Harvard Business School Publishing Reading Materials for the Introductory MBA-Level Course in FINANCE 1 Based on the Fall 2003 course taught at Harvard Business School. See additional outline for Finance 2, taught Spring 2004. Both of these finance courses are required for MBA students at HBS. Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu www.hbsp.harvard.edu/educators This list includes only course materials that are sold through HBS Publishing, and every syllabus provides only a partial list of relevant items. To explore alternatives, or for more information on the cases listed below, visit our web site: www.hbsp.harvard.edu/educators Case Title HBSP Product Number, Length, Teaching note Geographical and Industry Setting, Company Size, Time Frame Abstract Module 1 Managing Working Capital Butler Lumber Co. 292013 4p TN 292014 US, lumber, $3 million, 1991 The Butler Lumber Co. is faced with a need for increased bank financing due to its rapid sales growth and low profitability. Students must determine the reasons for the rising bank borrowing, estimate the amount of borrowing needed, and assess the attractiveness of the loan to the bank. A rewritten version of an earlier case. Allows students to practice ratio analysis, financial forecasting, and evaluating financing alternatives. Toy World, Inc. 295073 6p TN 297118 US, toys, $10 million, 1994 A shift from seasonal to level production of toys will change the seasonal cycle of Toy World's working capital needs and necessitate new bank credit arrangements. Students must analyze the company's performance, forecast funds needs, and make a recommendation. Teaching Purpose: To introduce the pattern of current assets and cash flows in a seasonal company and provide an elementary exercise in the construction of pro forma financial statements and estimation of funds needs. A rewritten version of an earlier case. Dell's Working Capital 201029 6p TN 201017 Round Rock TX Computers Large, 1997 Dell Computer Corp. manufactures, sells, and services personal computers. The company markets its computers directly to its customers and builds computers after receiving a customer order. This build-to-order model enables Dell to have much smaller investment in working capital than its competitors. It also enables Dell to more fully enjoy the benefits of reduction in component prices and to introduce new products Harvard Business School Publishing Reading Materials for the Introductory MBA-Level Course in FINANCE 1 Based on the Fall 2003 course taught at Harvard Business School. See additional outline for Finance 2, taught Spring 2004. Both of these finance courses are required for MBA students at HBS. Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu www.hbsp.harvard.edu/educators more quickly. Dell has grown quickly and has been able to finance that growth internally by its efficient use of working capital and its profitability. This case highlights the importance of working capital management in a rapidly growing firm. Module 2 Valuing and Selecting Investment Opportunities Ginny's Restaurant 201099 2p TN 202013 n/a An individual is considering the development of a new restaurant. To make the decision, she uses NPV analysis to determine whether she should undertake the investment, and if so, the optimal size of the investment. Teaching Purpose: Introduces net present value analysis. Decision Analysis 894004 14p n/a Describes decision analysis, a systemic approach for analyzing decision problems. A running example illustrates problem structuring (decision trees), probability assessment and endpoint evaluation, folding back the tree as a method of analysis, and sensitivity analysis. Tree Values 201031 3p TN 202018 New Hampshire, forestry, 1999 Describes two alternative tree cutting strategies. The first is to cut all trees that are at least 12 inches in diameter at breast height. The second is to thin the forest by cutting less desirable trees immediately and harvesting the crop trees later. The case presents information for students to estimate the cash flows for each alternative. After estimating the corresponding cash flows, students have the opportunity to use discounted cash flow techniques to decide when to cut trees under each strategy and to select which strategy maximizes the value of the forest. NetFlix.com, Inc. 201037 11p TN 202058 Los Gatos CA Internet/home video $5 million 2000 The CEO of a successful Internet start-up must decide whether or not to delay the company's initial public offering following a significant decline in the NASDAQ market during the spring of 2000. The company's CFO is asked to reevaluate the company's projected cash flow needs in light of the new requirement that, in order to go public, Internet companies show positive cash flows within a 12-month horizon. While examining ways to extend the company's working capital, the CFO considers various changes to the company's existing business model, including changes in the company's Harvard Business School Publishing Reading Materials for the Introductory MBA-Level Course in FINANCE 1 Based on the Fall 2003 course taught at Harvard Business School. See additional outline for Finance 2, taught Spring 2004. Both of these finance courses are required for MBA students at HBS. Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu www.hbsp.harvard.edu/educators contractual relationships with both its suppliers and its customers. Teaching Purpose: Provides an opportunity for students to construct a detailed cash flow model (a subscriber model) for a company in a fast-growing market for which standard financial ratios provide limited insight. The specific case setting requires students to think critically about the expected cash flows that are likely to be generated by the business. Also provides the setting for an interesting discussion about strategic versus financial value related to the acquisition of subscribers to a new Internet service. Highlights the need to coordinate operating and financial strategies and demonstrates that financing considerations may preclude first-best operating strategies. Ocean Carriers 202027 6p TN 202029 New York, Hong Kong Shipping 2001 In January 2001, Mary Linn, VP of finance for Ocean Carriers, a shipping company with offices in New York and Hong Kong, was evaluating a proposed lease of a ship for a three-year period, beginning in early 2003. The customer was eager to finalize the contract to meet his own commitments and offered very attractive terms. No ship in Ocean Carrier's current fleet met the customer's requirements. Mary Linn, therefore, had to decide whether Ocean Carriers should immediately commission a new capsize carrier that would be completed two years hence and could be leased to the customer. Teaching Purpose: Provides the opportunity for students to make a capital budgeting decision. The key pedagogical objective is to develop an understanding of how discounted cash flow analysis can be used to make investment and corporate policy decisions. Whirlpool Europe 202017 7p TN 202124 Italy, home appliances, 1999 Presents a capital budgeting problem. Whirlpool Europe is evaluating an investment in an enterprise resource planning (ERP) system that would reorganize the information flow throughout the company. Students derive the cash flows from working capital, sales, and other improvements along with the cost of the investment. Teaching Purpose: Students evaluate the potential investment using a Harvard Business School Publishing Reading Materials for the Introductory MBA-Level Course in FINANCE 1 Based on the Fall 2003 course taught at Harvard Business School. See additional outline for Finance 2, taught Spring 2004. Both of these finance courses are required for MBA students at HBS. Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu www.hbsp.harvard.edu/educators discount cash flow analysis. Health Development Corp. 200049 6p TN 201030 Boston MA Fitness $22 million 2000 Health Development Corp. (HDC) owns and operates health clubs in the Greater Boston Area. HDC engaged a local investment banker to explore a sale of the company. The most likely buyer views HDC's prior purchase of real estate as a negative. HDC's management is convinced the purchase enhanced value, and a discounted cash flow analysis confirms that it was a substantially positive net present value decision. Nevertheless, the real estate reduces the valuation according to the approach used by the potential buyer. The challenge is to structure a transaction that allows HDC to realize its full value. Teaching Purpose: Shows the relation between discounted cash flow techniques and multiples. Module 3 Risk, Return, and Value in Capital Markets The State of South Carolina 201061 31p TN 201172 South Carolina, state government, 1998 Considers the managerial decision faced by the state's treasurer in 1998. Until last year the South Carolina state pension fund (with over $17 billion in assets) was barred by the state constitution from investing in equities. After the constitution was amended, the state government had to decide how much to invest in equities, and what assets to choose. Using domestic and international data, the concepts of standard deviation, correlation, covariance, diversification, and risk are introduced. Additionally the case looks at the equity premium from a global setting. Covers two days, and will be used early in the Risk and Return module, just before the introduction of the CAPM. Teaching Purpose: To introduce the concept of risk and return in capital markets. Illustrates benefits of portfolio diversification. Carol Brewer's Investments 204017 11p Washington DC Asset management $1-1.5 million 2003 Following her husband's death in 1994, Carol Brewer took over the management of her family's investments. Describes the decisions Brewer made during this process, including her choice to seek active account management, her selection of an investment firm, and her determination of asset allocation within her portfolio. In 2003, Brewer is reassessing her Harvard Business School Publishing Reading Materials for the Introductory MBA-Level Course in FINANCE 1 Based on the Fall 2003 course taught at Harvard Business School. See additional outline for Finance 2, taught Spring 2004. Both of these finance courses are required for MBA students at HBS. Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu www.hbsp.harvard.edu/educators previous investment choices and considering changes she might need to make in the future in light of her plans to retire in six years and live on the income from her investments. Teaching Purpose: Allows students to consider and evaluate fundamental choices surrounding investment management and asset allocation. Measuring Mutual Fund Performance 298139 15p n/a Examines various approaches to measuring mutual fund performance. The approaches include the use of risk exposure and the Sharpe Ratio, as well as the Morningstar star system for rating mutual funds. Applies the approaches to a variety of mutual funds to demonstrate the effect of using different metrics to measure fund performance. Cost of Capital at Ameritrade 201046 24 TN 201123 Omaha NE, brokerage, $77 million, 1997 Ameritrade Holding Corp. is planning large marketing and technology investments to improve the company's competitive position in deep-discount brokerage by taking advantage of emerging economies of scale. In order to evaluate whether the strategy would generate sufficient future cash flows to merit the investment, Joe Ricketts, chairman and CEO of Ameritrade, would need an estimate of the project's cost of capital. There is considerable disagreement as to the correct cost of capital estimate. A research analyst pegs the cost of capital at 12%, the CFO of Ameritrade uses 15%, and some members of Ameritrade management believe that the borrowing rate of 9% is the rate by which to discount the future cash flows expected to result from the project. There is also disagreement as to the type of business that Ameritrade is in. Management insists that Ameritrade is a brokerage firm, whereas some research analysts and managers of other online brokerage firms suggest that Ameritrade is a technology/Internet firm. Teaching Purpose: A two-day case to estimate the cost of capital that Ameritrade should employ in evaluating the proposed large investments in marketing and technology. The lesson plan builds on the prior cases in the Risk & Return module. Uses the capital asset pricing model to estimate Ameritrade's cost of capital. Harvard Business School Publishing Reading Materials for the Introductory MBA-Level Course in FINANCE 1 Based on the Fall 2003 course taught at Harvard Business School. See additional outline for Finance 2, taught Spring 2004. Both of these finance courses are required for MBA students at HBS. Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu www.hbsp.harvard.edu/educators Focus is on CAPM variables such as the risk free rate, market risk premium, and beta. Students will use regression analysis to directly calculate the beta estimates. Arguments will be made as to which comparable firms (brokerage firms or Internet firms) should be used to obtain beta estimates. Module 4 Equity Financing of Growth Enterprises A-Rod: Signing the Best Player in Baseball 203047 14p TN 203091 Texas, baseball, $126.5 million, 2000 Analyzes a large investment decision considered by the Texas Rangers in 2000: whether to spend $252 million for the services of shortstop Alex Rodriguez. The signing was probably the most controversial sports contract of the past decade. Teaching Purpose: 1) To teach students to evaluate a complex investment decision--the signing of the largest player contract in baseball history (was $252 million too high a price to pay?)