Financial Analysis Merrill Electronics Corporation - DOC
Financial Analysis Merrill Electronics Corporation document sample
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Finance 552 A Corporate Planning and Financing Winter 2000 Room BLM 307; T & Th; 8:30-10:20 pm ****************************************************************************** Instructor: Larry L. DuCharme, Ph.D. Office: M-259 Office hours: Tu & Th (3:00 - 4:00 pm) and by mutual arrangement. Office phone: 543-8194 / 543-4368; Home phone: (425) 640-3025; e-mail: firstname.lastname@example.org ****************************************************************************** TEXTS: Bruner, Case Studies in Finance, 3d Ed., Irwin MH, 1999 [B] Higgins, Analysis for Financial Management, 5th Ed., Irwin M-H, 1998 [H] ****************************************************************************** Course Information This course deals with two important issues in the financial management of business firms: managing cash flows and external financing of operations and capital investment. To address management of cash flows, we will cover financial statement analysis, forecasting and financial planning, managing growth, and working capital strategies. To address financing and investment issues, we will look at banking relationships and other principal sources of capital for corporations including derivative securities. The focus throughout the course is on the design and management of a firm’s financial structure--the right-hand side of the balance sheet. Reading assignments are from the Higgins book or handouts. They are intended to be helpful, but not necessarily cover all aspects of a given situation. I suggest that you refer to an intermediate finance text (e.g., Brealey and Myers) if you need to review the basics. Unless indicated otherwise, the daily assignments do not require that you hand in written work. During the quarter, we will examine a series of case problems which are taken from the Bruner book (Darden cases). Existing theory has relatively little of practical value to say about many of the topics we will examine in this course. Therefore, the best way (other than real life experience--which is quit costly) to understand the nature of the problem and to master the logic by which alternative actions can be evaluated is to examine a series of practical problems (cases). Course Grade Grades will be based on class participation and written assignments as follows: Class discussion 30% Written assignments 70% Please see “Guidelines for Written Cases” attached. There will be no in class exams. Daily class preparation is essential for obtaining the maximum benefit from this course. I do not expect you to always have the “right” answer coming into class, but I do expect you to be prepared to participate in an informed class discussion. I want you to “learn by doing.” If you do not attempt to understand the problems assigned, you will not adequately learn the material. If you anticipate that you will not have enough time or motivation to “dig into the material”--I strongly encourage you to not take this course. Working the cases and discussing them in a group before class is a good way to be prepared for class. Please form a study group. This will help you to excel in your school work and subsequent business life/career. “Procrastination is like a credit card: it’s a lot of fun until you get the bill.”--Christopher Parker ver.: 2/3/2011 [B] = Bruner Case Studies; [H] = Higgins text; [HO] = handout PART 1: Financial Analysis, Forecasting, and Bank Financing 01/04 Introduction: “The Case of the Unidentified Industries” (attached) 01/06 Financial Analysis: Readings: [B] pg. xxiii; [H] pp 3-33, Ch. 2, and [HO] “Ratios” The Financial Detective, 1996 ([B] case#5 pg. 68) 01/11 Financial Analysis: Continued ORACLE SYSTEMS CORP. ([B] case#6 pg. 74) 1. What can historical income statements (Exh. 1) and balance sheets (Exh. 2) tell you about the health and current condition of Oracle Systems? 2. How can financial ratios extend your understanding of financial statements? What questions do the time series of ratios in Exh. 3 raise? What questions do the ratios on peer firms in Exh. 4 and 5 raise? 3. Is Oracle Systems Corp. financially healthy in September 1990? 4. In light of question 3, what might account for Oracle’s recent decline in share price? 5. What is the source of intrinsic investment value in Oracle? Does this source appear on the financial statements? 