Texas Christian University



EMBA Finance 65013

Financial Management

Mauricio Rodriguez, Ph.D.

Texas Christian University

Spring 2011 – Session I

This is the first course in a two-course series that introduces the participant to financial theory with a heavy emphasis on its application to real problems. The topics covered in the two courses include financial analysis and planning, capital expenditure analysis, capital structure policies, and corporate structure and restructuring. Issues of managerial compensation and potential management-owner conflicts are integrated throughout the courses. The unifying theme of the courses is that the manager’s job is to use the resources and opportunities at his or her disposal to maximize the value of the company. Accordingly, many of the cases we cover will have the creation or destruction of value as core issues.

To get the most you can out of the courses, you must analyze each of the cases that we study. You should also share your thoughts, questions and ideas with the members of your team and during class discussions. Case learning emphasizes the process of experiencing a problem and its resolution. To gain that experience and to make that experience a part of the knowledge and intuition that you carry with you all of your life, it is essential that you prepare ahead of time.

Cases can be frustrating. It is highly likely that you will be frustrated at times in these courses. Most students will find that most of the solutions they generate before class will be incomplete or incorrect in some important respects. It is essential that you generate your own solutions and that you sometimes take wrong turns and make mistakes. That is because recognizing those wrong turns, seeing the mistakes, realizing there is a better approach, etc., are key for you making these cases an experience on your part rather than just an exercise. So, don’t give up and do your best to be prepared for each and every session.

As a student in this course, I expect you to contribute to the discussion of points and analysis of issues during every single class meeting. You should study the cases and readings to the best of your ability prior to each class. I may call on you in class whether or not you volunteer. Your answers in class are vital to the development of issues for the class as a whole. Come prepared to express a point of view and actively join in the discussion. The chief determinants of how much you learn and retain from this class will be the amount of effort you put into studying the cases before class, and your willingness to take risks by suggesting an approach during the class. This is a fundamental principle of finance: Little risk, little return.

I suggest this approach: Study the cases entirely on your own as a first pass, and develop your own ideas to resolve the issues. Then follow up by meeting and discussing the issues with your group (electronically or otherwise). Remember that "none of us is as smart as all of us."

Grade Evaluation:

Group Presentations 35%

Class Participation 25%

Final Exam 40%

There will be group presentations worth 35% of your grade. The evaluation of group presentations will include a team-member grading allocation in which you may tell me your opinions about the level of contribution from your colleagues, and I will consider those opinions in assigning individual grades on work related to group presentations. You should assign team members a score from 1 (no contribution) to 5 (excellent contribution) for their level of participation. If everyone participated equally well, you may assign everyone a 5. If someone did nothing, you may assign them a 1. If someone was a star in a particular project, you may wish them to receive a higher grade than the group average. You can accomplish that by giving them a score higher than the average that you assign to other members.

You will also be evaluated by the quality of your contribution to the exchange of ideas in the classroom (i.e., to the class’ overall experience and learning). Your class participation (quality will be emphasized over quantity) will count 25% toward your grade. I will record my view of your level of participation after each class meeting. I understand that sometimes it is unavoidable to miss a class, but obviously you can’t provide any direct contribution during a class discussion if you are not there. Speaking privately during class or otherwise disrupting class discussions will negatively impact your class participation grade. Individual class participation will be worth 25% of your grade.

A final exam (to be done individually) will be worth 40% of your grade.

The TCU EMBA program has an honor code in place. I expect you to follow that code entirely. For example, I will ask you to sign a statement on your final exam that asks you to assure me that you have not communicated with anyone else about the test during the time the final exam is in your possession. Also, on work related to group presentations, I expect groups to do their own work as opposed to receiving help from others outside the group, such as former EMBA students. Remember that the goal is not grading (I hope) as much as it should be learning. The more you and your group do on your own, the more all of you will learn.

Texts and Materials

1. Higgins, 8th edition, 2007. Analysis for Financial Management (H)

2. Brealey, Myers, and Allen, 9th edition, 2009. Principles of Corporate Finance (BMA)

3. Packet of cases.

4. Some course materials will be posted at my website at TCU, .

5. A financial calculator will be useful, but is not mandatory for this class.

Schedule of Class Assignments

Note that the questions for each case are listed following the date outline.

“H-#” means “Higgins Chapter #” and “BMA-#” means “Brealey, Myers, & Allen Chapter #”

Friday 1/14: Analyzing Financial Performance; Introduction to Financial Planning

• Background Reading: H-1, 2, and 3 is all you really need, but if you love reading finance, you can find similar and additional material in BMA-29.

• Case: Assessing a Firm’s Future Financial Health. You will have the solution to this case provided with the case. Try to solve it on your own, then review the solution. In class, we’ll take some class time to discuss any parts you found to be unclear.

• Lecture: Growth and the need for external capital

• Mini-case: Bay Area Corrugated Pipe

Saturday 1/15: Growth, Cash Flow and Financial Planning; Introduction to Time Value of Money

• Background Reading: H-4

• Case: Tire City, Inc.

