FI 8320, Spring 2005

Cases and Readings in Corporate Finance

Instructor

Professor David C. Nachman

Office: RCB 1239

Phone: 651-1696

email:

Office Hours: W 10:00 am – 2:00 pm, or by appointment

Prerequisites

FI 8000

CSP: 1, 2, 6

Course Description

This course focuses on financial policy-making through case analyses, contemporary readings from the professional literature, and problem solving. The emphasis in the course is on investment and financing decisions and their impact on firm value and on capital market imperfections and their impact on the raising of corporate capital. The course also provides an opportunity for the study of additional topics of special current significance such as capital structure and dividend policy, corporate restructuring and the market for corporate control, real options, risk management, international capital budgeting and financing, financial planning and working capital management, project financing, reorganizations and advanced equity valuation.

Course Material

Required text material

• (BMA) R. A. Brealey, S. C. Myers and F. Allen, Principles of Corporate Finance, 8th ed., McGraw- Hill/Irwin, Inc., 2006.

•(RP) Reading Packet

•(CP) Case Packet

The required text (BMA) and the materials that make up the Case Packet (CP) are available at the GSU Book Store. The Reading Packet (RP) is available at ERes. Contents of (CP) and (RP) (with ERes access instructions) follow at the end of this syllabus.

The CD-ROM that comes with your text has the Financial Tutor Series with three modules, PowerPoint presentations for the text, Financial Analysis Spreadsheet Templates (F.A.S.T.) tied to specific problems in the text, video clips and Web links that make using this text easier and more fun. The website for this text is www.mhhe.com/bma8e and has in addition chapter summaries with news, articles, links and PowerPoint slides for each chapter and some selected advanced topics. The PowerPoint slides for assigned material will be used in class.

Many lecture notes and spreadsheets are available at my web site at http://www2.gsu.edu/~fncdcn/website/index.htm, under Teaching, Cases and Readings in Corporate Finance. Make a copy of each and bring them to each class. I have indicated when each will be covered on the course outline that follows.

Course Work and Grades

A topic outline with reading and case assignments follows. Each assignment should be done before the class for which it is scheduled and students should be prepared to answer questions and to partake in discussion in class on this material. Classes will be a mixture of lecture and discussion and problem solving.

Case Assignments. There are five cases assigned. These appear in boldface on the topic outline that follows. You must prepare each assignment before the class for which it is scheduled. Each assignment will be handed in for grading at the beginning of the class for which it is scheduled, so make a copy for class discussion. NO late work will be accepted.

Your solution to these assignments will be an individual effort. The case report consists of answering a list of questions pertaining to the case. The list of questions for each assignment follows at the end of this syllabus. The report must be typewritten, double-spaced, with one inch margins top, bottom, and sides, three pages of prose at the max. Supporting spreadsheets and other calculations should be included as attachments to the report. Please use a binder clip to secure your report. I must be able to see and read your work. Reports in improper format or improper use of the English language will be penalized severely. NO handwritten work will be accepted.

The case assignments require use of spreadsheets. If you use a spreadsheet or spreadsheet template that you get from my website or some other source, you must cite the source. Failure to do so is plagiarism. First offense gets you a grade of zero. Second offense gets you a grade of F for the course.

Exams. There will be two exams, a midterm exam (ME), and a final exam (FE). These exams will be multiple choice questions with a mix of verbal and problem type questions. (ME) This is an open book, open note exam based on the material covered prior to it. (ME) is scheduled for Class 8, Thursday, April 7, 2005. NO makeup exam will be given. (FE) This is an open book, open note exam based on all the material covered in the course. According to the Final Exam Schedule for Spring 2005, (FE) will be at 7:15 P. M., Tuesday, May 3, 2005. NO makeup exam will be given.

Course Grade. A student's grade will be determined from a weighted average of scores on the exams and the case assignments using the following weighting schemes:

Scheme I Scheme II

(FE) (ME) (FE) > (ME)

Case

Assignments 40* 40*

(ME) 25 20

(FE) 35 40

*Each case score counts eight percent for a total of forty percent.

Topic Outline and Reading/Case Assignments**

Class Day/Date Topic/Assignments.

1 T 3/15 Review and overview of financial management. (BMA) Chapter 1-4. Lecture notes at website: Financial Management, Value Creation Orientation, Economic Profit, A Firm's Accounting Profit.

