UNIVERSITY OF WASHINGTON

Problems in Corporate Planning an Finan!ing

Finan!e ""#
Fall #$$"
Pro%essor &enni%er '( )os*i
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Co8rse materials a=ailable on >la!*boar
?ESCRIPTION;
This class deals with two important problems facing financial managers: managing the cash
flowing through the business and financing company operations. We will use the case study
approach to learn to address these problems. In addressing the first problem, the course will
cover financial statement analysis, forecasting and financial planning, cash budgeting,
managing growth, and working capital strategies. Our study of financing company operations
will consider the principle sources of capital available to corporations and the ways in which
companies can best utilize these sources to further operating goals and to create shareholder
value.
The course is organized into three sections:
. !hort"term financial analysis and planning
#. Optimal capital structure and long"term financing
$. !pecial topics in long"term financing
The first part of the course e%amines financial management of short"term operations and the
cash flowing through the business. The section and third sections e%amine issues related to
the long"term financing of company operations. !ection # presents an overview of various
financing choices and analyzes the basic capital structure decision. In !ection $, we look at
specialized financing situations such as new venture funding, pro&ect financing, leasing, and
financial distress and restructuring.
When you complete this course, you should be able to
'nalyze a company(s financial statements and draw inferences about the firm(s
strengths and weaknesses.
)se a computer spreadsheet to create pro forma financial forecasts.
)nderstand the financial dimensions of working capital, including cash, trade credit,
and investory management.
*reate financing policies that best support company operating strategies.
Identify and analyze the many aspects of corporate financing policy, including
o the appropriate balance between debt and e+uity,
o the proper mi% of internal and e%ternal sources of capital,
o the appropriate maturity profile and structure for liabilities, and
o the most advantageous markets in which to raise capital.
)nderstand the mechanics and appropriate uses of specialized financing vehicles such
as convertible securities, leases and private e+uity financing.
'ppreciate the effect of company decisions to pay dividends or repurchase shares on
firm value and know now to establish a practical payout policy.
The case method is the ideal way to study the topics addressed in this course to supplement
the theoretical approach to this material traditionally taken in the ,-' core. We will e%amine
a se+uence of practical problems to better understand the nature of those problems, and more
importantly, to master the logic by which alternative policies can be evaluated.
PREPARATION;
,uch of our class time will be devoted to discussion of assigned cases. To get the most out
of class you must prepare conscientiously and participate actively in study group and class
discussions. .ailure to participate robs others of your perspective and increases the chances
that the discussion will not be relevant to your interests and abilities. !o please participate
actively.
!o what is conscientious case preparation/ 0ead the case thoroughly1 identify principle issues
to be addressed in the case1 attempt to analyze these issues using your common sense and any
appropriate tools or techni+ues1 and note any action recommendations implied by your
analysis. 'lternatively, if you find yourself hitting a roadblock, try to articulate what your
problem is. Oftentimes, identifying roadblocks is as valuable as a complete analysis. 2ou
should e%pect to spend a total of about si% hours a week on this class. This suggests that you
should spend about three hours preparing each case.
.or each case assigned you will note below that I have posed one or more preparation
+uestions. The +uestions play several roles depending on the case. )sually the +uestions are
simply to help you get started on your analysis, and you should not feel constrained by them.
3or should you assume that answering all of the preparation +uestions necessarily constitutes
a complete analysis. In other instances, I may give you additional information in the
+uestions, or when the case is a mechanical one, I may ask you to perform specific
calculations. ,y general advice is always to read the preparation +uestions, but do not feel
overly constrained by them.
4o not be surprised if after conscientious preparation you still feel there are some loose ends
in the case you are not certain about. 2our test of whether you are learning the material and
progressing ade+uately should be how you feel after the class discussion, not before. 2ou are
#
doing fine if after a class discussion you believe you could ade+uately handle a similar
situation in the future.
I will alternate between asking for volunteers and calling on individuals. I% <o8 are not
prepare. please noti%< me be%ore !lass. an 9e !an bot: a=oi t:e embarrassment( If
you have spent appropriate time on the case but still feel unsure of your opinions, consider
