Study Questions:
1. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability?
2. How has Mr. Clarkson met the financing needs of the company during the period 1993 – 1995? Has the financial strength of Clarkson Lumber improved or deteriorated?
3. What do you think about the wisdom of taking the trade discounts?
4. Do you agree with Mr. Clarkson’s estimate of the company’s loan requirements? How much will he need to finance the expected expansion in sales to $5.5 million in 1996 and to take all trade discounts?
5. As Mr. Clarkson’s financial advisor, would you urge him to go ahead with, or reconsider his anticipated expansion and his plans for additional debt financing? As the banker, would you approve the loan request, and if so, what conditions would you put on the loan?
Study Questions:
1. How was Dell’s working capital policy a competitive advantage?
2. How did Dell fund its 52% growth in 1996?
3. Assuming Dell sales will grow 50% in 1997, how might the company fund this growth internally? How much would working capital need to be reduced and/or profit margin increased? What steps do you recommend the company take?
4. How would your answers to (3) change if Dell also repurchased $500 million of coming stock in 1997 and repaid its long-term debt?
Study Questions:
1. How much business risk does American Home Products (AHP) face? How much financial risk would AHP face at each of the proposed levels of debt shown in Ex. 3? How much potential value, if any, can AHP create for its shareholders at each of the proposed levels of debt?
2. What capital structure would you recommend as appropriate for AHP. What are the advantages (disadvantages) of leveraging this company? How would leveraging up affect the company’s taxes? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure?
3. How might AHP implement a more aggressive capital structure policy? What are the alternative methods for leveraging up?
4. In view of AHP unique corporate culture, what arguments would you advance to persuade Mr. Laporte or his successor to adopt you recommendation?
Study Questions:
1. What is the likely level of MCI’s external needs over the next several years? By how much could they reasonably be expected to vary? Why?
2. Critique MCI’s past financial strategy, giving attention to the types of securities on which it has relied. Why did MCI finance itself in the manner it did?
3. Based upon your analysis of the outlook for MCI and the competitive and regulatory evolution of the industry, recommend a capital structure policy for MCI and defend your proposal against plausible alternatives.
4. Assume that Mr. English, the MCI chief financial officer, has the following financial alternatives available to him as of April 1983:
a) $500
million of 12 1/2 , 20-year subordinated
debentures.
b) $400 million of common stock.
c1) $600 million of 7 5/8, 20-year convertible subordinated debentures with conversion price of $54 per share (i.e., each $1,000 bond would be converted into 18.52 common shares).
c2) $1 billion of a unit package consisting of a $1,000 7 ½, 10-year subordinated debenture and 18.18 warrants, each entitling the holder to purchase one share of MCI common stock for $55. The warrants would be exercisable until 1988 and are callable. The exercise price of the warrants would be payable either in cash or by surrender of the debentures valued at their principal amount.
Which, if any, of these alternatives, would you recommend that Mr. English take? Why? In broad outline, what financing steps would you recommend he take over the next several years?
Study Questions:
1. Compare and contrast the three venture capital funds. Does any one fund strike you as being a better investment?
2. What skills are required to run a successful fund? Do the funds differ in these skills?
3. How is the venture capital industry different today compared to the late 90’s? What are the reasons for these differences?
4. What kind of returns should an investor in any of these funds expect to earn? Would the answer to this question be different if this case was set in the late 90’s? You might find the following working paper helpful for answering this question: Private Equity Performance: Returns, Persistence and Capital Flows
Study Questions:
1. Estimate the cost of
equity appropriate for the evaluation of the incremental cash flows associated
with the
2. Project the incremental
cash flows associated with the acquisition of the
3. Is the
4. Assess the strategic
issues associated with the proposal. Is
5. As CEO of Dixon Corporation, would you
approve the acquisition of the
Study Questions:
1. Evaluate the economics of Gulf’s exploration and development program in net present value terms. How do Gulf’s outlays for exploration and development compare to the cash returns Gulf generates from these activities?
2. When Gulf was placed on the auction block, a minimum bid level was established at $70 per share. Yet only a few months before, Gulf was trading in the $40 range. How could Gulf become so much more valuable in such a short period of time?
3. How did Boone Pickens stampede Gulf into a sale? Even if the Pickens group were totally successful in their last tender offer, they would only control 21% of Gulf’s stock. Why did the Gulf Investors’ Group limit its total offer to 21% of the equity? Could they have afforded to buy more? Do you think reincorporation influenced the raiders’ strategy? Why?
4. If you were one of the
prospective Gulf buyers called to
Study Questions:
1. Assess Interco’s financial performance. Why is the company a target of a hostile takeover attempt?
2. As a member of Interco’s board are you persuaded by the premiums paid analysis (Exhibit 10) and the comparable transactions analysis (Exhibit 11)? Why?
3. Wasserstein, Perella & Co. established a valuation range of $68-$80 per common share for Interco. Show that this valuation range can follow from the assumptions described in the discounted cash flow analysis section of Exhibit 12. As a member of Interco’s board, which assumptions would you have questioned? Why?
4. How would you advise the Interco board on the $70 per share offer?
5. How would you assess the actions of
Interco’s board up to
Study Questions:
1. What are the most important operating and financial characteristics of the Case Company?
2. Is the company worth Mr. Cases’s $20 million asking price?
3. Can the $20 million purchase be financed so that management can retain at least 51% ownership? What sources should management tap? In what amounts? Is the return being sought by the venture capital firm reasonable?
4. How compelling a buyout opportunity is this proposition for the four managers?
5. Would you, as a commercial banking lender, provide the loan needed to finance the seasonal buildup in accounts receivable and inventory? On what terms?
6. Would you, as the venture capital firm, provide the balance of the funds needed? If so, on what terms?
Note: Mr. Case is willing to take a note with a face value of $6 million and an interest rate of 4%. However, the note’s economic value, due to the low interest rate, is only $4 million; the $20 million sale price is based on receiving the note plus $16 million in cash.
The study questions are included in the case writeup.
Study Questions:
1. What are the most compelling reasons to merge Pepsi and Quaker?
2. What is the value of Quaker's businesses to Pepsi?
3. Put yourself in Enrico’s shoes. What are the hurdles that could come up that would scuttle a deal. Come up with an effective negotiation strategy that minimizes these hurdles.