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 Corp.: The Financial Reporting Crisis: Amy P. Hutton Product Number: 102013 Length: 10p Teaching Note: 102033

Explores the challenges facing Tim Williams, the new CFO of a publicly-traded enterprise software company, as he attempts to rebuild his company's reputation for reliable financial reporting following a highly visible financial reporting crisis. Armed with an understanding of the company business model, sales cycle, and revenue recognition 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 R. Piper Product Number: 297028 Length: 6p Teaching Note: 297076

The owner of a rapidly growing retail lumber company is considering the financial implications of continued rapid growth. The magnitude of the company's future financing requirements must be assessed in the context of the company's access to bank finance and/or equity 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 (HBS background note): David F. Hawkins; Jacob Cohen Product Number: 101108

Discusses the accounting equation and defines common terms found in the statement. Also provides an example of the balance sheets of Coca-Cola Co., Ariba, Inc., and Safeway, Inc. Subjects Covered: Accounting; Balance sheets; Financial reporting

Length: 7p Kmart Corp.: Christopher F. Noe Product Number: 199017 Length: 10p

Describes a situation in which a company (Kmart) refinances a portion of its debt. Used to illustrate how the asset and liability sides of the balance sheet are linked. Subjects Covered: Accounting procedures; Assets; Balance sheets; Debt management; Discount department stores; Liability; Retail stores

The Income Statement (HBS background note): David F. Hawkins; Jacob Cohen Product Number: 101109 Length: 6p

Includes a description of the common components of the income statement. Includes examples of the income statements of Home Depot, Inc., Lucent Technology, Inc., Gap, Inc., and McDonald's Corp. and lends itself to a brief discussion regarding these companies. Subjects Covered: Accounting; Financial reporting; Income

The Statement of Cash Flows (HBS background note): David F. Hawkins; Jacob Cohen Product Number: 101107 Length: 8p

Discusses the components of the statement of cash flow and its direct and indirect format of presentation. Also briefly explains the difference between cash and accrual accounting and provides examples of Standard Microsystems Corp. and Intel Corp. Subjects Covered: Accounting; Cash flow; Financial reporting

Preparing and Using the Statement of Cash Flows (HBS background note): Robert L. Simons; Antonio Davila Product Number: 196108 Length: 10p

Explains the concepts and procedures behind the statement of cash flows. Presents an overview of the reporting objectives of this report, and describes in detail the preparation of the cash flow statement using both the indirect method and the direct method. A complete numerical example is presented. Financial analysis techniques using 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: Three Examples: William J. Bruns Jr.; Julie H. Hertenstein Product Number: 193103 Length: 8p Teaching Note: 193173

Introduces the statement of cash flow. Contains three examples of multi-year statements of cash flows from three unidentified companies. The analysis tasks include examination of cash flows, analysis of profitability of operations, investment policies, and financing. Learning Objective: To introduce the statement of cash flows now required in the United States.

Chemalite, Inc. (B): Cash Flow Analysis: Robert L. Simons; Antonio Davila Product Number: 195130 Length: 3p Teaching Note: 198120

Students are asked to use actual and pro forma financial statements to prepare a statement of cash flows under both the direct and indirect method. Subjects Covered: Accounting procedures; Cash flow; Chemicals; Financial analysis

Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc.: Gregory S. Miller; Christopher F. Noe Product Number: 101011 Length: 18p Teaching Note: 102052

This case is designed to familiarize students with the use of financial ratios. Two retailers, Sears, Roebuck and Co. and Wal-Mart Stores, Inc., have a very similar value for return on equity (ROE) in the 1997 fiscal year. Students use the information in the case and the accompanying exhibits, which include financial statements as well as 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. Piper

The Butler Lumber Co. is faced with a need for increased bank financing due to its rapid sales growth and low profitability. Students

Product Number: 292013 Length: 4p Teaching Note: 292014

must determine the reasons for the rising bank borrowing, estimate the amount of borrowing needed, and assess the attractiveness of the 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, Inc.: William J. Bruns Jr. Product Number: 192150 Length: 6p Teaching Note: 193128

An introductory case in cash flow analysis and the preparation of statements of cash flows. Based on the 1991 income statement and balance sheet at a ski resort company, the case provides additional information which allows a student to prepare both a direct and an 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 Product Number: 295073 Length: 6p Teaching Note: 297118

A shift from seasonal to level production of toys will change the seasonal cycle of Toy World's working capital needs and necessitate new bank credit arrangements. Students must analyze the company's 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 (Exercises): Todd Pulvino Product Number: 201101 Length: 4p

A set of four exercises that teach compounding interest and valuing bonds. Learning Objective: To teach the mechanics of valuing bonds.

Note on Valuation in Private Equity Settings: Joshua Lerner; John Willinge Product Number: 297050 Length: 21p

Discusses several ways in which venture-backed firms can be valued, including comparables, net present value, decision-tree analysis, and the "venture capital method." Learning Objective: Provides an introduction to valuation of entrepreneurial firms.

