrants). Highlights the global nature
of new product development in the securities market and provides
opportunities for students to make and critique the key decisions
involved in creating this new product. Students must consider the costs
of production, the preferences of consumers, competitive dynamics, and
the pricing of substitutes for the new product.
Subjects Covered: Capital markets; Hedging; Investment banking;
Product design; Product introduction; Securities
Coca-Cola Harmless Warrants: Underscores the arbitrage implicit in the pricing of a complex unit of
Scott P. Mason; Mihir Desai debt and warrants issued by the Coca-Cola Co.
Product Number: 295007 Subjects Covered: Beverages; Bonds; Innovation; Pricing
Length: 4p
Teaching Note: 295099
GetConnected: Jay O. Light; An embryonic Internet-based telecom marketing firm considers its first
Dan J. Green (seed) round of funding. They are choosing between a fixed price
Product Number: 201010 round and a discounted convertible round.
Length: 17p Learning Objective: To discuss fixed price vs. floating price seed
financing.
Jupiter Management Co.: The manager of a small company growth fund considers relative
Ronald W. Moore merits of investing in a company's convertible debt versus its common.
Product Number: 292107 Subjects Covered: Investment management; Mutual funds; Portfolio
Length: 24p management
Teaching Note: 298023

Chapter 25 Derivatives and

Hedging Risk Abstract
Introduction to Derivative Provides an elementary introduction to three major classes of
Instruments derivative instruments: options, forwards and futures, and swaps.
(HBS background note): W. Carl Subjects Covered: Commodity markets; Derivatives; Securities
Kester; Kendall Backstrand
Product Number: 295141
Length: 23p
Futures on the Mexican Peso: The Chicago Mercantile Exchange needs to decide how to design, and
Kenneth A. Froot; Matthew whether and when to introduce, a futures contract on the Mexican
McBrady; Mark Seasholes peso.
Product Number: 296004 Subjects Covered: Commodity markets; Country analysis; Foreign
Length: 22p exchange rates; International finance; Mexico; Money; Money markets
Alcoma: The Strategic Use of Increases in orange tree production led to an orange juice surplus.
Frozen Concentrated Orange How does one manage price risk in the orange juice industry under
Juice Futures: Ray A. Goldberg; these conditions?
Phil Herndon; Kate Morris Subjects Covered: Agribusiness; Commodity markets; Hedging; Risk
Product Number: 595029 management
Length: 40p
Interest Rate Derivatives Introduces and explains the six major interest rate derivative products:
(HBS background note): Peter swaps, forward rate agreements, Eurodollar futures, bond options,
Tufano; Jonathan S. Headley caps/floors/collars, and swap options.
Product Number: 294095 Learning Objective: Provides students with an introductory
Length: 11p knowledge of the basic interest rate derivative instruments used in the
Teaching Note: 296063 market today. It will walk students through both the cash flows
 involved and the institutional differences between each of the
instruments.
Risk Management at Apache: After initiating a hedging strategy, Apache Corp. is interested in
Lisa Meulbroek; Puja Malhotra revisiting its decision to determine if hedging is value-adding. This
Product Number: 201113 case investigates how the company initially decided to hedge against
Length: 24p commodity price risk and how it implemented its hedging practice.
Teaching Note: 202019 Also examines when financial theory argues hedging is value-adding.
Learning Objective: To determine when a company should hedge.
PART VII: SHORT-TERM FINANCE

