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 Note: This is a sample ssyllabus, yllabus, ty typical pical of th thee course as taug taught ht in past  semesters. However, yyou ou are bound by the actual syllabus han handed ded out by  your instructor instruct or in your cl class, ass, which may di differ ffer as regar regards ds to text, assignments, or other details.

CASES IN STRATEGIC FINANCIAL MANAGEMENT

FIN 522 Cases In Strategic Financial Management Spring Semester 2004

Professor James A. Gentry 140A Wohlers Hall 333-7995  [email protected]   [email protected]  Office Hours: 2:00 p.m. p.m. to 4:00 p.m. Tuesday and Thursday or by Appointment

I. Teaching Objectives

Financial decision decision making maki ng cases are used to… Create a highly interactive learning environment; •  Create the need to learn about the application of financial management concepts; •  •  Discover what you do not know; Provide an opportunity for you to show what you have learned; •  Highlight the relationships between strategic goals and the creation of firm value; •  •  Develop your ability to interpret financial data and strategic information presented in an unstructured case setting; •  Raise the level of your critical thinking and problem solving skills; Enhance your understanding of financial theory and its application; •  Expand your listening and cooperative learning skills. •  II. Learning Promises

At the end of this course your will be able to… •  Interpret the financial health (strengths and weaknesses) of a company based on its cash flow and financial ratio performance; Learn to identify a turnaround company the steps in the turnaround and •   bankruptcy process; Create financial forecasts and learn to interpret the insights that appear in •  different scenarios; Justify with confidence the acceptance or rejection of a loan and how to assign •  covenants and work to establish the necessary collateral;

 

 

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  Estimate the value of capital investment projects and articulate the positive



and negative issues associated with a project ; Explain the secrets that underlie a firm’s capital structur structuree and learn how to •  measure a firm’s cost of capital; •  Discover the many faces of long-term financing and the related issues associated with debt, equity and a nd hybrid sources of funds; •  Estimate the value of a stock and a firm and explain the strengths and shortcomings of your analyses. III. Cases and Readings A.  Cases: •  Cases in Strategic Financial Management  by  by TIS, January 2004 •  Western Indiana Restaurant Distributors (Feb. 10) [WEB] •   Assessing Investment Alternatives (Feb. 26) [Exhibits 15 and 16 onWEB] •   Integrated Valuation System text with Exhibits on Abbott’s Past Financial  Performance and Financial Forecast [Exhibits 17 and 18 WEB]   Gillette Company  Company  •  B. Readings: Selected Readings for Cases in Strategic Financial Management, by Management,  by James James A. •  Gentry, Champaign, IL: Stipes Publishing 2004. Cash Flow Story, by Story, by James A. Gentry Gentry [WEB] •  th  Edition, by  by Robert C. Higgins,  Higgins, McGraw•   Analysis for Financial Management, 7   Edition, Hill/Irwin, 2004. Model, by •   Learning about Intrinsic Valuation with the Help of an Integrated Model, by James A. Gentry, Frank K. Reilly and Michael Sandretto. [WEB]

IV. SYLLABUS FOR FOR FIN 453 453 Spring 2004 2004 A. Exhibits related to assignments:

                         





• •





• • • •



• •

Exhibit 1. Cash Flow Statement Exhibit 2. The Cash Flow Cycle Exhibit 3. The Cash Conversion Cycle Exhibit 4. DuPont System Exhibit 5. Micro-Drive Micro- Drive Balance Sheet Exhibit 6. Micro-Drive Micro- Drive Income Statement Exhibit 7. Micro-Drive Micro- Drive Summary Sheet Exhibit 8. AFN-Financial AFN- Financial Forecast Exhibit 9. Cash Budget Exhibit 10. Leveraged Betas and EAA Exhibit 11. IRR (Internal Rate of Return) Exhibit 12. MIRR (Modified Internal Rate of Return) Exhibit 13. EAA (Equivalent Annual Annuity)

 

 

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Exhibit 14. Dixon Corporation • Exhibit 15. Assessing Investment Alternatives.doc Alternative s.doc (Case) • Exhibit 16. Assessing Investment Alternatives.xls (Exhibits for Case) • Exhibit 17. Integrated Valuation System (text) Exhibit 18. Integrated Valuation System Exhibits • • Exhibit 19. Gillette Company Company Case • Exhibit 20. 20. Gillette Compa Compa ny. xls (Exhibits of Case) Case) • Exhibit 21. Forecast Inputs for Gillette Case B. Exhibits Related To Valuation •

           



• •

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Exhibit 1. Exhibit 2. Exhibit 3. Exhibit 4. Exhibit 5. Exhibit 6.