Cougars: Scott P. Mason; Mihir Desai Product Number: 295006 Length: 6p Teaching Note: 295098

Provides an introduction to zero coupon bonds and stripping coupon bonds. Concerns the relationship between the spot curve, the strip curve, and the coupon curve. Subjects Covered: Bonds; Innovation; Interest rates; Pricing

Jupiter Management Co.: The manager of a small company growth fund considers relative

Ronald W. Moore Product Number: 292107 Length: 24p Teaching Note: 298023

merits of investing in a company's convertible debt versus its common. Subjects Covered: Investment management; Mutual funds; Portfolio management

Arbitrage in the Government Bond Market?: Michael E. Edleson; Peter Tufano Product Number: 293093 Length: 9p Teaching Note: 298023

Documents a pricing anomaly in the large and liquid treasury bond market. The prices of callable treasury bonds seem to be inconsistent with the prices of noncallable treasuries and an arbitrage opportunity appears to exist. Permits instructors to introduce the treasury market, the concept of creating synthetic instruments, principles of arbitrage, and institutional frictions in the bond markets. Subjects Covered: Bonds; Capital markets; Securities analysis; Valuation

Ford Motor Co.’s Value Enhancement Plan (A): Andre F. Perold Product Number: 201079 Length: 17p Teaching Note: 204116 B case available

In April 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to significantly recapitalize the firm's ownership structure. Ford had accumulated $23 billion in cash reserves and under the VEP would return as much as $10 billion of this cash to shareholders. 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: 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 Case of Royal Dutch and Shell: Kenneth A. Froot; Andre F. Perold Product Number: 296077 Length: 19p Teaching Note: 201093

Royal Dutch and Shell common stocks are securities with linked cash flow, so that the ratio of their stock prices should be fixed. In fact, the ratio is highly variable, moving with the markets where the securities are intensively traded. Royal Dutch trades more actively in the Netherlands and U.S. markets, whereas Shell trades more actively in the United States. The result is that the Royal Dutch/Shell relative 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, Inc. (A): Benjamin C. Esty; Craig F. Schreiber Product Number: 295059 Length: 17p Teaching Note: 296072 B case available

A Wall Street analyst has just learned that FPL (the holding company for Florida's largest electric utility) may cut its dividend in several days despite a 47-year streak of consecutive dividend increases. In response to the deregulation of the electric utility industry, FPL has substantially revised its competitive strategy over the past several years. The analyst must decide whether a change in dividend policy 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 Lockheed TriStar: Michael E. Edleson Product Number: 291031 Length: 6p Teaching Note: 291032

A set of five exercises in capital budgeting. Student calculates and compares various decision criteria (including IRR and NPV) for capital investment projects. This is an introductory case, where relevant cash flows are provided, and the focus is on the discounting mechanics and the decision to invest. In addition, one exercise directly probes the link 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 of Debt and Its Relevance to DCF-Based Valuation Methods (HBS background note): Lisa Meulbroek Product Number: 201110 Length: 5p

The flows-to-equity or equity cash flows valuation method is a discounted cash flow method used to estimate the equity portion of the capital structure. It is closely related to the venture capital/buyout valuation method, which estimates the IRR of the stream of cash flows accruing to equity holders. Both of these methods are likely to result in an estimate of equity value that is too low when the firm's debt is risky (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 (HBS exercise): David E. Bell Product Number: 189001 Length: 2p

A shop owner has limited shelf space for display of impulse purchase products near the cash register. He must select only nine to display. Exercise shows the relevance of opportunity cost or resource pricing. 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; Angela Chao; Kathleen S.

In January 2001, Mary Linn, VP of finance for Ocean Carriers, a shipping company with offices in New York and Hong Kong, was

Luchs Product Number: 202027 Length: 6p Teaching Note: 202029

evaluating a proposed lease of a ship for a three-year period, beginning in early 2003. The customer was eager to finalize the contract to meet his own commitments and offered very attractive 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. Ruback; Kathleen S. Luchs Product Number: 201031 Length: 3p Teaching Note: 202018

Describes two alternative tree-cutting strategies. The first is to cut all trees that are at least 12 inches in diameter at breast height. The second is to thin the forest by cutting less desirable trees immediately and harvesting the crop trees later. The case presents information for 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 Cash Flow Analysis (Exercise): Thomas R. Piper Product Number: 298068 Length: 6p

Comprises seven problems that collectively allow students to work through each type of cash flow that is encountered in capital budgeting. The instructor can also address such issues as product cannibalization and real options. 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? (HBS background note): Peter Tufano; Jonathan S. Headley Product Number: 294107 Length: 6p

Conventional finance theory demonstrates that, under simplistic assumptions, firms cannot add to shareholder value through the use of risk management activities. Modern finance theory recently has begun to carefully consider and examine those circumstances under which 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 Capital: W. Carl Kester; Kendall Backstrand

The Lex Service company has grown to become a large multidivisional company with a substantial capital budget. In 1993, the board was reviewing its capital budgeting procedures. Specifically, it sought to

Product Number: 296003 Length: 12p Teaching Note: 204158

determine the company's cost of capital and whether it should use different hurdle rates for different divisions. Introduces practical 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 Capital (Abridged): Richard S. Ruback Product Number: 289047 Length: 10p Teaching Note: 298081

Gives students the opportunity to explore how a company uses the Capital Asset Pricing Model (CAPM) to compute the cost of capital for each of its divisions. The use of Weighted Average Cost of Capital (WACC) formula and the mechanics of applying it are stressed. Subjects Covered: Capital costs; Hotels & motels

