Case Studies in Finance:

Managing for Corporate Value Creation

Fifth Edition
2006

Robert F. Bruner
Dean and Charles C. Abbott Professor of
Business Administration
Darden Graduate School of Business Administration
University of Virginia
Post Office Box 6550
Charlottesville, Virginia 22906
Email: brunerr@virginia.edu
Web site: http://faculty.darden.edu/brunerb/

ABSTRACT:
This book presents 50 case studies and technical notes in finance, targeted toward upper-level
undergraduates and introductory and intermediate-level MBA students. The purpose of these
cases is to afford the basis for classroom discussion of tools and concepts. The range of topics
includes value creation, market efficiency, economic profit, financial analysis and forecasting,
cost of capital, capital budgeting, dividend policy, equity issuance, capital structure management,
derivative securities, and mergers and acquisitions. The spirit of these cases is to link the study
of value creation with a respect for the administrative point of view, and an orientation toward
capital markets. Three-quarters of the cases are set in 2000 or after; half the cases are set outside
of the United States or draw significantly on international issues; 37 percent are new or seriously
updated since the fourth edition. A new chapter addresses ethics in finance. The accompanying
paper outlines the plan of the book and its table of contents.

June 14, 2006

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Contents
Dedication
About the Author
Contents
Foreword
Preface
Note to the Student: How To Study and Discuss Cases
Ethics in Finance
Part I: Setting Some Themes
1 Warren E. Buffett, 2005 To think like an investor
2 Bill Miller and Value Trust Market efficiency
3 Ben & Jerry’s Homemade, Inc. Value creation and
governance
4 The Battle For Value, 2004: FedEx Corp. vs. Value creation and
United Parcel Service, Inc. economic profit
Part 2: Financial Analysis and Forecasting
5 The Financial Detective, 2005 Ratio analysis
6 Krispy Kreme Doughnuts, Inc. Financial statement
analysis
7 The Body Shop International Plc 2001: An Introduction to forecasting
Introduction to Financial Modeling
8 Padgett Paper Products Company Analysis of growth and
bank financing
9 Kota Fibres Ltd. Forecasting seasonal
financing needs
10 Deutsche Brauerei Forecasting and policies
regarding growth
11 Servervault: “Reliable, Secure, and Wicked “Burn rate” of the high-
Fast” growth firm
Part 3: Estimating the Cost of Capital
12 Best Practices in Estimating the Cost of Estimating the cost of
Capital: Survey and Synthesis capital
13 Nike, Inc.: Cost of Capital Cost of capital for the firm
14 Coke vs. Pepsi, 2001 Cost of capital and EVA for
competitors
15 Teletech Corporation, 2005 Business segments and risk-
return trade-offs
16 The Boeing 7E7 Project-specific risk-return
trade-offs
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Part 4: Capital Budgeting and Resource Allocation

17 The Investment Detective Investment criteria and
discounted cash flow
18 Fonderia Di Torino S.p.A. Analysis of an automation
investment
19 Compass Records Analysis of capital
investment alternatives
20 Diamond Chemicals Plc (A): The Merseyside Relevant cash flows
Project
21 Diamond Chemicals Plc (B): Merseyside and Mutually exclusive
Rotterdam Projects investment opportunities
22 Genzyme/Geltex Pharmaceuticals Joint Staged versus up-front
Venture investing
23 Euroland Foods S.A. Strategic resource
allocation
24 Star River Electronics Ltd. Capital project analysis and
forecasting
Part 5: Management of the Firm’s Equity: Dividends, Repurchases, Initial
Offerings
25 Gainesboro Machine Tools Corp. Dividend and stock buyback
decisions
26 Jetblue Airways IPO Valuation Initial public offering
27 Purinex, Inc. Financing the early-stage
firm
Part 6: Management of the Corporate Capital Structure
28 An Introduction to Debt Policy and Value Effects of debt tax shields
29 Structuring Corporate Financial Policy: Concepts in setting
Diagnosis of Problems and Evaluation of financial policy
Strategies
30 The Wm. Wrigley, Jr. Company: Capital Leveraged restructuring
Structure, Valuation, and Cost of Capital
31 Deluxe Corporation Financial flexibility
32 Rosario Acero S.A. Choice between debt and
equity financing
33 Deutsche Bank Securities: Financing the Acquisition financing
Acquisition of Consolidated Supply S.A.
34 Threshold Sports LLC Capital acquisition for the
young firm
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Part 7: Analysis of Financing Tactics: Leases, Options, and Foreign Currency

