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Finance Theory II(Corporate Finance)
Katharina Lewellen
February 5 2003
2
Today
Preliminaries Introduction to the course
Corporate finance Types of questions Course outline Course requirements
Case of Unidentified Industries
3
Preliminaries
Texts
minus Brealeyamp Myers Principles of Corporate Finance
7th edition
minus Higgins Analysis for Financial Management 7th
edition
minus Case and Readings Packet
Professor minus Katharina Lewellen
4
Introduction
Corporate finance
Investment policy
How the firm spends its money (real and financial assets)
Financing and payout policy
How the firm obtains funds (debt equity) and disposes of excess cash
5
Balance sheet view of the firm
6
Introduction cont
But we also need to understandhellip Capital markets
Types of securities (stocks bonds optionshellip) Trade-off between risk and return Pricing
Taxes and government regulation
7
Financial markets
8
Introduction contFinance is really about value Firms Projects and real investments Securities
Common characteristic Invest cash today in exchange for cash (hopefully) in the futur
e
Central question How do we create value through investment and financing dec
isions
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
2
Today
Preliminaries Introduction to the course
Corporate finance Types of questions Course outline Course requirements
Case of Unidentified Industries
3
Preliminaries
Texts
minus Brealeyamp Myers Principles of Corporate Finance
7th edition
minus Higgins Analysis for Financial Management 7th
edition
minus Case and Readings Packet
Professor minus Katharina Lewellen
4
Introduction
Corporate finance
Investment policy
How the firm spends its money (real and financial assets)
Financing and payout policy
How the firm obtains funds (debt equity) and disposes of excess cash
5
Balance sheet view of the firm
6
Introduction cont
But we also need to understandhellip Capital markets
Types of securities (stocks bonds optionshellip) Trade-off between risk and return Pricing
Taxes and government regulation
7
Financial markets
8
Introduction contFinance is really about value Firms Projects and real investments Securities
Common characteristic Invest cash today in exchange for cash (hopefully) in the futur
e
Central question How do we create value through investment and financing dec
isions
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
3
Preliminaries
Texts
minus Brealeyamp Myers Principles of Corporate Finance
7th edition
minus Higgins Analysis for Financial Management 7th
edition
minus Case and Readings Packet
Professor minus Katharina Lewellen
4
Introduction
Corporate finance
Investment policy
How the firm spends its money (real and financial assets)
Financing and payout policy
How the firm obtains funds (debt equity) and disposes of excess cash
5
Balance sheet view of the firm
6
Introduction cont
But we also need to understandhellip Capital markets
Types of securities (stocks bonds optionshellip) Trade-off between risk and return Pricing
Taxes and government regulation
7
Financial markets
8
Introduction contFinance is really about value Firms Projects and real investments Securities
Common characteristic Invest cash today in exchange for cash (hopefully) in the futur
e
Central question How do we create value through investment and financing dec
isions
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
4
Introduction
Corporate finance
Investment policy
How the firm spends its money (real and financial assets)
Financing and payout policy
How the firm obtains funds (debt equity) and disposes of excess cash
5
Balance sheet view of the firm
6
Introduction cont
But we also need to understandhellip Capital markets
Types of securities (stocks bonds optionshellip) Trade-off between risk and return Pricing
Taxes and government regulation
7
Financial markets
8
Introduction contFinance is really about value Firms Projects and real investments Securities
Common characteristic Invest cash today in exchange for cash (hopefully) in the futur
e
Central question How do we create value through investment and financing dec
isions
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
5
Balance sheet view of the firm
6
Introduction cont
But we also need to understandhellip Capital markets
Types of securities (stocks bonds optionshellip) Trade-off between risk and return Pricing
Taxes and government regulation
7
Financial markets
8
Introduction contFinance is really about value Firms Projects and real investments Securities
Common characteristic Invest cash today in exchange for cash (hopefully) in the futur
e
Central question How do we create value through investment and financing dec
isions
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
6
Introduction cont
But we also need to understandhellip Capital markets
Types of securities (stocks bonds optionshellip) Trade-off between risk and return Pricing
Taxes and government regulation
7
Financial markets
8
Introduction contFinance is really about value Firms Projects and real investments Securities
Common characteristic Invest cash today in exchange for cash (hopefully) in the futur
e
Central question How do we create value through investment and financing dec
isions
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
7
Financial markets
8
Introduction contFinance is really about value Firms Projects and real investments Securities
Common characteristic Invest cash today in exchange for cash (hopefully) in the futur
e
Central question How do we create value through investment and financing dec
isions
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
8
Introduction contFinance is really about value Firms Projects and real investments Securities
Common characteristic Invest cash today in exchange for cash (hopefully) in the futur
e
Central question How do we create value through investment and financing dec
isions
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
9
Types of questions
Investment and financing decisions At the end of 1999 GM had $114 billion in cash1048766
