finance case study

    finance case study

    Finance case study.
    You have to do the CASE 1: WARREN BUFFETT from attachment. The case is in page 54 to 73.
    In this case, you are going to do a qualitative evaluation of the decision to acquire PacifiCorp. You don’t have to do any calculations, but use the all the data and numbers given in the exhibits. Your case report should include analysis and answers to the following:

    1. What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp?
    2. Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range?
    3. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value? As an alternative, the instructor could suggest that students perform a simple discounted cash-flow (DCF) analysis.
    4. How well has Berkshire Hathaway performed? How well has it performed in the aggregate? What about its investment in MidAmerican Energy Holdings?
    5. What is your assessment of Berkshire’s investments in Buffett’s Big Four: American Express, Coca-Cola, Gillette, and Wells Fargo?
    6. From Warren Buffett’s perspective, what is the intrinsic value? Why is it accorded such importance? How is it estimated? What are the alternatives to intrinsic value? Why does Buffett reject them?
    7. Critically assess Buffett’s investment philosophy. Be prepared to identify points where you agree and disagree with him.
    8. Should Berkshire Hathaway’s shareholders endorse the acquisition of PacifiCorp?

    Be sure to read the case very carefully. Read all footnotes, endnotes, tables, exhibits, etc. This requirement applies to all case studies. Try to determine what all the numbers are telling you about the valuation of the company and the purchase price.

    Conditions; the case report I recommend you use the following general format.

    1. Introduction: (a) to the case (b) the problem or situation (c) the people involved (when applicable). This should be a few paragraphs (as needed).
    2. Analysis: Most cases will require both quantitative and qualitative analysis. You must show step by step, all formulas used, and all calculations performed. If you like, some of the details can be moved to the appendix. Spreadsheets should be uploaded as separate documents. It is not enough just to do the number crunching. You must explain and interpret all your analysis.
    3. Conclusions: Some cases require you to make recommendations. You will have to justify them with the appropriate arguments and calculations. You can also write here any additional things you recommend the company should do or look at.

    Case Studies in Finance links managerial decisions to capital markets and the expectations of
    investors. At the core of almost all of the cases is a valuation task that requires students to look to
    financial markets for guidance in resolving the case problem. These cases also invite students to apply
    modern information technology to the analysis of managerial decisions. In the Seventh Edition, 25%
    of the cases are new with many dating from 2011–2012, ensuring that your students are learning
    from the most relevant and current sources.
    Visit the Online Learning Center at to see a complete list of changes
    to the Seventh Edition and to access study and teaching tools.
    Bruner Ea des Schill
    Case Studies
    in Finance
    managing for corporate value creation
    seventh edition
    Schill Case Studies in Finance managing for corporate value creation
    MD DALIM #1218056 12/10/12 CYAN MAG YELO BLK
    Case Studies
    in Finance
    Managing for
    Corporate Value
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    ii Part One Part Title
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page ii
    Case Studies in
    Managing for
    Corporate Value
    Seventh Edition
    Robert F. Bruner
    Kenneth M. Eades
    Michael J. Schill
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page iii
    Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the
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    In dedication to
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    Barbara M. Bruner
    Kathy N. Eades
    Mary Ann H. Schill
    and to our children
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page vii
    Robert F. Bruner is Dean of the Darden Graduate School of Business Administration,
    Distinguished Professor of Business Administration and Charles C. Abbott Professor of
    Business Administration at the University of Virginia. He has taught and written in
    various areas, including corporate finance, mergers and acquisitions, investing in emerging
    markets, innovation, and technology transfer. In addition to Case Studies in Finance,
    his books include Finance Interactive, multimedia tutorial software in Finance (Irwin/
    McGraw-Hill 1997), The Portable MBA (Wiley 2003), Applied Mergers and Acquisitions,
    (Wiley, 2004), Deals from Hell: M&A Lessons that Rise Above the Ashes (Wiley, 2005)
    and The Panic of 1907 (Wiley, 2007). He has been recognized in the United States and
    Europe for his teaching and case writing. BusinessWeek magazine cited him as one of
    the “masters of the MBA classroom.” He is the author or co-author of over 400 case
    studies and notes. His research has been published in journals such as Financial Management,
    Journal of Accounting and Economics, Journal of Applied Corporate Finance,
    Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and
    Journal of Money, Credit, and Banking. Industrial corporations, financial institutions, and
    government agencies have retained him for counsel and training. He has been on the
    faculty of the Darden School since 1982, and has been a visiting professor at various
    schools including Columbia, INSEAD, and IESE. Formerly he was a loan officer and
    investment analyst for First Chicago Corporation. He holds the B.A. degree from Yale
    University and the M.B.A. and D.B.A. degrees from Harvard University. Copies of his
    papers and essays may be obtained from his website,
    web/Faculty-Research/Directory/Full-time/Robert-F-Bruner/. He may be reached via
    email at
    About the Authors
    Kenneth M. Eades is Professor of Business Administration and Area Coordinator of the
    Finance Department of the Darden Graduate School of Business Administration at the
    University of Virginia. He has taught a variety of corporate finance topics including: capital
    structure, dividend policy, risk management, capital investments and firm valuation. His
    research interests are in the area of corporate finance where he has published articles in The
    Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative
    Analysis, and Financial Management. In addition to Case Studies in Finance, his books
    include The Portable MBA (Wiley 2010) Finance Interactive, a multimedia tutorial software
    in Finance (Irwin/McGraw-Hill 1997) and Case Studies in Financial Decision Making (Dryden
    Press, 1994). He has written numerous case studies as well as a web-based, interactive
    tutorial on the pricing of financial derivatives. He has received the Wachovia Award for
    Excellence in Teaching Materials and the Wachovia Award for Excellence in Research. Mr.
