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Case 18 Report Instructions

CASE 18: Worldwide Paper Company

Case Introduction/Overview

The case is based on an actual investment decision made by a major paper-products company in the 1990s. The numbers and the company name have been disguised at the request of the company. The dates have been revised for pedagogical reasons. The case provides a glimpse into the paper business but is primarily designed to present a straightforward problem in assessing cash flows, cost of capital, and net present value of a capital-investment decision. 

The case touches on the following capital-investment topics:

· Estimation of relevant cash flows (both cost savings and increased revenues)

· Influence of taxes vis-à-vis cost savings and revenues

· Change in net working capital as a cash flow

· Component costs of capital as determined by current market conditions

· Weighted-average cost of capital (WACC) as the discount rate for the average investment

Case Report Instructions

This is a “Use a set of provided questions to prepare a formal case report” assignment. For this case study, you must write a professional report as per the guidelines in “Learning with Cases and Writing Case Reports.” You should create an action-oriented advisory report that presents concisely your analysis and recommendations. The questions below should help you analyze the case and identify the specific issue(s) raised. These are not questions that you should directly answer in your report; instead these questions are designed to help you frame your report with specific focus on the last question: “What is the net present value (NPV) and internal rate of return (IRR) for the investment?” 

1. What yearly cash flows are relevant for this investment decision? Itemize the cash flows for each of the six years of the investment. Do not forget the effect of taxes and the initial investment amount. 

2. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Be sure to justify your recommended rate and the assumptions that you used to estimate it.

3. What is the net present value (NPV) and internal rate of return (IRR) for the investment?

NOTE: You can access a student spreadsheet file that you might find helpful for this case on the textbook website found at the following link:

http://highered.mheducation.com/sites/1259277194/student_view0/index.html 

This directory contains Excel spreadsheet files with the primary exhibits for this case. Some of the Excel tables exercisable models which will allow you to test ideas with minimum setup time.

Case 25 Report Instructions

CASE 25: Star River Electronics Ltd.

Case Introduction/Overview

In July 2015, a new CEO joins this small manufacturer of CD-ROMs and DVDs to discover that the firm is in the midst of a financial crisis that was induced by rapid growth. The CEO asks an analyst for help with five tasks:

· Review the historical performance of the firm.

· Forecast financing requirements for the next two years.

· Exercise the forecasting model to identify key driver assumptions.

· Estimate Star River’s weighted-average cost of capital.

· Analyze a proposed investment in a packaging machine.

The analyst must offer insights and recommendations based on the work.

Case Report Instructions

This is a “Directly answer a set of questions” case report. For this case study, answer each of the following questions (as per the guidelines in “Learning with Cases and Writing Case Reports”). 

1. What are the issues in this case? In what order should Andy Chin and Adeline Koh address them? 

2. Assess the current financial health and recent financial performance of the company. What strengths and/or weaknesses would you highlight to Adeline Koh?

3. Forecast the firm’s financial statements for 2016 and 2017. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period?

4. What are the key driver assumptions of the firm’s future financial performance? What are the managerial implications of those key drivers? That is, what aspects of the firm’s activities should Koh focus on especially?

5. What is Star River’s weighted-average cost of capital (WACC)? What methods did you use to estimate WACC? What are the key assumptions that especially influence WACC?

6. What are the free cash flows of the packaging-machine investment? Should Koh approve the investment?

NOTE: You can access a student spreadsheet file that you might find helpful for this case on the textbook website found at the following link:

http://highered.mheducation.com/sites/1259277194/student_view0/index.html 

This directory contains Excel spreadsheet files with the primary exhibits for this case. Some of the Excel tables exercisable models which will allow you to test ideas with minimum setup time.

Case 30 Report Instructions

CASE 30: M&M Pizza

Case Introduction/Overview

Moe Miller, the new managing director of M&M Pizza, is considering changing the company’s capital structure to reduce the cost of capital. With the cost of debt at 4% and the cost of equity at 8%, adding a cheaper cost of funds through debt appears to be obvious. The case provides a simple framework for understanding the powerful intuition behind the foundational capital structure irrelevance propositions of Modigliani and Miller (1958). The case is written as an introductory experience in financial policy. Students are required to generate simple estimates of the cost of capital and estimate the value of debt and equity claims under various recapitalization scenarios. As the business is very simple and operates in a quasi-perfect market, the calculations require only that students are comfortable with the estimation of firm cost of capital.

The case is designed to achieve the following learning objectives:

· Introduce students to Modigliani and Miller’s irrelevance propositions for capital structure.

· Build intuition on the conservation of value and risk across financial policies in a perfect market.

· Debunk popular notions of how value is created, such as by reducing the cost of capital by borrowing at the lowest cost of funds.

· Introduce the concept of tax shields and how tax savings are reflected in corporate valuation.

· Provide motivation for the trade-off model of capital structure in which firms trade off the gains and costs of tax shields and financial distress.

Case Report Instructions

This is a “Directly answer a set of questions” case report. For this case study, answer each of the following questions (as per the guidelines in “Learning with Cases and Writing Case Reports”). 

1. What is going on at M&M Pizza?

2. How do the financial statements for M&M Pizza vary with the proposed repurchase plan? Do the alternative policies improve the expected dividends per share?

3. What impact does the repurchase plan have on M&M’s weighted-average cost of capital? 

4. What are the debt and equity claims worth under the alternative scenarios? You may note that the present value of a perpetual cash flow stream is equal to the expected payment divided by the associated required return.