Concordia Electronic Systems Test: Thomas R. Piper Product Number: 298115 Length: 2p

The management of an electronics company is attempting to decide whether to use a single hurdle rate for all projects or to move to a system of different hurdle rates for each of its two divisions. The 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: Mark Mitchell; Erik Stafford Product Number: 201046 Length: 24p Teaching Note: 201123

Ameritrade Holding Corp. is planning large marketing and technology investments to improve the company's competitive position in deep-discount brokerage by taking advantage of emerging economies of scale. In order to evaluate whether the strategy would generate 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. Ltd.: Diversify or Focus?: Su Han Chan; Ko Wang; Mary Ho Product Number: HKU166 Length: 16p Teaching Note: HKU167

New World Development Co. Ltd. (NWD) was a leading conglomerate based in Hong Kong. After more than 20 years of operations, the group had expanded its core businesses to include property, infrastructure, services, and telecommunications. From late 1997 to June 2001, the stock price performance of the company had been 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 E. Edleson Product Number: 292122 Length: 5p Teaching Note: 294113

A manager of a small investment company has been successfully using index funds for limited market timing. Growth has allowed her to move into picking stocks. She is considering two small and highly variable listed stocks, but is concerned about the risk that these 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 Management, L.P. (A): Andre F. Perold Product Number: 200007 Length: 23p B, C, and D supplemental cases available

Long-Term Capital Management, L.P. (LTCM) was in the business of engaging in trading strategies to exploit market pricing discrepancies. Because the firm employed strategies designed to make money over long horizons--six months to two years or more--it adopted a long-term financing structure designed to allow it to withstand short-term market fluctuations. In many of its trades, the firm was in effect a seller of 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, LLC (A): Erik Stafford; Mark Mitchell; Todd Pulvino Product Number: 202024 Length: 3p Teaching Note: 202028 B and C cases available

Strategic Capital Management, LLC is a hedge fund planning to make financial investments in Creative Computers and Ubid. Creative Computers recently sold approximately 20% of its Internet auction subsidiary, Ubid, to the public at $15 per share. Ubid's stock price closed the first day of trading at $48, giving Ubid a $439 million market capitalization. Paradoxically, the parent's stock price did not keep pace 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: Risk Arbitrage (A): Andre F. Perold; Robert Howard Product Number: 299020 Length: 27p B case available

Farallon Capital Management, an investment firm that specializes in risk arbitrage, has taken significant long and short positions in MCI Communications and British Telecommunications, respectively, in the belief that the proposed merger of these firms will be successfully completed. Raises the issues facing Farallon as positive and negative 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 Corp.--1991: Peter Tufano Product Number: 292129 Length: 10p Teaching Note: 296058

An investment manager notices a large apparent discrepancy in the prices of two nearly-identical bonds issued in conjunction with a major leveraged buyout. The manager must figure out whether the instruments are mispriced relative to one another, and if so, how to 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: Mark Mitchell; Erik Stafford Product Number: 201046 Length: 24p Teaching Note: 201123

Ameritrade Holding Corp. is planning large marketing and technology investments to improve the company's competitive position in deep-discount brokerage by taking advantage of emerging economies of scale. In order to evaluate whether the strategy would generate 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 Capital: W. Carl Kester; Kendall Backstrand Product Number: 296003 Length: 12p Teaching Note: 204158

The Lex Service company has grown to become a large multidivisional company with a substantial capital budget. In 1993, the board was reviewing its capital budgeting procedures. Specifically, it sought to determine the company's cost of capital and whether it should use different hurdle rates for different divisions. 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.: Richard S. Ruback Product Number: 292011 Length: 5p Teaching Note: 292080

Pioneer is an integrated oil company. Its operations include exploration and development, production, transportation, and marketing. The case focuses on Pioneer's cost of capital calculations and its choice between a single company-wide cost of capital or 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 of Equity (HBS background note): Paul Asquith; David M. Mullins Product Number: 288036 Length: 11p

The objective is to delineate on methodology for measuring the risk associated with financial leverage and estimating its impact on the cost of equity capital. Subjects Covered: Capital costs; Capital structure; Equity financing

Financial Leverage, the Capital Asset Pricing Model and the Cost of Equity Capital (HBS background note): David W. Mullins Jr. Product Number: 280100 Length: 12p

Demonstrates how the capital asset pricing model can be used to estimate the impact of financial leverage on the cost of equity capital. The levering and unlevering of betas are illustrated. Also presents a methodology for decomposing the cost of equity into its three components--the risk-free rate, a premium for business, and a premium for financial risk. 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, Inc.: Andre F. Perold; Austin Scee Product Number: 202008 Length: 28p

NASDAQ's mission "to facilitate capital formation" is threatened by the emergence of Electronic Communication Networks, which are not as heavily regulated by the SEC. This case reviews the development of NASDAQ and it's evolution from a loose network of broker-dealers 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 E. Edleson Product Number: 292122 Length: 5p Teaching Note: 294113

A manager of a small investment company has been successfully using index funds for limited market timing. Growth has allowed her to move into picking stocks. She is considering two small and highly variable listed stocks, but is concerned about the risk that these 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 at BP Amoco: Luis M. Viceira Product Number: 201052 Length: 17p Teaching Note: 206121