    Eades is active in executive education programs at the Darden School and has served as a
    consultant to a number of corporations and institutions; including many commercial banks
    and investment banks; Fortune 500 companies and the Internal Revenue Service. Prior to
    joining Darden in 1988, Professor Eades was a member of the faculties at The University
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page viii
    of Michigan and the Kellogg School of Management at Northwestern University. He has a
    B.S. from the University of Kentucky and Ph.D. from Purdue University. His website is
    and he may be reached via email at
    Michael J. Schill is Associate Professor of Business Administration of the Darden
    Graduate School of Business Administration at the University of Virginia where he
    teaches corporate finance and investments. His research spans empirical questions in
    corporate finance, investments, and international finance. He is the author of
    numerous articles that have been published in leading finance journals such as Journal
    of Business, Journal of Finance, Journal of Financial Economics, and Review of
    Financial Studies, and cited by major media outlets such as The Wall Street Journal.
    Some of his recent research projects investigate the market pricing of firm growth and
    the corporate gains to foreign stock exchange listing or foreign currency borrowing.
    He has been on the faculty of the Darden School since 2001 and was previously with
    the University of California, Riverside, as well as a visiting professor at Cambridge
    and Melbourne. Prior to his doctoral work, he was a management consultant with
    Marakon Associates in Stamford and London. He continues to be active in consulting
    and executive education for major corporations. He received a B.S. degree from
    Brigham Young University, an M.B.A. from INSEAD, and a Ph.D. from University
    of Washington. More details are available from his website,
    Michael-J-Schill/. He may be reached
    via email at
    About the Authors ix
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page ix
    Dedication vii
    About the Authors viii
    Contents x
    Foreword xiii
    Preface xiv
    Note to the Student: How To Study and Discuss Cases xxv
    Ethics in Finance xxxii
    Setting Some Themes
    1. Warren E. Buffett, 2005 To think like an investor 3
    2. Bill Miller and Value Trust Market efficiency 23
    3. Ben & Jerry’s Homemade Value creation and governance 39
    4. The Battle for Value, 2004: FedEx Corp. vs. Value creation and economic profit 53
    United Parcel Service, Inc.
    5. Genzyme and Relational Investors: Science Value creation, business strategy and activist investors 75
    and Business Collide?
    Financial Analysis and Forecasting
    6. The Thoughtful Forecaster Forecasting principles 101
    7. The Financial Detective, 2005 Ratio analysis 119
    8. Krispy Kreme Doughnuts, Inc. Financial statement analysis 125
    9. The Body Shop International PLC 2001: Introduction to forecasting 143
    An Introduction to Financial Modeling
    10. Value Line Publishing: October 2002 Financial ratios and forecasting 161
    11. Horniman Horticulture Analysis of growth and bank financing 175
    12. Guna Fibres, Ltd. Forecasting seasonal financing needs 181
    Estimating the Cost of Capital
    13. “Best Practices” in Estimating the Cost Estimating the cost of capital 193
    of Capital: Survey and Synthesis”
    14. Roche Holdings AG: Funding the Genentech Cost of debt capital 219
    15. Nike, Inc.: Cost of Capital Cost of capital for the firm 235
    16. Teletech Corporation, 2005 Business segments and risk-return tradeoffs 243
    17. The Boeing 7E7 Project specific risk-return 257
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page x
    Capital Budgeting and Resource Allocation
    18. The Investment Detective Investment criteria and discounted cash flow 283
    19. Worldwide Paper Company Analysis of an expansion investment 285
    20. Target Corporation Multifaceted capital investment decisions 289
    21 Aurora Textile Company Analysis of an investment in a declining industry 311
    22. Compass Records Analysis of working capital investment 323
    23 The Procter and Gamble Company: Scenario analysis in a project decision 337
    Investment in Crest Whitestrips Advanced
    24. Victoria Chemicals plc (A): Relevant cash flows 349
    The Merseyside Project
    25 Victoria Chemicals plc (B): The Merseyside Mutually exclusive investment opportunities 357
    and Rotterdam Projects
    26. Star River Electronics Ltd. Capital project analysis and forecasting 365
    27. The Jacobs Division 2010 Strategic planning 373
    28. University of Virginia Health System: Analysis of an investment in a not-for-profit 381
    The Long-Term Acute Care Hospital organization
    Management of the Firm’s Equity: Dividends and Repurchases
    29. Gainesboro Machine Tools Corporation Dividend payout decision 393
    30. AutoZone, Inc. Dividend and stock buyback decisions 409
    Management of the Corporate Capital Structure
    31. An Introduction to Debt Policy and Value Effects of debt tax shields 425
    32. Structuring Corporate Financial Policy: Concepts in setting financial policy 431
    Diagnosis of Problems and Evaluation
    of Strategies
    33. California Pizza Kitchen Optimal leverage 449
    34. The Wm. Wrigley Jr. Company: Capital Leveraged restructuring 467
