...less appealing to consumers. Further, an increasing portion of Polaroid's revenues come from outside the United States. Many of the sales are in developing countries: Russia alone accounted for almost 9% of 1995 sales. Polaroid does not have a large installed base in these countries, and the Polaroid brand name may not be as strong as in the United States. Although Polaroid uses international lines of credit and possibly other hedging techniques to reduce currency risk, doing business in developing nations poses an increased market risk. The growth in international business is a logical move for Polaroid given that U.S. sales are flat and net margins of foreign sales have been higher than domestic margins for the past three years. The increased risk and the possibility that the company will need additional funds to develop or acquire new technologies in the near future mean that Polaroid must maintain a strong enough balance sheet to provide a cushion for future financing needs. Polaroid’s current capital structure should be improved to ensure a minimum BBB rating and to avoid market perceptions of the company as a cash cow with limited growth opportunities. The company should reverse direction and emphasize growth...
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...Journal of Financial Economics 61 (2001) 000-000 The theory and practice of corporate finance: Evidence from the field John R. Grahama, Campbell R. Harveya,b,* aFuqua School of Business, Duke University, Durham, NC 27708, USA bNational Bureau of Economic Research, Cambridge, MA 02912, USA (Received 2 August 1999; final version received 10 December 1999) Abstract We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investments. Firms are concerned about financial flexibility and credit ratings when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes. JEL classification: G31, G32, G12 Key words: Capital structure; Cost of capital; Cost of equity; Capital budgeting; Discount rates; Project valuation; Survey *Corresponding author, Tel: 919 660 7768, Fax: 919 660 7971 E-mail address: cam.harvey@duke...
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...Jacque Final Review Guide 1) Operating Leverage vs. financial leverage: Laurence A high degree of Operating Leverage means that a relatively low change in sales will result in large change in EBIT. If all things are held constant, the higher the firm’s fixed cost the greater its Operating Leverage. In Jacque’s words, this has to do with volatility of the top line. Those firms are usually highly automated, capital intensive, hire highly skilled individuals (read pay them huge salaries), and engage into costly R&D activities. Effects of Operating Leverage on Business Risk: (if all other things held constant) the higher a firm’s Operating Leverage, the higher its business risk. This is because in lower economical cycles, the firm will still be incurring its fixed cost. However, remember that higher risk usually commands for a higher return on investment. Financial leverage is the use of debt to finance the activities of a business. Financial risk is the additional risk put on the shareholder when management decides to finance with debt. The more debt a firm takes on, the more concentrated the business risk on the shareholder because the shareholder is a residual claimant. This results in a higher expected rate of return on the investment by the shareholder. Consequences of an increase in leverage (Leverage ↑): * Expected ROE ↑ * Stockholder risk ↑ * Standard deviation ↑ * Coefficient of variation ↑ 2) Cash-Flow statement and valuation: Natalia ...
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...Bryan Kimmell How do CFOs make capital budgeting and capital structure decisions? Introduction A comprehensive survey is gone that describes the current practice of corporate finance. The survey will give us a betting understanding of where the theory and practice of corporate finance are consistent and areas where they are not. The survey conducted is based on two parts, capital budgeting and capital structure. The survey goes deeper and tries to find out what causes capital budgeting and structure decisions in firms. The survey consists of 100 questions to explore capital budgeting and structure decisions in depth. The original sample for the survey was 4,440 firms but only 392 CFOs responded to the survey, making the response rate a dramatic 9%. The results of the survey were analyzed based on firm characteristics. The responses given by the executives are compared in relation to the firm size, P/E ratio, leverage, credit rating, dividend policy, industry, management ownership, CEO age, CEO tenure, and CEO educational attainment. Comparing the responses to all these variables gives the results a more meaningful explanation because it is able to test various finance theories. The responses to the capital budgeting portion of the survey follow academic advice and use present value techniques to evaluate new projects. But when it comes to capital structure, firms rely on practical, informal rules and pay less attention to academic advice. Survey Methodology Before the...
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...“Gainesboro Machine Tools Corporation,” (case 25) In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations for the company’s board of directors regarding the firm’s financial policy. Some special considerations are the mix of debt and equity, maintenance of financial flexibility, and the preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the firm’s core business. The student must recommend an appropriate financial policy for the firm and, in support of that recommendation, must show the impact on the firm’s cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations. This case may be used to pursue a number of teaching objectives: • Survey the determinants of corporate bond ratings. The case highlights the important influence of the rating agencies on the costs of debt and the access to capital markets. The case data affords students the opportunity to explore profitability, coverage ratios, and capitalization ratios as measures of credit quality. • Explore the practical challenges involved in determining the optimal mix of debt and equity, in particular assessing the trade-off between the benefits of debt tax shields and the costs of financial distress. The case affords the opportunity to highlight methodological problems in estimating the optimal mix. • Consider the concepts of debt capacity...