On August 11, 1998, United States' Amoco Corp. (NYSE: AR) and the British Petroleum Co. (BP), p.l.c. (NYSE: BP), announced the BPC merger with Amoco. This deal was the largest industrial merger to date, and created the world's third-largest oil company, BP (NYSE: 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; Jeremy Cott Product Number: 296050 Length: 20p Teaching Note: 298085

A large diversified steel and energy firm is pressured by a corporate raider to spin off its steel business in order to increase its stock price. As an alternative to the spinoff, management proposes replacing the company's common stock with two new classes of "targeted" stock 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. : Steven R. Fenster; Rajiv Gharalia Product Number: 292039 Length: 23p Teaching Note: 294015

Deals with the privatization of the Argentine telephone industry. Focuses on the restructuring aspect. Commercial banks owned sovereign debt of Argentina trading at a deep discount to par. The question is whether the banks should exchange their sovereign debt instruments for the common or preferred stock of Telefonica. The 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 Tiemann Product Number: 289049 Length: 9p Teaching Note: 290004 & 292059

Avon Products announced both a change in its business focus and a reduction of its dividend in June 1988. To offset the likely stock price 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 common stock in exchange for an unusual preferred stock. The case 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

Chapter 15 Capital Structure: Basic Concepts and Chapter 16 Capital Structure: Limits to the Use of Debt

Abstract Debt Policy at UST, Inc.: Mark Mitchell Product Number: 200069 Length: 14p Teaching Note: 201002

UST, Inc. is a very profitable smokeless tobacco firm with low debt vis-a-vis other firms in the tobacco industry. The setting for the case is UST's recent decision to substantially alter its debt policy by borrowing $1 billion to finance its stock repurchase program. Learning Objective: Introduction to optimal capital structure with emphasis on calculation of interest tax shields.

Continental Carriers, Inc.: W. Carl Kester Product Number: 291080 Length: 5p Teaching Note: 292050

A U.S. trucking company is considering using debt for the first time to acquire another company. The directors of the company are divided in their opinion of the likely impact of leverage on Continental Carriers' performance. Their differences must be reconciled and a decision 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 Y. Baldwin; Joetta Forsyth

George Hatsopoulos, CEO at Thermo Electron Corp., is considering whether to issue shares in a subsidiary via an initial public offering

Product Number: 292104 Length: 25p

(IPO). The company has developed an unusual corporate structure in 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 C. Gilson; Jose Camacho Product Number: 201062 Length: 24p

A publicly-traded funeral home and cemetery consolidator faces imminent financial distress. The company has aggressively grown through use of debt. Restructuring the debt is potentially very costly to 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; Peter Tufano; Joshua Musher Product Number: 201033 Length: 16p Teaching Note: 201117

A major U.K.-based multinational is reevaluating its leverage policy as it restructures its business. The treasury team models the tradeoffs between the benefits and costs of debt financing, using Monte Carlo simulation to estimate the savings from the interest tax shields and 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 Meulbroek Product Number: 295150 Length: 12p Teaching Note: 200003

In March 1990, Baring Capital Investors faced a decision about whether and how much to bid for Acova Radiateurs, a subsidiary of Source Perrier. Source Perrier had decided to sell Acova, and Baring Capital Investors thought it might make a good leveraged buyout 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 Structure (HBS Exercise): Dwight B. Crane; Indra A. Reinbergs Product Number: 201039 Length: 3p Teaching Note: 201049

Contains common-size balance sheets and financial ratios for ten companies, each representative of a different industry. Students are asked to identify the industries from the structure of the financial statements. Learning Objective: Gives students practice in using financial ratios and helps develop an understanding of the factors that drive the 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 Product Number: 201094 Length: 3p Teaching Note: 204125

Management attempts to value the project under different financing strategies and methods, specifically adjusted present value (APV) and weighted average cost of capital (WACC). Learning Objective: Shows how to implement APV and WACC and when each is appropriate.

Note on the Equivalency of Methods for Discounting Cash Flows: William E. Fruhan Jr. Product Number: 202128 Length: 4p

Uses a numerical example to demonstrate that when you discount the cash flows to capital from a project at the weighted average cost of capital, you get same net present value result as you obtain when discounting the cash flows to equity at the cost of equity. Also 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 (HBS background note): Kenneth A. Froot; W. Carl Kester Product Number: 295100 Length: 21p

Provides a review of valuation techniques used to assess cross-border investments. Discusses the discounting of free cash flows with a weighted average cost of capital and the use of adjusted present value. Special concerns such as foreign-exchange risk, country risks, and international diversification are also discussed. Unlike Note on 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.: Richard S. Ruback Product Number: 292011 Length: 5p Teaching Note: 292080

Pioneer is an integrated oil company. Its operations include exploration and development, production, transportation, and marketing. The case focuses on Pioneer's cost of capital calculations and its choice between a single company-wide cost of capital or 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 Capital (Abridged): Richard S. Ruback Product Number: 289047 Length: 10p Teaching Note: 298081

Gives students the opportunity to explore how a company uses the Capital Asset Pricing Model (CAPM) to compute the cost of capital for each of its divisions. The use of Weighted Average Cost of Capital (WACC) formula and the mechanics of applying it are stressed. Subjects Covered: Capital costs; Hotels & motels

