Applied Corporate Finance
IBM TJ Watson Research Center
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
How is the project structured?
- 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.
What company should we pick?
- 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
- 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.
How will the project be graded?
- 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
, among other places.
Who polices the group?
- 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.
Live Case Study: Issues for Analysis
I. Corporate Governance Analysis
II. Stockholder 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?
III. Risk and Return
- 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?
IV. Measuring Investment Returns
- 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
- How risky is this company's debt? What is its cost of debt?
- What is this company's current cost of capital?
V. Capital Structure Choices
- 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
- Are the projects in the future likely to look like the projects
in the past? Why or why not?
VI. Optimal Capital Structure
- 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?
VII. Mechanics of Moving to the Optimal
- 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?
VIII. Dividend Policy
- 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
- 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?
- 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)?
X. Possible Restructuring
- 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?
- 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?
Format for Report
Commonly Asked Questions
The following is a sample report.
A Live Case Study of Disney