Intermediate Corporate Finance
Lecturer: Michel Habib, Institut für Banking und Finance, Universität Zürich
The course builds on Corporate Finance I, in which students will have learnt the basic tools
and concepts of corporate finance. The course introduces few new tools, but applies the
tools learnt in Corporate Finance I to a range of corporate finance problems (e.g., valuation,
takeovers, working capital management, investment appraisal, capital structure, project
finance and hedging foreign exchange risk). Many are studied in the context of real cases.
The course is also a preparation for Corporate Finance II and Advanced Corporate Finance
II, both taught at the Master’s level.
• Review of basic concepts: Questionnaire
• Valuing an internet bank: Egg
• A hostile takeover: Schneider SA and Square D
• Working capital management: Dell
• Investment appraisal: Airbus A3XX
• Capital structure
• Project finance in Kuwait: The International Investor
• Hedging foreign exchange risk: Aspen
I presume you all have Corporate Finance: Grundlagen von Finanzierung und Investition, by
R. Volkart. Other books that may prove useful are Principles of Corporate Finance, by R.
Brealey, S. Myers and F. Allen, Business Analysis and Valuation, by K. Palepu, V. Bernard
and P. Healy and International Financial Markets and the Firm, by P. Sercu and R. Uppal.
Some notes have been posted on the course website. Please print them and bring them to
class on the relevant days.
You are strongly encouraged to attend the lectures. Whilst it is certainly possible to pass
this course without attending the lectures, you are more likely to get a good grade, and will
most certainly learn a lot more corporate finance, if you attend the lectures than if you do
not. In deciding whether to attend the lectures, please bear in mind that (i) communications
made in class, regarding how to address a case question for example, will not be repeated
outside of class and (ii) grades and comments will be distributed only in class; grades will not
be communicated by email. As a general rule, every group should make sure that it has at
least one group member present at every lecture.
Assessment is based on four case write-ups. I have assigned the first three cases; you will
choose the fourth. The write-up of each of the first three cases is to be handed in on the
Sunday before the day on which the case is to be discussed. The write-up of the fourth case
is to be handed in on … December. Work is to be done in groups; groups of four to five
persons are preferred. Each of the first three cases accounts for 17% of the course grade.
The fourth case accounts for 49% of the grade. The write-up of each of the first three cases
need be no longer than 4-5 pages; it should not exceed 7-8 pages. The write-up of the
fourth case need be no longer than 20 pages; it should not exceed 30 pages. Please specify
the names of all group members in every write-up. I reserve the right to adjust the final
grade for class participation.
Information on the fourth case
The fourth case requires you to analyse an actual problem/project/transaction such as
Toyota’s acquisition of Uster Technologies, Toshiba’s acquisition of Landis and Gyr, or
Glencore’s attempted merger with Xstrata. Unlike the first three cases which I assign to you
and which I discuss in class, you choose the fourth case and present it to your fellow
students and to me during either of the last two lectures. The fourth case involves a lot of
work, as it essentially requires you to write your own case. So, if you expect to be busy
preparing examinations at the end of the semester, you should make sure to prepare the
fourth case well in advance.
It is your responsibility to (i) let me know what the topic of your fourth case is and (ii) let me
know on which date you would like to present. Please do so by email. The choice of
presentation date is on a first-come, first-served basis.
If you wish to contact me or the assistants
You should contact the teaching assistants, Lorenzo Brandi (email@example.com),
Elisabeth Megally (firstname.lastname@example.org) and Diego Ostinelli
(email@example.com) for any question regarding the grading of the first three cases.
You should contact me (firstname.lastname@example.org) in matters regarding the fourth case.
Preparation for the first lecture
There is no preparation for the first lecture, as we shall answer the ‘Questionnaire in
Finance’ in class.
18 September: Questionnaire in Finance
25 September: A Note on Valuation
2 October: Egg
9 October: Exercise in Valuation
16 October: Schneider SA and Square D
Hand in write-up on 14 October
23 October: Dell
30 October: Airbus A3XX
Hand in write-up on 28 October
6 November: Capital Structure
13 November: Capital Structure
20 November: Capital Structure
27 November: The International Investor
Hand in write-up on 25 November
4 December: Aspen
11 December: Class presentations
18 December: Class presentations
Hand in write-up of fourth case on 23 December
Questions for cases
We use the information below and in the attached article from the Financial Times to value
All deposits are lent as mortgages (this serves to simplify the analysis).
