CASE QUESTIONS Cash Flows and Value. Cost of Capital Case 1: Hop-In Food Stores, Inc. 1.

Determine the correct price for this particular IPO. Use several methods to do this and compare them. 2. What extra information would you try to acquire in a real life situation? Case 2: Chem-Cal Corporation 1. How do you calculate the WACC for this firm? 2. What is the cost of capital of the debt, preferred stock, and common stock (assume the equity beta is 1.22)? 3. Calculate the WACC. How can a WACC be used? 4. Which projects should be selected? (State your assumptions) 5. How should the projects be financed? Analyze all other issues in the case. Case 3: Marriot Corporation 1. What is the Weighted Average Cost of Capital for Marriott Corporation? 2. What is the cost of capital for the lodging and restaurant divisions of Marriot? 3. If Marriot uses a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? Case 4: Tom.Com 1. Size up Tom.com Ltd. Assess Toms business model, revenue model, growth potential, risks, and major shareholders. 2. Consider the valuation of Internet stocks versus traditional firms. What are the similarities? What are the differences? 3. Apply the implied average annual revenue growth rate approach to Tom as suggested by Perkins, as well as any other valuation approaches. Clearly state and be prepared to defend any assumptions. What is Toms worth compared to the suggested IPO price? 4. What would you recommend to Andy Lau and EuroGlobal regarding the purchase of Tom shares?

Capital Structure Case 5: AT&T 1. Review AT&Ts past financial policies and financing choices. Were these appropriate for the nature of its business? In what fundamental ways will its business change in the near future? What are the implications for financial policy? 2. What is the range of AT&Ts financial needs for the next 5 years? 3. In view of AT&Ts changing strategic and economic environment, what debt policy would you recommend? What other financial policies are appropriate for the new AT&T? Case 6: Iridium LLC 1. Assuming the market was rational at the time (i.e. market prices reflect fundamental values), how much was Iridium worth at the end of 1998 according to the projections in Exhibit 5? What are the important determinants of value? How confident are you in your answer? 2. What caused Iridium to fail: was it a bad strategy, bad execution, or bad luck? 3. With regard to Iridiums financial strategy, did it have the wrong target capital structure, issue the wrong kinds of capital, or issue capital in the wrong sequence? Which capital structure theory justifies its target debt-to-total book capitalization rate of 60%? 4. Why did Motorola finance Iridium with project debt instead of corporate debt? Case 7: Avon Products 1. Compare the performance of Avon stock from 1978 to 1988 with the performance of overall market. Explain why this has happened that is, evaluate Avons operating and financial strategies from 1979 to 1988. 2. Evaluate Avons financial condition in mid-1988. Why was Avon reducing its dividend? 3. What was the purpose of the exchange offer? 4. As an institutional investor holding Avon stock, how would you evaluate the trade-off between accepting the new preferred and keeping the common stock?

Applications Case 8: Netscapes Initial Public Offering 1. Does Netscape need to go public to satisfy its capital needs? What would you estimate might be the magnitude of its capital needs over the next 3 to 5 years? What sources other than the public equity market could be tapped to satisfy those needs? 2. Can the recommended offering price of $28 per share for Netscape's stock be justified? In valuing Netscape, you might find it helpful to use the following assumptions: Total cost of revenues remains at 10.4% of total revenues; R&D remains at 36.8% of total revenues; Other operating expenses decline on a straight-line basis from 80.9% of revenues on 1995 to 20.9% of revenues in 2001 (this would give Netscape a ratio of operating income to revenues close to Microsoft's. which is about 34%); Capital expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001 (again, close to Microsoft's experience); Depreciation is held constant at 5.5% of revenues; Changes in net working capital of essentially zero; Long-term steady-state growth of 4% annually after 2005; and A long-term riskless interest rate of 6.71%. Given these assumptions, and starting from its current sales base of $16.625 million, how fast must Netscape grow on an annual basis over the next ten years to justify a $28 share value? 3. As an executive of Netscape, what would you recommend with respect to the proposed offering price? As an investor in Netscape, what would you recommend? As the manager of an institutional fund who was willing to buy and hold Netscape's stock at the originally proposed price of $14 per share, would you be willing to buy and hold at an initial offering price of $28 per share? Case 9: Tiffany & Co. 1. Review Tiffanys operations since the LBO. How attractive does the company look compared to other retailing operations? 2. As the lead manager of the underwriting syndicate, how far would you be willing to go in accommodating Tiffanys pricing preferences? 3. As Tiffanys top management, what is the highest gross spread you would be willing to settle for? 4. As the lead investment banks syndicate manager, what short position, if any, would you build into your offering strategy?