2 Th 3/17 Net present value and other criteria. (BMA) Chapter 5. Relevant cash flows (BMA) Chapter 6, Sections 6.1-6.3. Lecture notes at website: Characteristics of an

Evaluation Technique . . ., Investments as Cash Flow Streams, Projects One and Two, Payback Period, Accounting ROI, IRR Decision Rules, NPV Decision

Rules, PI Decision Rules, Relevant Cash Flow.

3 T 3/22 (CP) Case: Diamond Chemicals PLC. (A): The Merseyside Project. (BMA)

Chapter 11. (RP) “Corporate Strategy and the Capital Budgeting Decision,”

Shapiro. Lecture notes at website: Some Notes on Forward Prices.

4 Th 3/24 Real Options. (RP) Class Notes I – V. (BMA) Chapters 20-22.

5 T 3/29 (RP) Class Notes VI. “Valuing Managerial Flexibility,” Trigeorgis and Mason,

“To Wait or Not to Wait,” Corman, “Getting Real,” Mintz, “Real Options in the

Digital Economy.” Kulatilaka and Venkatraman., “Exploiting Uncertainty,” Coy.

6 Th 3/31 (CP) Case: Diamond Chemicals PLC. (B): Merseyside and Rotterdam

Projects. Capital Structure. (BMA) Chapters 13-16.

7 T 4/5 Capital Structure continued. (BMA) Chapter 17, 18. Lecture notes at website:

Perfect Capital Markets, Irrelevance Propositions, Circular File. (RP) "After the

Revolution," Gifford.

8 Th 4/7 (ME) Midterm Exam.

F 4/8 Mini-Mester II MIDPOINT (last day to withdraw and possibly receive a W).

9 T 4/12 (BMA) Chapter 19. (RP) “Using APV: A Better Tool for Valuing Operations,”

Luehrman. (CP) Note on Adjusted Present Value.

10 Th 4/14 (CP) Case: MW Petroleum Corporation (A). (RP) “How Financial Engineering

Can Advance Corporate Strategy,” Tufano.

11 T 4/19 (BMA) Chapter 27. (RP) Class Notes VII.

12 Th 4/21 (CP) Case: MW Petroleum Corporation (B). (RP) “Cover Your Assets,”

Reason. Lecture notes at website: Some Notes on Convenience Yields and Forward Prices.

13 T 4/26 (RP) “Framework for Risk Management,” Froot, Scharfstein, and Stein, “A New

Approach to Evaluating Natural Resource Investments,” Brennan and Schwartz. Lecture notes at website: Gold Lease Rate.

14 Th 4/28 (CP) Case: American Barrick Resources: Managing Gold Price Risk. Review.

**This topic/assignment outline provides a general plan for the course. Changes may be necessary. If such changes are necessary, they will be announced in class and students will be responsible for accommodating them.

Withdrawals

The last day to withdraw from this course with the possibility of receiving a grade of “W” is Friday, April 8, 2005. This is the midpoint of Mini-Mester II grading period. A grade of “W” is not automatic. When a student withdraws (or is withdrawn) from a course, University regulations (pages 50-52, GSU Graduate Catalog) require that the instructor assign the grade WF under any of the following circumstances:

(i) The student has been forced to withdraw because of excessive absences. The Department of Finance's policy is to deem absences of more than one week of classes in a Mini-Mester as excessive.

(ii) The student withdraws from the course before the midpoint of the grading period while doing failing work.

(iii) The student withdraws from the course after the midpoint of the grading period.

Failing work (for item (ii) above) consists of having failed to earn a grade of C or better on exams taken and cases due by the date the student withdraws.

Class Attendance

An attendance sheet will be passed around each class (perhaps more than once per class). It is your responsibility to see that you have signed the sheet. If you have not signed the sheet, you will be considered absent from that class. Any student who is absent for two classes (including the first class) will be dropped from the course. Keeping track of your attendance record is your responsibility. You will not receive any formal update of your attendance record. Late arrivals to any class will not be permitted to sign the attendance sheet.

Academic Honesty

The Department of Finance adheres to the University's policy on academic honesty as contained in the Academic Regulations section of the GSU Graduate Catalog and in the Faculty Handbook and On Campus: The Undergraduate Co-Curricular Affairs Handbook. This section contains some examples of unacceptable conduct, such as plagiarism, cheating on examinations, unauthorized collaboration, etc. This policy applies to the homework, case assignments, and exams for this course.

Case Assignment: Diamond Chemicals PLC. (A): The Merseyside Project

1. What changes, if any, should Lucy Morris ask Frank Greystock to make in his discounted-cash-flow analysis? Why? What should Morris be prepared to say to the Transport Division, the Director of Sales, her assistant plant manager, and the analyst from the Treasury staff?

