Cases in Corporate Finance PDF
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Cases in Corporate Finance Cases in Corporate Finance Vishwanath S R Institute of Management Technology, Nagpur Tata McGraw-Hill Publishing Company Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto TataMcGraw-Hill Published by Tata McGraw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008. Cases in Corporate Finance Copyright © 2009, by Tata McGraw-Hill Publishing Company Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw-Hill Publishing Company Limited. ISBN (13): 978-0-07-009025-5 ISBN (10): 0-07-009025-4 Managing Director: Ajay Shukla General ManagerPublishing (B&E/HSSL and School): V Biju Kumar Editorial ManagerB&E: Tapas K Maji Editorial Executive: Hemant K Jha Development Editor: Shalini Negi Executive (Editorial Services): Anubha Srivastava Senior Production Manager: Manohar Lal Production Executive: Atul Gupta General ManagerMarketing (Higher Education & School): Michael J. Cruz Asst. Product Manager: Vijay Sarathi Jagannathan ControllerProduction: Rajender P Ghansela Asst. General ManagerProduction: B L Dogra Information contained in this work has been obtained by Tata McGraw-Hill, from sources believed to be reliable. However, neither Tata McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw-Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw-Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Text-o-Graphics, B1/56 Arawali Apartment, Sector 34, Noida 201301 and printed at Sai Printo Pack, A-102/4, Okhla Industrial Area, PhaseII, New Delhi 110020 Cover Design: K Anoop Cover printed at: Rashtriya Printers RALQCRZFRALCR To Sri Krishna, the only real guru and to the following Harvard Business School professors whose writings inspired this volume: Andre Perold, Benjamin Esty, Brian Hall, Carliss Baldwin, Carl Kester, George Chacko, Jay Light, Joshua Lerner, Karen Wruck, Kenneth Froot, Krishna Palepu, Lisa Meulbroek, Malcolm Baker, Malcolm Salter, Mihir Desai, Paul Gompers, Paul Healy, Peter Tufano, Randolph Cohen, Richard Ruback, Stuart Gilson, Thomas Piper, Timothy Luehrman, and William Fruhan Preface This book presents 18 case studies in finance, targeted towards upper-level undergraduates and MBA students. The purpose of these cases is to facilitate class room discussion of tools and concepts of corporate finance. The range of topics includes value creation, economic profit, financial analysis and forecasting, cost of capital, discounted cash flow valuation, security design, bank loans and mergers and acquisitions. The spirit of these cases is to show how financial managers add value to the firm through the financial choices they make. INTRODUCTION TO CASE METHOD TEACHING Pioneered by the Harvard Business School, the case method of teaching is, by far, the most popular method of instruction in business schools around the world. Quite often the available cases are written either in the North American or European context. Though the underlying theories these cases are supposed to reinforce are global, students can better identify them with local cases. This book tries to bridge the gap in the Indian/Asian context. The case method is not only the most relevant and practical way to learn managerial skills, it is exciting and fun. Success in business comes from experience and knowledge, from the ability to analyse and reflect, from observing and interacting with others, and learning from these encounters. The case method of instruction, the standard practice in good business schools, is based on these principles. It is a process of inductive learning that goes beyond facts and theories—a process that teaches individuals not only how to manage organisations, but also how to continually grow and learn throughout life. The case method presents the greatest challenges confronting leading companies today and places the student in the role of the decision maker. Bringing real-life business problems into the classroom is the essence of the case method. The case method fuses analysis and action. The goal of the case method of instruction is to create an environment where students learn how to tackle difficult, complex problems by probing, viii Preface discussing, and integrating, working together towards an understanding much deeper than could be achieved on their own. Students learn what it feels like to exercise judgement, make decisions, and take responsibility. In doing so, they must sharpen their skills of effective communication and be able to persuade, synthesise, and adapt. EDUCATIONAL OBJECTIVES Financial management is concerned with the manner in which individuals and firms allocate resources across assets and over time. How does a company ensure that it has enough money to operate and grow? How do managers make good investment decisions? This book examines the role of finance in supporting other functional areas of the firm while fostering an understanding of how financial decisions can create value. The central theme of the book is value-based management which assumes that value creation should be the key factor in making financial, strategic and operating decisions. The cases depict a wide range of financial and business situations. The cases have been drawn from most areas of corporate finance. They represent a wide range of industries and time periods. They also illustrate different phases of a firm’s life cycle. It is quite common to supplement cases with text book readings. Instructors may assign any standard text on corporate finance. We have provided a small list in a subsequent section. The book includes two types of instructional materials—cases and problem sets. Problem sets are included to demonstrate the application of theory to real life data. Examples include risk and return of investing in stocks, option pricing theory, valuation of exotic financial instruments and issues in valuation. These can be combined with lectures. In a way, cases build on what is covered in problem sets. The problem sets include examples of real life companies. The valuation problem set (A) and (B), for instance, require students to estimate returns, beta and such other parameters for listed firms; value publicly listed companies etc. Cases are more decision oriented in the sense that students are required to make decisions after analysing data given in the case. Case topics include: n Basic analytical skills and principles of corporate finance n Functions of modern capital markets and financial institutions n Estimation of cost of capital n Standard techniques of analysis, including capital budgeting, discounted cash flow valuation, and risk analysis n Estimation and management of working capital n Estimating external fund requirement and executing an intelligent financing strategy
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