    Structure, Valuation, and Cost of Capital
    35. Deluxe Corporation Financial flexibility 479
    36. Horizon Lines, Inc. Bankruptcy/restructuring 497
    Analysis of Financing Tactics: Leases, Options, and Foreign Currency
    37. Carrefour S.A. Currency risk management 513
    38. Baker Adhesives Hedging foreign currency cash flows 523
    39. J&L Railroad Risk management and hedging commodity risk 529
    40. Primus Automation Division, 2002 Economics of lease financing 541
    41. MoGen, Inc. Convertible bond valuation and financial engineering 553
    Contents xi
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xi
    Valuing the Enterprise: Acquisitions and Buyouts
    42. Methods of Valuation for Mergers Valuation principles 569
    and Acquisitions
    43. American Greetings Firm valuation in stock repurchase decision 589
    44. Arcadian Microarray Technologies, Inc. Evaluating terminal values 599
    45. JetBlue Airways IPO Valuation Initial public offering valuation 617
    46. Rosetta Stone: Pricing the 2009 IPO Initial public offering valuation 635
    47. The Timken Company Financing an acquisition 655
    48. Sun Microsystems Valuing a takeover opportunity 671
    49. Hershey Foods Corporation: Bitter Corporate governance influence 693
    Times in a Sweet Place
    50. Flinder Valves and Controls Inc. Valuing the enterprise for sale 715
    51. Palamon Capital Partners/TeamSystem Valuing a private equity investment 727
    52. Purinex, Inc. Financing the early-stage firm 745
    53. Medfield Pharmaceuticals Valuing strategic alternatives 755
    xii Contents
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xii
    The half-decade from 2008 to 2013 forced a series of “teachable moments” into the consciousness of
    leaders in both business and government. More such moments may be in the offing, given the unresolved
    issues stemming from the global financial crisis. What lessons shall we draw from these moments? And
    how shall we teach the lessons so that the next generation of leaders can implement wiser policies?
    One theme implicit in most critiques and policy recommendations of this period entails the consequences
    of financial illiteracy. At few other times in financial history have we seen so strong an affirmation
    of Derek Bok’s famous argument, “If you think education is expensive, try ignorance.” The
    actions and behavior of consumers, investors, financial intermediaries, and regulators suggest ignorance
    (naïve or otherwise) of such basic financial concepts as time value of money, risk-adjusted returns, cost
    of capital, capital adequacy, solvency, optionality, capital market efficiency, and so on. If ignorance is
    bliss, teachers of finance face a delirious world.
    Now more than ever, the case method of teaching corporate finance is critical to meeting the
    diverse educational challenges of our day. The cases presented in this volume address the richness of
    the problems that practitioners face and help to develop the student in three critical areas:
    • Knowledge. The conceptual and computational building blocks of finance are the necessary foundation
    for professional competence. The cases in this volume afford solid practice with the breadth
    and depth of this foundational knowledge. And they link the practical application of tools and concepts
    to a contextual setting for analysis. Such real-world linkage is an important advantage of case
    studies over textbook problem sets.
    • Skills. Case studies demand decisions and recommendations. Too many analysts are content to
    calculate or estimate without helping a decision-maker fully understand the implications of the
    analysis. By placing the student in the position of the decision-maker, the case study promotes
    confidence and competence in making decisions. Furthermore, class discussions of cases promote
    skills in communication, selling and defending ideas, giving feedback, negotiating, and getting results
    through teamwork—these are social skills that are best learned in face-to-face engagement.
    • Attributes of character. Popular outrage over the crisis focused on shady ethics. The duty of agents,
    diligence in the execution of professional responsibilities, breaches of trust, the temptations of selfdealing,
    and outright fraud intrude into retrospective assessments of what might otherwise be dry and
    technical analyses of the last decade. It is no longer possible or desirable to teach finance as a purely
    technical subject devoid of ethical considerations. Ultimately, teaching is a moral act: by choosing
    worthy problems, modeling behavior, and challenging the thinking of students, the teacher strengthens
    students in ways that are vitally important for the future of society. The case method builds attributes
    of character such as work ethic and persistence; empathy for classmates and decision-makers;
    social awareness of the consequences of decisions and the challenging context for decision-makers;
    and accountability for one’s work. When students are challenged orally to explain their work, the
    ensuing discussion reveals the moral dilemmas that confront the decision maker. At the core of
    transformational teaching with cases is growth in integrity. As Aristotle said, “Character is destiny,” a
    truism readily apparent in the ruinous aftermath of the global financial crisis.