• Case: Clarkson Lumber Company

• Lecture: Introduction to the time value of money

Friday 1/28: Growth, Cash Flow; Time Value of Money and Criteria for Capital Budgeting

• Case: Science Technology Corp. (1st Group Presentation)

• Case: Dell’s Working Capital. (2nd Group Presentation)

• Lecture: Introduction to the time value of money continued and Common Decision Criteria

Saturday 1/29: Time value of Money Applications and Sources of Positive NPV Undertakings

• Background Reading: BMA-2-6, H-7

• Mini-case: Mo-Money Decisions (All Groups will present solutions to a section in this mini case)

• Lecture: What if analysis and breakeven analysis. Where do positive NPVs stem from?

• Each Student to Provide Stock Picks for Contest

Friday 2/11: Capital Budgeting, Part 1

• Background Reading: BMA 11, 12

• Investment Analysis and Lockheed Tri Star (All Groups will present solutions to part of this case)

• Background Reading: BMA 14

• Lecture: Market Efficiency

Saturday 2/12: Capital Budgeting, Part 2

• Case: Worldwide Minerals (3rd Group Presentation).

• Case: MRC, Inc., Consolidated (4th Group Presentation)

• Lecture: Introduction to Risk

Friday 2/25: Capital Budgeting, Part 3

• Case: New America Drill

• Case: Kochman, Reidt + Haigh (5th Group Presentation)

• Lecture: Introduction to Risk Continued

Saturday 2/26: Capital Budgeting, Part 4

• Background Reading: BMA 8-10, 20, H8

• Case: Nike, Inc.: Cost of Capital

• Overview of the Entire Course

• Distribute Final Exam

Study Questions for Cases

Starting with Dell’s Working Capital case on the second weekend, one group will be expected to make a presentation of their views on one of the five case presentations indicated above. Your group can pick the case it wants to present and let me know that choice ASAP by e-mailing me at m.rodriguez@tcu.edu. These case assignments will be made on a first come, first served basis. The groups should expect to spend roughly 30 minutes presenting. The presentation will be followed by a question and answer session with the class. Groups do not have to turn in their case reviews except for the case they present. However individual participation following the group presentations as well as Q&A during my review of the cases will affect individuals’ “class participation” evaluation. Note that all groups will present part of the Mo-Money mini-case. The assignments for the parts of this mini-case will also be on a first come, first served basis.

Assessing a Firm’s Future Financial Health (HBS 201-077) Read the text on financial ratios. Answer each of the questions, and be sure you understand the calculation and meaning of each of the ratios. You will receive the solution with the case, so please review that after generating your own solutions. We will cover in class any parts that class members find unclear.

Bay Area Corrugated Pipe (CBB) This mini-case gives you just the basics of financial data on BACP. However, you also have data on how other companies of similar size in the same industry as BACP are performing as measured by various financial ratios. Your task is to determine how BACP is doing relative to its competition, and then try to decide why it has that level of performance. Next, you should determine how much, if any, external funds BACP will need to achieve its growth.

Tire City, Inc. (HBS 297-091) This case will expand your analysis of financial characteristics of the firm and then require you to begin the process of forecasting the company’s future financial statements.

1. Evaluate Tire City’s financial health. What key items stand out to you?

2. Develop pro forma forecasts for Tire City’s income statements and balance sheets for 1996 and 1997 assuming sales reach the levels of $28,206,000 and $33,847,000 for 1996 and 1997, respectively, as predicted by management. Take into account the other assumptions provided in the case. Assume that any new financing that would be required will be in the form of bank debt at a cost of 10%.

Clarkson Lumber Company (HBS 297-028) We will work through this case in two parts. First, we will cover questions 1, 2 and 3, and then I will ask the groups to go back and do a little more work on their projections so they can tell the class their answers to 4, 5 and 6. These will not be group presentations, but in class responses during the second half will be made by groups instead of random individuals.

Part 1: Analysis of Clarkson’s Financial Health:

1. How is Clarkson Lumber faring against its competition? What accounts for its relative performance?

2. Why is Clarkson having to borrow to support this business? Support your conclusions with analysis.

3. If Mr. Clarkson pays for a dollar's worth of inventory for his business, how long is it before he sees the dollar again? Has it grown by that time? To what size?

Part 2: Where Clarkson is headed. What to do?

4. Suppose that Clarkson expects 1996 sales to achieve $6,000,000. How much new financing is Clarkson likely to need by the end of 1996? In performing your analysis, assume that Clarkson pays off all of the “trade notes” and reduces the time that accounts payable are outstanding to 10 days. Assume otherwise that the trends in the case continue. Will $750,000 be enough?

5. How would you advise the banker, Mr. Jackson, to proceed? Should he finance this company? Under what terms?

6. How can Clarkson solve the problems faced by the company?

Science Technology Corporation (HBS 289-040) 1st Group Presentation

1. What are the competitive, operating and financial characteristics of companies competing in the industry of Science Technology? How do such firms compete? How do the characteristics of STC and its industry worsen the cash flow-growth problem?

