FI 4320, Spring, 2002 Cases and Readings in Corporate Finance

Instructor
Professor David C. Nachman Office: RCB 1239 Phone: 651-1696 email: dnachman !s".ed" Office #o"rs: $% $h 1&:&& ' 12:&& (. ).% or *+ a,,oin-men-

Prerequisites
./ 03&& C1P: 1% 2% 0% 6

Course Description
This course focuses on financial policy-making and practical applications of the topics covered in FI 4300 through case analyses, contemporary readings from the professional literature, and problem solving. The emphasis in the course is on investment and financing decisions and their impact on firm value and capital market imperfections and their impact on the raising of corporate capital. The course also provides an opportunity for the study of additional topics of special current significance such as capital structure and dividend policy, corporate restructuring and the market for corporate control, real options, risk management, international capital budgeting and financing, financial planning and working capital management, project financing, reorganizations and advanced equity valuation.

Course Material
Required -e2- ma-erial 3 4B)5 R. (. Breale+ and 1. C. )+ers% Principles of Corporate Finance% 6-h ed.% )c6ra7- #ill% /nc.% 2&&&. 3 48195 8. 1ivarama 9rishnan% Study Guide to Principles of Corporate Finance % )c6ra7- #ill% /nc.% 2&&&. 3 4)65 ). 6riffi-hs% Solutions Manual to Principles of Corporate Finance% )c6ra7- #ill% /nc.% 2&&&.

3 4#5 C. :. #olden% Spreadsheet Modeling in Corporate Finance: Book and CD-ROM % &&-&1-version% Pren-ice #all% 2&&2. 34RP5 Readin! Pac;e34CP5 Case Pac;eThe required texts (BM) and (H) and the materials that make up the Case Packet (CP) are available at the GSU Book Store, as are the supplements (VSK) and (MG). The Reading Packet (RP) is available at DocuWeb. Contents of (CP) and (RP) (with DocuWeb access instructions) follow at the end of this syllabus.

Course Work and

rades

A topic outline with reading, question, problem and case assignments follows. Each assignment should be done before the class for which it is scheduled and students should be prepared to answer questions and to partake in discussion in class on this material. Classes will be a mixture of lecture and discussion and problem solving. The course is in the process of being put on the web. Many lecture notes are available at my web site at http://www.gsu.edu/~fncdcn/website/index.htm, under Teaching, Cases and Readings in Corporate Finance. Make a copy of each and bring them to each class. I will try to alert you ahead of time when each will be covered. Question and Problem Assignments. The practice and challenge questions and problems assigned are an important part of the course. The ones assigned are suggestive of the kinds of questions and problems that will be on exams. Students are responsible for doing these assignments on their own. They will not be graded. Solutions to all practice and challenge questions are in the solutions manual (MG). Case Assignments. There are five cases assigned. These appear in boldface on the topic outline that follows. You must prepare each assignment before the class for which it is scheduled. Each assignment will be handed in for grading at the beginning of the class for which it is scheduled, so make a copy for class discussion and for your records. NO late work will be accepted. Your solution to these assignments will be an individual effort. The case report consists of answering a list of questions pertaining to the case. The list of questions for each assignment follows at the end of this syllabus. The report must be typewritten, double-spaced, with one inch margins top, bottom, and sides. Please use a binder clip to secure your report. I must be able to see and read your work. Reports in improper format or improper use of the English language will be penalized severely. NO handwritten work will be accepted. The case assignments require extensive use of spreadsheets. The assignments in the text (H) are made to facilitate the case assignments. In addition, spreadsheet modeling is the language of finance in practice. The better you are at it the more valuable you will be to employers. The text (H) should be a great resource in this regard.

FI 4320. Cases and Readings in Corporate Finance.

