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Finance 551 CW Haley

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Finance 551 CW Haley

GEMBA 510 C. W. Haley

    Winter 2002 357 Mackenzie

     MW 1:30-3:30

     TTH 10:30-12:30

     543-7697

     e-mail: chiph

    Financial Aspects of Global Strategy

     thText: R. Higgins, Analysis For Financial Management, 6 Ed. Plus selected

    chapters from Shapiro, International Financial Management.

General Information:

    This series of classes deals with several problems in the financial aspects of global business strategyplanning the cash needed to implement business and corporate strategies, the analysis of investment opportunities both domestic and foreign, business valuation, managing currency risk, and other problems arising in cross-border transactions. The specific topics are shown with each daily assignment. The objectives are to provide the basic financial concepts needed by senior executives in a multinational firm and to provide some practice in assessing analyses prepared by others.

    The course is built around a series of case problems which are in the course packet. The case method is the ideal way to study the topics addressed here because existing theory is often very difficult to apply. The best way to learn the material, therefore, is to examine practical problems to better understand the nature of the problems and to master the logic by which alternative policies can be evaluated. The classes build and rely on the finance course taught earlier at Yonsei University and in conjunction with the current course you are taking from Debra Glassman. You may find the texts used in those courses useful in dealing with the problems here.

    The reading assignments are intended to be helpful, but may not provide a “solution” to the problem or problems posed in the case. Daily class preparation is essential for obtaining the maximum benefit from this course. It is not expected that students have the "right" answer coming into class, but that everyone is prepared to participate in an informed class discussion. It is highly recommended that you discuss the case in your study group in advance of class. There are Excel spreadsheets available on my web page (us.badm.washington.edu/haley) under GEMBA which will be helpful (or essential) for many of the assignments.

    Grading: Class discussion and participation 35%

     Written assignments 55%

     Team negotiation exercise 10%

    SECTION I Basic Concepts

1. 1/7 Introduction: Evaluating Corporate and Business Strategies

     Background Reading: Higgins. Ch 9 (Review contents but don’t study, it will be assigned again later in the course.)

     Prepare: MRC, Inc

    a. What are the key elements of MRC's corporate strategy?

    b. How would MRC's strategic interests be advanced by acquisition of ARI?

    c. Describe the business strategy for ARI that is implied by the cash flow

    forecasts of Exhibits 6 and 8. What problems do you foresee in

    managing ARI in a manner consistent with these forecasts of its future

    operations?

    d. The appendix describes the capital budgeting process at MRC. How

    does the company evaluate capital investments? What criteria does

    management use? How important is managerial judgement in the

    process?

    e. Do you foresee any problems for MRC management if ARI is acquired?

    f. What do you recommend that MRC do with respect to the ARI

    acquisition?

2. 1/9 Introduction to Planning and Forcasting

     Background Reading: Higgins Chapter 2

3. 1/14 Planning and Financing Imports

     Background Reading: Chapter 14 from Global Business included in the course

    pack.

     Prepare: FL Imports, Ltd.

     a. Assume that Francine expects to achieve sales of $200,000 per month if she

    expands into Eastern Canada and the cost of her overseas purchases is

    60% of sales. What would be the size of the L/C line that she would need?

     b. If she will have operating expenses of $25,000 per month, including wages,

    rent, etc. at this level of sales, how much cash from some source will be

    needed to start up this business?

    c. If she has no significant amount of her own money to invest in this business,

    do you think a bank would support her?

     d. What would you do in her shoes?

4. 1/16 Cash Flows and Investment Decisions

     Background Reading: Higgins, Ch 7

     Prepare: Antron Corporation

    a. Analyze the banana starch investment proposal for Antron making

    whatever assumptions you feel are appropriate.

    b. What are the strategic implications for the Crantwell Division of not

    making the investment? If you were Crantwell management, how would

    you feel about a rejection of the proposal? Are there any elements to

    this decision that have not been addressed?

    c. Should Eric Serrano approve the banana starch project? If not, how

    should he communicate the decision to Crantwell Division management?

5. 1/21 Holiday

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    6. 1/23 Economic Assumptions in Investment Decisions

     Prepare: Alco, Inc.

    Evaluate and make a recommendation regarding each of the two problems faced by Mark Chen.

    a. With respect to the choice of stamping press, what are you assuming

    about the need for stamping press capacity over the next 10 years? b. With respect to the choice of extrusion press, precisely what is the

    advantage of the 8 inch press over the 4 inch press? Is there a strategic

    issue here?

    c. In your judgment, how does the risk of the incremental cash flows

    provided by the 8 inch press compare with the risk of the cash flows from

    the 4 inch press?

    d. How does the risk of the cash flows from the 4 inch extrusion press

    compare with the risk of the cash flows from the Stanford stamping press? e. What does all this imply about the potential for errors in the evaluation of

    these investment options? What could you do about it if you were Mark

    Chen? Are we missing something here?