Chapter 26 Short-Term
Finance and Planning Abstract
Cash Management Practices in Most small business managers claim that cash management is their
Small Companies leading concern. Often walking a tightrope between growth and
(HBS background note): H. illiquidity, small business managers face different cash management
Kent Bowen; Andrew R. Jassy; challenges than their counterparts in larger companies. Compared to
Laurence E. Katz; Kevin Kelly; larger firms, small businesses often have under-staffed and under-
Baltej Kochar trained accounting staffs, volatile cash flows dependent on a single
Product Number: 699047 product line, limited access to new capital, and a significant share of
Length: 8p their net worth tied up in working capital. These limitations are often
compounded by management's focus on growth, which can put
additional pressure on the cash management system by increasing net
working capital requirements.
Learning Objective: To provide managers with a broader universe of
specific techniques used by small businesses to manage cash. Uses
the following three-part model of cash management systems for a
discussion of best practices: 1) cash cycle policies and tactics, 2)
forecasting and preview processes, and 3) organizational design and
incentive systems.
Dell's Working Capital: Richard Dell Computer Corp. manufactures, sells, and services personal
S. Ruback; Aldo Sesia computers. The company markets its computers directly to its
Product Number: 201029 customers and builds computers after receiving a customer order. This
Length: 7p build-to-order model enables Dell to have much smaller investment in
Teaching Note: 201017 working capital than its competitors. It also enables Dell to more fully
enjoy the benefits of reduction in component prices and to introduce
new products more quickly. Dell has grown quickly and has been able
to finance that growth internally by its efficient use of working capital
and its profitability. This case highlights the importance of working
capital management in a rapidly growing firm.
Subjects Covered: Capital; Computer industry; Financial
management
Dynashears, Inc.: Thomas R. A senior loan officer is reviewing the recent performance of a company
Piper that has failed to repay its loan as scheduled. The failure results from
Product Number: 292017 a cyclical downturn in sales, coupled with a lag in cutting back
Length: 8p production. Inventory risk is minimal. Teaching objective: Practice in
Teaching Note: 292018 financial analysis and in understanding the impact of business cycle
on durable goods companies. Also an opportunity to evaluate the
situation from a lender's perspective.
Subjects Covered: Financial analysis; Financial planning; Loan
evaluation; Tools
Toy World, Inc.: W. Carl Kester A shift from seasonal to level production of toys will change the
Product Number: 295073 seasonal cycle of Toy World's working capital needs and necessitate
Length: 6p new bank credit arrangements. Students must analyze the company's
Teaching Note: 297118 performance, forecast funds needs, and make a recommendation.
Learning Objective: To introduce the pattern of current assets and
cash flows in a seasonal company and provide an elementary exercise
in the construction of pro forma financial statements and estimation of
funds needs.

Chapter 27 Cash Management Abstract

Cash Management Practices in Most small business managers claim that cash management is their
Small Companies leading concern. Often walking a tightrope between growth and
(HBS background note): H. illiquidity, small business managers face different cash management
Kent Bowen; Andrew R. Jassy; challenges than their counterparts in larger companies. Compared to
Laurence E. Katz; Kevin Kelly; larger firms, small businesses often have under-staffed and under-
Baltej Kochar trained accounting staffs, volatile cash flows dependent on a single
Product Number: 699047 product line, limited access to new capital, and a significant share of
Length: 8p their net worth tied up in working capital. These limitations are often
compounded by management's focus on growth, which can put
additional pressure on the cash management system by increasing net
working capital requirements.
Learning Objective: To provide managers with a broader universe of
specific techniques used by small businesses to manage cash. Uses
the following three-part model of cash management systems for a
discussion of best practices: 1) cash cycle policies and tactics, 2)
forecasting and preview processes, and 3) organizational design and
incentive systems.