Chapter 18 Dividends and Other Payouts

Abstract Avon Products: Jonathan Tiemann Product Number: 289049 Length: 9p Teaching Note: 290004 & 292059

Avon Products announced both a change in its business focus and a reduction of its dividend in June 1988. To offset the likely stock price 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 common stock in exchange for an unusual preferred stock. The case 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, Inc. (A): Benjamin C. Esty; Craig F. Schreiber Product Number: 295059 Length: 17p Teaching Note: 296072 B case available

A Wall Street analyst has just learned that FPL (the holding company for Florida's largest electric utility) may cut its dividend in several days despite a 47-year streak of consecutive dividend increases. In response to the deregulation of the electric utility industry, FPL has substantially revised its competitive strategy over the past several years. The analyst must decide whether a change in dividend policy 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.: Krishna G. Palepu Product Number: 187178 Length: 27p Teaching Note: 190198

After a record year in 1983, Murray Ohio's earnings declined in 1984. The company was faced with competition from cheap imports and was experiencing declining margins. Students are asked to analyze the company's 1984 financial statements and predict whether there is likely to be a change in the dividend policy. Subjects Covered: Competition; Dividends; Financial analysis; Manufacturing

Ford Motor Co.'s Value Enhancement Plan (A): Andre F. Perold Product Number: 201079 Length: 17p Teaching Note: 204116 B case available

In April 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to significantly recapitalize the firm's ownership structure. Ford had accumulated $23 billion in cash reserves and under the VEP would return as much as $10 billion of this cash to shareholders. In exchange for each share currently held, the plan would give stockholders one new share plus the choice of 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.: Dwight B. Crane; Paul W. Marshall; Indra A. Reinbergs Product Number: 200033 Length: 25p Teaching Note: 201014

Candace Kendle and Christopher Bergen, the CEO and COO of Kendle International, Inc., are reviewing ways to finance the growth of their privately-owned company. Kendle is a contract research organization that conducts clinical drug trials for pharmaceutical and biotechnology companies. To compete more effectively, Kendle plans 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; Ko Wang; Mary Ho Product Number: HKU124 Length: 20p Teaching Note: HKU125

On February 18, 2000, month-old Internet startup, Tom.com, began its initial public offering and would open for trading on March 1 on Hong Kong's Growth Enterprise Market. The Internet company, majority-owned by Mr. Li Ka-shing's Cheung Kong Holdings and Hutchison 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: Andre F. Perold; Gunjan Bhow Product Number: 200019 Length: 18p

OpenIPO is a new mechanism for pricing and distributing initial public offerings. The system, which is based on a Dutch auction, represents an attempt by the investment bank W.R. Hambrecht + Co. to change the manner in which IPOs are underwritten. The case provides a 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 Offering Process: Joshua Lerner Product Number: 200018 Length: 6p

Provides an overview of the going public process. Subjects Covered: Entrepreneurial finance; Equity financing; Financial strategy; IPO; Venture capital

Buenos Aires Embotelladora S.A. (BAESA): A South American Restructuring: Stuart C. Gilson; Gustavo A. Herrero Product Number: 202009 Length: 27p

In 1998, BAESA, PepsiCo's largest bottler and distributor outside North America, experienced severe financial difficulty and had to restructure its debt and business operations to avoid bankruptcy or liquidation. Based in Argentina, with operations throughout South America, the company had for years been a spectacular success story 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 Tufano; John C. Handley Product Number: 299098 Length: 11p

In 1994 General Property Trust, an Australian property investment trust, was anticipating future cash needs beyond those that the Trust could fund with internal cash flows. The managers of the Trust were 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: Paul A. Gompers Product Number: 298083 Length: 11p

Discusses the economics of the private equity market and recent efforts by the U.S. Small Business Administration to promote greater angel financing. Subjects Covered: Capital markets; Entrepreneurial finance; Financing

Chapter 20 Long-Term Debt

Abstract

Debt Policy at UST, Inc.: Mark Mitchell Product Number: 200069 Length: 14p Teaching Note: 201002

UST, Inc. is a very profitable smokeless tobacco firm with low debt vis-a-vis other firms in the tobacco industry. The setting for the case is UST's recent decision to substantially alter its debt policy by borrowing $1 billion to finance its stock repurchase program. Learning Objective: Introduction to optimal capital structure with emphasis on calculation of interest tax shields.

Cox Communications, Inc.--1999: George Chacko; Peter Tufano Product Number: 201003 Length: 18p Teaching Note: 201116

Covers the decision of how much external financing a firm needs and what securities the firm should issue to raise this financing. Cox Communications is a major player in the cable industry, which is consolidating due to technological changes/capabilities brought about by the Internet. The corporate treasury of Cox Communications needs 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.: Stuart C. Gilson; Harry DeAngelo; Linda DeAngelo Product Number: 296032 Length: 19p Teaching Note: 296095

The manager of a money-management firm considers whether to invest in the securities of a large, financially troubled, California-based life insurance holding company that holds 40% of its assets in high-yield junk bonds. Over the past year, the value of its junk bond portfolio has declined significantly. The insurer is seeking a large 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 Desai Product Number: 295006

Provides an introduction to zero coupon bonds and stripping coupon bonds. Concerns the relationship between the spot curve, the strip curve, and the coupon curve.