    As with the sixth edition of this book, I must commend my colleagues, Kenneth Eades and
    Michael Schill, who brought this seventh edition to the public. They are accomplished scholars in
    Finance and masterful teachers—above all, they are devoted to the quality of the learning experience
    for students. Their efforts in preparing this volume will enrich the learning for countless students and
    help teachers world-wide to rise to the various challenges of the post-crisis world.
    Robert F. Bruner
    Dean and Charles C. Abbott Professor of Business Administration
    Distinguished Professor of Business Administration
    Darden Graduate School of Business Administration
    University of Virginia
    Charlottesville, Virginia
    October 8, 2012
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xiii
    The inexplicable is all around us. So is the incomprehensible. So is the unintelligible. Interviewing Babe
    Ruth* in 1928, I put it to him “People come and ask what’s your system for hitting home runs—that
    so?” “Yes,” said the Babe, “and all I can tell ‘em is I pick a good one and sock it. I get back to the
    dugout and they ask me what it was I hit and I tell ‘em I don’t know except it looked good.”
    —Carl Sandburg†
    Managers are not confronted with problems that are independent of each other, but with dynamic
    situations that consist of complex systems of changing problems that interact with each other. I call
    such situations messes . . . Managers do not solve problems: they manage messes.
    —Russell Ackoff‡
    Orientation of the Book
    Practitioners tell us that much in finance is inexplicable, incomprehensible, and unintelligible.
    Like Babe Ruth, their explanations for their actions often amount to “I pick
    a good one and sock it.” Fortunately for a rising generation of practitioners, tools and
    concepts of Modern Finance provide a language and approach for excellent performance.
    The aim of this book is to illustrate and exercise the application of these tools
    and concepts in a messy world.
    Focus on Value
    The subtitle of this book is Managing for Corporate Value Creation. Economics
    teaches us that value creation should be an enduring focus of concern because value
    is the foundation of survival and prosperity of the enterprise. The focus on value also
    helps managers understand the impact of the firm on the world around it. These cases
    harness and exercise this economic view of the firm. It is the special province of
    finance to highlight value as a legitimate concern for managers. The cases in this book
    exercise valuation analysis over a wide range of assets, debt, equities, and options,
    and a wide range of perspectives, such as investor, creditor, and manager.
    Linkage to Capital Markets
    An important premise of these cases is that managers should take cues from the capital
    markets. The cases in this volume help the student learn to look at the capital
    markets in four ways. First, they illustrate important players in the capital markets
    such as individual exemplars like Warren Buffett and Bill Miller and institutions like
    *George Herman “Babe” Ruth (1895–1948) was one of the most famous players in the history of American
    baseball, leading the league in home runs for 10 straight seasons, setting a record of 60 home runs in one
    season, and hitting 714 home runs in his career. Ruth was also known as the “Sultan of Swat.”
    †Carl Sandburg, “Notes for Preface,” in Harvest Poems (New York: Harcourt Brace Jovanovich, 1960), p.11.
    ‡Russell Ackoff, “The Future of Operational Research is Past,” Journal of Operational Research Society, 30, 1
    (Pergamon Press, Ltd., 1979): 93–104.
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xiv
    investment banks, commercial banks, rating agencies, hedge funds, merger arbitrageurs,
    private equity firms, lessors of industrial equipment, and so on. Second, they
    exercise the students’ abilities to interpret capital market conditions across the economic
    cycle. Third, they explore the design of financial securities, and illuminate the
    use of exotic instruments in support of corporate policy. Finally, they help students
    understand the implications of transparency of the firm to investors, and the impact
    of news about the firm in an efficient market.
    Respect for the Administrative Point of View
    The real world is messy. Information is incomplete, arrives late, or is reported with
    error. The motivations of counterparties are ambiguous. Resources often fall short.
    These cases illustrate the immense practicality of finance theory in sorting out the
    issues facing managers, assessing alternatives, and illuminating the effects of any particular
    choice. A number of the cases in this book present practical ethical dilemmas
    or moral hazards facing managers—indeed, this edition features a chapter, “Ethics in
    Finance” right at the beginning, where ethics belongs. Most of the cases (and teaching
    plans in the associated instructor’s manual) call for action plans rather than mere
    analyses or descriptions of a problem.
    All of the cases in this book are set in the year 2000 or after and 40 percent are set
    in 2006 or later. A substantial proportion (25 percent) of these cases and technical
    notes are new, or significantly updated. The mix of cases reflects the global business
    environment: 45 percent of the cases in this book are set outside the United States,
    or have strong cross-border elements. Finally the blend of cases continues to reflect
    the growing role of women in managerial ranks: 28 percent of the cases present
    women as key protagonists and decision-makers. Generally, these cases reflect the
    increasingly diverse world of business participants.
    Plan of the Book
    The cases may be taught in many different combinations. The sequence indicated by
    the table of contents corresponds to course designs used at Darden. Each cluster of cases
    in the Table of Contents suggests a concept module, with a particular orientation.