Egg’s nearest competitor is Standard Life’s mortgage lending business. It is telephone-
based, earns a spread of 100bp and has cost-deposit ratio 20bp.
The corporate tax rate is 30%.
Egg has equity beta 0.9.
The real risk-free rate is 3% and the market risk premium is 6%.
The cost of attracting a new credit-card-holder is £150.
Egg has capital and reserves equal to 6% of deposits.
Egg expects to increase its number of customers by 500,000 per year over the years 2000-
2004. Each new customer deposits £8,000.
Schneider SA and Square D
What is the maximum price per share Schneider should pay for Square D?
How can Schneider overcome Square D’s hostility to the bid?
Over the course of the year 1997, Dell intends simultaneously to (i) grow its sales by 50%,
(ii) repay most of its long-tem debt and (iii) repurchase $500m of equity. Can it do it? How?
Why should Airbus consider developing the A3XX?
How many A3XXs must Airbus sell?
How will Boeing respond?
Should Airbus proceed?
The International Investor
Compute the NPV of the Equate project. Assume no investment has yet been made. Use
the spread between US and Kuwaiti bills as a measure of the Kuwait country risk. Assume a
6% market risk premium. Compute the present value of the interest tax shield by
discounting the yearly interest tax shield associated with each form of debt at the
corresponding interest rate.
Does the project create value? If so, what is the source of value?
Comment on the level of debt envisaged.
Discuss the merits of a joint venture as opposed to a fully owned investment by either Union
Carbide or PIC.
Identify the risks presented by the project. How are these risks allocated?
In your opinion, how should be the Islamic Finance Tranche structured?
What are the implications of Aspen’s hedging programme for Aspen’s cash flows?
Should Aspen hedge? If it should hedge, what should Aspen hedge and why?
By James Mackintosh, Retail Financial
Services Correspondent Egg has 940,000 customers, A current account, share
…………………………………… including 250,000 credit card dealing and access to
Prudential, the UK’s largest customers. It has taken accounts over next-
life assurer, plans to float its £7.6bn in deposits and lent generation Wap mobile
Egg internet banking £679m. However, rivals telephones will follow this
offshoot in a deal it expects liken its strategy of loss- year.
to value the 18-month-old leading interest rates to Mike Harris, Egg chief
bank at £2.75bn. “selling £10 notes for a executive, said it had put its
Customers of Egg, the fiver”, and it lost £150m last troubles behind it after a year
largest online bank, will be year. It is expected to lose a in which it struggled to keep
able to buy shares later this total of £377m before up with demand and twice
year when 15-25 per cent of breaking even next year. had security problems.
the bank is brought to Analysts estimate the value However, the bank’s web site
market. Non-customers are of Egg at £1.5bn to £4bn, was unavailable for 15
unlikely to be able to with Mr Bloomer saying he minutes yesterday and a
subscribe. anticipated the valuation to separate failure prevented
Egg – which has gained fall in the middle of the customers accessing details
almost 1m customers – also range. of credit card accounts.
plans to head into continental Egg, which offers savings, The plans for an initial
Europe by early next year. credit cards, loans and an public offering come just a
“We want Egg to have the online shopping mall, week after four UK banks
sort of focus you get from a yesterday announced the trial announced plans for stand-
public listing,” said Jonathan of its internet, “fund alone internet banks, most
Bloomer, Prudential chief supermarket”. This will sell competing directly with Egg.
executive designate. cut-price unit trusts and offer But Mr Harris said Egg had
He said it would give Egg a help to investors in deciding the advantage of being first
currency for acquisitions and where to invest. The bank and the new banks would
help it retain staff. It faces has not decided whether it face a tougher time.
“ferocious” competition for will launch before the end- Prudential reported pre-tax
skilled internet workers. of-year tax season when most profits for 1999 down 10 per
funds are sold. cent before goodwill to