2. Has Mr. Finson done a good job of financial planning? What possible conditions might place STC under the greatest financial pressure?

3. What sensitivity analysis would you suggest? This is not just a matter of changing some inputs, but of considering also which inputs are most uncertain and most susceptible to deviations from plan. If you were STC's banker, how would you view the risk faced by a lender for the company?

4. What financial strategies can you suggest for STC, and why?

Dell’s Working Capital (HBS 201-029) – 2nd Group Presentation

This case in one that brings together many of the issues that arose in the prior cases and provides an interesting approach to resolving the issues.

1. How was Dell’s approach to working capital a competitive advantage for the firm?

2. How did Dell manage to fund its 53% growth in 1996?

3. If Dell’s sales grow by 50% in 1997, how might the company find internal resources to fund this growth? How much would working capital have to be reduced or profit margins have to rise? What would you suggest the company do to achieve its needed goals?

4. Suppose that Dell decides to repurchase $500MM of its common stock and to pay off its long-term debt. How would that affect the solutions to questions 3?

Mo-Money Decisions (MR) – This mini case provides 5 sets of questions. Each group will present how to arrive at the solutions to one of the five sets of questions.

Investment Analysis and Lockheed Tri Star (HBS-5-291-032): Each group will present and discuss their solutions to one of five parts of the case addressing to the following: The analysis and answers to the questions regarding the payback, IRR, and NPV for 1) the rainbow products, 2) the hot dog stand, 3) the MBAT plant subsidy; 4) the NPV of the Tri Star program and 5) accounting and economic break even points for the Tri Star program.

Worldwide Minerals (CBB) – 3nd Group Presentation

1. Should Worldwide pursue the petroleum project in Monrovia? Why?

2. Assume the decision is that Worldwide does choose to pursue the exploration and development project. Then you have to consider the four alternative “foreign aid” projects. Calculate all the basic criteria for evaluating these projects.

3. Which of the four “foreign aid” projects should Worldwide pursue? Would you follow strict, textbook capital investment criteria? If not, why not? If so, why?

MRC, Inc., Consolidated (HBS 277-123) – 4th Group Presentation

1. Consider the prospect of disposing of ARI (as had been the original plan) instead of investing further in ARI. What are the pros and cons? How would the market react? Would shareholders be happy? Provide a recommendation: Should MRC dispose of ARI?

2. Develop an NPV analysis of the polyester project assuming that the data presented in the case (and especially Case Exhibit 5) are correct with the possible exception of prices and volumes. Include a view of the price forecasts that takes into account the economics of this industry. Include a recommended discount rate and your basis for the recommendation.

3. Examine the capital budgeting system as employed at MRC. Provide a critique of that system, and include a proposal to change the system in specific ways.

4. Note that MRC's original goals in acquiring ARI had been to drain the company of its cash. Now there is a proposal to invest $25 million in the division. What circumstances have led to that proposal? Do you think it's a good idea or not to abandon the original plan and invest in ARI?

New America Drill (CBB) – This case will add details to cash flow considerations. To get started, I suggest that you start out by making enough simplifying assumptions to keep the problem manageable. Complications can be added via sensitivity analysis. Be prepared for a class discussion about this case.

1. Should Foster approve this project?

2. What are the cash flows that are relevant to Foster's decision?

3. How should the numbers be analyzed? Why is that particular technique preferred? Is that what is done in your company?

4. What should Foster do?

5. Now consider the possibility of leasing the equipment instead of buying it. What are the incremental cash flows to this decision? What should Foster do? How does the lease affect his personal situation in the case?

Kochman, Reidt + Haigh, Inc. (HBS 294-056) – 5th Group Presentation

1. What financial problems are brought about by KR+H’s operating strategy?

2. What is the breakeven level of sales for KR+H under its existing operating structure? How would breakeven sales change with the new investments?

3. Develop cash flow forecasts for the firm for 1993 through 1998 assuming financing can be obtained. What is the value of the business? Make these assumptions: Sales growth at 10% per year; Use 1992 profit margins; Assume cost savings occur in the year after the investment. Assume the cost of capital is 15%

4. If you didn’t like any of the assumptions in Q3, use sensitivity analysis on the assumptions.

5. If KR+H finances internally rather than externally, what are your forecasts? What would the firm be worth?

6. How should KR+H finance its investments?

Nike, Inc.: Cost of Capital (UVA-F-1353) – In this case we will use what we learned about risk to finally compute the cost of capital (instead of just assuming it). Be prepared for a class discussion about this case.

1. What is the Weighted Average Cost of Capital (WACC) and why is it important to estimate a firm’s cost of capital?

2. Do you agree with Joanna Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions.

3. Calculate the cost of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method?

4. What should Kimi Ford recommend regarding an investment in Nike?

Final Exam:

I will pass out copies and give you instructions during the final class.

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