Length: 6p Teaching Note: 295098

Subjects Covered: Bonds; Innovation; Interest rates; Pricing

Chapter 21 Leasing

Abstract

Financing PPL Corp.'s Growth Strategy: Benjamin C. Esty; Carrie Ferman Product Number: 202045 Length: 25p Teaching Note: 204046

PPL Corp., an electric utility in Pennsylvania, needs to finance $1 billion of peaking plants as part of its new growth strategy. In February 2001, Steve May, director of finance for PPL's Global Division, is responsible for recommending a finance plan. After considering all the options, May decides that a synthetic lease is the best option, but he 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 the Restaurant Industry: Amy P. Hutton; Paul M. Healy; Jacob Cohen Product Number: 101033 Length: 15p

Amid mounting concern by credit agencies about off-balance sheet liabilities, an analyst for one of the leading credit-rating agencies has been asked to make a presentation about off-balance sheet liabilities, the strategic analysis behind leasing versus purchasing property, and accounting for leases. Subjects Covered: Financial ratios; Financial statements; Leasing; Restaurants

Kmart, Inc. and Builders Square: Lisa Meulbroek Jonathan Barnett Product Number: 200044 Length: 25p Teaching Note: 202083

In 1997, Kmart received an offer from retail buyout specialists Leonard Green & Partners for the purchase of its ailing 162-store home improvement chain, Builders Square. Green's offer included a $10 million cash payment, a warrant to purchase a 28% stake in the new entity in the future, and the assumption of approximately $1.5 billion in non-cancelable 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 Industry: Joshua Lerner Product Number: 294069

Provides an overview of venture leasing, an innovative financing mechanism that resembles both venture equity investments and bank lending.

Length: 13p

Subjects Covered: Entrepreneurial finance; Financial planning; Leasing; Venture capital

Aloha Airlines, Inc.: A Leasing Decision: George G.C. Parker Product Number: F240 Length: 15p

Discusses the decision of whether to lease or buy aircraft at Aloha Airlines in Hawaii. Subjects Covered: Airlines; Capital budgeting; Capital costs; 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; Geoffrey Verter; Markus F. Mullarkey Product Number: 298116 Length: 18p

In early 1997, Cephalon, Inc. awaited an FDA panel's decision on whether its drug, Myotrophin, would be approved. If the drug was approved, the firm might need substantial additional funds to commercialize the drug as well as to buy back rights to it (which had 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 Strategies: W. Carl Kester Product Number: 295096 Length: 5p Teaching Note: 298013

A closed-end mutual fund's decision to study option trading provides an opportunity to study the profit profile and pricing of multiple option investment strategies (e.g., buy a call, buy a put, write a call, buy stock-write call, etc.). This case is designed to provide students with an introduction to option pricing. Subjects Covered: Derivatives; Investment management; Mutual funds; Option pricing; Risk management; Securities

Arundel Partners: The Sequel Project: Timothy A. Luehrman; William A. Teichner Product Number: 292140 Length: 19p Teaching Note: 295118

A group of investors is considering buying the sequel rights for a portfolio of feature films. They need to determine how much to offer to pay and how to structure a contract with one or more major U.S. film studios. The case contains cash flow estimates for all major films released in the United States during 1989. These data are used to 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 Put Warrants--1989: Peter Tufano

Japanese financial institutions' willingness to sell put options on the Nikkei Stock Average provides investment banks with the raw material from which to create a security that would allow U.S. investors to bet on

Product Number: 292113 Length: 16p Teaching Note: 296067

falls in the Japanese Stock Market. The investment bank that seeks to create this new product must decide how to design, produce (hedge), 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: Scott P. Mason; Mihir Desai Product Number: 295007 Length: 4p Teaching Note: 295099

Underscores the arbitrage implicit in the pricing of a complex unit of debt and warrants issued by the Coca-Cola Co. Subjects Covered: Beverages; Bonds; Innovation; Pricing

GetConnected: Jay O. Light; Dan J. Green Product Number: 201010 Length: 17p

An embryonic Internet-based telecom marketing firm considers its first (seed) round of funding. They are choosing between a fixed price round and a discounted convertible round. Learning Objective: To discuss fixed price vs. floating price seed financing.

Jupiter Management Co.: Ronald W. Moore Product Number: 292107 Length: 24p Teaching Note: 298023

The manager of a small company growth fund considers relative merits of investing in a company's convertible debt versus its common. Subjects Covered: Investment management; Mutual funds; Portfolio management

Chapter 25 Derivatives and Hedging Risk

Abstract Introduction to Derivative Instruments (HBS background note): W. Carl Kester; Kendall Backstrand Product Number: 295141 Length: 23p

Provides an elementary introduction to three major classes of derivative instruments: options, forwards and futures, and swaps. Subjects Covered: Commodity markets; Derivatives; Securities

Futures on the Mexican Peso: Kenneth A. Froot; Matthew McBrady; Mark Seasholes Product Number: 296004 Length: 22p

The Chicago Mercantile Exchange needs to decide how to design, and whether and when to introduce, a futures contract on the Mexican peso. Subjects Covered: Commodity markets; Country analysis; Foreign exchange rates; International finance; Mexico; Money; Money markets