01/13 Financial Modeling and Forecasting: Reading: [H] Ch.3 The BODY SHOP INTERNATIONAL PLC ([B] case#7 pg. 86) Work through the exercises in this case, first using pencil and paper and then using your personal computer. Then follow the directions on the last page of the case to make the three-year forecast and prepare responses to the questions posed. • Check out my web pages for Case data in excel format (version 6 or higher). This case is Body Shop.xls If you download this file, you will save time with data entry and format. 01/18 Forecasting Seasonal Financial Needs: Reading: [HO] “Note on Bank Loans” SENGUPTA FIBERS, Ltd. ([B] case#9 pg. 118) 1. How did Ashoka construct his financial forecast? Using the financial forecast, prepare to show the cash cycle of the firm, i.e. the flow of funds through the working-capital accounts of the firm. 2. Examine the exhibits in the case. On the basis of Ashoka’s forecast, how much debt will Sengupta need to arrange for the coming year? Will Sengupta be able to repay the line of credit this year? 3. Why do Sengupta’s financial requirements vary across the year? What are the key determinants of Sengupta’s borrowing needs. Exercise the spreadsheet model to identify the critical forecast assumptions (i.e., do some sensitivity analysis with the spreadsheet). 4. Consider the four memos that Sharma received. • Assess the desirability of Pondicherry’s request for credit. What will be the effect of this proposal on accounts receivable and debt balances across the year? (one student present) • Assess the desirability of the level-production proposal. If level production is undertaken now, at the low point of the business cycle, what is the likelihood of inventory stockouts at the peak of the cycle? If the company waits to undertake level production until just after the peak, what will happen to inventory and debt balances at the cyclical low? (one student present) • Assess the impact of the new inventory policy proposal. Please note that the forecasting model contains a circular reference among the financial statements, so you should set the model to iterate a small number of times (try 15) to find a solution. In Excel you would do this by clicking on options- calculation-iteration. (Hint: Purchases will be a percentage of next month’s sales, and wages will be a percentage of this month’s purchases.) What effect will this scheme have on inventory and debt balances? To test if the effect is material, reforecast the financial statements based on an adjustment to the purchases/sales ratio that produces the desired reduction in the final inventory balance (in the model, purchases drive wages and hence, inventory). (team of three students). • Hibachi Chemical’s just-in-time proposal: (Hint: assume that this proposal will reduce 35% of the firm’s inventory to about 5% of its former balance). What will be the effect of this proposal on inventory and debt balances? To test if the effect is material, reforecast the financial statements based on an adjustment to the purchases/sales ratio. (team of three students). 5. Why does the bank require a 30-day “cleanup” of the loan? Should the bank continue to waive compliance with this covenant? 3 6. What are the three most important actions or policies that Sharma should take? What should Sharma say to the bank? What should she say to other stakeholders (e.g., customers and employees)? • Data in Excel format is available on my web pages on my “Case Data” page. Downloading this file will save you time with data entry. 01/20 Growth and Bank Financing: Reading: [H] Chapter 4 PADGETT PAPER PRODUCTS CO. ([B] case#8 pg. 102) 1. As a banker, how would you evaluate Padgett’s strategy and financial performance to date? 2. Why should Francis Libris, the banker, seek to structure Padgett’s loan on a “more orderly basis?” 3. Why does Padgett need a loan? How fast can Padgett repay the loan? 4. What should Libris propose as terms for the new loan structure? 01/25 Growth and Bank Financing: continued MERRILL ELECTRONICS (A) ([B] case#11 pg. 144) WRITTEN ASSIGNMENT:: 4-6 pages plus exhibits, 20% You are an independent consultant and your job is to prepare a written report for Patricia Merrill. In this report you should address the following three issues: 1. An assessment of the performance of the company over the past 18 months. What are some positive points and weak points of its performance? How could this be improved? Look at the cash flows of the company. What were the principal sources and uses of cash? 2. Future financial needs: How much cash will Merrill need if its sales targets are meet and the firm continues to be managed as it has been in the past? How fast can Merrill grow without additional equity investment? What changes do you suggest with respect to the firm’s operations that might reduce the firm’s need for financing? 