FI 627: Corporate Finance: Applications and advanced topics -------------------------------------------------
Study questions for case studies: Spring 2013
Week 1: Sears, Roebuck & Co. vs. Wal-Mart Stores, Inc.
1. How do the retailing strategies of Sears and Wal-Mart differ?
2. Wal-Mart’s average return on equity for the 1997 fiscal year was 19.7% while Sears’ average return on equity over roughly the same period was 22.0%. Don Edwards was puzzled by these numbers because of Wal-Mart’s reputation as a premier retailer and Sears’ financial difficulties not long ago. What is driving the performance of these two companies during fiscal 1997?
3. What ratios are most important in assessing current and predicting future value creation for Sears? For Wal-Mart?
Week 2: Valuing Rajat Bhatia’s Business Plan
1. Estimate (i) the current market value of the firm’s debt, (ii) the current market value of the firm using the free cash flow to equity, and (iii) the current market value of the firm using the free cash flow to the firm.
Week 3: Deutsche Brauerei
1. What accounts for Deutsche Brauerei’s rapid growth in recent years? Specifically, what policy choices account for this success?
2. What is Deutsche Brauerei’s credit policy toward its distributors in Ukraine? Why is it different from the policy toward its other distributors? Is the company’s credit policy appropriate? Is it profitable? If not, how would you change it? If so, what arguments would you offer to the board of directors in its defense?
3. Why does this profitable firm need increasing amounts of bank debt?
4. As a member of the board of directors, how would you vote on: a. The proposed raise for Oleg Pinchuk?
b. The quarterly dividend declaration of €698,000?
c. Adoption of the financial plan for 2001?
Week 4: NetFlix.com, Inc.
1. What is NetFlix’s long-run objective? How do they plan to achieve this objective? How would you assess their performance to date?
2. Why does McCarthy use a subscriber model to forecast NetFlix’s future cash flow requirements? What are the basic elements of a subscriber model?
3. Construct an annual subscriber model for Net Flix that can be used to forecast the expected cash flows for a new subscriber over the next five years. What is the value of a new NetFlix subscriber, assuming a discount rate of 20%? Based on your analysis, should NetFlix be acquiring new subscribers?
4. Assuming that NetFlix does not change its current business model, what is the value of NetFlix.com? What changes, if any, would you suggest be made to its existing business model? What are the value implications of these changes?
Week 5: Target Corporation
1. Describe and critique Target’s capital budgeting system. Give specific consideration to the role of the real-estate managers and the makeup of the CEC.
2. Which of the five CPRs should Doug Scovanner accept? Explain how each of the following considerations influenced your decision:
(i) NPV and IRR, (ii) Size of the project, (iii) Cannibalization of other stores’ sales, (iv) Store sensitivities, (v) Variance to prototype, (vi) Customer demographics, (vii) Brand-awareness impact
3. Why does Target use different hurdle rates for the store and the credit card (9% and 4% respectively)? What process would you use to estimate these discount rates to see if they are reasonable?
4. As a member of the CEC, would you continue to approve CPRs if it meant that Target would need to fund the requests with external funds, either debt or equity?
Week 6: Tottenham Hotspur plc
1. Assuming Tottenham Hotspur continues in their current stadium following their current player strategy,
a. Perform a DCF analysis using the CF projections given in the case. Based on this...