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FIN 522 Professor James A. Gentry

    Cases In Financial Management 343M Wohlers Hall

    Spring Semester 2009 333-7995

    2043 BIF

     Office Hours: 10:30 a.m. to 11:45 a.m.

     on Mon. and Wed/. or by Appointment

I. Teaching Objectives

Financial decision making cases are used to…

    ? Create a highly interactive learning environment;

    ? Learn about the application of financial management and credit analysis concepts;

    ? Discover what you do not know about the practice of financial management;

    ? Show what you have learned;

    ? Highlight the relationships between strategic goals and the creation of firm value;

    ? Develop techniques for interpreting a firm’s financial data and strategic plans;

    ? Enhance your critical thinking and problem solving skills;

    ? Expand your understanding of financial theory and its application;

    ? Improve your listening and cooperative learning skills.

II. Learning Promises

At the end of this course your will be able to…

    ? Think like a financial manager;

    ? Interpret a company’s financial health by evaluating the performance of its cash

    flow components and financial ratios;

    ? Create financial forecasts with different scenarios;

    ? Justify the acceptance or rejection of a loan based on credit analysis:

    ? Learn to interpret loan covenants and the underlying collateral;

    ? Discover the metrics that Moody’s uses to identify credit risk changes;

    ? Explain how management establishes a firm’s target capital structure;

    ? Learn to measure a firm’s cost of capital components; to use Credit Risk

    Spreads to adjust the interest rate on debt when the D/V [Wd] makes changes

    up or down; and learn ROIC is a cost of capital proxy;

    ? Discover issues that cause changes in a firm’s target capital structure;

    ? Estimate the intrinsic value of a stock and the enterprise value of a firm and

    explain the strengths and shortcomings of your analyses.

    ? Learn best practices and invaluable insights from Visiting Executives.


    III. Cases and Readings

A. Cases:

    ? Cases in Financial Management by TIS, January 2009;

    ? Text for the Caterpillar Case [Exhibit 25 WEB], Caterpillar Case [Exhibit 27


     B. Readings:

    ? Selected Readings for Cases in Financial Management, by James A. Gentry,

    Champaign, IL: Stipes Publishing, 2009.

    ? Cash Flow Story, January 2007, by James A. Gentry [WEB]

    ? Analysis for Financial Management, 8th Edition, by Robert C. Higgins, McGraw-

    Hill/Irwin, 2007.

    ? Estimating The Intrinsic Value of a Real Company With An Integrated Financial

    System: A Live Case, January 2009, by James A. Gentry and Frank K. Reilly.

    [Exhibit 25 WEB];

    IV. SYLLABUS FOR FIN 522 Spring 2009

     A. Exhibits related to assignments:

? Exhibit 1. Cash Flow Statement

    ? Exhibit 2. The Cash Flow Cycle

    ? Exhibit 3. The Cash Conversion Cycle

    ? Exhibit 4. Dupont System

    ? Exhibit 5 Gentry’s Key Financial Ratios

    ? Exhibit 6 Moody’s User’s Guide

    ? Exhibit 7 Moody’s Key Ratios for Comparison ? Exhibit 8 Porter’s Five Competitive Forces ? Exhibit 9. Micro-Drive Balance Sheet

    ? Exhibit 10. Micro-Drive Income Statement

    ? Exhibit 11. Micro-Drive Summary Sheet

    ? Exhibit 12. AFN-Financial Forecast

    ? Exhibit 13. Cash Budget

    ? Exhibit 14. Dell’s Pro-forma Balance Sheet

    ? Exhibit 15. Dell’s Pro-forma Income Statement

    ? Exhibit 16 Credit Risk Premiums

    ? Exhibit 17 Equity Premiums

    ? Exhibit 18. DuPont’s Bond Rating: Is it optimal? ? Exhibit 19. Moody’s Corporate Default and Recovery Rates 1920-2008 ? Exhibit 20. Estimating the Probability of Default

    ? Exhibit 21. Moody’s Speculative Grade Liquidity Ratings Sept. 2002

    ? Exhibit 22. Moody’s Market Implied Ratings Description… ? Exhibit 23. Financial Structure


    ? Exhibit 24 Polaroid Financial Flexibility

    ? Exhibit 25. Integrated Valuation System (text)

    ? Exhibit 26. Integrated Valuation System (Exhibits)

    ? Exhibit 27. Caterpillar Case

    ? Exhibit 28. Caterpillar Case, xls (Exhibits).

    ? Exhibit 29. Scorecard for Exhibit 3 results

    ? Exhibit 30. MCI Capital Structure 1974-1983

    ? Exhibit 31. Analysis of MCI Convertible Bond Financing

    ? Exhibit 32. Valuation of Gannett’s Cable Properties

    ? Exhibit 33. Cox: Short- and Long-Term Funding

    ? Exhibit 34. Instructions for estimating the value of Interco

    B. Exhibits Related To Valuation

    ? Exhibit 1. Generalized Cash Flow Valuation Model

    ? Exhibit 2. Dividend Valuation Model

    ? Exhibit 3. Capital Investment Valuation Model

    ? Exhibit 4. Dividend Valuation of a Stock

    ? Exhibit 5. Valuation of a StockFCFE Approach

    ? Exhibit 6. Valuation of a FirmFCFF Approach

     C. Case Exams: You will purchase a package of two tickets at the TIS Bookstore,

    one for each case. The tickets will be used to pick up each case at the Business and

    Economics Library (BEL) for the designated time period. Do not purchase tickets until

    February 16, 2009. Note the Business and Economics Library is currently scheduled to

    be open during the following times:

     Monday Thursday -- 8:30 a.m. 10 p.m.

     Friday -- 8:30 a.m. 5:00 p.m.

     Saturday -- 1:00 p.m. 5:00 p.m.

     Sunday -- 1:00 p.m. 10:00 p.m.

D. Grading Policies:

There are three components to your grade. First, each student will complete two

    written case examinations during the semester. The second component is a group

    valuation analysis of Caterpillar Inc. Each case exam and the valuation project

    represent 20 percent of your total grade, for a total of 60 percent. Third,

    participation in case discussions will contribute 40 percent of each student’s total

    grade. There are two ways to earn participation points. They are: (1) contributions

    to class discussions and/or (2) submitting case briefs, an optional approach, that are

    discussed below. Team Peer Evaluations will be distributed for the Caterpillar

    valuation project. The peer evaluation points will be added to your class

    contribution points.


    The examination cases will be made available in the Business and Economics Library at appropriate times during the semester. A completed case analysis shall be no more than

    five double- spaced typewritten pages. Exhibits are not included in the five-page limit.

    You will have nine (9) hours to complete the case analysis. The clock starts running when

    you pick up the exam in the Business and Economics Library (BEL) and ends when you

    submit your completed case exam.

     Upon completing the case exam, you will print the following pledge on the back of your case analysis, “On my honor as a University of Illinois graduate student I have

    neither given nor received unauthorized aid on this exam, and I have limited the time

    spent on this case to eight hours”. Please carefully sign your name below the pledge, date the pledge and print your name below the pledge. Your name should NOT appear

    elsewhere on the paper. Please do not miss other classes when you are writing the exam.

Intrinsic Valuation of Caterpillar Inc. (CAT). The assignment is to prepare a

    financial forecast and then estimate and interpret the intrinsic value of Caterpillar Inc.

    Each valuation team will consist of two or three Fin 522 students. On April 1 Mike