Generalized Cash Flow Valuation Model Dividend Valuation Model Capital Investment Valuation Model Dividend Valuation of a Stock Valuation of a Stock—FCFE Approach Valuation of a Firm—FCFF Approach

C. Case Exams: You will purchase a package of three tickets at the Illini Union Bookstore, one for for each case. The tickets will be used to to pick up each case at the Commerce Library for the designated designated time period. Do not purchase tickets until February 16, 2004. Note the Commerce Library Library is currently scheduled to be open during the following times: Monday – Thursday -- 8:30 a.m. – 10 p.m. Friday -- 8:30 a.m. – 6:00 p.m. p.m. Saturday -- 1:00 p.m. – 5:00 p.m. Sunday -- 1:00 p.m. – 10:00 p.m.

D.  Grading Policies: There will be three written case examinations during the semester and they compose 50 percent of your total grade. Each case contributes 16.66 percent of the total. Class participation will contribute the remaining 50 percent of your grade.

The examination cases will be made available in the Commerce Library at appropriate times during the semester. semester. A completed case analysis shall be no more that five five doublespaced typewritten typewritten pages. Exhibits are are not included included in the five-page limit. Students who speak English as their native language will have seven (7) hours to complete the case analysis, beginning beginning from the time you pick up the the case. If English is a second language, you will have 8 hours to complete the case examinations. Upon completing completing the case exam, yo u will print the following pledge on the back of your case analysis, “On “On my honor as a University of Illinois student I have neither given nor received unauthorized aid on this exam, and I have limited the time spent on this case to  seven hours”. Pleasebelow carefully sign your name sign below the pledge,  pledge(eight) and print your name the pledge, which affirms the credibility credibi lity of date yourthe

 

 

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 pledge. Your name should NOT appear elsewhere on the paper. Please do not miss other classes when you are writing writing the exam.   Participation grades. You can receive a maximum of 50 percent of course grade based on participation in class. The quality of your class participat participation ion will be graded each day on a scale of zero to three points. The participation points wil willl be based on the following criterion:

  0 points No participation or observations



  ½ point Contributes relevant information and/or facts, asks critical questions



concerning the discussion in class, reading assignments and responses to comments of your classmates.

  1 point Provides an interpretation of relevant relevant information information and/or facts that are



 based on analysis and, in turn, advances the discussion to other related topics;

  2 points Develops a well supported interpretation of relevant information information that is



related to a well-known well- known theory of finance; or provides contributions that leads the discussion to a significantly higher level of thought.

  3 points Presents a superior analysis analysis and interpretation interpretation of the relevant



information that results results in a solution to the case. You are encouraged to work independently independently in preparing th thee case. After you have completed your analysis, you should meet with your study group in order to challenge your ideas and thereby allow you to defend your analysis and iinterpretation. nterpretation. Finally, discussions within within your study group will help you to be more effectively prepared to  participate in the class class discussion.

SCHEDULE OF CLASSES C= Cases in Strategic Financial Management  Sele lect cte ed R eadi ngs for for Ca Case se Pr Pro oble lem ms i n F i na nanc nce e by Gentry G = Se H = Ana  Analy lysis sis for for F ina inanc ncial ial Man Mana age gem ment  by  by Higgins B&E = Brigham and Earnhardt, F i nanci nanci al Mana Managg ement: T he heory ory and P r acti cti ce, ce, 10th 

Jan. 20 Organization Day--Analyzing Day--Analyzing Business Business Problems: The Case Method (G); Students Guidelines: Guidelines: Preparing a Case (G). Jan. 22 Reading: Assessing Reading: Assessing a Company’s Future Financial Health (C); Health (C); The Case of the   Unidentified Industries (C) ; Other Readings: DuPont Analysis (G) and Exhibit 4 on WEB. Optional Reading: Chap. 2 in (H). Form Case Study Groups. Groups.

 

 

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Jan. 27 Clarkson Lumber Company (C); Cash Flow Story (WEB); Exhibits related to assignments are found on the WEB--Cash Flow Statement (Exhibit 1), Cash Flow Cycle (Exhibit 2) and Cash Conversion Cycle (Exhibit 3), DuPont Analysis (G) and Exhibit 4 on WEB. See presentation of cash flow data and financial ratios in The Quaker Oats (A) Case (G) “ Prepare cash flow statements for for 1994 and 1995”, using Exhibits cited above. Jan. 29 Clarkson Lumber Company (C) (continued); Financial Statement Forecasting: The Percent of Sales Method (H), 84-94 and Sustainable Growth (H) 122-133.; Optional: Forecasting in B&E Exhibits 5-9 on WEB; Reading: Solving the Interest Dilemma Dilemma (G); Note Note on Bank Loans (C). “ Prepare a proforma income statement and balance sheet for 1996” using Exhibits cited above. Feb. 3 SureCut Shears, Inc. (C), Optional Reading Higgins, pp. 3-19. Feb. 5 Hampton Machine Company (C); Note on Bank Loans (G). Feb. 10 Western Indiana Restaurant Distributors (WEB) Feb. 13 U. S. Bank of Washington (C) ; Note on Bank Loans (G). Feb. 17 U. S. Bank of Washington (C)  (continued). Feb. 18-24 Case Examination 1 begins on Feb. 18 and ends Feb. 24. Cases for Examination 1 and instructions may be picked up at the Commerce Library commencing Wednesday, Feb. 18 at 8 a.m. and must be returned to the Commerce Library no later than seven (7) hours or, if English is a second language, eight (8) sign for it. Please arrrange for adequate time to complet completee the hours from the time you sign case analysis before before the Library closes closes of the night. All analyses must abe returned returned by 11:59 P.M.. Tuesday February February 24. Library Hours Schedule Schedule is attached. Feb. 26 Assessing Investment Alternatives (C) in Exhibit 15 & 16. Use IRR (Exhibit 11), MIRR (Exhibit (Exhibit 12) and EAA (Exhibit (Exhibit 13); Theoretical equation of Capital Investment process is found in Exhibit 3 of Exhibits related to valuation. Optional Reading: Reading: Chapter 7 in Higgins text. Mar. 2 Iskall Arno (C) ; Assignment: Rank Assignment: Rank Investment Alternatives on NPV based NPV  based on Exhibit 5 in Case.  Case.  What WACC WACC do you prefer? Why?  Why?   Mar. 4 Iskall Arno (C) (continued), Assignment: Rank Assignment: Rank Alternatives based on  Leveraged Betas and EAA—Adjusments for Life and Size  (Exhibit 9 on WEB), ( H) H) 308-313, and on Synergistic Effects, (Exhibit Effects, (Exhibit 6 in Case).  Case).  Mar. 9