Alcoma: The Strategic Use of Frozen Concentrated Orange Juice Futures: Ray A. Goldberg; Phil Herndon; Kate Morris Product Number: 595029 Length: 40p

Increases in orange tree production led to an orange juice surplus. How does one manage price risk in the orange juice industry under these conditions? Subjects Covered: Agribusiness; Commodity markets; Hedging; Risk management

Interest Rate Derivatives (HBS background note): Peter Tufano; Jonathan S. Headley Product Number: 294095 Length: 11p Teaching Note: 296063

Introduces and explains the six major interest rate derivative products: swaps, forward rate agreements, Eurodollar futures, bond options, caps/floors/collars, and swap options. Learning Objective: Provides students with an introductory knowledge of the basic interest rate derivative instruments used in the 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: Lisa Meulbroek; Puja Malhotra Product Number: 201113 Length: 24p Teaching Note: 202019

After initiating a hedging strategy, Apache Corp. is interested in revisiting its decision to determine if hedging is value-adding. This case investigates how the company initially decided to hedge against commodity price risk and how it implemented its hedging practice. 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 Small Companies (HBS background note): H. Kent Bowen; Andrew R. Jassy; Laurence E. Katz; Kevin Kelly; Baltej Kochar Product Number: 699047 Length: 8p

Most small business managers claim that cash management is their leading concern. Often walking a tightrope between growth and illiquidity, small business managers face different cash management challenges than their counterparts in larger companies. Compared to larger firms, small businesses often have under-staffed and under-trained accounting staffs, volatile cash flows dependent on a single product line, limited access to new capital, and a significant share of 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 S. Ruback; Aldo Sesia Product Number: 201029 Length: 7p Teaching Note: 201017

Dell Computer Corp. manufactures, sells, and services personal computers. The company markets its computers directly to its customers and builds computers after receiving a customer order. This build-to-order model enables Dell to have much smaller investment in 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. Piper Product Number: 292017 Length: 8p Teaching Note: 292018

A senior loan officer is reviewing the recent performance of a company that has failed to repay its loan as scheduled. The failure results from a cyclical downturn in sales, coupled with a lag in cutting back production. Inventory risk is minimal. Teaching objective: Practice in 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 Length: 6p Teaching Note: 297118

seasonal cycle of Toy World's working capital needs and necessitate new bank credit arrangements. Students must analyze the company's 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 Small Companies (HBS background note): H. Kent Bowen; Andrew R. Jassy; Laurence E. Katz; Kevin Kelly; Baltej Kochar Product Number: 699047 Length: 8p

Most small business managers claim that cash management is their leading concern. Often walking a tightrope between growth and illiquidity, small business managers face different cash management challenges than their counterparts in larger companies. Compared to larger firms, small businesses often have under-staffed and under-trained accounting staffs, volatile cash flows dependent on a single product line, limited access to new capital, and a significant share of 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 Default Swaps: George Chacko; Eli Peter Strick Product Number: 203033 Length: 18p Teaching Note: 203101

Discusses a bank's ability to manage its credit exposure to a particular client using credit default swaps. Learning Objective: To give students basic understanding of credit risk and credit derivative mechanics.

Collateralized Loan Obligations and the Bistro Trust: Kenneth A. Froot; Ivan Farman Product Number: 299016 Length: 27p

Examines a large bank trying to protect itself from the risks and capital requirement created by its loan portfolio. Considers a variety of ways available to the firm to offload the risks. Learning Objective: Credit risk management.

Wiegandt GmbH Cologne: Dwight B. Crane; Mathew Mateo Millett Product Number: 298159 Length: 8p

The credit department of Wiegandt, a furniture manufacturer, is evaluating the financial condition of two stores that retail the company's furniture. Learning Objective: Provides an opportunity to teach basic financial analysis and to discuss the trade credit policy of companies.

SureCut Shears, Inc.: W. Carl Kester Product Number: 297013 Length: 8p Teaching Note: 297079

A bank loan officer must determine whether to waive convenants and extend terms on a line of credit granted to SureCut Shears. At issue is whether the inability of SureCut to pay down its line of credit is due to a temporary cyclical downturn or other long-term financial problems. 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 Insurance: The Acquisition of Paul Revere: Mihir Desai; Mark Veblen; Frank Williamson Product Number: 202044 Length: 21p Teaching Note: 202046

Provident Life & Accident Insurance Co. has made an initial bid to acquire a primary competitor, Paul Revere, from conglomerate, Textron. The due diligence process uncovers a significant block of problematic disability insurance policies. Provident is forced to assess the negative impact of this discovery on its initial valuation and revise its bid. In the process, the divergent views of the evolution of these 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 (A): Carliss Y. Baldwin; Leonid Soudakov Product Number: 801458 Length: 25p

Throughout 1999, PepsiCo closely tracked several potential strategic acquisitions. In the fall of 2000, it appeared that the right moment for an equity-financed acquisition had arrived. At this time, PepsiCo management decided to initiate confidential discussions with The 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. Ruback; Pauline Fischer Product Number: 201025 Length: 15p Teaching Note: 201027