35 Merton Electronics Corporation Hedging foreign currency
cash flows
36 Carrefour S.A. Currency risk management
37 National Railroad Passenger Corporation Evaluating a lease
(“Amtrak”): Acela Financing financing proposal
38 Primus Automation Division, 2002 Economics of lease
financing
39 Corning Inc. Zero Coupon Convertible Convertible bond valuation
Debentures (A) and financing
40 Enron Corporation’s Weather Derivatives (A) Financial innovation for
risk management
Part 8: Valuing the Enterprise: Acquisitions and Buyouts
41 Arcadian Microarray Technologies Inc. Evaluating terminal values
42 Yeats Valves and Controls Inc. Valuing the enterprise for
sale
43 Chrysler Corporation: Negotiations Between Negotiating a complex
Daimler and Chrysler cross-border merger
44 Palamon Capital Partners/TeamSystem S.p.A. Valuing a private equity
investment
45 General Mills’ Acquisition of Pillsbury from Evaluating a contingent
Diageo Plc value right
46 Printicomm’s Proposed Acquisition of Evaluating an earnout
Digitech: Negotiating Price and Form of proposal
Payment
47 Structuring Repsol’s Acquisition of YPF S.A. Financing a cross-border
(A) hostile offer
48 Hostile Takeovers: A Primer for the Decision Contests for control
Maker
49 General Electric’s Proposed Acquisition of Evaluating an arbitrage
Honeywell position
50 The Hilton/ITT Wars Setting bidding strategy for
takeovers
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Excerpt from the Preface

The inexplicable is all around us. So is the incomprehensible. So is the unintelligible.

Interviewing Babe Ruth 1 in 1928, I put it to him “People come and ask what’s your system
for hitting home runs—that so?” “Yes,” said the Babe, “and all I can tell ‘em is I pick a
good one and sock it. I get back to the dugout and they ask me what it was I hit and I tell
`em I don’t know except it looked good.”
Carl Sandburg 2

Managers are not confronted with problems that are independent of each other, but with
dynamic situations that consist of complex systems of changing problems that interact with
each other. I call such situations messes ...Managers do not solve problems: they manage
messes.
Russell Ackoff 3

ORIENTATION OF THE BOOK

Practitioners tell us that much in finance is inexplicable, incomprehensible, and

unintelligible. Like Babe Ruth, their explanations for their actions often amount to “I pick a
good one and sock it.” Fortunately for a rising generation of practitioners, tools and concepts of
Modern Finance provide a language and approach for excellent performance. The aim of this
book is to illustrate and exercise the application of these tools and concepts in a messy world.

Focus on Value: The subtitle of this book is Managing for Corporate Value Creation.
Economics teaches us that value creation should be an enduring focus of concern because value
is the foundation of survival and prosperity of the enterprise. The focus on value also helps
managers understand the impact of the firm on the world around it. These cases harness and
exercise this economic view of the firm. It is the special province of finance to highlight value
as a legitimate concern for managers. The cases in this book exercise valuation analysis over a
wide range of assets, debt, equities, and options, and a wide range of perspectives, such as
investor, creditor, and manager.

Linkage to Capital Markets: An important premise of these cases is that managers should take
cues from the capital markets. The cases in this volume help the student learn to look at the
capital markets in four ways. First, they illustrate important players in the capital markets such

1George Herman “Babe” Ruth (1895-1948) was one of the most famous players in the history of American baseball,
leading the league in home runs for 10 straight seasons, setting a record of 60 home runs in one season, and hitting
714 home runs in his career. Ruth was also known as the “Sultan of the Swat.”

2Carl Sandburg, “Notes for Preface,” in Harvest Poems (New York: Harcourt Brace Jovanovich, 1960), p.11.

3Russell
Ackoff, “The Future of Operational Research is Past,” Journal of Operational Research Society, 30, 1
(Pergamon Press, Ltd., 1979): 93-104.
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as individual exemplars like Warren Buffett and Bill Miller and institutions like investment
banks, commercial banks, rating agencies, hedge funds, merger arbitrageurs, private equity
firms, lessors of industrial equipment, and so on. Second, they exercise the students’ abilities to
interpret capital market conditions across the economic cycle. Third, they explore the design of
financial securities, and illuminate the use of exotic instruments in support of corporate policy.
Finally, they help students understand the implications of transparency of the firm to investors,
and the impact of news about the firm in an efficient market.

Respect for the Administrative Point of View: The real world is messy. Information is
incomplete, arrives late, or is reported with error. The motivations of counterparties are
ambiguous. Resources often fall short. These cases illustrate the immense practicality of
finance theory in sorting out the issues facing managers, assessing alternatives, and illuminating
the effects of any particular choice. A number of the cases in this book present practical ethical
dilemmas or moral hazards facing managers—indeed, this edition debuts a new chapter, “Ethics
in Finance” right at the beginning, where ethics belongs. Most of the cases (and teaching plans
in the associated instructor’s manual) call for action plans rather than mere analyses or
descriptions of a problem.