    SECTION II Valuation and Strategic Investments

    7. 1/28 Relevant Cash Flows and Strategic Considerations

     Prepare: Empirical Chemicals Ltd. (A): The Merseyside Project

     Take the position of a senior manager in this company.

    a. How do the "concerns" expressed by the various groups in the situation

    affect the desirability of this project?

    b. What changes would you make in Hawkin's analysis?

    c. Are there strategic considerations in this project that need to be

    addressed? How would the project affect the ranking of Merseyside in

    Exhibit 1?

    8. 1/30 Discount Rates, Cash Flows, and Valuation

Background Reading: Higgins, pages 273-296

Prepare: The Ertsberg Project

    a. Review the history, financing, and operating characteristics of the Ertsberg

    project. Why is Freeport interested in this project? What is the corporate

    strategy?

    b. If Freeport invested $120 million in this project as an “ordinary business

    investment” without all the complicated legal and financial arrangements,

    how risky would this be for the company? What are the major sources of

    risk?

    c. How has the actual structure (separate subsidiary, etc.) of the project

    affected the risk to Freeport? How does the structure affect the risk to the

    lenders?

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    d. Looking at the four “Approaches” to analysis, which one seems to be the

    best method of evaluating the value of this project to Freeport? Why do you

    think so?

    e. Look at Exhibits 4 and 9. What do they tell you about the project? Are

    there any other factors that should be considered? If you were a member of

    Freeport’s senior management, is there any additional analysis that you

    would like to have done?

    f. Do you see any differences between valuing the Ertsberg Project and

    valuing a business?

    g. Should Freeport undertake the Ertsberg project?

    9. 2/4 Business Valuation and Terminal Values:

Background Reading: “Note on VC Valuation” handout

Prepare: Rocky Mountain Advanced Genome

    a. If a particular method is useful for estimating the terminal value, why not

    use it for estimating current (today’s) value?

    b. What role does “exit strategy” play in valuation by an investor like Big

    Sur?

    c. Where did the 90% figure come from? What is its significance? If

    RMAG needs another round of financing, how does this affect Big Sur’s

    position/valuation?

    d. What counter-offer should Kate McGraw make?

    10. 2/6 Estimating a Corporate Cost of Capital

     Background Reading: “Best Practices” handout.

     Prepare: Proctor and Gamble: Cost of Capital

a. Critically evaluate Mary Shiller's analysis.

    b. Evaluate each of the six points in Ron Emory's memo to Mary Shiller.

    ; Does it make sense to look at companies other than P&G? Why?

    ; Is Emory's method of computing yield to maturity correct?

    ; What is your opinion of other ke methods relative to CAPM?

    ; Should the cost of retained earnings be part of the cost of capital?

    ; Is anything lost if Mary's recommendation is written in terms of IRR rather

    than NPV?

    ; Since Clorox has less leverage than P&G, would you expect that its cost

    of capital to be higher or lower than P&G's? Why?

    c. Based on your assessment of these points, what is your estimate of

    P&G's cost of capital.

     d. What is your estimate of Clorox's cost of capital?

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11. 2/11 Valuing an Acquisition Candidate

     Background Reading: H. Ch 9

     Prepare: Cooper Industries, Inc

    Please provide a written answer to Part C only2-3 pages plus exhibits (15%).

    a. How would you describe Cooper’s corporate strategy? Does Nicholson File

    fit the strategy? What is your opinion of the strategy in general?

    b. Given the situation in May 1972, (Porter and VLN offers), should Cooper

    make a serious effort to acquire Nicholson File? Precisely what are the

    financial benefits to be derived from owning Nicholson?

    c. What is the maximum price per share of Nicholson, Cooper should be

    willing to pay to acquire 100% of the outstanding stock? What business

    strategy are you assuming for your analysis here?

    d. If you plan to make an offer, what is the amount and what form will your

    offer take (cash, common stock, or ???)?

    In May 1972, the following interest rates were in effect:

    US Treasury bills-3.7%, US Treasury bonds-6.1%, Aaa corporate bonds-7.3%, Baa corporate bond-8.23%, high grade preferred stock-6.90%.

    Cooper Industries common stock had an estimated beta of 1.17, Nicholson File had an

    estimated beta of 0.80.

12. 2/13 Valuing a Business for an IPO

     Prepare: Chromos Molecular Systems, Inc

     As Jaysen Smalley, what value range would you present to Peter Hoffman on

    Monday morning? How was this derived?

13. 2/18 Holiday

    SECTION III Problems in Cross-border Transactions

14. 2/20 Using DCF Analysis to Evaluate Marketing Strategies

    Prepare: Glaxo Italia SpA: The Zinnat Marketing Decision

    a. What are the relative advantages and disadvantages of co-marketing

    arrangements versus direct sales? Why is Glaxo considering co-

    marketing Zinnat?

    b. Critically evaluate Glaxo’s decision-making criteria regarding marketing

    strategies (payback and internal rate of return). How would you compare

    these with the net present value approach?

    c. Evaluate the forecasts. Are all relevant cash flows present? Are the

    assumptions reasonable? What causes the differences between the two

    strategies? Does the difference in tax rates between Italy and the UK

    affect the decision?

    d. What would you recommend?

