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FINA 6092 Case Questions

This document provides case questions for 6 cases to be analyzed for an advanced financial management course. The cases cover topics such as capital structure, cost of capital estimation, mergers and acquisitions, and corporate financial strategy. Students will evaluate companies and proposed transactions to develop recommendations regarding financing, investment, and value creation.

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Kenny Ho
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126 views

FINA 6092 Case Questions

This document provides case questions for 6 cases to be analyzed for an advanced financial management course. The cases cover topics such as capital structure, cost of capital estimation, mergers and acquisitions, and corporate financial strategy. Students will evaluate companies and proposed transactions to develop recommendations regarding financing, investment, and value creation.

Uploaded by

Kenny Ho
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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FINA 6092 Advanced Financial Management

2021-22 Term 1
Case questions

Case #A: Butler Lumber Company

Questions

1. Why does Mr. Butler have to borrow so much money to support this profitable
business?

2. Do you agree with his estimate of the company’s loan requirements? How much
will he need to borrow to finance his expected expansion in sales (assume a 1991
sales volume of $3.6 million)?

3. As Mr. Butler’s financial advisor, would you urge him to go ahead with, or to
reconsider, his anticipated expansion and his plans for additional debt financing? As
the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions
would you put on the loan?

4. Has Butler Lumber Company created value for shareholders?

Hint: It might help you to analyze the case if you conduct the following analyses:

1. Construct a common-size (percentage) income statement.


2. Construct a common-size (percentage) B/S
3. Using information from 1&2 to find out the operating efficiency
4. Assuming the same operating efficiency in 1990, forecast cash needs for the
target growth
FINA 6092 Advanced Financial Management
2021-22 Term 1
Case questions

Case #1: Ocean Carriers

Questions

Ocean Carriers uses a 9% discount rate.

1. Do you expect daily spot hire rates to increase or decrease next year?

2. What factors drive daily hire rates?

3. How would you characterize the long-term prospects of the capesize dry bulk
industry?

4. Should Ms Linn purchase the $39M capesize? Make 2 different assumptions. First,
assume that Ocean Carriers is a U.S. firm subject to 35% taxation. Second, assume
that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are
not required to pay any tax on profits made overseas and are also exempt from paying
any tax on profit made on cargo uplifted from Hong Kong.

5. What do you think of the company’s policy of not operating ships over 15 years
old?
FINA 6092 Advanced Financial Management
2021-22 Term 1
Case questions

Case #2: Merck & Company

Questions

1. How has Merck been able to achieve substantial returns to capital given the large
costs and lengthy time to develop drug?

2. Build a decision tree that shows the cash flows and probabilities at all stages of the
FDA approval process.

3. Should Merck bid to license Davanrik? How much should they pay?

4. What is the expected value of the licensing arrangement to LAB? Assume a 5%


royalty fee on any cash flows that Merck receives from Davanrik after a successful
launch.

5. How would your analysis change if the costs of launching Davanrik for weight loss
were $225 million instead of $100 million as given in the case?
FINA 6092 Advanced Financial Management
2021-22 Term 1
Case questions

Case #3: Midland Energy Resources, Inc.: Cost of Capital

Questions

1. How are Mortensen’s estimates of Midland’s cost of capital used? How, if at all,
should these anticipated uses affect the calculations?

2. Calculate Midland’s corporate WACC. Be prepared to defend your specific


assumptions about the various inputs to the calculations. Is Midland’s choice of
EMRP appropriate? If not, what recommendations would you make and why?

3. Should Midland use a single corporate hurdle rate for evaluating investment
opportunities in all of its divisions? Why or why not?

4. Compute a separate cost of capital for the E&P and Marketing & Refining
divisions. What causes them to differ from one another?

5. How would you compute a cost of capital for the Petrochemical division?
FINA 6092 Advanced Financial Management
2021-22 Term 1
Case questions

Case #4: Diageo Plc

Questions

1. How has Diageo historically managed its capital structure?

2. What is the static tradeoff theory (textbook version)? How would you apply it to
Diageo’s business prior to the sale of Pillsbury and spinoff of Burger King?

3. Why is Diageo selling Pillsbury and spinning off Burger King? How might value
be created through these transactions?

4. Based on the results of the model, what recommendation would you make for
Diageo’s future capital structure? Does the model capture all of the important risk
factors faced by Diageo? How might you adjust the recommendation from the model
to adjust for any missing risk factors?
FINA 6092 Advanced Financial Management
2021-22 Term 1
Case questions

Case #5: Stone Container Corporation

Questions

1. What was the basis of Stone Container’s successful growth during its first fifty
years? What was its product market strategy? What was its financing strategy?

2. How did Roger Stone’s management of the company compare to that of his
predecessors? In general, would you judge his leadership to have been successful?
Why or why not?

3. How sensitive are Stone Container’s earnings and cash flow to the paper and
linerboard pricing cycle? Estimate the effect on earnings and cash flow of a $50 per
ton industry-wide increase in prices. Assume Stone Container’s sales volume
appropriates its 1992 production level of 7.5 million tons per year, and costs, other
than interest expense, remain the same. Also assume a 35% tax rate.

4. What would be the effect of a $100 per ton industry-wide increase under the same
assumptions given above?

5. What would be the effect under both these pricing scenarios if production and sales
volume increased to full capacity of 8.3 million tons per year (for simplicity, assume
costs per ton remain constant)?

6. What should be Stone Container’s financial priorities for 1993? What must be
accomplished if Stone is to relieve the financial pressure afflicting it?

7. Of the various financing alternatives described at the end of the case, which would
be in the best interest of Stone’s shareholders?
8. Which of the financing alternatives would you recommend Stone Container pursue
in 1993? If you recommend more than one, which do you view as most important and
why? Which would you do first, and which later?
FINA 6092 Advanced Financial Management
2021-22 Term 1
Case questions

Case #6: Mylan Lab’s Proposed Merger with King Pharmaceuticals

Questions

1. Does this deal create value? Is this a good deal for Mylan? For King?

2. Shareholders in both Mylan and King must vote in favour of the merger for it to go
ahead. What does the reaction of the firms’ stock prices to the announcement of the
merger suggest about how each group should vote?

3. Use the information contained in market prices to form an assessment of the


likelihood of the merger being consummated.

4. What is Perry Capital trying to achieve and why? Should the SEC aim to prevent
future similar trades, and if so, how?

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