Contemporaneity: Over three-quarters of the cases in this book are set in the year 2000 or after.
37 percent of these cases and technical notes are new, or significantly updated. The mix of cases
reflects the global business environment: 50 percent of the cases in this book are set outside the
United States, or have strong cross-border elements. Finally the blend of cases continues to
reflect the growing role of women in managerial ranks: 43 percent of the cases present women as
key protagonists and decision-makers. Generally, these cases reflect the increasingly diverse
world of business participants.

PLAN OF THE BOOK

The cases may be taught in many different combinations. The sequence indicated by the table of
contents corresponds to course designs used at Darden. Each cluster of cases in the Table of
Contents suggests a concept module, with a particular orientation.

1. Setting Some Themes. These cases introduce basic concepts of value creation, assessment of
performance against a capital market benchmark, and capital market efficiency that reappear
throughout a case course. The numerical analysis required of the student is relatively light. The
synthesis of case facts into an important framework or perspective is the main challenge. The
case, “Warren E. Buffett, 2005,” sets the nearly universal theme of this volume: the need to think
like an investor. “Bill Miller and Value Trust,” explores a basic question about performance
measurement: what is the right benchmark against which to evaluate success? “Ben & Jerry’s
Homemade, Inc.” invites a consideration of “value” and the ways to measure it. The cases about
FedEx versus United Parcel Service and Coca-Cola versus Pepsico (in the third section) use
“economic profit” (or EVA®) to explore the origins of value creation and destruction, and its
competitive implications for the future.

2. Financial Analysis and Forecasting. In this section, students are introduced to the crucial
skills of financial-statement analysis, break-even analysis, ratio analysis, and financial statement
 7

forecasting. One case (“The Body Shop International Plc, 2001: An Introduction to Financial
Modeling”) takes the student step-by-step through the preparation of forecasts, both by hand and
with the aid of a computer-spreadsheet program. Other cases address issues in the analysis of
working-capital management, and credit analysis. A new case, “Krispy Kreme Doughnuts,
Inc.,” confronts issues regarding the quality of reported financial results.

3. Estimating the Cost of Capital. This module begins with a discussion of “best practices”
among leading firms. The cases exercise skills in estimating the cost of capital for firms and
their business segments. The cases aim to exercise and solidify students’ mastery of the capital
asset pricing model, the dividend-growth model, and the weighted average cost of capital
formula. “Nike, Inc.: Cost of Capital” presents an introductory exercise in the estimation of the
weighted average cost of capital. “Teletech Corporation, 2005,” explores the implications of
mean-variance analysis to business segments within a firm, and gives a useful foundation for
discussing value-additivity. A new case, “The Boeing 7E7,” presents a dramatic exercise in the
estimation of a discount rate for a major corporate project.

4. Capital Budgeting and Resource Allocation. The focus of these cases is the evaluation of
investment opportunities and entire capital budgets. The analytical challenges range from simple
time value of money problems to setting the entire capital budget for a resource-constrained firm.
Key issues in this module include the estimation of Free Cash Flows, the comparison of various
investment criteria (NPV, IRR, payback, and equivalent annuities), the treatment of issues in
mutually exclusive investments, and capital budgeting under rationing. “Genzyme/Geltex
Pharmaceuticals Joint Venture,” explores the economics of staged investing versus investing in a
lump sum. A new case, “Compass Records,” considers the dilemma of a small recording
company regarding the best terms for engaging an artist.

5. Management of Shareholders’ Equity. This module seeks to develop practical principles

about dividend policy and share issues by drawing on concepts about dividend irrelevance,
signaling, investor clienteles, bonding, and agency costs. “Gainesboro Machine Tools Corp.”
explores decisions about dividends and share repurchase through the lenses of a range of
theoretical concepts, including signaling, clientele effects, and residual policies. The new case,
“JetBlue Airways IPO Valuation,” considers numerous issues in initial public offerings,
including underpricing, choice of comparables, and underwriter risk. Another new case,
“Purinex, Inc.,” explores the decision of a young company to issue new equity to angel investors
and venture capitalists.

6. Management of the Corporate Capital Structure. The problem of setting capital structure
targets is introduced in this module. Prominent issues are the use and creation of debt tax
shields, the role of industry economics and technology, the influence of corporate competitive
strategy, the tradeoffs between debt policy, dividend policy, and investment goals, and the
avoidance of costs of distress. The new case, “The Wm. Wrigley, Jr. Company: Capital
Structure, Valuation, and Cost of Capital,” addresses the classic dilemma entailed in optimizing
the use of debt tax shields and providing financial flexibility—this theme is extended in another
new case, “Deluxe Corporation” that asks how much flexibility a firm needs. A third new case
in this section is “Deutsche Bank Securities: Financing the Acquisition of Consolidated Supply
 8

S.A.” that takes the view of a lender in a large leveraged acquisition to explore the relation
between firm value and debt capacity.