Should it invest in new projects or return the cash to shareholders 1048766
If it decides to return the cash should it declare a dividend or repurchase stock
If it decides to invest what is the most valuable investment What are the risks
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
10
General Dynamic
Major contractor in the defense industry Doing well during 1980s (cold war)
Growth in sales Reasonable profitability1048766 RampD and capital investment
Beginning of 1990s1048766 The end of cold war Likely decline in defense spending Strategy
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
11
General Dynamics
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
12
Value of $100 invested in Jan lsquo80$
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
13
General Dynamics
bull Investment 1980 ndash1990 RampD + Capital expenditures $37 billion
If invested at 10 $55 billion
Ending market value $10 billion
Value destroyed $45 billion Sales grew from $47 billion to $102 billion
Earnings in 1990 = -578 million
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
14
New strategy in 1991William A Anders (new CEO) Cuts capital expenditure and RampD
Cap Exp drops from $321 million in 1990 to $81 million in 1991
Sells off divisions and subsidiaries
Cuts workforce
Distributes cash to shareholders1048766 From 1991 through 1993 GD returns $34 billion to shareholders a
nd debtholders
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
15
General Dynamics 1987 ndash1997
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
16
Value of $100 invested Jan lsquo91
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
17
Types of questions
Investment and financing decisions Your firm needs to raise capital to finance growth
Should you issue debt or equity or obtain a bank loan1048766
How will the stock market react to your decision
If you choose debt should the bonds be convertible callable Long or short maturity1048766
If you choose equity what are the trade-offs between common and preferred stock
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
18
Types of questions cont
Investment and financing decisions IBM recently announced that it would repurchase $25 billion in
stock Its price jumped 7 after the announcement Why How would the market have reacted if IBM increased dividends instead Suppose Intel made the same announcement Would we expect the same price response
Motorola wants to build a new chip factory in Ireland How will fluctuations in the foreign exchange rate affect the value of the project What are the risks What actions can Motorola take to hedge the risks More importantly should it hedge the risks What are the costs and benefits
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
19
Our Approach
What we will do Acquire a set of general tool
s that are crucial to sound business decision1048766 Financial managers1048766 General managers
Apply and confront them to a number of real business cases Usefulness1048766 Limitations
What we wonrsquot do Pretend to be experts in an
y industry financial or other
Discuss many institutional aspects in detail
Discuss in detail stuff you could learn just as well reading a book or an article (see ldquoreadingsrdquo)
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
20
Outline Theory + Applications
Part I Financing minus Capital structure minus Payout policy
Part II Valuation minus Project valuation (FCF PV Real Options) minus Company valuation (MampA Start-ups)
Part III Selected topics in corporate finance minus Corporate governance minus HedgingRisk management
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
21
The tools of finance (15401) Time Value of Money
Portfolio Theory
Asset Pricing Theory
Efficient Markets Hypothesis
Option Pricing Theory
The Concept of No-Arbitrage
Agency Theory (Micro-economics Incentives and Contracts)
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
22
Course Requirements
Class Participation (10) Case Memoranda (30)
Teams up to four people Hand in all write-ups except two write-ups of your choice A professional memo to the decision maker
Midterm (30) Final (30)
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
23
The Case of the Unidentified Industries
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
24
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
25
Industry Groups
Service providers Advertising agency Airline Commercial bank HMO
Zero inventories A B F H
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
26
Group 1
Advertising Agency
Airline
Commercial Bank
HMO
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
27
Identified Industries in Group 1
A Commercial Bank
B Advertising Agency
F Airline
H Health Maintenance Organization (HMO)
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
28
Group 2 Computer
software dev
Dept store
Electric amp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
29
Group 2 Inventory turnover
Computer software dev
Dept store
Electricamp gas utility
Meat packer
Pharmaceutical manufacturer
Retail drug
Retail grocery
Industry Inventory Turnover
I 476
C 167
G 86
J 75
D 56
E 52
K 20
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
30
Group 2 Receivables collection period
Computer software dev
Dept store
Pharmaceutical
manufacturer
Retail drug
Retail grocery
Industry Collection Period
K 74
J 37
D 31
E 8
G 6
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
31
Group 2 Inventory amp PPE
Computer software dev
Dept store
Pharmaceutical
manufacturer
Industry INV() PPE()
D 24 55
K 12 48
J 2 17
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
32
The Identified Industries
A Commercial Bank CiticorpB Advertising Agency InterpublicC Electric amp Gas Utility Consolidated
EdisonD Department Store Chain Dayton-HudsonE Retail Drug Chain WalgreenF Airline AMR CorpG Retail Grocery Chain American StoresH HMO US HealthcareI Meat Packers IBP IncJ Software Developer MicrosoftK Pharmaceutical Manuf Novo Nordisk
33
Any Comments
34
Leverage
35
33
Any Comments
34
Leverage
35
34
Leverage
35
35