Prof. D. C. Nachman

Exams. There will be two exams, a midterm exam ( ME), and a final exam (FE). These exams will be multiple choice questions with a mix of verbal and problem type questions. ( ME) This is an open book, open note exam based on the material covered prior to it. ( ME) is scheduled for class 8, Thursday, April 4, 2002. NO makeup exam will be given. (FE) This is an open book, open note exam based on all the material covered in the course. According to the Final Exam Schedule for Spring, 2002, ( FE) will be at 12:30 P. M., Tuesday, May 7, 2002. NO makeup exam will be given. Course Grade. ( s-"den-<s !rade 7ill *e de-ermined from a 7ei!h-ed avera!e of scores on -he e2ams and -he case assi!nmen-s "sin! -he follo7in! 7ei!h-in! schemes: 1cheme / 4.=5 > 4)=5 Case (ssi!nmen-s 4)=5 4.=5 0&@ 25 35 1cheme // 4.=5 ? 4)=5 0&@ 2& 0&

@$he five case scores 7ill *e avera!ed 7i-h each co"n-in! ei!h- ,ercen- for a -o-al of for-+ ,ercen-.

$o,ic O"-line and Readin!AB"es-ionAPro*lemACase (ssi!nmen-s @@

Class Da!"Date 1 $ 3A12 #opic"$ssign%ents& Revie7 and overvie7 of financial mana!emen-. 4B)5 Cha,-er 1. 4B)5 Cha,-er 2. Prac-ice B"es-ions 1-6% 11% Challen!e B"es-ion 2. 4B)5 Cha,-er 3% Prac-ice B"es-ions 1-C% Challen!e B"es-ion 0. 4B)5 Cha,-er 0% Prac-ice B"es-ions 1-C% 9% Challen!e B"es-ion 3. Ne- ,resen- val"e and o-her cri-eria. 4B)5 Cha,-er 5. Prac-ice B"es-ions 1-9% Challen!e B"es-ion 2. 4#5 Cha,-er 3. Relevan- cash flo7s. 4B)5 Cha,-er 6. Prac-ice B"es-ion 1-D. 4#5 Cha,-ers 0% 1&. 4CP5 Case' (%pirical C)e%icals *td& +$,' #)e Merse!side Pro-ect. 4B)5 Cha,-er 11. Prac-ice B"es-ions 1-D. 4RP5 ECor,ora-e 1-ra-e!+ and -he Ca,i-al B"d!e-in! Decision%F 1ha,iro. Real O,-ions. 4RP5 Class No-es / ' 8. 4#5 Cha,-ers 1C% 1D. 4B)5 Cha,-er 2&% Prac-ice B"es-ions 1-C% 22% Challen!e B"es-ion 0. 4B)5 Cha,-er 21% Prac-ice B"es-ions 1-D% 15. 4#5 Cha,-er 2&. Con-in"ed. 4RP5 Class No-es 8/% E8al"in! )ana!erial .le2i*ili-+%F $ri!eor!is and )ason% E$o :ai- or No- -o :ai-%F Corman% E6e--in! Real%F )in-G% EReal O,-ions in -he Di!i-al =conom+.F 9"la-ila;a and 8en;a-raman.% E=2,loi-in! Hncer-ain-+%F Co+.

$h 3A10

$ 3A19

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$h 3A21 $ 3A26 $h 3A2D

FI 4320. Cases and Readings in Corporate Finance.

Prof. D. C. Nachman

$ 0A2

4CP5 Case' (%pirical C)e%icals *td& +.,' Merse!side and Rotterda% Pro-ects. Ca,i-al 1-r"c-"re. 4B)5 Cha,-ers 1D. 4*ac;!ro"nd is 4B)5 Cha,-ers 13-1C5 +M(, )id-erm =2am. Ca,i-al 1-r"c-"re con-in"ed. 4RP5 E(f-er -he Revol"-ion%F 6ifford% E$he De-erminan-s of Cor,ora-e Ievera!e and Dividend Policies%F Barcla+% 1mi-h% and :a--s% E$he Ca,i-al 1-r"c-"re P"GGle: (no-her Ioo; a- -he =vidence%F Barcla+ and 1mi-h. 4B)5 Cha,-er 19% Prac-ice B"es-ions 1-D. 4RP5 EHsin! (P8: ( Be--er $ool for 8al"in! O,era-ions%F I"ehrman. 4CP5 No-e on (dJ"s-ed Presen- 8al"e. 4#5 Cha,-er 13. 4CP5 Case' MW Petroleu% Corporation +$,. 4RP5 E#o7 .inancial =n!ineerin! Can (dvance Cor,ora-e 1-ra-e!+%F $"fano. 4B)5 Cha,-er 26% B"es-ions 1-16% 2&. 4RP5 Class No-es 8//. 4CP5 Case' MW Petroleu% Corporation +., . 4RP5 ECover Ko"r (sse-s%F Reason. 4RP5 E.rame7or; for Ris; )ana!emen-%F .roo-% 1charfs-ein% and 1-ein% E( Ne7 (,,roach -o =val"a-in! Na-"ral Reso"rce /nves-men-s%F Brennan and 1ch7ar-G. 4CP5 Case' $%erican .arrick Resources' Managing old Price Risk. Revie7.