Chapter 28 Credit
Management Abstract
First American Bank: Credit Discusses a bank's ability to manage its credit exposure to a particular
Default Swaps: George Chacko; client using credit default swaps.
Eli Peter Strick Learning Objective: To give students basic understanding of credit
Product Number: 203033 risk and credit derivative mechanics.
Length: 18p
Teaching Note: 203101
Collateralized Loan Obligations Examines a large bank trying to protect itself from the risks and capital
and the Bistro Trust: Kenneth A. requirement created by its loan portfolio. Considers a variety of ways
Froot; Ivan Farman available to the firm to offload the risks.
Product Number: 299016 Learning Objective: Credit risk management.
Length: 27p
Wiegandt GmbH Cologne: The credit department of Wiegandt, a furniture manufacturer, is
Dwight B. Crane; Mathew evaluating the financial condition of two stores that retail the
Mateo Millett company's furniture.
Product Number: 298159 Learning Objective: Provides an opportunity to teach basic financial
Length: 8p analysis and to discuss the trade credit policy of companies.
SureCut Shears, Inc.: W. Carl A bank loan officer must determine whether to waive convenants and
Kester extend terms on a line of credit granted to SureCut Shears. At issue is
Product Number: 297013 whether the inability of SureCut to pay down its line of credit is due to
Length: 8p a temporary cyclical downturn or other long-term financial problems.
Teaching Note: 297079 Learning Objective: To expose students to the impact of a cyclical
downturn on financial performance, and to provide practice in
 modeling business cycles in pro forma forecasts.
PART VIII: SPECIAL TOPICS

Chapter 29 Mergers and

Acquisitions Abstract
Provident Life and Accident Provident Life & Accident Insurance Co. has made an initial bid to
Insurance: The Acquisition of acquire a primary competitor, Paul Revere, from conglomerate,
Paul Revere: Mihir Desai; Mark Textron. The due diligence process uncovers a significant block of
Veblen; Frank Williamson problematic disability insurance policies. Provident is forced to assess
Product Number: 202044 the negative impact of this discovery on its initial valuation and revise
Length: 21p its bid. In the process, the divergent views of the evolution of these
Teaching Note: 202046 policies by the bidder and seller have to be translated through
discounted cash flow analysis into appropriate bid prices. Finally, this
DCF analysis, in combination with multiples analysis, is used in
negotiations with Textron and public shareholders.
Learning Objective: Provides a platform for: 1) introducing students
to the insurance industry by examining how insurers pool risks,
incorporate asymmetric information in pricing and designing their
policies, manage these risks by investing assets over time, and how
this industry reports financial results to investors; 2) demonstrating
discounted cash flow analysis and multiples analysis in the insurance
industry; and 3) discussing negotiation dynamics in an M&A situation
involving a large majority shareholder and a minority public float and
divergent views of future expected cash flows.
PepsiCo's Bid for Quaker Oats Throughout 1999, PepsiCo closely tracked several potential strategic
(A): Carliss Y. Baldwin; Leonid acquisitions. In the fall of 2000, it appeared that the right moment for an
