Applied Corporate Finance

IBM TJ Watson Research Center
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Live Case Study: The Project

What is this project?

This project provides an opportunity to get some hands-on experience applying corporate finance theory and models to real firms. In the process, participants will get a chance to

  • evaluate the risk profile of a firm, and examine the sources of risk and risk management policies.
  • analyze its capital structure, and decide whether the firm is under or over leveraged.
  • examine its dividend policy, and decide whether more or less should be paid in dividends
  • value the firm
  • restructure the firm, and revalue it.
How is the project structured?
  • This is a group project. Each group must have about five individuals in it.
  • Each person in the group will pick one or more aspects of company to analyze: for example, corporate governance, financing, risk management policies, or valuation.
  • One person should perform a comparative industry analysis, looking at other companies in the same industry. This does not imply however that they have to be competitors. For instance, a group can pick a company that manufactures personal computers, and contrast it with a company that produces software and a company that provides computer services.
  • At the end of the process, the group will write one report. In this report, the results will be presented as a whole rather than as five separate parts.
What company should we pick?
  • The company may be large or small, domestic or international, manufacturing or service.
  • I'd choose one for which plenty of information is publically available.
  • Examples: Ford; Great Lakes Chemicals; Sprint; Viacom; Norwest Bancorp; EDS; Volkswagen; Unilever; Sony.
  • Perhaps an interesting "story" can be your guide. You'll find stories daily at The Motley Fool , among other places.
How will the project be graded?
  • Each group will receive one grade and every group member will receive the same grade.
  • No attempt will be made to allow for intra-group differences in effort.
Who polices the group?
  • You do.

Live Case Study: Issues for Analysis

I. Corporate Governance Analysis
  • Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders?
  • How does this firm interact with financial markets? How do markets get information on the firm?
  • How does this firm view its social obligations and manage its image in society?
II. Stockholder Analysis
  • Who is the average investor in this stock? (Individual or pension fund, taxable or tax-exempt, small or large, domestic or foreign)
  • Who is the marginal investor in this stock?
III. Risk and Return
  • What is the risk profile of your company? (How much overall risk is there in this firm? Where is this risk coming from (market, firm, industry or currency)? How is the risk profile changing?)
  • What is the performance profile of an investment in this company? What return would you have earned investing in this company's stock? Would you have under or out performed the market? How much of the performance can be attributed to management?
  • How risky is this company's equity? Why? What is its cost of equity?
  • How risky is this company's debt? What is its cost of debt?
  • What is this company's current cost of capital?
IV. Measuring Investment Returns
  • Is there a typical project for this firm? If yes, what would it look like in terms of life(long term or short term), investment needs and cash flow patterns?
  • How good are the projects that the company has on its books currently?
  • Are the projects in the future likely to look like the projects in the past? Why or why not?
V. Capital Structure Choices
  • What are the different kinds or types of financing that this company has used to raise funds? Where do they fall in the continuum between debt and equity?
  • How large, in qualitative or quantitative terms, are the advantages to this company from using debt?
  • How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt?
  • From the qualitative trade off, does this firm look like it has too much or too little debt?
VI. Optimal Capital Structure
  • Based upon the cost of capital approach, what is the optimal debt ratio for your firm?
  • Bringing in reasonable constraints into the decision process, what would your recommended debt ratio be for this firm?
  • Does your firm have too much or too little debt
    • relative to the sector?
    • relative to the market?
VII. Mechanics of Moving to the Optimal
  • If your firm's actual debt ratio is different from its recommended debt ratio, how should they get from the actual to the optimal? In particular,
    • should they do it gradually over time or should they do it right now?
    • should they alter their existing mix (by buying back stock or retiring debt) or should they take new projects with debt or equity?
    • What type of financing should this firm use? In particular,
      • should it be short term or long term?
      • what currency should it be in?
      • what special features should the financing have?
VIII. Dividend Policy
  • How has this company returned cash to its owners? Has it paid dividends, bought back stock or spun off assets?
  • Given this firm's characteristics today, how would you recommend that they return cash to stockholders (assuming that they have excess cash)?
IX. Valuation
  • What type of cash flow (dividends, FCFE or FCFF) would you choose to discount for this firm?
  • What growth pattern (Stable, 2-stage, 3-stage) would you pick for this firm? How long will high growth last?
  • What is your estimate of value of equity in this firm? How does this compare to the market value?
  • What is the "key variable" (risk, growth, leverage, profit margins...) driving this value?
X. Possible Restructuring
  • Is the firm a possible target for a takeover or shareholder activism? Is it facing some financial stress?
  • Does the firm need a change in the amount or composition of its debt? How would you recommend changing it?
  • Is a change in the business mix warranted? What acquisitions or divestitures do you recommend? How?
  • Can needed changes be made without a change in management or control? How would these be effected?
  • If you were hired to enhance value at this firm, what would be the path you would choose?


Data Sources
Help Manual
Format for Report
Commonly Asked Questions
The following is a sample report.
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