Corporate Finance II

Professor Matthew Spiegel

Overview

• Cases and lectures.

• Case groups of two.

– Deadline is

this

Friday for the formation of groups!

• Case days.

– One group will be randomly selected to conduct a 45 to 60 minute presentation.

– Each group must turn in a four page write up of each case.

• Tables and graphs do not count.

• Syllabus on the web.

Cases

• Most will not be typical business school cases!

• Cases will ask you to examine a firm as it currently exists and to answer questions about it.

How Will You Know if You Made the Right Call?

• By waiting a few years to see what happened.

– Such is life.

• Too many cases rely on 20-20 hindsight. This is a luxury you do not have in real life. Here you are stuck making decisions based on arguments with the data at hand.

Then How Will We be Graded?

• Grades will depend on how well you defend your conclusions.

• Bad defense: It seemed to us a 3% growth in sales for five years was reasonable.

– Ad hoc. Why not assume 2% or 4%?

• Better defense: Sales growth has been 3% for the past several years so we are projecting that forward for the next five years.

– At least this is based on something. But why do you think the past growth rate is the appropriate one going forward?

• Much better defense: Sales growth has been 3% for the past several years. Furthermore, the firm’s market share has been fairly constant and unless that changes we should see a 3% growth rate into the future. As of today management has not presented a plan that would improve upon that. Thus we using that as our projection for the next five years.

– Uses past results for the projection’s basis, but also looks forward asking if there might be any changes in the works.

Questions Every Presentation Should Answer

• What does the firm do?

• How has it performed relative to its peers?

• What is its current and future financial policy?

• Have their been any recent changes in its product mix.

– Divisions purchased or sold.

• Does it plan to add or subtract product lines in the foreseeable future?

Lesson Specific Questions

• At least a week prior to each case’s discussion in class questions specific to that case will be posted on the web.

– Foamex is currently in financial distress.

• How did this happen?

• What should management do?

• What should the bond holders do?

• How much is the debt worth?

Class Discussion

• Do the presenters a favor and question what they say!

• If the class has nothing to say I will assume they find the case presentation to be so abysmal that it is not even worth commenting on!

• Do yourself a favor and question what the presentation.

– Class participation is part of your grade!

Discussion Goals

• The goal of each discussion is to analyze the elements that go into making a business decision.

– What data do you have?

– What do you need to just assume in order to go forward?

– What kind of additional analysis might you do if you had the resources and time?

Class Notation

• The value of a firm’s equity: E.

• The value of a firm’s debt: D.

• A firm’s marginal tax rate: T C .

• Risk free rate: r f .

• Expected return on the market: r m .

Information Sources

• Hoover’s – http://www.library.yale.edu/databases/ • Business Browser – http://www.library.yale.edu/socsci/databases/bbinfo.html

• Yahoo!

– http://www.yahoo.com

• WRDS – http://wrds.wharton.upenn.edu/ • SEC Free Edger – http://www.sec.gov

• Bloomberg – There is a Bloomberg terminal in a breakout room on level A.

Hoover’s

• Financial statement summaries.

– Warning: not as good as going to the 10-k’s.

• Financial and accounting ratios.

• Comparisons with competitors.

Business Browser

• Financial statements.

– As reported or standardized.

– Use as reported! Standardize them yourself!

• A few analyst reports.

– In the real world a

much

Thompson Financial.

• Create peer lists.

better source is • Industries by SIC code.

• Need to set up your own account.

Yahoo!

• Click on finance and then enter the ticker symbol of the firm you are interested in.

• Real time statistics.

• Historical prices.

WRDS

• CRSP stock price database.

– Daily stock returns through 2003.

– Extremely useful for testing theories you hope to develop.

– Web based, easy to use.

– Fast and easy source for data on E, r m , and r f .

• Compustat database – Accounting data going back several decades.

• Enter the firm.

• Click on the accounting items you want.

• Instant delivery of the spreadsheet data you want!

• Class account.

– Login name: xxxxx. Note all

small

letters!

– Password: xxxxxxx. Who can argue with that?

SEC Free Edger

• The place to get the company’s current and past financial filings.

Bloomberg

• Essential for getting bond data.

– Bond price quotes.

• Good for bonds that are not currently going up or down in price by large amounts.

• Quotes are likely to be stale for bonds seeing rapid price changes.

– Bond terms (covenants).

• Useful for stock data as well, but there are other sources.

• Extremely user hostile!

– Learning to use a Bloomberg terminal is a painful but, alas, essential experience. It is the standard data source on Wall Street.