Financial Analysis and Decision Making
Marlena L. Akhbari
Wright State University
Finance and Financial Services
Case Studies in Finance: Managing for
Corporate Value Creation, 4/e
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Bruner • Case Studies in Finance: Managing for Corporate Value Creation, 4/e II. Financial Analysis and Forecasting
6. The Financial Detective, 1996
11. ServerVault: ‘‘Reliable, Secure, and Wicked Fast’’
III. Estimating the Cost of Capital
12. ‘‘Best Practices’’ in Estimating the Cost of Capital: Survey and Synthesis
15. Teletech Corporation, 1996
IV. Capital Budgeting and Resource Allocation
19. Diamond Chemicals PLC (A): The Merseyside Project
20. Diamond Chemicals PLC (B): Merseyside and Rotterdam Projects
VI. Management of the Corporate Capital Structure
29. Structuring Corporate Financial Policy
31. Polaroid Corporation, 1996
VIII. Valuing the Enterprise: Acquisitions and Buyouts
41. Palamon Capital Partners/TeamSystem S.P.A.
Bruner: Case Studies in
Finance: Managing for
Corporate Value Creation,
II. Financial Analysis and
6. The Financial Detective,
© The McGraw−Hill
The Financial Detective, 1996
Financial characteristics of companies vary for many reasons. The two most prominent drivers are industry economics and firm strategy.
Each industry has a financial norm around which companies within the industry tend to operate. An airline, for example, would naturally be expected to have a high proportion of fixed assets (airplanes), while a consulting firm would not. A steel manufacturer would be expected to have a lower gross margin than a pharmaceutical manufacturer, because commodity products like steel are subject to strong price competition, while highly differentiated products like patented drugs enjoy much more pricing freedom. Because of unique economic features of each industry, average financial statements will vary from one industry to the next. Similarly, companies within industries have different financial characteristics, in part, because of varied strategies. Executives choose strategies that will position their company favorably in the competitive jockeying within an industry. Strategies typically entail making important choices in how a product is made (e.g., capital intensive versus labor intensive), how it is marketed (e.g., direct sales versus use of distributors), and how the company is financed (e.g., the use of debt or equity). Strategies among companies in the same industry can differ dramatically. Different strategies can produce arresting differences in financial results for firms in the same industry. The following paragraphs describe two participants in a number of different industries. Their strategies and market niches provide clues to the financial condition and performance one would expect of them. The companies’ common-sized financial statements and operating data as of early 1996 have been presented in a standardized format in Exhibit 1. It is up to you to