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15. 2/25 Financial Risks in Imports

     Background Reading: “Chapter 6 Transaction Exposure”

     Prepare: Merton Electonics

    a. What is currency risk exposure and how is it measured?

    b. What are the costs and risks associated with each of the hedging

    methods described in the caseforward contracts, money-market

    transactions, futures, and options?

    c. What happens if the company hedges a particular transaction and later

    finds out that the period or amount at risk has changed?

    d. In Merton’s situation, when should a transaction be hedgedat the time

    the order is placed, when the goods and invoice is received, or when

    budgets or operating plans are prepared? Should all the identified

    exposure be hedged or only part of it?

    e. In your opinion, under what circumstances should a non-financial

    company try to make money from exchange rate movementsspeculate,

    trade, or take views?

16. 2/27 Valuation, Exports, and Economic Exposure

     Background Reading: Shapiro Chapters 10,11

     Prepare: Jaguar plc, 1984

    a. Consider Jaguar’s exchange rate exposures. Do they appear to be

    significant? Why?

    b. To which currencies is Jaguar exposed? What are the sources of these

    exposures?

    c. How would the company be affected by a 25% decline in the value of the

    dollar? (There is a spreadsheet available to help you answer this question.)

     d. How should Jaguar’s shares be priced?

     17. 3/4 Using Exchange Rate Models

     Jaguar VAR assignment due (15 %). See Course Package for details.

     Background Reading: Shapiro Chapter 7

18. 3/6 International Capital Investment Analysis

     Background Reading: Shapiro Pages 718-734

     Prepare: MSDI- Alcala de Henares, Spain

     Notes: Assume that Merck’s cost of capital, measured in US dollars, is 15%.

     Selected long-term interest rates in June, 1987 are

     US Government Bonds ($) 8.63%

     Spanish Government Bonds (Pts) 13.20%

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     High-grade US Corporate Debt ($) 9.50-10.00%

    a. Compute the net present value of the photoelectric inspection equipment in

    pesetas using a peseta discount rate.

    b. Compute the NPV of the equipment in dollars by translating expected future

    peseta cash flows at expected future spot exchange rates.

    c. How and why do the two NPVs differ? Which one would you recommend

    that Merck use to evaluate this project? Why?

    d. How sensitive is the NPV of the equipment to changes in the peseta/dollar

    exchange rate? What happens to the NPV if the Spanish inflation rate is

    assumed to be 8% per year while the US inflation rate is assumed to remain

    at 4% per year?

    e. Is this project riskier because of its location? What are the sources of any

    added risks?

    f. Are there any strategic issues here? Is there a potential for conflicting views

    between Merck headquarters staff and MSDI management?

    g. Should headquarters approve the equipment purchase?

19. 3/11 Estimating the Cost of Capital for International Business Valuation

     Prepare: Paginas Amarelas

     a. Develop cost of capital estimates for Paginas Amarelas' ("yellow pages")

    operations in each country.

     b. As Juan Lopez, what values would you recommend to Brasil

    Investimentos?

20. 3/13 Joint Ventures and Financing Foreign Subsidiaries

     Background Reading: Shapiro Pages 578-81 and Appendix 20A

     Written Case Assignment: The Nordesclor JV

     (Handout, 4-6 pages plus exhibits, 25%)

    Take the role of Bill Schmitt and prepare a report containing an analysis and recommendations for the Nordesclor joint venture with Votorantim. Include a recommendation regarding the preferred method of financing the joint venture if it were undertaken. The report is to be provided to Olin’s Board of Directors in advance of his presentation to them. Bill is sure that the board will have questions about whatever analysis and recommendations he comes up with; but having a solid report going in would help avoid a lot of them.

    A member of Bill’s staff has developed an analysis of the joint venture (Nordesclor JV Analysis.xls) which showed decent expected returns on Olin’s investment in the project relative

    to Olin’s corporate cost of capital estimated at 11%. The analysis looked at both direct investment by Olin with repatriation of dividends and using a government loan program. The possibility of using some form of debt-equity swap was not considered in this analysis, but a swap could significantly reduce Olin’s investment and therefore increase the expected rate of return to Olin.

    Other issues facing Bill include the underlying economic assumptions in the analysis such as the assumption that the changes in the cruzado/$US exchange rate would offset inflation in Brazil. All analysis was done in $US. In addition, it was not clear that repatriation of dividends to Olin was an appropriate assumption. What would actually happen to Olin’s share of the

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    cash generated by the joint venture depended on future investment opportunities in Brazil and foreign exchange management decisions made by Olin’s treasury department.

    Apart from the financial issues, there were also the normal concerns associated with the projectthe joint venture partner, the HTH market, production issues, and the supply of raw materials. This would be the first significant investment in Brazil for Olin and Bill Schmitt would have a personal stake in its success or failure. Nordesclor could become a stepping-stone to future opportunities in Latin America or end up as a drag on International Operations.

21/22. 3/16 Merger and Acquisition Negotiation

    The assignments for these class sessions will be distributed on March 13. The

    exercise will take the entire day starting at 9:00.

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