7. Analysis of Financing Tactics: Leases, Options, and Foreign Currency. While the
preceding module is concerned with setting debt targets, this module addresses a range of tactics
a firm might use to pursue those targets, hedge risk, and exploit market opportunities. Included
are domestic and international debt offerings, leases, currency hedges, weather derivatives,
warrants, and convertibles. With these cases, students will exercise techniques in securities
valuation, including the use of option-pricing theory. This module includes two new cases.
“Carrefour S.A.” gives a problem in currency risk management. “Primus Automation Division,
2002” explores the challenges of a lessor attempting to set the terms of a lease.

8. Valuing the Enterprise: Acquisitions and Buyouts. This module exercises students’ skills
in valuing the firm. The focus includes valuation using DCF and multiples, techniques of
valuing highly leveraged firms, reallocation of value in financial distress, and distribution of
joint value in merger negotiation. This module features two merger negotiation exercises and a
technical note on hostile takeovers. A new case, “General Electric’s Proposed Acquisition of
Honeywell,” invites students to take the perspective of a merger arbitrage firm in evaluating a
proposed deal. The cases in this module are excellent vehicles for end-of-course classes, student
term papers, and/or presentations by teams of students.

This edition offers a number of cases that give insights about investing or financing decisions in
emerging markets. These include “Deutsche Brauerei,” “Kota Fibres Ltd.,” “Rosario Acero
S.A.,” “Star River Electronics Ltd.,” and “Structuring Repsol’s Acquisition of YPF S.A..”

SUMMARY OF CHANGES FROM THE FOURTH EDITION

The fifth edition represents a substantial change from the fourth edition.

This edition offers 18 new and significantly updated cases in this edition, or 37 percent of
the total. All of the cases are set in 1996 or after, and the vast majority is set in 2000 or later.
Time marches on. In the interest of presenting a fresh and contemporary collection, older cases
have been updated and/or replaced with new case situations. Several of the most favorite
“classic” cases from the first four editions are available online from Irwin/McGraw-Hill, from
where instructors who adopt this edition may copy them for classroom use. All cases and
teaching notes have been edited to sharpen the opportunities for student analysis.

The book continues with a strong international aspect (23 of the cases, 50 percent, are set outside
the United States or feature significant cross-border issues). Also, the collection continues to
feature female decision-makers and protagonists prominently (20, or 43 percent, of the cases).

SUPPLEMENTS

The case studies in this volume are supported by various resources that help make student
engagement a success:
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• Spreadsheet files support student and instructor preparation of the cases. They are
located on the book’s website at www.mhhe.com/bruner5e.
• A guide to the novice on case preparation, “Note to the Student: How to Study and
Discuss Cases” in this volume.
• 5 cases in the instructor’s resource manual provide counterparty roles for two negotiation
exercises, or present detailed discussions of case outcomes (i.e., the “B” case to cases
appearing in this volume). These supplemental cases can significantly extend student
learning and expand the opportunities for classroom discussion.
• An instructor’s resource manual of about 1,000 pages in length containing teaching notes
for each case. Each teaching note includes suggested assignment questions, a
hypothetical teaching plan, and a prototypical finished case analysis.
• Website addresses in many of the teaching notes. These provide a convenient avenue for
updates on the performance of undisguised companies appearing in the book.
• Notes in the instructor’s manual on how to design a case method course, on using
computers with cases, and on preparing to teach a case.
• A companion book by Robert Bruner titled, Socrates’ Muse: Reflections on Excellence in
Case Discussion Leadership (Irwin/McGraw-Hill, 2002), is available to instructors who
adopt the book for classroom use. This book offers useful tips on case method teaching.
• Several “classic” cases and their associated teaching notes were among the most popular
and durable cases in the first three editions of Case Studies in Finance. Instructors
adopting this volume for classroom use may request permission to reproduce them for
their courses.

Robert F. Bruner
Dean,
Charles C. Abbott Professor of Business Administration and
Distinguished Professor of Business Administration
Darden Graduate School of Business
University of Virginia
brunerr@virginia.edu

* Students should know that I am unable to offer any comments that would assist their
preparation of these cases without the prior express request of their instructors with agreement
by me.

Individual copies of all the Darden cases in this and previous editions may be obtained promptly
from McGraw-Hill/Irwin’s Primis Online (www.mhhe.com/primis/) or from Darden Business
Publishing (telephone: 800-246-3367; mailto: sales@dardenpublishing.com). Proceeds from
these case sales support casewriting efforts. Please respect the copyrights on these materials.