--as well as to look at regression analysis, complex conditional cash flows, and discounting; and 2) to consider the difference between correlation and causation, the nature of insurance, and the long-run benefits of brand improvement. Eskimo Pie Corp. (Abridged) 202037 15p Richmond VA Ice cream novelties $60 million, 1991 In early 1991, Reynolds Metals, the makers of aluminum products, decided to sell its holding of Eskimo Pie, a marketer of branded frozen novelties. Reynolds had an offer from Nestle to acquire Eskimo Pie. However, Reynolds decided instead to make an initial public offering of Eskimo Pie shares. Teaching Purpose: Allows students to value Eskimo Pie and to examine methods of selling a division of a large corporation. Includes information required to estimate the risk of Eskimo Pie using the stock prices of comparable firms. Allows students to estimate Eskimo Pie's cost of capital. Radio One, Inc. 201025 15p TN 201027 Washington DC Radio $81.7 million 1999 Radio One (NYSE: ROIA and RIOAK), the largest radio group targeting African-Americans in the country, had the opportunity to acquire 12 urban stations in the top 50 markets from Clear Channel Communications, Inc. (NYSE: CCU) in the winter of 2000. The stations were being sold by Clear Channel Communications, Inc. to obtain Federal Communications Commission Harvard Business School Publishing Reading Materials for the Introductory MBA-Level Course in FINANCE 1 Based on the Fall 2003 course taught at Harvard Business School. See additional outline for Finance 2, taught Spring 2004. Both of these finance courses are required for MBA students at HBS. Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu www.hbsp.harvard.edu/educators (FCC) approval for its acquisition of AMFM, Inc. (NYSE: AFM). Radio One was also negotiating the acquisition of nine stations in Charlotte, NC; Augusta, GA; and Indianapolis, ID. The proposed acquisitions would double the size of Radio One. The case focuses on the strategic and financial evaluation of the proposed acquisitions. Teaching Purpose: Provides students the opportunity to forecast the cash flows associated with the proposed acquisitions and to value those projections using discounted cash flows as well as transaction and trading multiples. Pharmacyclics: Financing Research & Development 201056 14p TN 204012 Sunnyvale CA, pharmaceuticals, $1.3 million, 2000 Pharmacyclics (NASDAQ:PCYC), a pharmaceutical company developing products to improve upon current therapeutic treatments of cancer, arteriosclerosis, and retinal disease, was considering a $60 million private placement in February 2000. The company had more cash than ever before, but projections of R&D and marketing expenses were also unprecedented. PCYC's most promising oncology drug, a radiation enhancer called Xcytrin, was in Phase III clinical trials--the rigorous final phase before FDA approval for commercialization. Analysts gave the drug a slightly better than 50% chance of success. This case focuses on stage financing and a simple decision-tree evaluation. Students have the opportunity to consider the impact of past staged financing decisions on the ownership structure of the firm and to evaluate the current stock market price in light of analyst forecasts of the cash flow and the probability of success for each drug. These two analyses help inform the private placement decision. Teaching Purpose: Allows students the opportunity to value a startuu pharmaceutical company using discounted cash flow analysis and decision trees. Also explores financial strategies, especially staged financing. Valuing Project Achieve 201080 14p TN 201130 San Francisco CA Software $1 million, 1999 Project Achieve is a start-up providing information management solutions for schools. Its founders see a need for software both to manage the volumes of information necessary to administer a school and to connect parents, Harvard Business School Publishing Reading Materials for the Introductory MBA-Level Course in FINANCE 1 Based on the Fall 2003 course taught at Harvard Business School. See additional outline for Finance 2, taught Spring 2004. Both of these finance courses are required for MBA students at HBS. Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) custserv@hbsp.harvard.edu www.hbsp.harvard.edu/educators teachers, and students in a more effective way. Originally funded by angel investors, Project Achieve is raising its first formal round of financing and needs to establish a firm valuation. This case outlines the economics of the business and provides the necessary background figures to build the business model and arrive at a valuation. Explores quantitative considerations of venture financing: 1) value neutrality of equity issuance is illustrated; 2) cost of capital is computed from raw return series, and the appropriate discount rate is selected based on comparables; 3) decision trees are used to highlight the importance of probabilistic thinking; and (4) subscriber models are compared with annual free cash flow models both for determining financial value and as decision-making tools for business choices. In addition, provides a setting to discuss the more qualitative issues involved in choosing investors. In particular, the founders are comparing two options: an infusion of additional capital from current and new investors or an investment from a potential strategic partner. Each option has very different implications for the direction of the business going forward.