3. Merrill’s financing strategy: How should Patricia Merrill deal with the bank? What actions should be taken to deal with the firm’s financing requirements? Include a forecast of the firm’s operations that might be presented to the firm’s bankers with a proposal for financing arrangements. A computer model for pro forma projections is in Lotus 123 format on my web pages. Please note that Merill borrows from the bank at a rate of prime + 1.5%. In May, the Fed pushed the prime rate down from 10% to 8.5% in an attempt to support a weakening economy. The current expectation is for further reductions in interest rates. 01/27 Interest Rate Risk Management: Reading: [H] Chapter 5 [HO] “Interest Rate Swaps” and “The Rise of Risk Management” and “Corporate Risk Management” MERIT MARINE CORPORATION [HO] 1. What are Merit’s external funds requirements for 1985-88? Why should Merit be concerned about interest rate risk? 2. How well does each financing alternative meet the requirements? 3. Which is the least costly alternative? (Hint: look at the costs of the total financing packages.) 4. Are the alternatives comparable in terms of interest-rate risk exposure? 5. Which alternative would be the most profitable for Omni Bank? 6. If you were Ginny Shields, what would you recommend to John Merit? 4 PART 2: Long-term Financing Strategies 02/01 Financial Flexibility and Bond Ratings: Reading: [H] Ch. 6 POLAROID CORPORATION ([B] case#28 pg. 364) 1. What are the main objectives of the debt policy that Ralph Norwood must recommend to Polaroid’s board of directors? 2. Based on case Exhibit 9, how much debt could Polaroid borrow at each bond rating? 3. Do you agree with Hudson Guaranty’s view that equity investors are indifferent to the increases across the investment grade debt categories? 4. Is Polaroid’s current maturity structure of debt appropriate? Why or why not? 5. If you were Ralph Norwood, what recommendations would you make to the CEO and board regarding: • target bond rating, • level of flexibility or reserves, • mix of debt and equity, and • maturity structure of debt. 02/03 Debt/Equity Financing: Reading: [H] Ch 6; [HO] “Choosing the Right Mix” ROSARIO ACERO S.A. ([B] case#29 pg. 384) 1. Why is Pablo Este considering obtaining long-term capital? 2. How will the two financing alternatives affect the performance of the firm? (refer to Exhs. 6-11 in case) 3. What are the main risks that the firm faces? Under some reasonable downside scenario, could Rosario Acero continue to service the debt? 4. From the firm’s standpoint, are the terms of the notes-and-warrants package competitive/attractive? 5. Would an offering price of $9.00 per share be fair? 6. What course of action should Este adopt? Identify the tradeoffs between the two alternatives by considering: Flexibility, Risk, Income, Control, and Timing. 02/08 Financing the Early-Stage High-Growth Firm: PLANET COPIAS & IMAGEM ([B] case#30 pg. 402) WRITTEN ASSIGNMENT 20% 5-7 pages plus exhibits; Teams of 3-4 You are an advisor to the three founders. Your assignment is to prepare a report to them dealing with the issues raised in the case. You need to consider the founder’s goals, vision and strategy for Planet. What possible constraints are there for achieving their goals? Based on your evaluation of the situation, provide specific recommendations for the future financing of the company. What concerns are the founders likely to have regarding your recommendations? Note that a extensive evaluation of infeasible alternatives is NOT necessary. On my web pages, is an Excel format spreadsheet that contains the models used to prepare the forecast exhibits in the case. Please feel free to modify them in developing your report (i.e., you are not bound by the results if your have good reason to explore alternatives). Some errors in the printed case exhibit 7 have been corrected in the spreadsheet. 02/10 Dividend Policy: Readings: [HO] “The Dividend Puzzle” and “Supplemental Note: The Dividend Decision and Financing Policy.” NORTHBORO MACHINE TOOLS CORPORATION ([B] case#23 pg. 294) 1. After reviewing “The Dividend Decision and Financing Policy,” what are your conclusions regarding Northboro’s dividend policy? 2. How might a firm fund an increased dividend payout? What is Northboro willing to vary and what remains fixed as a matter of policy? 3. How do you expect Northboro’s providers of capital to react if Northboro declares a dividend in 1992? Over what range of payouts will these reactions exist? 4. What should Christine Olson recommend to the board of directors, re: long-run dividend policy for Northboro? What about the advertising and name change? 