    1. Setting Some Themes. These cases introduce basic concepts of value creation,
    assessment of performance against a capital market benchmark, and capital market
    efficiency that reappear throughout a case course. The numerical analysis required of
    the student is relatively light. The synthesis of case facts into an important framework
    or perspective is the main challenge. The case, “Warren E. Buffett, 2005,” sets the
    nearly universal theme of this volume: the need to think like an investor. “Bill Miller
    and Value Trust,” explores a basic question about performance measurement: what is
    the right benchmark against which to evaluate success? “Ben & Jerry’s Homemade,
    Inc.” invites a consideration of “value” and the ways to measure it. The case entitled,
    “The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.” uses
    Preface xv
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xv
    “economic profit” (or EVA®) to explore the origins of value creation and destruction,
    and its competitive implications for the future. A new case, “Genzyme and Relational
    Investors: Science and Business Collide?”, poses the dilemma of managing a public
    company when the objectives of the shareholders are not always easily aligned with
    the long-term objectives of the company.
    2. Financial Analysis and Forecasting. In this section, students are introduced to
    the crucial skills of financial-statement analysis, break-even analysis, ratio
    analysis, and financial statement forecasting. The section starts with a note, “The
    Thoughtful Forecaster”, that provides a helpful introduction to financial statement
    analysis and student guidance on generating rational financial forecasts.
    The case, “Value Line Publishing: October 2002”, provides students an exposure
    to financial modeling with electronic spreadsheets. “Horniman Horticulture” uses
    a financial model to build intuition for the relevancy of corporate cash flow and
    the financial effects of firm growth. The case, “Krispy Kreme Doughnuts, Inc.,”
    confronts issues regarding the quality of reported financial results. “Guna Fibres”
    asks the students to consider a variety of working capital decisions, including the
    impact of seasonal demand upon financing needs. Other cases address issues in
    the analysis of working-capital management, and credit analysis.
    3. Estimating the Cost of Capital. This module begins with a discussion of “best
    practices” among leading firms. The cases exercise skills in estimating the cost of
    capital for firms and their business segments. The cases aim to exercise and solidify
    students’ mastery of the capital asset pricing model, the dividend-growth model,
    and the weighted average cost of capital formula. “Roche Holdings AG: Funding
    the Genentech Acquisition” is a new case that invites students to estimate the
    appropriate cost of debt in the largest debt issuance in history. The case provides an
    introduction to the concept of estimating required returns. “Nike, Inc.: Cost of
    Capital” presents an introductory exercise in the estimation of the weighted
    average cost of capital. “Teletech Corporation, 2005,” explores the implications of
    mean-variance analysis to business segments within a firm, and gives a useful
    foundation for discussing value-additivity. “The Boeing 7E7,” presents a dramatic
    exercise in the estimation of a discount rate for a major corporate project.
    4. Capital Budgeting and Resource Allocation. The focus of these cases is the
    evaluation of investment opportunities and entire capital budgets. The analytical
    challenges range from simple time value of money problems (“The Investment
    Detective”) to setting the entire capital budget for a resource-constrained firm
    (“Target Corporation”). Key issues in this module include the estimation of Free
    Cash Flows, the comparison of various investment criteria (NPV, IRR, payback,
    and equivalent annuities), the treatment of issues in mutually exclusive investments,
    and capital budgeting under rationing. This module features several new
    cases. The first is “The Procter and Gamble Company: Crest Whitestrips Advanced
    Seal”, which asks the student to value a new product launch but then consider
    the financial implications of a variety of alternative launch scenarios. The
    second new case, “Jacobs Division”, presents students an opportunity to consider
    the implications of strategic planning processes. And finally, “UVa Hospital
    System: The Long-term Acute Care Hospital Project”, is an analysis of investment
    xvi Preface
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xvi
    decision within a not-for-profit environment. In addition to forecasting and
    valuing the project’s cash flows, students must assess whether NPV and IRR are
    appropriate metrics for an organization that does not have stockholders.
    5. Management of the Firm’s Equity: Dividends and Repurchases. This module
    seeks to develop practical principles about dividend policy and share issues by
    drawing on concepts about dividend irrelevance, signaling, investor clienteles, bonding,
    and agency costs. The first case, “Gainesboro Machine Tools Corporation”,
    concerns a company that is changing its business strategy and considering a change
    in its dividend policy. The case serves as a comprehensive introduction to corporate
    financial policy and themes in managing the right side of the balance sheet. The second
    case is new to this edition. “AutoZone, Inc.” is a leading auto parts retailer that
    has been repurchasing shares over many years. The case serves as an excellent example
    of how share repurchases impact the balance sheet and presents the student
    with the challenge of assessing the impact upon the company’s stock price.