Radio One (NYSE: ROIA and RIOAK), the largest radio group targeting African-Americans in the country, had the opportunity to acquire 12 urban stations in the top 50 markets from Clear Channel Communications, Inc. (NYSE: CCU) in the winter of 2000. The stations 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 Rail Corp. (A): Benjamin C. Esty; Mathew Mateo Millett Product Number: 298006 Length: 17p Teaching Note: 298087 B case available

On October 15, 1996, Virginia-based CSX Corp. and Pennsylvania-based Consolidated Rail Corp. (Conrail), the first and third largest railroads in the Eastern United States, announced their intent to merge in a friendly deal worth $8.3 billion. This deal was part of an industry-wide trend toward consolidation and promised to change the competitive dynamics of the Eastern rail market. Students, as 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. Fruhan Jr. Product Number: 295121 Length: 20p Teaching Note: 297087

Microsoft Corp. proposes to acquire Intuit Corp. The case examines the strategic fit and the price proposed to complete the transaction. Learning Objective: Valuation and implementing a business strategy.

Chapter 30 Financial Distress

Abstract

The Loewen Group, Inc.: Stuart C. Gilson; Jose Camacho Product Number: 201062 Length: 24p

A publicly-traded funeral home and cemetery consolidator faces imminent financial distress. The company has aggressively grown through use of debt. Restructuring the debt is potentially very costly to 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; Fuaad A. Qureshi; William Olsen Product Number: 200039 Length: 21p Teaching Note: 200050

Part of a module on financing large projects in the elective curriculum course entitled "Large-Scale Investment." Set in August 1999, just after Iridium, a global communications firm, declared bankruptcy. While the case describes Iridium's creation, development, and commercial launch, it concentrates primarily on the firm's financial 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: Mary E. Barth; Nese Yildiz Product Number: A178 Length: 25p

In May 1995, about 19 months after emerging from the Chapter 11 bankruptcy it filed in 1993, Trans World Airlines issued a proxy statement to seek the consent of its shareholders and certain creditors 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. Piper; Ronald W. Moore Product Number: 299014 Length: 14p

A turnaround expert must determine whether a firm in distress is worth more as a going concern than its liquidation value. If so, the finances of the firm must be restructured consistent with the bargaining power 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: Benjamin C. Esty; Jason S. Auerbach Product Number: 298059 Length: 18p Teaching Note: 298028

Marvel Entertainment Group is the leading comic book publisher in the country with superheros like Spider-Man, The Incredible Hulk, The X-Men, and Captain America. It is also one of the leading manufacturers of sports and entertainment trading cards under the Fleer and Sky Box brand names. In the mid 1990s, it experienced sharp declines in both businesses causing it to file for bankruptcy in December 1996. This 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.: Steven R. Fenster; Paul J. Reiferson Product Number: 291052 Length: 23p Teaching Note: 293046

Japonica Partners, an investment firm, is trying to determine whether there is any unseen value in Sunbeam Oster Co., Inc., a Chapter 11 debtor. If there is, Japonica must consider the means by which they can acquire control of a company in Chapter 11. Subjects Covered: Acquisitions; Appliances; Bankruptcy; Consumer goods; Household products; Liquidation; Reorganization

Chapter 31 International Corporate Finance

Abstract Foreign Direct Investment (HBS background note): Laura Alfaro; Esteban Clavell Product Number: 703018 Length: 10p

Briefly reviews motivations and trends behind foreign direct investment and multinational corporations as well as the policy debate that surrounds them. Subjects Covered: Business government relations; Economic development; Foreign exchange; Government policy; International banking; International finance; Investments; Multinational corporations; Policy making

Malaysia: Capital and Control: Rawi Abdelal; Laura Alfaro Product Number: 702040 Length: 31p Teaching Note: 703020

On September 1, 1998 the government of Malaysia imposed currency and capital controls in response to the financial crisis that had swept Asia. The controls sparked an enormous controversy in the world of international finance. Some celebrated the controls for insulating the 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: Michael J. Enright ; Vincent Mak Product Number: HKU187 Length: 20p Teaching Note: HKU217

In August 2001, Credit Suisse First Boston (CSFB), a major international investment bank, was removed from the foreign underwriting team that would handle a pending share offering for China Unicom Group Ltd., the second largest telecommunications 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, Inc.: Building a Venture Capital Firm: Walter Kuemmerle; Chad Ellis Product Number: 899099 Length: 22p Teaching Note: 899305

Describes the second attempt at entry of JAFCO, a large Japanese venture capital firm, into the U.S. venture capital market. The U.S. subsidiary, JAFCO America Ventures, is in the midst of a challenging turnaround. Going forward, the U.S. subsidiary's leadership needs to make a number of important decisions regarding investment focus, deal flow generation, compensation, and cooperation with the 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 Development and Pipeline Project (A): Benjamin C. Esty Carrie Ferman Product Number: 202010 Length: 22p Teaching Note: 202032 B case available

On June 6, 2000, the World Bank's and IFC's board of directors was scheduled to vote on whether to approve funding for the $4 billion Chad-Cameroon Petroleum Development and Pipeline project. Although the project presented a unique opportunity to alleviate poverty in Chad, one of the poorest countries in the world, Chad had a president who had been described as a "warlord" and a history of civil war and oppression. This case describes the project, the setting, and 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.