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...HOW DO CFOS MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS? by John Graham and Campbell Harvey, Duke University* e recently conducted a comprehensive survey that analyzed the current practice of corporate finance, with particular focus on the areas of capital budgeting and capital structure. The survey results enabled us to identify aspects of corporate practice that are consistent with finance theory, as well as aspects that are hard to reconcile with what we teach in our business schools today. In presenting these results, we hope that some practitioners will find it worthwhile to observe how other companies operate and perhaps modify their own practices. It may also be useful for finance academics to consider differences between theory and practice as a reason to revisit the theory. We solicited responses from approximately 4,440 companies and received 392 completed surveys, representing a wide variety of firms and industries.1 The survey contained nearly 100 questions and explored both capital budgeting and capital structure decisions in depth. The responses to these questions enabled us to explore whether and how these corporate policies are interrelated. For example, we investigated whether companies that made more aggressive use of debt financing also tended to use more sophisticated capital budgeting techniques, perhaps because of their greater need for discipline and precision in the corporate investment process. More generally, the design of our survey...
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...HOW DO CFOS MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS? by John Graham and Campbell Harvey, Duke University* e recently conducted a comprehensive survey that analyzed the current practice of corporate finance, with particular focus on the areas of capital budgeting and capital structure. The survey results enabled us to identify aspects of corporate practice that are consistent with finance theory, as well as aspects that are hard to reconcile with what we teach in our business schools today. In presenting these results, we hope that some practitioners will find it worthwhile to observe how other companies operate and perhaps modify their own practices. It may also be useful for finance academics to consider differences between theory and practice as a reason to revisit the theory. We solicited responses from approximately 4,440 companies and received 392 completed surveys, representing a wide variety of firms and industries.1 The survey contained nearly 100 questions and explored both capital budgeting and capital structure decisions in depth. The responses to these questions enabled us to explore whether and how these corporate policies are interrelated. For example, we investigated whether companies that made more aggressive use of debt financing also tended to use more sophisticated capital budgeting techniques, perhaps because of their greater need for discipline and precision in the corporate investment process. More generally, the design of our survey...
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...MGT-435B Bond Markets – Final Project Report: The Economic Function of Credit Rating Agencies - What does the Watchlist tell us? Christina E. Bannier, Christian W. Hirsch (2010) Executive Summary In the “Economic Function of Credit Rating Agencies” by Christina Bannier and Christian Hirsch (2010), the authors researched whether the economic role of credit rating agencies have been enhanced after the introduction of Watchlists. Therefore, the focus of this paper is to analyze the shift in function of credit rating agencies from a passive player providing creditworthiness certification to a more active credit monitoring entity. First, the paper examines if the Watchlist instrument changes the informational content of credit ratings. Next, the paper tested between two different explanatory lines regarding the function of the rating agencies by analyzing their use of the Watchlist as delivering information to market participants and creating an implicit contract to influence a firm’s risk choices via the threat of a credit downgrade. They find that the general market reaction to downgrades is stronger in the post-Watchlist period, which is consistent with previous research conclusions. These results hence indicate that the informational content of rating downgrades has strongly risen after the introduction of Watchlist. Additionally, the authors find that direct rating downgrades trigger a much stronger market reaction than watch-preceded downgrades. These findings support...
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...analysis of credit; • Help prepare financial forecasts and estimate short-term financing needs; • Discover what you do not understand and what you have learned; • Interpret credit rating processes and why they are necessary; • Highlight the relationships between strategic goals and the creation of firm value; • Develop techniques for interpreting financial data and strategic corporate plans; • Enhance your critical thinking and problem solving skills; • Expand your understanding of financial theory and its application; • Improve your listening and cooperative learning skills. II. Learning Promises At the end of this course your will be able to… • Think like a progressive corporate financial manager; • Learn how to prepare and interpret cash flow accounts; • Interpret a company’s financial health; • Create financial forecasts with different scenarios; • Justify the acceptance or rejection of a loan based on credit analysis: • Learn to interpret loan covenants and the underlying collateral; • Discover metrics that Moody’s measures credit risk, default and recovery rates; • Explain how target capital structure is determined; • Learn to estimate the components of a firm’s cost of capital; • Use Credit Risk Spreads to estimate risk adjusted interest rates; • Explain why ROIC is a cost of capital proxy; • Discover issues that cause changes in a firm’s target capital structure; • Estimate the intrinsic value of a stock and the enterprise value of a firm and explain...