    6. Management of the Corporate Capital Structure. The problem of setting
    capital structure targets is introduced in this module. Prominent issues are the
    use and creation of debt tax shields, the role of industry economics and technology,
    the influence of corporate competitive strategy, the tradeoffs between debt
    policy, dividend policy, and investment goals, and the avoidance of costs of
    distress. The case, “California Pizza Kitchen,” addresses the classic dilemma
    entailed in optimizing the use of debt tax shields and providing financial
    flexibility—this theme is extended in another case, “Deluxe Corporation” that
    asks how much flexibility a firm needs. “Horizon Lines, Inc.” is a new case
    about a company facing default on a debt covenant that will prompt the need for
    either Chapter 11 protection or a voluntary financial restructuring.
    7. Analysis of Financing Tactics: Leases, Options, and Foreign Currency. While
    the preceding module is concerned with setting debt targets, this module
    addresses a range of tactics a firm might use to pursue those targets, hedge risk,
    and exploit market opportunities. Included are domestic and international debt
    offerings, leases, currency hedges, warrants, and convertibles. With these cases,
    students will exercise techniques in securities valuation, including the use of
    option-pricing theory. For example, “Baker Adhesives” explores the concept of
    exchange-rate risk and the management of that risk with a forward-contract hedge
    and a money-market hedge. “MoGen, Inc” presents the pricing challenges associated
    with a convertible bond as well as a complex hedging strategy to change the
    conversion price of the convertible through the purchase of options and issuance
    of warrants. A new case, “J&L Railroad”, presents a commodity risk problem for
    which students are asked to propose a specific hedging strategy using financial
    contracts offered on the open market or from a commercial bank.
    8. Valuing the Enterprise: Acquisitions and Buyouts. This module begins with
    an extensive introduction to firm valuation in the note “Methods of Valuation:
    Mergers and Acquisitions.” The focus of the note includes valuation using DCF
    and multiples. This edition features four new cases in this module. The first new
    case, “American Greetings”, is provides a straightforward firm valuation in the
    context of a repurchase decision and is designed to be an introduction to firm
    Preface xvii
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    xviii Preface
    valuation. The second new case is “Rosetta Stone: Pricing the 2009 IPO”,
    provides an alternative IPO valuation case to the JetBlue case with additional
    focus on valuation with market multiples. “Sun Microsystems” is the third new
    addition to the module and presents traditional takeover valuation case with
    opportunities to evaluate merger synergies and cost of capital implications.
    Several of the cases demand an analysis that spans several stakeholders. For
    example, “Hershey Foods Corporation,” presents the high profile story of when
    the Hershey Trust Company put Hershey Foods up for sale. The case raises a
    number of challenging valuation and governance issues. “The Timken Company”
    deals with an acquisition that requires the student to conduct a challenging valuation
    analysis of Torrington as well as develop a financing strategy for the deal.
    The module also features a merger negotiation exercise (“Flinder Valves and
    Controls Inc.”) that provides an engaging venue for investigating the distribution
    of joint value in a merger negotiation. Thus, the comprehensive nature of cases in
    this module makes them excellent vehicles for end-of-course classes, student
    term papers, and/or presentations by teams of students.
    This edition offers a number of cases that give insights about investing or financing
    decisions in emerging markets. These include “Guna Fibres Ltd.,” “Star River Electronics
    Ltd.,” and “Baker Adhesives.”
    Summary of Changes for this Edition
    The seventh edition represents a substantial change from the sixth edition.
    This edition offers 13 new or significantly updated cases in this edition, or 25 percent
    of the total. In the interest of presenting a fresh and contemporary collection, older cases
    have been updated and/or replaced with new case situations such that all the cases are set
    in 2000 or later and 40 percent are set in 2006 or later. Several of the favorite “classic”
    cases from the first six editions are available online from Irwin/McGraw-Hill, from where
    instructors who adopt this edition may copy them for classroom use. All cases and teaching
    notes have been edited to sharpen the opportunities for student analysis.
    The book continues with a strong international aspect (24 of the cases, 45 percent,
    are set outside the United States or feature significant cross-border issues). Also, the
    collection continues to feature female decision-makers and protagonists prominently
    (15, or 28 percent, of the cases).
    The case studies in this volume are supported by various resources that help make
    student engagement a success:
    • Spreadsheet files support student and instructor preparation of the cases. They are
    located on the book’s website at
    • A guide to the novice on case preparation, “Note to the Student: How to Study
    and Discuss Cases” in this volume.
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xviii
    Preface xix
    • The instructor’s resource manual provides counterparty roles for two negotiation
    exercises and also presents detailed discussions of case outcomes, one of which is
    designed to be used as second class period for the case. These supplemental materials
    can significantly extend student learning and expand the opportunities for
    classroom discussion.
    • An instructor’s resource manual of about 800 pages in length containing teaching
    notes for each case. Each teaching note includes suggested assignment questions,
    a hypothetical teaching plan, and a prototypical finished case analysis.
    • Website addresses in many of the teaching notes. These provide a convenient avenue
    for updates on the performance of undisguised companies appearing in the book.
    • Notes in the instructor’s manual on how to design a case method course, on using
    computers with cases, and on preparing to teach a case.