Case 10: Empirical Chemicals Ltd (B): Merseyside and Rotterdam Projects 1. Why are the Merseyside and Rotterdam projects mutually exclusive? 2. How do the two projects compare on the basis of Empirical Chemicals, investment criteria? What might account for the differences in rankings? 3. Is it possible to quantify the value of managerial flexibility associated with the Merseyside project? How, if at all, does this flexibility affect the economic attractiveness of the project? 4. What are the differences in the ways Johan Silver and Frances Trelawney have advocated their respective projects? How might these differences in style affect the outcome of the decision? 5. Which project should Trevor Livesey propose to the chief executive officer and board of directors? Case 11: Huaneng Power Int 1. You have been hired by a large U.S. institutional investor considering purchasing HPI stock. Provide an analysis of PRC, the power industry, key success factors, and HPIs strengths and weaknesses. 2. What benefits are there to a non-U.S. firms listing on a U.S. exchange? Are there other alternatives that HPI should have considered? 3. Was the chosen issue price for HPI a reasonable value? Present your recommendation on whether, where, how, and why HPI should have proceeded with the issue. 4. As an institutional investor, would you have bought stock in this company? Note: HPI will issue 1,250,000,000 new B shares to bring the total number of shares outstanding to 5 billion. Each ADR represents 40 B class shares. To get cash flows, you need to estimate the firm's capital expenditures. This can be done using the data in Exhibit 10 noting that capital expenditures in year t equals net assets in year t+1 ( net assets in year t + depreciation in year t. Regarding the data in Exhibit 14, keep in mind that the projected EPS of $1.45 is for an ADR, not an ordinary share. Mergers, Acquisitions and Restructuring Case 12: The Acquisition of Consolidated Rail Corporation (A) and (B) 1. Why does CSX want to buy Conrail? How much should CSX be willing to pay for it? 2. Analyze the structure of CSXs offer for Conrail. a. Why did CSX make a two-tiered offer? What effect does this structure have on the transaction. b. What are the economic rationales for and the takeover implications of the various provisions in the merger agreement (i.e. no-talk clause, lock-up options, break-up fee, an poison pill shareholder rights plan)?

3. As a Conrail shareholder, would you tender your shares to CSX at $92.50 in the firststage offer? 4. Why did Norfolk Southern make a hostile bid for Conrail? 5. How much is Conrail worth? In a bidding war, who should be willing to pay more, Norfolk Southern or CSX? 6. Why does CSX refer to Norfolk Southerns bid as a non-bid? What should Norfolk Southern do as of mid-January 1997? 7. As a shareholder, would you vote to opt-out of the Pennsylvania antitakeover statute? What do the capital markets expect will happen? Case 13: VacationSpot.com & Rent-A-Holiday: Negotiating a Trans-Atlantic Merger of Start-Ups in the New Economy 1. What is the nature of this opportunity for the two companies? 2. What is the context of for internet entrepreneurs in the US and Europe in early 1999? 3. What is the value of VacationSpot.com in 6/99? 4. Should the two companies merge? If yes, under what terms? 5. If you were Steve Murch would you keep Peter Ingelbrecht and Laurent Coppieters on board? If yes, what kind of incentives would you offer them? 6. If you were an investor in Rent-A-Holiday, what would be your concerns about the merger? Case 14: Congoleum Corporation 1. Is Congoleum a good target for an LBO? 2. Explain the sources and uses of financing in the proposed structured 3. Is the $38 per share a fair price of Congoleum? Value the company using two approaches: a. Incremental approach where does the extra value come from? b. Full DCF valuation. Give also your opinion on Lazards valuation. 4. Calculate the expected return for management in this LBO.