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...The Timken Company – a leader in the bearing industry, is considering acquiring the Torrington Company. Torrington Company, a leading manufacturer of needle roller bearings which is an engineering solution segment from Ingersoll-Rand. Both companies operate and compete in same business and therefore, Timken is seeking substantial operating synergies from this largest acquisition of its history. With this acquisition, Timken is increasing the size of company by almost 50 percent. And, Timken will continue to concentrate on what it do best by buying a company in an industry, where it has a leadership position built on decades of expertise. Timken expects to expand its worldwide business base with new products and services as both companies have only 5 percent overlap in their product offerings. Timken will also be able to broaden its technology and engineering capabilities to enable it to deliver more value to customers around the globe; the two companies’ customer list overlaps by 80 percent. Thus it was expected that the combined companies would be able to create more value for customers with a more complete product line and, eventually more effective new-product development. Timken will move quickly to integrate Torrington into its global automotive and industrial business structures and expects to achieve estimated annualized savings of $80 million by the end of 2007. These savings are expected to come from economies of scale; consolidating purchasing activities and distribution...
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...Investment Banking Giuliano Iannotta Investment Banking A Guide to Underwriting and Advisory Services Professor Giuliano Iannotta Department of Finance ` Universita Bocconi via Roentgen 1 20136 Milano Italy giuliano.iannotta@unibocconi.it ISBN: 978-3-540-93764-7 e-ISBN: 978-3-540-93765-4 DOI 10.1007/978-3-540-93765-4 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2009943831 # Springer-Verlag Berlin Heidelberg 2010 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg, Germany Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) To my family ...
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...molybdenum-based chemicals and continuous-cast copper rod. In the case study of Freeport-McMoRan in financing an acquisition, several questions will be discussed including the events, which lead to the merger transaction following the analysis of operating and financial performance as well as the involvement of J.P. Morgan and Merrill Lynch prior to the acquisition announcement. 2. Question 1 a. During the year of 2006, a tumultuous series of events occurred before the acquisition of Phelps Dodge by Freeport-McMoRan on November 19, 2006, concerning M&A landscape in the US mining industry. The events emerge from the implementation of a poison pill, which hostile and non-hostile companies fight to win the M&A transaction of the target company. Phelps agreed to acquire Inco Ltd in which had merge with Falconbridge Ltd. By this agreement, Phelps formed a three-way merger with Inco as well as Falconbridge with attempt to create the world’s largest nickel producer and largest publicly traded copper producer. However, the merger agreement was eventually failed as Falconbridge accepted hostile (Xstrata) high bid and canceled the three-way merger agreement. On...
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...preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the firm’s core business. The purpose is to recommend an appropriate financial policy for the firm and, in support of that recommendation, to show the impact on the firm’s cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations. This case may be used to pursue a number of objectives: * Survey the determinants of corporate bond ratings. The case highlights the important influence of the rating agencies on the costs of debt and the access to capital markets. The case data provide the opportunity to explore profitability, coverage ratios, and capitalization ratios as measures of credit quality. * Explore the practical challenges involved in determining the optimal mix of debt and equity, in particular assessing the trade-off between the benefits of debt tax shields and the costs of financial distress. The case affords the opportunity to highlight methodological problems in estimating the optimal mix. * Consider the concepts of debt capacity and financial flexibility. The notion advanced in this case is that flexibility is the ability to access capital without falling short of the firm’s minimum target credit rating. Suggested Questions 1. What are the risks associated with Deluxe’s business and strategy? What financing requirements do you foresee for the firm in the coming years? 2. What...
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... and Wed/. or by Appointment I. Teaching Objectives Financial decision making cases are used to… • Create a highly interactive learning environment; • Learn about the application of financial management and credit analysis concepts; • Discover what you do not know about the practice of financial management; • Show what you have learned; • Highlight the relationships between strategic goals and the creation of firm value; • Develop techniques for interpreting a firm’s financial data and strategic plans; • Enhance your critical thinking and problem solving skills; • Expand your understanding of financial theory and its application; • Improve your listening and cooperative learning skills. II. Learning Promises At the end of this course your will be able to… • Think like a financial manager; • Interpret a company’s financial health by evaluating the performance of its cash flow components and financial ratios; • Create financial forecasts with different scenarios; • Justify the acceptance or rejection of a loan based on credit analysis: • Learn to interpret loan covenants and the underlying collateral; • Discover the metrics that Moody’s uses to identify credit risk changes; • Explain how management...
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...September 2005, Ashley Swenson, the chief financial officer (CFO) of a large computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders, or to repurchase stock. If Swenson chose to pay out dividends, she would have to also decide upon the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising, and change its corporate name to reflect its new outlook. The case serves as an omnibus review of the many practical aspects of the dividend and share buyback decisions, including (1) signaling effects, (2) clientele effects, and (3) the finance and investment implications of increasing dividend payouts and share repurchase decisions. This case can follow a treatment of the Miller-Modigliani[1] dividend-irrelevance theorem and serves to highlight practical considerations to consider when setting a firm’s dividend policy. Suggested Questions 1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of those three elements is Gainesboro’s management willing to vary, and which elements remain fixed as a matter of the company’s policy? 2. What happens to Gainesboro’s financing need and unused debt capacity if: a. no dividends are paid? b. a 20% payout is pursued? c. a 40% payout is pursued? d. a residual...
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