Finance II: Advanced Corporate Finance – SMM471 2013–2014, Coursework Questions and Instructions

Coursework will consist of group work leading to (a) an active discussion and (b) a written report on one of the case studies. At the beginning of term, student groups will be randomly assigned to one of the following two cases: “Valuation of AirThread Connections” or “Dividend Policy at FPL Group, Inc.” Please find out which case you have been allocated to and the week in which that case is discussed. In the following I explain which deadlines you have to meet and how effort towards each deadline contributes to your coursework mark: • Deadline 1. You must read up your case material and prepare oral answers to the case questions by the Thursday lecture to which your case discussion is allocated. Groups that have not prepared before the case discussion will suffer a coursework mark penalty. The penalty will be 10 points of the coursework mark (e.g., a drop from 60% on your submission to 50% overall). Groups that have fully prepared and present their arguments during the class discussion in a lively and enthusiastic way will receive a 5-point coursework mark uplift (e.g., an increase from 70% to 75%). • Deadline 2. The next deadline is for submission of your complete case report. This must be done on Moodle, by the Thursday one week after the case discussion week. Therefore, the deadlines for submitting the written report are as follows: – Groups assigned to the AirThread case: Thursday 27 March – Groups assigned to the FPL case: Thursday 3 April. Advice on how to write the case report Each group will have to prepare a written report for its assigned case. The report should be no longer than 10 pages (excluding diagrams, tables and references), typed and double spaced font 12pt. Get to the main problem quickly and state the main questions clearly. In presenting your recommendations: state the alternatives, discuss the pros and cons of each alternative, and argue convincingly in favour of your proposed recommendation. Probably the most important warning about case studies is that there are no right answers to a case, but many wrong ones. The material covered in the lectures should help you avoid the many wrong answers. Your objective when preparing for a case is not to find the correct solution, but rather to discuss the issues raised by the case, and assess the pros and cons of alternative solutions. To sum up, your case report will have to demonstrate your ability to ponder and present the pros and cons of alternative solutions, relying on both the course material and the information provided in the case. Note that in writing the report your group will have to tackle a mix of technical and qualitative questions: both matter a lot, so do not understate the importance of qualitative trade-offs. Class discussion The Airthread case and the FPL case will be discussed one week before the respective reports are handed in. It is in your best interest to prepare in time in order to successfully participate in the class discussion. There are two possibilities: 1

• If your assigned case is being discussed, be prepared to argue in favour of your proposed arguments and solutions. So, when the class discussion takes place, politely raise your hand and you will be invited to speak. What can you do in advance to convince the class of the quality of your arguments? Get prepared, organise your answer into bullet points and be ready to communicate clearly your arguments. Anticipate others’ questions and be prepared to provide well-founded arguments based on the information you have collected on the case. Respond to the questions in a clear and convincing manner, capitalising on the remarks coming from the audience. • If the case being discussed is not your assigned case, you still have an interest in participating in the discussion. Remember that one question in the final exam will test your understanding of case studies. By participating in the discussion you will train towards the exam – not to mention the long term benefit of being actively exposed to more case studies.

Assignment for Valuation of AirThread Connections 1. Describe the methodological approach (should Ms. Zhang use WACC, APV, or some combination thereof). How should the cash-flows be valued for 2008 through 2012? How should the terminal value be estimated? How should the non-operating investments in equity affiliates be accounted for in the valuation? 2. What discount rate should Ms. Zhang use for unlevered free cash-flows for 2008 through 2012? Is this the same discount rate that should be used to evaluate the terminal value? Why or why not? 3. What is the present value of the AirThread’s terminal value (use an estimate of the long-term EBIT growth rate of 2.9%). 4. What is the total value of AirThread before considering any synergies? In solving the AirThread case, please follow these instructions: • Only focus on AirThread stand alone value. In other words, recover the value of AirThread before considering any synergy. • In recovering the unlevered free cash flow projections, use the following variations in net working capital: 2008 2009 2010 2011 2012 Changes in working capital 25.9 19.7 20 18 13.9

Assignment for Dividend Policy at FPL Group, Inc. 1. From FPL management’s perspective, is FPL’s current dividend payout ratio appropriate? What factors should be considered in determining its dividend policy? Would you recommend a change in FPL’s current level of dividend payout? If so, how would you implement that change?

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2. Historically, how has FPL financed its dividend? Based on the financial projections shown in Exhibit 6 of the case, what will happen over the next five years if the company maintains its dividend payout rate at the current level? 3. From an investor’s perspective, is FPL’s payout ratio appropriate? Why or why not? 4. As Kate Stark, what would you recommend regarding investment in FPL’s stock – buy, sell or hold?

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