5. Which proposal is best for investors? What do you recommend that Miller do?

6. How would your analysis in questions 2 and 3 and recommendation in question 4 change if the new tax law is implemented? Please note that, with corporate taxes, the expected debt-to-equity ratio under the share repurchase plan is 0.588, and the number of remaining shares outstanding is 39.4 million.

NOTE: You can access a student spreadsheet file that you might find helpful for this case on the textbook website found at the following link:

http://highered.mheducation.com/sites/1259277194/student_view0/index.html 

This directory contains Excel spreadsheet files with the primary exhibits for this case. Some of the Excel tables exercisable models which will allow you to test ideas with minimum setup time. 

Case 32 Report Instructions

CASE 32: California Pizza Kitchen

Case Introduction/Overview

This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program. The case is intended to provide an introduction to the Modigliani-Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to investigate the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions.

The case serves to motivate the following teaching objectives:

· Examine the Modigliani-Miller intuition of capital structure irrelevance.

· Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered-beta capital asset pricing model (CAPM) equation.

· Discuss interest tax deductibility and the valuation tax shields.

· Explore the importance of debt capacity in a growing business.

Case Report Instructions

This is a “Use a set of provided questions to prepare a formal case report” assignment. For this case study, you must write a professional report as per the guidelines in “Learning with Cases and Writing Case Reports.” You should create an action-oriented advisory report that presents concisely your analysis and recommendations. The questions below should help you analyze the case and identify the specific issue(s) raised. These are not questions that you should directly answer in your report; instead these questions are designed to help you frame your report with specific focus on the last question: “What capital structure policy would you recommend for CPK?” 

1. In what ways can Susan Collyns facilitate the success of CPK?

2. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital? In assessing the effect of leverage on the cost of capital, you may assume that a firm’s CAPM beta can be modeled in the following manner: βL = βU[1 + (1 − T)D/E], where βU is the firm’s beta without leverage, T is the corporate income tax rate, D is the market value of debt, and E is the market value of equity.

3. Based on the analysis in case Exhibit 9, what is the anticipated CPK share price under each scenario? How many shares will CPK be likely to repurchase under each scenario? What role does the tax deductibility of interest play in encouraging debt financing at CPK?

4. What capital structure policy would you recommend for CPK?

NOTE: You can access a student spreadsheet file that you might find helpful for this case on the textbook website found at the following link:

http://highered.mheducation.com/sites/1259277194/student_view0/index.html 

This directory contains Excel spreadsheet files with the primary exhibits for this case. Some of the Excel tables exercisable models which will allow you to test ideas with minimum setup time.

CASE 44: Medfield Pharmaceuticals

Case Introduction/Overview

The founder and largest shareholder of a small pharmaceutical company faces two related decisions: how best to extend the patent life of a key drug and how to respond to a recent takeover offer. A central source of tension in the case is determining the appropriate balance between the firm’s financial objectives and the mission and culture of the founder and employees. The conflicts are made explicit and are given depth with sufficient information to value a drug reformulation strategy and to value the company’s pipeline. Background on the pharmaceutical industry and exploration of issues related to patent-life extensions provide a rich context for analysis.

This case serves multiple purposes. The analytic opportunities allow a careful exploration of the drivers of value; in particular, how a going-concern valuation of a company combines both the value of assets already in place (in this case, the drug pipeline) and the net value of future projects (the value created from R&D). The context of the decision adds a strong ethical dimension to the case that allows an exploration of issues related to stakeholders, corporate culture, and corporate missions. 

The case is designed to achieve the following learning objectives:

· Determine the value of a project given facts related to cash flows.

· Determine the value of a set of existing assets of a company and explore the relationship between the value of projects and the value of the company as a going concern.

· Articulate the purpose of the company and explore the relationship between company mission and value creation.

· Identify the stakeholders of a company and analyze the implications of the firm’s choices to those stakeholders. Confront the ethical aspects of the firm’s resource allocation decisions.

Case Report Instructions

This is a “Use a set of provided questions to prepare a formal case report” assignment. For this case study, you must write a professional report as per the guidelines in “Learning with Cases and Writing Case Reports.” You should create an action-oriented advisory report that presents concisely your analysis and recommendations. The questions below should help you analyze the case and identify the specific issue(s) raised. These are not questions that you should directly answer in your report; instead these questions are designed to help you frame your report with specific focus on the last question: “Should Johnson recommend accepting the acquisition offer at the given price?” 

5. What is the financial value that might be created if Medfield decides to pursue the Fleximat reformulation as described in the case?

6. What is the value of Medfield’s existing drugs and drug pipeline? Is the takeover offer price reasonable?

7. What factors should Johnson consider in choosing whether to initiate the reformulation? What factors should Johnson consider in choosing a recommendation regarding the takeover offer?

8. What are the moral/ethical implications of the reformulation decision? Should these be considered when making the final accept/reject decision? 

9. Should Johnson recommend accepting the acquisition offer at the given price?

NOTE: You can access a student spreadsheet file that you might find helpful for this case on the textbook website found at the following link:

http://highered.mheducation.com/sites/1259277194/student_view0/index.html 

This directory contains Excel spreadsheet files with the primary exhibits for this case. Some of the Excel tables exercisable models which will allow you to test ideas with minimum setup time.