D 9

$h 0A0 $ 0A9

1&

$h 0A11

11 12 13 10 15

$ 0A16 $h 0A1D $ 0A23 $h 0A25 $ 0A3&

//$his -o,icAassi!nmen- o"-line ,rovides a !eneral ,lan for -he co"rse. Chan!es ma+ *e necessar+. /f
s"ch chan!es are necessar+% -he+ 7ill *e anno"nced in class and s-"den-s 7ill *e res,onsi*le for accommoda-in! -hem.

Wit)dra0als
$he las- da+ -o 7i-hdra7 from -his co"rse 7i-h -he ,ossi*ili-+ of receivin! a !rade of E:F is .rida+% (,ril 5% 2&&2. $his is -he mid,oin- of )ini-)es-er //. ( !rade of E:F is no- a"-oma-ic. :hen a s-"den7i-hdra7s 4or is 7i-hdra7n5 from a co"rse% Hniversi-+ re!"la-ions 4,a!es 02-00% 61H Hnder!rad"a-e Ca-alo!5 reL"ire -ha- -he ins-r"c-or assi!n -he !rade :. "nder an! of -he follo7in! circ"ms-ances: 4i5 $he s-"den- has *een forced -o 7i-hdra7 *eca"se of e2cessive a*sences. $he De,ar-men- of .inance<s ,olic+ is -o deem a*sences of more -han one 7ee; of classes in a mini-mes-er as e2cessive. 4ii5 $he s-"den- 7i-hdra7s from -he co"rse *efore -he mid,oin- of -he -o-al !radin! ,eriod 4mini-mes-er5 7hile doin! failin! 7or;. 4iii5 $he s-"den- 7i-hdra7s from -he co"rse af-er -he mid,oin- of -he -o-al !radin! ,eriod 4mini-mes-er5.

FI 4320. Cases and Readings in Corporate Finance.

Prof. D. C. Nachman

.ailin! 7or; 4for i-em 4ii5 a*ove5 consis-s of havin! failed -o earn a !rade of C or *e--er on e2ams -a;en or cases d"e *+ -he da-e -he s-"den- 7i-hdra7s.

Class $ttendance
(n a--endance shee- 7ill *e ,assed aro"nd each class 4,erha,s more -han once ,er class5. /- is +o"r res,onsi*ili-+ -o see -ha- +o" have si!ned -he shee-. /f +o" have no- si!ned -he shee-% +o" 7ill *e considered a*sen- from -ha- class. (n+ s-"den- 7ho is a*sen- for -7o classes 4incl"din! -he firs- class5 7ill *e dro,,ed from -he co"rse. 9ee,in! -rac; of +o"r a--endance record is +o"r res,onsi*ili-+. Ko" 7ill noreceive an+ formal ",da-e of +o"r a--endance record. Ia-e arrivals -o an+ class 7ill no- *e ,ermi--ed -o si!n -he a--endance shee-.

$cade%ic 1onest!
$he De,ar-men- of .inance adheres -o -he Hniversi-+<s ,olic+ on academic hones-+ as con-ained in -he (cademic Re!"la-ions sec-ion of -he 61H Hnder!rad"a-e Ca-alo! and in -he .ac"l-+ #and*oo; and On Cam,"s: $he Hnder!rad"a-e Co-C"rric"lar (ffairs #and*oo;. $his sec-ion con-ains some e2am,les of "nacce,-a*le cond"c-% s"ch as ,la!iarism% chea-in! on e2amina-ions% "na"-horiGed colla*ora-ion% e-c. $his ,olic+ a,,lies -o -he home7or;% case assi!nmen-s% and e2ams for -his co"rse.