Soudakov equity-financed acquisition had arrived. At this time, PepsiCo
Product Number: 801458 management decided to initiate confidential discussions with The
Length: 25p Quaker Oats Co. about a potential business combination. Gatorade, a
key brand in Quaker's portfolio, had long been on PepsiCo's wish list,
but PepsiCo's managers, led by CEO Roger Enrico and CFO Indra
Nooyi, were committed to upholding the value of PepsiCo's shares and,
as a result, were determined not to pay too much for Quaker. This case
provides information that allows students: 1) to assess the value of
Quaker's businesses, 2) to estimate potential synergies associated with
a Pepsi-Quaker merger, and 3) to come up with an effective negotiation
strategy.
Learning Objective: Valuation of a multidivisional business in support
of an M&A bid, structuring a stock-for-stock offer, and negotiation of the
acquisition of a public company.
Radio One, Inc.: Richard S. Radio One (NYSE: ROIA and RIOAK), the largest radio group
Ruback; Pauline Fischer targeting African-Americans in the country, had the opportunity to
Product Number: 201025 acquire 12 urban stations in the top 50 markets from Clear Channel
Length: 15p Communications, Inc. (NYSE: CCU) in the winter of 2000. The stations
Teaching Note: 201027 were being sold by Clear Channel Communications, Inc. to obtain
Federal Communications Commission (FCC) approval for its
acquisition of AMFM, Inc. (NYSE: AFM). Radio One was also
negotiating the acquisition of nine stations in Charlotte, NC; Augusta,
GA; and Indianapolis, ID. The proposed acquisitions would double the
size of Radio One. The case focuses on the strategic and financial
evaluation of the proposed acquisitions.
 Learning Objective: Provides students the opportunity to forecast the
cash flows associated with the proposed acquisitions and to value
those projections using discounted cash flows as well as transaction
and trading multiples.
The Acquisition of Consolidated On October 15, 1996, Virginia-based CSX Corp. and Pennsylvania-
Rail Corp. (A): Benjamin C. based Consolidated Rail Corp. (Conrail), the first and third largest
Esty; Mathew Mateo Millett railroads in the Eastern United States, announced their intent to merge
Product Number: 298006 in a friendly deal worth $8.3 billion. This deal was part of an industry-
Length: 17p wide trend toward consolidation and promised to change the
Teaching Note: 298087 competitive dynamics of the Eastern rail market. Students, as
B case available shareholders, must decide whether to tender shares into the front-end
of a two-tiered acquisition offer. To make this decision, they must
value Conrail as an acquisition target and understand the structure of
CSX's offer.
Learning Objective: Provides an opportunity to value a large-scale
acquisition using comparable transactions and discounted merger
synergies. In addition, it illustrates the mechanics of a two-tiered offer
and provides a vehicle to discuss various anti-takeover provisions
including poison pills, lock-up options, break-up fees, and no-talk
clauses.
Microsoft/Intuit: William E. Microsoft Corp. proposes to acquire Intuit Corp. The case examines the
Fruhan Jr. strategic fit and the price proposed to complete the transaction.
Product Number: 295121 Learning Objective: Valuation and implementing a business strategy.
Length: 20p
Teaching Note: 297087