    • A companion book by Robert Bruner titled, Socrates’ Muse: Reflections on Excellence
    in Case Discussion Leadership (Irwin/McGraw-Hill, 2002), is available to
    instructors who adopt the book for classroom use. This book offers useful tips on
    case method teaching.
    • Several “classic” cases and their associated teaching notes were among the most
    popular and durable cases in previous editions of Case Studies in Finance.
    Instructors adopting this volume for classroom use may request permission to
    reproduce them for their courses.
    This book would not be possible without the contributions of many other people. Colleagues
    at Darden who have taught, co-authored, contributed to, or commented on these
    cases are Brandt Allen, Yiorgos Allayannis, Sam Bodily, Karl-Adam Bonnier, Susan
    Chaplinsky, John Colley, Bob Conroy, Mark Eaker, Richard Evans, Bob Fair, Paul Farris,
    Jim Freeland, Sherwood Frey, Bob Harris, Jared Harris, Mark Haskins, Michael Ho,
    Marc Lipson, Elena Loutskina, Pedro Matos, Matt McBrady, Charles Meiburg, Jud Reis,
    William Sihler and Robert Spekman. We are grateful for their collegiality and for the
    support for our casewriting efforts from the Darden School Foundation, the L. White
    Matthews Fund for Finance Casewriting, the Batten Institute, the Citicorp Global Scholars
    Program, Columbia Business School, INSEAD, and the University of Melbourne.
    Colleagues at other schools provided worthy insights and encouragement toward
    the development of the seven editions of Case Studies in Finance. We are grateful to
    the following persons (listed with the schools with which they were associated at the
    time of our correspondence or work with them):
    Michael Adler, Columbia
    Raj Aggarwal, John Carroll
    Turki Alshimmiri, Kuwait Univ.
    Ed Altman, NYU
    James Ang, Florida State
    Paul Asquith, M.I.T.
    Bob Barnett, North Carolina State
    Geert Bekaert, Stanford
    Michael Berry, James Madison
    Randy Billingsley, VPI&SU
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xix
    xx Preface
    Gary Blemaster, Georgetown
    Rick Boebel, Univ. Otago, New Zealand
    Oyvind Bohren, BI, Norway
    John Boquist, Indiana
    Michael Brennan, UCLA
    Duke Bristow, UCLA
    Ed Burmeister, Duke
    Kirt Butler, Michigan State
    Don Chance, VPI&SU
    Andrew Chen, Southern Methodist
    Barbara J. Childs, Univ. of Texas at Austin
    C. Roland Christensen, Harvard
    Thomas E. Copeland, McKinsey
    Jean Dermine, INSEAD
    Michael Dooley, UVA Law
    Barry Doyle, University of San Francisco
    Bernard Dumas, INSEAD
    Craig Dunbar, Western Ontario
    Peter Eisemann, Georgia State
    Javier Estrada, IESE
    Ben Esty, Harvard
    Thomas H. Eyssell, Missouri
    Pablo Fernandez, IESE
    Kenneth Ferris, Thunderbird
    John Finnerty, Fordham
    Joseph Finnerty, Illinois
    Steve Foerster, Western Ontario
    Günther Franke, Konstanz
    Bill Fulmer, George Mason
    Louis Gagnon, Queens
    Dan Galai, Jerusalem
    Jim Gentry, Illinois
    Stuart Gilson, Harvard
    Robert Glauber, Harvard
    Mustafa Gultekin, North Carolina
    Benton Gup, Alabama
    Jim Haltiner, William & Mary
    Rob Hansen, VPI&SU
    Philippe Haspeslagh, INSEAD
    Gabriel Hawawini, INSEAD
    Pekka Hietala, INSEAD
    Rocky Higgins, Washington
    Pierre Hillion, INSEAD
    Laurie Simon Hodrick, Columbia
    John Hund, Texas
    Daniel Indro, Kent State
    Thomas Jackson, UVA Law
    Pradeep Jalan, Regina
    Michael Jensen, Harvard
    Sreeni Kamma, Indiana
    Steven Kaplan, Chicago
    Andrew Karolyi, Western Ontario
    James Kehr, Miami Univ. Ohio
    Kathryn Kelm, Emporia State
    Carl Kester, Harvard
    Naveen Khanna, Michigan State
    Herwig Langohr, INSEAD
    Dan Laughhunn, Duke
    Ken Lehn, Pittsburgh
    Saul Levmore, UVA Law
    Wilbur Lewellen, Purdue
    Scott Linn, Oklahoma
    Dennis Logue, Dartmouth
    Paul Mahoney, UVA Law
    Paul Malatesta, Washington
    Wesley Marple, Northeastern
    Felicia Marston, UVA (McIntire)
    John Martin, Texas
    Ronald Masulis, Vanderbilt
    John McConnell, Purdue
    Richard McEnally, North Carolina