Case $ssign%ent' (%pirical C)e%icals *td& +$,' #)e Merse!side Pro-ect

1. :ha- chan!es% if an+% sho"ld .rances $rela7ne+ as; Mim #a7;ins -o ma;e in his disco"n-ed-cash-flo7 anal+sisN :h+N :ha- sho"ld $rela7ne+ *e ,re,ared -o sa+ -o -he $rans,or- Division% -he direc-or of 1ales% her assis-an- ,lan- mana!er% and -he anal+s- from -he $reas"r+ s-affN 2. #o7 a--rac-ive is -he )erse+side ,roJec-N B+ 7ha- cri-eriaN 3. 1ho"ld $rela7ne+ con-in"e -o ,romo-e -he ,roJec- for f"ndin!N

Case $ssign%ent' (%pirical C)e%icals *td& +.,' Merse!side and Rotterda% Pro-ects
1. :h+ are -he )erse+side and Ro--erdam ,roJec-s m"-"all+ e2cl"siveN 2. #o7 do -he -7o ,roJec-s com,are on -he *asis of =m,irical ChemicalsO inves-men- cri-eriaN :hami!h- acco"n- for -he differences in ran;in!sN 3. /s i- ,ossi*le -o L"an-if+ -he val"e of mana!erial fle2i*ili-+ associa-ed 7i-h -he )erse+side ,roJec-N #o7% if a- all% does fle2i*ili-+ affec- -he economic a--rac-iveness of -he ,roJec-N 0. :ha- are -he differences in -he 7a+s Mohan 1ilver and .rances $rela7ne+ have advoca-ed -heir res,ec-ive ,roJec-sN #o7 mi!h- -hese differences in s-+le affec- -he o"-come of -he decisionN 5. :hich ,roJec- sho"ld $revor Iivese+ ,ro,ose -o -he chief e2ec"-ive officer and *oard of direc-orsN

Case $ssign%ent' MW Petroleu% Corporation+$,

FI 4320. Cases and Readings in Corporate Finance.

Prof. D. C. Nachman

1. =val"a-e (mocoOs and (,acheOs cor,ora-e o*Jec-ives and s-ra-e!ies. /s i- reasona*le -o e2,ec- -ha- -he ): ,ro,er-ies are more val"a*le -o (,ache -han -o (mocoN :ha- so"rces of val"e mos- ,la"si*l+ acco"n- for -he difference *e-7een *"+er and sellerN 2. 1-r"c-"re and e2ec"-e a disco"n-ed cash flo7 val"a-ion of all -he ): reserves "sin! (P8. #o7 m"ch are -he reserves 7or-hN /s +o"r es-ima-e more li;el+ -o *e *iased hi!h or lo7N :ha- are -he so"rces of *iasN 3. #o7 7o"ld +o" s-r"c-"re an anal+sis of ): as a ,or-folio of asse-s-in-,lace and o,-ionsN 1,ecificall+% 7hich ,ar-s of -he *"siness sho"ld *e re!arded as asse-s-in-,lace and 7hich as o,-ionsN :ha- ;inds of o,-ions are ,resen-N 1ho"ld -his a,,roach +ield a hi!her or lo7er val"e -han -he all-(P8 a,,roach +o" em,lo+ed a*oveN 0. =2ec"-e -he anal+sis +o" s-r"c-"red in L"es-ion 3% *e!innin! 7i-h asse-s-in-,lace. #o7 ris;+ are -he asse-s -ha- "nderlie -he o,-ionsP i. e.% ho7 7o"ld +o" es-ima-e for eachN #o7 m"ch is -he 7hole ,or-folio 7or-hN 5. (ss"min! a sale !oes -hro"!h% ho7 does (,ache e2ercise each of -he vario"s o,-ionsN :hen sho"ld ido soN