MRC, Inc. (A) (C); Read: “ Determining the Likelihood of a

 

 

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Turnaround” (G). Mar. 11 American Chemical Corporation (C)   How would you assess the past performance of American Chemical? •  What is your interpretation of the competitive environment of American •  Chemical Corporation? What is the beta relevered? •  •  What is the the WACC? What are the appropriate weights for debt and equity and the cost of debt and cost of equity? Mar. 16 American Chemical Corporation (C), (continued) What are the free cash flow estimates for for Collinsville Collinsville plant? (Exh.14 on the •  WEB) What range of value did you estimate for the Collinsville plant? •  What decision decision would you make if you were Dixon Corporation •  management? Mar. 18 Cooper Industries, Inc. (C) Mar. 20 -28 Spring Break Mar. 30 Atlantic Corporation-Abridged (C). Apr. 1 Atlantic Corporation-Abridged (C), (continued) Apr. 2 Case Examination 2 begins  Apr. 7 Case Examination 2 ends   Cases for examination 2 and instructions may be picked up at the Commerce Library commencing 8 a.m. on April 2 and must be returned to the Commerce Library no later than seven (7) hours, or if English is a second language, eight (8) hours from the time you sign for it. All exams must must be returned by 11:59 p.m., Wednesday, Wednesday, April 7. Apr. 8 Introduction to Capital Capital Structure and Valuation: Valuation: Readings:  Note of the Theory Th eory Of Optimal Capital Structure Structu re (G) (G), Apr. 13 Continental Carriers (C); Reading: Higgins 195-203 & EBIT Chart 202. Apr. 15 MCI Communications Corporation (1983) (C) Why did MCI choose to finance itself as shown in Exhibit 6 of the case?  •  What is the likely level of MCI’s financing needs during the next few years? •  Apr. 20 MCI Comunications Corporation (1983) (C) [continued] Based upon your interpretation of the outlook for MCI and the competitive and •  regulatory evolution of the industry, recommend a capital structure policy for MCI and defend your proposal.  Given four financial alternatives, which would you recommend to MCI?   • 

 

 

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Apr. 22 Reading: Learning Reading: Learning About Intrinsic  Intrinsic  Valuation with the Help of an Integrated System, in System,  in Exhibits 17 & 18 on WEB; Valuation Exhibit 6 on the WEB. Optional Readings in Higgins, 321-339

Apr. 27 Valuation of Gillette Company Based on an Integrated System, Exhibits 19 20. Reading on the premium for Control, Higgins Higgins 339-352. •  Prepare a financial forecast for Gillette? Gillette? See Exhibit 21 on WEB. •  What target capital structure did you select? How did you estimate k s  and k d? •  Apr. 29 Gillette Company Case •  What were the most important assumptions in the financial forecast? What is the value of the Gillette Company to the acquiring company? What •   premium for control control did you assume? What were the most important value drivers? •  May 4 “Voluntary Restructuring: The Case of General Mills,”  Mills,”  in in Journal  Journal of Applied Corporate Finance, pp Finance, pp 6-19 by Gordon Donaldson (G); (G); Additional Reading: •   EVA Analysis of General Mills, Exhibits 1-4 (G) Mills, Exhibits 5 (G) •   Additional Information on General Mills, Exhibits May 4 Summary of Finance Finance 453 and A Look into the Future Future May 7-14 Final Examination occurs during for this period. Reading Day is May 6. Cases for the final examination and instructions may be picked up at 8 a.m. on Friday, May 7 and returned to the Commerce Library no later than seven (7) hours, or eight (8) hours if English is a second language,  after the time you sign for the case. All exams must be returned by 5:00 p.m., Friday, May 14, 2003.

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