School of Business Administration

FIN 565: Cases in Corporate Finance

Case Descriptions and Suggestions

Fall 2010

As you review the case descriptions and read the cases, develop a plan for your analysis. The case report and presentation should include, but not be limited to, the suggested questions I have provided. Do not submit or present the case a simply a numbered series of answers to the questions. The case analysis must be a narrative report that includes the information needed to answer the questions.

Financial Statement Analysis Identify the Industry – 2007

Substantive Issues

This case provides financial statement data for 10 companies from 10 different industries from Thomson Banker One – Analytics. Using knowledge of the industries’ financial characteristics and financial rations, you are asked to match each of the 10 financial statement data sets to an appropriate industry. You are provided with common-sized income statements (all items scaled by revenues), common-sized balance sheets (all items scaled by total assets) and selected financial ratios. All data are averaged over three years – 2004 – 2006 – to smooth out one-time items.

Pedagogical Objectives

This case illustrates the difficulty of identifying a company in an industry since do few companies operate in a single homogeneous industry. It also serves to get each class member engaged with team members in an effort to determine the strengths of each member.

Suggested Questions

Identify the companies with an industry.

Marriott Corporation: The Cost of Capital

Substantive Issues

This case provides you with the opportunity to explore how a company uses the capital asset pricing model (CAPM) to compute the cost of capital for the company and for each of its divisions. The weighted average cost of capital (WACC) formula and the mechanics of applying it seem straight forward until the uncertainty of proxy variables is explored.

Pedagogical Objectives

The primary objective of this case is to explore the application of the CAPM. You must calculate a beta based on comparable companies and lever betas to adjust for capital structure. You are also asked to determine the appropriate riskless rate and market risk premium. You are encouraged to focus on the choice of time period to estimate expected returns and the differences between the geometric and arithmetic average as a measure of expected returns. In addition to the cost of capital issues, the case presents an integrated financial system that relies on the CAPM and modern financial economics. Marriott(s financial strategy emphasizes share repurchases, hotel syndications, and the aggressive use of debt financing. Each of these strategic components is consistent so that the strategy can be pursued coherently.

Suggested Questions

1. Are the four components of Marriott(s financial strategy consistent with its growth objective? 2. How does Marriott use its estimate of its cost of capital? Does this make sense? 3. What is the WACC for Marriott Corporation?

a. What risk-free rate and risk premium did you use to calculate ke? b. How did you measure Marriott(s cost of debt?

c. Did you use arithmetic or geometric averages to measure rates of return? Why? 4. What type of investments would you value using Marriott(s WACC? 5. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? 6. What is the cost of capital for the lodging and restaurant divisions of Marriott? a. What risk-free rate and risk premium did you use in calculating the cost of equity for for each division? Why did you choose these numbers? b. How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why? 1. What is the cost of capital for Marriott(s contract services...