    Catherine McDonough, Babson
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xx
    Wayne Mikkelson, Oregon
    Michael Moffett, Thunderbird
    Nancy Mohan, Dayton
    Ed Moses, Rollins
    Charles Moyer, Wake Forest
    David W. Mullins, Jr., Harvard
    James T. Murphy, Tulane
    Chris Muscarella, Penn State
    Robert Nachtmann, Pittsburgh
    Tom C. Nelson, University of Colorado
    Ben Nunnally, UNC-Charlotte
    Robert Parrino, Texas (Austin)
    Luis Pereiro, Universidad Torcuato
    di Tella
    Pamela Peterson, Florida State
    Larry Pettit, Virginia (McIntire)
    Tom Piper, Harvard
    Gordon Philips, Maryland
    John Pringle, North Carolina
    Ahmad Rahnema, IESE
    Al Rappaport, Northwestern
    Allen Rappaport, Northern Iowa
    Raghu Rau, Purdue
    David Ravenscraft, North Carolina
    Henry B. Reiling, Harvard
    Lee Remmers, INSEAD
    Jay Ritter, Michigan
    Richard Ruback, Harvard
    Jim Schallheim, Utah
    Art Selander, Southern Methodist
    Israel Shaked, Boston
    Dennis Sheehan, Penn State
    J.B. Silvers, Case Western
    Betty Simkins, Oklahoma State
    Luke Sparvero, Texas
    Preface xxi
    Richard Stapleton, Lancaster
    Laura Starks, Texas
    Jerry Stevens, Richmond
    John Strong, William & Mary
    Marti Subrahmanyam, NYU
    Anant Sundaram, Thunderbird
    Rick Swasey, Northeastern
    Bob Taggart, Boston College
    Udin Tanuddin, Univ. Surabaya,
    Anjan Thakor, Indiana
    Thomas Thibodeau, Southern Methodist
    Clifford Thies, Shenandoah Univ.
    James G. Tompkins, Kenesaw State
    Walter Torous, UCLA
    Max Torres, IESE
    Nick Travlos, Boston College
    Lenos Trigeorgis, Cyprus
    George Tsetsekos, Drexel
    Peter Tufano, Harvard
    James Van Horne, Stanford
    Nick Varaiya, San Diego State
    Theo Vermaelen, INSEAD
    Michael Vetsuypens, Southern Methodist
    Claude Viallet, INSEAD
    Ingo Walter, NYU
    Sam Weaver, Lehigh
    J.F. Weston, UCLA
    Peter Williamson, Dartmouth
    Brent Wilson, Brigham Young
    Kent Womack, Dartmouth
    Karen Wruck, Ohio State
    Fred Yeager, St. Louis
    Betty Yobaccio, Framingham State
    Marc Zenner, North Carolina
    bru6171X_fm_i-l.qxd 12/11/12 3:01 PM Page xxi
    xxii Preface
    Tom Adams, Rosetta Stone
    Norm Bartczak, Center for Financial
    Bo Brookby, First Wachovia
    Alison Brown, Compass Records
    W.L. Lyons Brown, Brown-Forman
    Bliss Williams Browne, First Chicago
    George Bruns, BankBoston
    Ian Buckley, Henderson Investors
    Ned Case, General Motors
    Phil Clough, ABS Capital
    Daniel Cohrs, Marriott
    David Crosby, Johnson & Johnson
    Jinx Dennett, BankBoston
    Barbara Dering, Bank of New York
    Ty Eggemeyer, McKinsey
    Geoffrey Elliott, Morgan Stanley
    Glenn Eisenberg, The Timken Company
    Louis Elson, Palamon Capital Partners
    Christine Eosco, BankBoston
    Larry Fitzgerald, UVA Health System
    Catherine Friedman, Morgan Stanley
    Carl Frischkorn, Threshold Sports
    Carrie Galeotafiore, Value Line
    Charles Griffith, AlliedSignal
    Ian Harvey, BankBoston
    David Herter, Fleet Boston
    Christopher Howe, Kleinwort Benson
    Paul Hunn, Manufacturers Hanover
    Kristen Huntley, Morgan Stanley
    James Gelly, General Motors
    Ed Giera, General Motors
    Betsy Hatfield, Bank Boston
    Denis Hamboyan, Bank Boston
    John Hulbert, Target Corp.
    Thomas Jasper, Salomon Brothers
    Andrew Kalotay, Salomon Brothers
    Lisa Levine, Equipment Leasing
    Mary Lou Kelley, McKinsey
    Francesco Kestenholz, UBS
    Daniel Lentz, Procter and Gamble
    Eric Linnes, Kleinwort Benson
    Peter Lynch, Fidelity Investments
    Dar Maanavi, Merrill Lynch
    Mary McDaniel, SNL Securities
    Jean McTighe, BankBoston
    Frank McTigue, McTigue Associates
    David Meyer, J.P. Morgan
    Michael Melloy, Planet
    Jeanne Mockard, Putnam Investments
    Pascal Montiero de Barros, Planet
    Lin Morison, BankBoston
    John Muleta, PSINet
    Dennis Neumann, Bank of New York
    John Newcomb, BankBoston
    Ralph Norwood, Polaroid
    Marni Gislason Obernauer, J.P. Morgan

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