Chapter 30 Financial Distress Abstract

The Loewen Group, Inc.: Stuart A publicly-traded funeral home and cemetery consolidator faces
C. Gilson; Jose Camacho imminent financial distress. The company has aggressively grown
Product Number: 201062 through use of debt. Restructuring the debt is potentially very costly to
Length: 24p creditors, shareholders, suppliers, and other corporate stakeholders.
Cross-border and accounting issues potentially complicate the
restructuring.
Learning Objective: To illustrate the costs of debt, financial distress,
basic restructuring options, and determinants of capital structure.
Iridium LLC: Benjamin C. Esty; Part of a module on financing large projects in the elective curriculum
Fuaad A. Qureshi; William course entitled "Large-Scale Investment." Set in August 1999, just
Olsen after Iridium, a global communications firm, declared bankruptcy.
Product Number: 200039 While the case describes Iridium's creation, development, and
Length: 21p commercial launch, it concentrates primarily on the firm's financial
Teaching Note: 200050 strategy and execution as it raised more than $5 billion of capital.
Describes the specific securities Iridium issued, the sequence in which
it issued them, and the firm's financial performance prior to
bankruptcy. Using analyst forecasts, students can value the firm prior
to bankruptcy, but will recognize how difficult it is to value technology
start-ups given the uncertainty in demand.
Learning Objective: Intended to challenge existing theories of capital
structure: is Iridium's target capital structure of 60% debt optimal?
Helps students understand the benefits and limitations of issuing
different kinds of securities (e.g. cash-pay vs. zero coupon bonds,
bank debt vs. public bonds, etc.) and the complexity of sequencing
 different kinds of securities. The overall objective is to help students
understand the relevant issues in financing large, greenfield projects.
TWA: The Second Bankruptcy: In May 1995, about 19 months after emerging from the Chapter 11
Mary E. Barth; Nese Yildiz bankruptcy it filed in 1993, Trans World Airlines issued a proxy
Product Number: A178 statement to seek the consent of its shareholders and certain creditors
Length: 25p for another debt restructuring plan. The prospectus contained two
plans of financial organization: one for an out-of-court restructuring,
and the other for a "prepackaged" Chapter 11 bankruptcy. The
exchange offers in the two plans were virtually identical, but the
prepackaged restructuring plan required a lower acceptance rate.
Under the plan, the creditors of TWA would forgive a substantial
amount of the company's debt in exchange for stock, other equity
instruments, and revised terms on remaining debt. The creditors would
own about 70% of the reorganized company and the common
shareholders, mostly employees, would see their stake in the airline
shrink to about 30% from 45%. Adam Chandler, a holder of TWA's 8%
secured notes, read the proxy with interest. He needed to decide how
to cast his vote--for or against the troubled carrier's reorganization
proposals. Was TWA worth more as a going concern than it would be
if its assets were liquidated? What were its assets really worth? Would
the company's performance match management's projections? Would
TWA's financial results be sufficient to support an increased equity
valuation post bankruptcy, or should Chandler try to thwart the deal in
the hopes of obtaining a larger debt component to his restructured
claim?
Subjects Covered: Airlines; Bankruptcy; Debt management;
Reorganization
Infinity Carpets, Inc.: Thomas R. A turnaround expert must determine whether a firm in distress is worth
Piper; Ronald W. Moore more as a going concern than its liquidation value. If so, the finances
Product Number: 299014 of the firm must be restructured consistent with the bargaining power
Length: 14p of the holders of the various securities. The restructuring requires a
delay in principal repayment, rate concessions, and a debt-for-equity
swap.
Learning Objective: Restructuring of firms in financial distress.
Bankruptcy and Restructuring at Marvel Entertainment Group is the leading comic book publisher in the
Marvel Entertainment Group: country with superheros like Spider-Man, The Incredible Hulk, The X-
Benjamin C. Esty; Jason S. Men, and Captain America. It is also one of the leading manufacturers
Auerbach of sports and entertainment trading cards under the Fleer and Sky Box
Product Number: 298059 brand names. In the mid 1990s, it experienced sharp declines in both
Length: 18p businesses causing it to file for bankruptcy in December 1996. This
Teaching Note: 298028 case is set in late January 1997, shortly after Marvel filed its
reorganization plan with the bankruptcy court and approximately one
month before creditors will have to vote on the plan at the confirmation
hearing. Pits two of the most prominent raiders of the 1980s against
each other for control of the company. On one side is Ronald
Perelman, who controls Marvel through his MacAndrews & Forbes
holding company. On the other side is Carl Icahn, who controls 25% of
Marvel's public debt. Icahn and the other bondholders must decide
whether to accept Perelman's plan, to reject it in favor of their own
plan, or to sell their bonds before the confirmation hearing. Perelman
must decide whether to change the plan in response to the
 debtholders threats or to wait and see what happens at the hearing.
Learning Objective: This case has four objectives: 1) Provides an
opportunity to value a Chapter 11 restructuring plan; 2) illustrates
debtholder/equityholder incentive conflicts in a distress setting; 3)
raises the issue of whether insider-trader in debt instruments,
specifically junior debt in a distress situation, should be illegal; and 4)
illustrates the role played by vulture investors in Chapter 11
restructurings. A rewritten version of another case.
Sunbeam Oster Co., Inc.: Japonica Partners, an investment firm, is trying to determine whether
Steven R. Fenster; Paul J. there is any unseen value in Sunbeam Oster Co., Inc., a Chapter 11
Reiferson debtor. If there is, Japonica must consider the means by which they
Product Number: 291052 can acquire control of a company in Chapter 11.
Length: 23p Subjects Covered: Acquisitions; Appliances; Bankruptcy; Consumer
Teaching Note: 293046 goods; Household products; Liquidation; Reorganization