Case $ssign%ent' MW Petroleu% Corporation +.,

1. :ha- ,ro*lems face (moco and (,ache in *rin!in! -his -ransac-ion -o com,le-ionN :ha- are -he firmsO o*Jec-ivesN 2. :ha- ,ossi*le al-erna-ives mi!h- e2is- -o solve -he s-alled ne!o-ia-ionsN 3. #o7 can -he ,ro,osed sol"-ion in =2hi*i- C *e e2,ressed in -erms of financial con-rac-sN :h+ do +o" -hin; -he deal is s-r"c-"red as !iven in =2hi*i- CN 0. #o7 m"ch are -he ,rice-sharin! and ,rice-s",,or- arran!emen-s 7or-hN 5. 1ho"ld (moco acce,- -he ,ro,osed deal from (,ache% incl"din! -he ,rice-sharin! and ,rice-s",,orarran!emen-sN

Case $ssign%ent' $%erican .arrick Resources' Managing Price Risk

old

1. /n -he a*sence of a hed!in! ,ro!ram "sin! financial ins-r"men-s% ho7 sensi-ive 7o"ld Barric; s-oc; *e -o !old ,rice chan!esN .or ever+ 1Q chan!e in !old ,rices% ho7 mi!h- i-s s-oc; *e affec-edN #o7 co"ld -he firm mana!e i-s !old ,rice e2,os"re 7i-ho"- -he "se of financial con-rac-sN 2. :ha- is -he s-a-ed in-en- of (BROs hed!in! ,ro!ramN :ha- sho"ld *e -he !oal of a !old mineOs ,rice ris; mana!emen- ,ro!ramN 3. :ha- 7o"ld convince +o" -ha- a ,rice ris; mana!emen- ,ro!ram crea-ed val"e for i-s shareholders e anteN 0. #o7 7o"ld +o" charac-eriGe -he evol"-ion of Barric;Os ,rice ris; mana!emen- ac-ivi-iesN (re -he+ consis-en- 7i-h -he s-a-ed ,olic+ !oalsN 5. #o7 sho"ld a !old mine 7hich 7an-s -o modera-e i-s !old ,rice ris; com,are s-ra-e!ies 4"sin! f"-"res% for7ards% !old loans% or s,o- deferred con-rac-s5 7i-h ins"rance s-ra-e!ies 4"sin! o,-ions5N On 7ha- *asis sho"ld -hese decisions *e madeN Once a firm has decided on ei-her a hed!in! or an ins"rance s-ra-e!+% ho7 sho"ld i- choose from amon! s,ecific al-erna-ivesN

FI 4320. Cases and Readings in Corporate Finance.

Prof. D. C. Nachman

6. :ha- is a Es,o- deferred con-rac-NF /s i- an o,-ionN a for7ard con-rac-N :h+ has (BR chosen -o rel+ on s,o- deferred con-rac-s rela-ive -o o-her !old deriva-ivesN

Contents o2 4CP5' ite%s sold separatel! at

S3 .ookstore

3 !"pirical Che"icals #td$ %&': (he Merseyside Pro)ect% 4H8(-.-1&2&% 8ersion 2.35. 3 !"pirical Che"icals #td$ %B': Merseyside and Rotterda" Pro)ects% 4H8(-.-1&21% 8ersion 2.35. 3 &"erican Barrick Resources: Managing Gold Price Risk% 4#B1 9-293-12D5. 3 *ote on &d)usted Present +alue% 4#B1 9-293-&925. 3 M, Petroleu" Corporation %&'% 4#B1 9-295-&295. 3 M, Petroleu" Corporation %B'% 4#B1 9-295-&055.