2. How attractive is the Merseyside project? By what criteria?

3. Should Morris continue to promote the project for funding?

Case Assignment: Diamond Chemicals PLC. (B): Merseyside and Rotterdam Projects

1. Why are the Merseyside and Rotterdam projects mutually exclusive?

2. What changes, if any, should Elizabeth Eustace make to her discounted-cash-flow analysis?

3. Is it possible to quantify the value of managerial flexibility associated with the Merseyside project? How, if at all, does flexibility affect the economic attractiveness of the project?

4. Which project should James Fawn propose to the chief executive officer and board of directors?

Case Assignment: MW Petroleum Corporation(A)

1. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? What sources of value most plausibly account for the difference between buyer and seller?

2. Structure and execute a discounted cash flow valuation of all the MW reserves using APV. How much are the reserves worth? Is your estimate more likely to be biased high or low? What are the sources of bias?

3. How would you structure an analysis of MW as a portfolio of assets-in-place and options? Specifically, which parts of the business should be regarded as assets-in-place and which as options? What kinds of options are present? Should this approach yield a higher or lower value than the all-APV approach you employed above?

4. Execute the analysis you structured in question 3, beginning with assets-in-place. How risky are the assets that underlie the options; i. e., how would you estimate s for each? How much is the whole portfolio worth?

5. Assuming a sale goes through, how does Apache exercise each of the various options? When should it do so?

Case Assignment: MW Petroleum Corporation (B)

1. What problems face Amoco and Apache in bringing this transaction to completion?

2. What possible alternatives might exist to solve the stalled negotiations?

3. How can the proposed solution in Exhibit 7 be expressed in terms of financial contracts? Why do you think the deal is structured as given in Exhibit 7?

4. How much are the price-sharing and price-support arrangements worth?

5. Should Amoco accept the proposed deal from Apache, including the price-sharing and price-support arrangements?

Case Assignment: American Barrick Resources: Managing Gold Price Risk

1. How could the firm manage its gold price exposure without the use of financial contracts?

2. What is the stated intent of ABX’s hedging program? What should be the goal of a gold mine’s price risk management program?

3. How would you characterize the evolution of Barrick’s price risk management activities? Are they consistent with the stated policy goals?

4. What is a “spot deferred contract?” Is it an option? a forward contract? Why has ABX chosen to rely on spot deferred contracts relative to other gold derivatives?

Contents of (CP): items sold separately at GSU Bookstore

• Diamond Chemicals PLC. (A): The Merseyside Project, (UVA-F-1351, Version 1.4).

• Diamond Chemicals PLC. (B): Merseyside and Rotterdam Projects, (UVA-F-1352, Version 1.4).

• American Barrick Resources: Managing Gold Price Risk, (HBS 9-293-128).

• Note on Adjusted Present Value, (HBS 9-293-092).

• MW Petroleum Corporation (A), (HBS 9-295-029).

• MW Petroleum Corporation (B), (HBS 9-295-045).

Contents of (RP): at ERes (access instructions follow)

Readings:

• A. C. Shapiro, 1985, Corporate Strategy and the Capital Budgeting Decision, Midland Corproate Finance Journal, 3: 22-36.

• L. Trigeorgis and S. Mason, 1987, Valuing Managerial Flexibility, Midland Corporate Finance Journal, 15: 14-21.

• L. Gorman, 1997, To Wait or Not to Wait, CFO, 13: 91-94.

• S. L. Mintz, 1999, Getting Real, CFO, 15: 52-60.

• P. Coy, Exploiting Uncertainty, Business Week, June 7, 1999, 118-124.

• N. Kulatilaka and N. Venkatraman, Real Options in the Digital Economy, Financial Times Mastering Management Review, October, 1999, 26-31.

• D. Gifford, 1998, After the Revolution, CFO, 14: 75-79.

• T. Luehrman, 1997, “Using APV: A Better Tool for Valuing Operations.” Harvard Business Review, May-June: 145-154.

• K. A. Froot, D. S. Scharfstein, and J. C. Stein, 1994, A Framework for Risk Management, Journal of Applied Corproate Finance, 7: 22- 32.

• M. Brennan and E. Schwartz, 1993, “A New Approach to Evaluating Natural Resource Investments,” in The New Corporate Finance: Where Theory Meets Practice, D. Chew, ed., New York, McGraw Hill.

• P. Tufano, “How Financial Engineering Can Advance Corporate Strategy,” Harvard Business Review, January-February, 1996, 136-146.