Chapter 31 International
Corporate Finance Abstract
Foreign Direct Investment Briefly reviews motivations and trends behind foreign direct investment
(HBS background note): Laura and multinational corporations as well as the policy debate that
Alfaro; Esteban Clavell surrounds them.
Product Number: 703018 Subjects Covered: Business government relations; Economic
Length: 10p development; Foreign exchange; Government policy; International
banking; International finance; Investments; Multinational corporations;
Policy making
Malaysia: Capital and Control: On September 1, 1998 the government of Malaysia imposed currency
Rawi Abdelal; Laura Alfaro and capital controls in response to the financial crisis that had swept
Product Number: 702040 Asia. The controls sparked an enormous controversy in the world of
Length: 31p international finance. Some celebrated the controls for insulating the
Teaching Note: 703020 Malaysian economy from the unstable international financial system.
Others criticized the controls for trapping investors and allowing the
government to protect the interests of "cronies." This debate also
raised the central question about the future of the international
financial architecture: What is the appropriate balance between
financial market freedom and government discretion in the
management of the global economy?
Learning Objective: The political economy of capital controls in
Malaysia during the Asian financial crisis.
CSFB's China Unicom Incident: In August 2001, Credit Suisse First Boston (CSFB), a major
Michael J. Enright ; Vincent Mak international investment bank, was removed from the foreign
Product Number: HKU187 underwriting team that would handle a pending share offering for
Length: 20p China Unicom Group Ltd., the second largest telecommunications
Teaching Note: HKU217 company in the Chinese Mainland. Only two months earlier, CSFB
was designated to deal with the U.S. portion of that offering. However,
after the bank hosted overseas investment "road shows" attended by
senior government officials from Taiwan (including the finance
minister), it was officially dropped from the China Unicom underwriter
list. The incident provoked criticism from governments in the United
States and Taiwan and widespread activity in investment banking
circles as several other banks dropped plans to host road shows for
Taiwan.
Learning Objective: To teach how business decisions may become
 caught up in political difficulties and how companies need to formulate
strategies and policies to address such issues.
JAFCO American Ventures, Describes the second attempt at entry of JAFCO, a large Japanese
Inc.: Building a Venture Capital venture capital firm, into the U.S. venture capital market. The U.S.
Firm: Walter Kuemmerle; Chad subsidiary, JAFCO America Ventures, is in the midst of a challenging
Ellis turnaround. Going forward, the U.S. subsidiary's leadership needs to
Product Number: 899099 make a number of important decisions regarding investment focus,
Length: 22p deal flow generation, compensation, and cooperation with the
Teaching Note: 899305 Japanese parent company.
Learning Objective: Introduction to venture capital operations,
strategy and focus of venture capital firms, and managing global
private equity firms.
The Chad-Cameroon Petroleum On June 6, 2000, the World Bank's and IFC's board of directors was
Development and Pipeline scheduled to vote on whether to approve funding for the $4 billion
Project (A): Benjamin C. Esty Chad-Cameroon Petroleum Development and Pipeline project.
Carrie Ferman Although the project presented a unique opportunity to alleviate
Product Number: 202010 poverty in Chad, one of the poorest countries in the world, Chad had a
Length: 22p president who had been described as a "warlord" and a history of civil
Teaching Note: 202032 war and oppression. This case describes the project, the setting, and
B case available the World Bank's reasons for participating in the deal--mainly an
opportunity to alleviate poverty, enforce environmental standards, and
minimize the impact on indigenous people. Also describes the very
public and very ardent opposition to the project's environmental,
social, and revenue management policies. Faced with a high-risk, but
potentially high-return opportunity to improve conditions in Chad,
students, as the directors, must decide whether to approve funding for
the deal.
Learning Objective: Illustrates not only the complexity of negotiating
very large deals between public and private entities, but also the
opportunity inherent in large-scale investment. Students must assess
whether the benefits received by the host countries are commensurate
with the risks they bear. This discussion raises critical ethical issues
related to investment in development countries. With regard to project
finance, the case illustrates the difference between project and
corporate finance and shows that risk sharing and risk mitigation are
motivations for using project finance.