Contents o2 4RP5' at DocuWe4 +access instructions 2ollo0,

Readin!s: 3 (. C. 1ha,iro% 19D5% Cor,ora-e 1-ra-e!+ and -he Ca,i-al B"d!e-in! Decision% Midland Corproate Finance -ournal% 3: 22-36. 3 I. $ri!eor!is and 1. )ason% 19DC% 8al"in! )ana!erial .le2i*ili-+% Midland Corporate Finance -ournal% 15: 10-21. 3 I. 6orman% 199C% $o :ai- or No- -o :ai-% CFO% 13: 91-90. 3 1. I. )in-G% 1999% 6e--in! Real% CFO% 15: 52-6&. 3 P. Co+% =2,loi-in! Hncer-ain-+% Business ,eek% M"ne C% 1999% 11D-120. 3 N. 9"la-ila;a and N. 8en;a-raman% Real O,-ions in -he Di!i-al =conom+% Financial (i"es Mastering Manage"ent Re.ie/% Oc-o*er% 1999% 26-31. 3 D. 6ifford% 199D% (f-er -he Revol"-ion% CFO% 10: C5-C9. 3 $. I"ehrman% 199C% EHsin! (P8: ( Be--er $ool for 8al"in! O,era-ions.F 0ar.ard Business Re.ie/% )a+-M"ne: 105-150. 3 9. (. .roo-% D. 1. 1charfs-ein% and M. C. 1-ein% 1990% ( .rame7or; for Ris; )ana!emen-% -ournal of &pplied Corproate Finance% C: 22- 32. 3 ). Brennan and =. 1ch7ar-G% 1993% E( Ne7 (,,roach -o =val"a-in! Na-"ral Reso"rce /nves-men-s%F in (he *e/ Corporate Finance: ,here (heory Meets Practice% D. Che7% ed.% Ne7 Kor;% )c6ra7 #ill.
FI 4320. Cases and Readings in Corporate Finance. 7 Prof. D. C. Nachman

3 P. $"fano% E#o7 .inancial =n!ineerin! Can (dvance Cor,ora-e 1-ra-e!+%F 0ar.ard Business Re.ie/% Man"ar+-.e*r"ar+% 1996% 136-106. 3 $. Reason% 2&&1% ECover Ko"r (sse-s%F CFO% 1C: 33-36. Class No-es: /. /nves-men- Decisions //. O,-ion -o Defer /nves-men-: ( 1im,le =2am,le ///. ( Primer on O,-ion Pricin! /8. $7o 8al"a-ion #e"ris-ics 8. Ris; Ne"-ral 8al"a-ion 8/. Oil =2-rac-ion Pro*lem 8//. /nves-men- /ncen-ives and Ris; )ana!emen(ccess /ns-r"c-ions: Please provide your students with the following steps to use the DocuWeb System after they have connected to the URL: http://docuweb.gsu.edu 1. Login with USER NAME and PASSWORD (both to be given in class). 2. Click on the course name in the left frame. 3. Click on a reading selection from the window in the right hand frame. 4. Click on the View button below the list of readings. Your first view of the document will be a fast loading single page at a time version for viewing only. 5. Click on a thumbnail page for a full-screen view or ... 6. Click on the green lettered "PRINT - download" to print the entire file. 7. Select the green "PRINT - download" option again to download the high resolution PDF version for printing. Then click on the small printer icon above the displayed document. 8. In the final Print window here you select the page range and number of copies check on "Fit to Page" and "Print as Image". 9. Select the "Help" option above the red bar at any time for detailed instructions. As an alternative, you may find it easier after logging in to click on the "Search" option above the red bar, then select your class name and click on the blue "search" button at the bottom of the screen. The Search display provides more details including authors. Downloading the PDF printfile requires that the Adobe Acrobat Reader software be installed on the computer. This software is already installed on all GSU lab and library PCs and is available for free from www.adobe.com/prodindex/acrobat/readstep.html . After downloading the program file remember
FI 4320. Cases and Readings in Corporate Finance. 8 Prof. D. C. Nachman

to run it (choose Start-Run-Browse and select the file "rp500enu.exe" that was just downloaded. After the software is installed you should have an Adobe Acrobat 5.0 icon on your desktop and the next time you access a pdf file on the web your browser will automatically recognize it. NOTE: Downloading print files will work 10-100 times faster from a PC at GSU in the Library or any of the computer labs on campus as opposed to trying it at home over a modem and phone line. Printing at GSU is free for the first 150 pages and costs 5 cents per page thereafter. A free computer account can be established at the main computer lab on the first floor of the Library South building. --------------------------------------------------------------------------------------------------Please send comments to the Docuweb support Team ( Jpalmour@gsu.edu ). Let us know of problems which may be discovered by you or your students. We will make adjustments as soon as possible. Likewise, if you have questions concerning electronic reserves material, please contact us. Thanks, Jim Palmour Phoe: 404-651-2658 FAX: 404-651-4669 Email: Jpalmour@gsu.edu

FI 4320. Cases and Readings in Corporate Finance.

Prof. D. C. Nachman