5 02/15 Introduction to Options: Readings: [HO] “Beyond Debt and Equity: Options and Corporate Finance.” 02/17 Convertible Bonds: BOSTON CHICKEN, INC. ([B] case#33 pg. 455) WRITTEN ASSIGNMENT 2-4 pages plus exhibits 10%; Individual report Complete C.K. Pao’s nine tasks. As a background to doing the tasks, consider the following questions: 1. Why is Boston Chicken issuing convertible bonds so soon after its initial public offering? 2. What are the advantages of convertible debt relative to straight debt and to common stock issues? 3. Is the valuation of the bond very sensitive to the volatility assumptions (estimates)? 4. Try to solve for the volatility implicit in the redemption option. Does the implicit volatility seem reasonable? 02/22 Effects of Debt Tax Shields: Readings: [H] pg. 252 & 339-342 An Introduction to Debt Policy and Value ([B] case#26 pp. 348-352) 02/24 Financial Flexibility and Benefits of Tax Shield: TONKA CORPORATION [HO] 1. How much business risk does Tonka face? 2. How much potential value, if any, can Tonka create for its shareholders at each of the levels of debt? 3. How would leveraging up affect the company’s taxes? 4. How would the capital markets react to a decision by the company to increase the use of debt in its capital structure? 5. What capital structure do you think is appropriate for Tonka? Why? 6. What are alternative tactics for leveraging up? 7. What arguments would you make to persuade Tonka’s management to adopt your recommendation? 02/29 Reorganization in Financial Distress: CALEDONIAN NEWSPAPERS LTD. ([B] case#42 pg. 644) 1. What happened? Did the terms of the loan provide protection from the problems that emerged? 2. What are the strengths and weaknesses of the two new restructuring proposals? What is the value of Eagle American Bank’s interest in Caledonian under each of the proposals? 3. What action would you recommend for Ian Sterling? 03/02 Financial & Business Strategy: Work: [B] Case 50, pp. 832-849 THE HOME DEPOT, INC. ([B] case#51 pg. 850) 1. What is The Home Depot’s business and competitive strategy? What is their financial policy? Are they compatible or do they conflict?” 2. Case exhibit 6 predicts that the company will need $1.46 billion in new external financing over the next 5 years. What is driving this requirement? What risks and key assumptions could significantly affect the financing requirements? 3. What do you recommend for financing funds needed during the next 12 months? Is this recommendation consistent with the firm’s past strategy? If your recommendation is not consistent with past strategy, then justify your recommendation. 4. At the time of the case, Home Depot’s stock price was in the low $50s. Does this seem like a fair price? 5. I will call on someone to update the class on Home Depot’s performance since 1991. You can look at Value Line data or search the web (www.homedepot.com; and EDGAR filings). 6 03/07 Financing the Turnaround Company: MASSIVE POWER DESIGN CORPORATION ([B] case#54 pg. 933) WRITTEN ASSIGNMENT: 4-6 pages plus exhibits 20%---Team Reports (3-4 students on a team) Recommend a plan of action (in particular, a program of financing transactions to meet the need over the entire forecast period) for Rand and Rhodes. Make your recommendation as detailed as possible (i.e., suggest terms, timing and amounts of any transaction). In making your recommendations consider the following: 1. Has MPDC recovered from its distress? 2. What are some of your arguments for and against conglomerate diversification? How well has this worked for MPDC in the past? How well is it expected to work? What concerns do you bring to the attention of Rand and Rhodes? 3. What is the value of MPDC? From an accounting stand point isn’t MPDC insolvent? What might explain the difference between book value of equity and your estimate of market value? 4. What problems and opportunities do you observe in the way that MPDC has been financing itself? Should MPDC finance its forthcoming external funds need in the same manner as the past? 5. Is MPDC worthy of a “B” credit rating? What concerns would potential investors or creditors have for Messrs. Read and Rhodes? The model and data which generated exhibits 12-14 is available on my web page in Excel format. I expect you to use the model to complete a sensitivity analysis of future financing need, and to value the company using the DCF approach. I will frequently leave messages for students on my web page: http://faculty.washington.edu/lducharm/Fin552/F552msg.htm From this site you can link to data in Excel format for selected cases. Downloading the Excel files will save on data input time.