yourself prepared.
COURSE RESPONSI>I'ITIES;
2our grade in this course will be based on the following components:
5articipation $67
8roup *ase Writeups 9$: $67
.inal *ase 'nalysis ;67
5articipation. 2our participation grade will be based on your presence in class, my assessment
of the e%tent to which you helped make the class a productive learning e%perience, and my
assessment of the depth of your command of the material.
8roup *ase Writeups. 4uring the +uarter, you will be responsible for completing three group
case writeups. 2ou may choose the cases from the syllabus that you would like to use for this
assignment1 your writeup will be due at the beginning of class on the day we discuss the case.
.or the first writeup, you may choose any case in the course syllabus assigned for the first
section of the material, short"term financial analysis and planning 9class sessions # through <:.
The second writeup should be one of the cases we will discuss during the second section of
the material, optimal capital structure 9sessions = through #:, and the third writeup should be
for one of the cases in the third section, special topics in long"term financing 9sessions $
through >:.
2our writeup should be a ma%imum of four double"spaced, typewritten pages, plus any
e%hibits. 2our analysis should address the preparation +uestions included in the syllabus in
addition to any useful analysis you deem appropriate. 4o not summarize the case situation in
any great detail. The reader should be assumed to be familiar with the general situation 9as
would be typical if an analysis like this were prepared for management:. ?owever you may
wish to highlight aspects of the situation that might not be obvious to the reader or that you
believe are especially important to your analysis.
@ach group should consist of from $"A students, and you should retain the same group for
each case writeup. If you would like to form your own group, please give me a list of names
of students in your group by Tuesday, Oct. ;. If you would like me to arrange a group for
you, please let me know in class on Oct. ;.
.inal *ase 'nalysis. The final will be a written case analysis with specific +uestions. 2ou will
receive this case along with further details about the assignment at the end of class on
Tuesday, 4ec. B, and your writeup will be due ,onday, 4ec. # at noon.
$
+ATERIA'S;
The following materials are re+uired for this course:
5acket of *ases and 0eadings 9available for purchase at -almer *opy *enter:
Robert C( Higgins. Analysis for Financial Management 9!eventh @dition:,
IrwinC,c8raw"?ill, #66;.
In addition, there are some resources that may serve as useful background reading. These
books are on reserve at the .oster -usiness Dibrary.
Ri!:ar A( >reale< an Ste9art C( +<ers, Principles of Corporate Finance
9!eventh @dition:, ,c8raw ?ill, #66$. 9If you have access to the eighth edition of
this te%t, co"authored by -realey, ,yers and 'llen, you may use it as well.:
+ar* Grinblatt an S:erian Titman. Financial Markets and Corporate Strategy
9!econd @dition:, IrwinC,c8raw"?ill, #66#.
;
Co8rse S!:e8le
SHORT3TER+ FINANCIA' ANA'YSIS AN? P'ANNING
Class @ /T:8rsa<. Sept( #51; 4eterminants of .inancial !tructure
Prepare /in !lass1; 4rivers of Industry .inancial !tructure
a.: Working in class, in teams, see how well you can match company financial data to
differing industries.
Class # /T8esa<. O!t( 21; 'ssessing the .inancial ?ealth of the .irm
Rea; ?iggins, *hapters and #.
Prepare; !ears 0obuck and *o. vs. Wal",art !tores, Inc.
a.: ?ow do the retailing strategies of !ears and Wal",art differ/
b.: What was Wal",art(s return on e+uity in >></ What was !ear(s return on e+uity
that year/ 4on @dwards was puzzled by these numbers because of Wal",art(s
reputation as a premier retailer and !ear(s financial difficulties not long ago. What is
driving the performance of these two companies during fiscal >></
c.: What ratios are most important in evaluating the current performance of each of the
two companies/ What are the determinants of 0O@/
d.: ?ow useful are financial ratios in evaluating the performance of each of the
two companies/
Class - /T:8rsa<. O!t( 01; .inancial .orecasting and *ash -udgeting
Rea; ?iggins, *hapter $
Prepare; *artwright Dumber *ompany
a.: Why has *artwright Dumber borrowed increasing amounts despite its consistent
profitability/
b.: ?ow has ,r. *artwright met the financing needs of the company during the last few
years/ ?as the financial strength of *artwright improved or deteriorated/
c.: ?ow much money will *artwright need/ .or how long, a few months or longer/
d.: 's a banker, would you approve ,r. *artwright(s loan re+uest, and if so, what
conditions would you put on the loan/

Class 2 /T8esa<. O!t( @@1; ,anaging Working *apital
Rea; ?iggins, *hapter ;
Prepare; 4ell(s Working *apital
A
a.: To what e%tent was 4ell(s working capital policy a competitive advantage/ ?ow/
b.: ?ow did 4ell fund its A#7 growth in >>B/
c.: 'ssuming 4ell sales will grow A67 in >><, how might the company fund this growth
internally/ ?ow much would working capital need to be reduced andCor profit margin
increased/ What steps should the company take/
d.: ?ow would your answers to part c change if 4ell also repurchased EA66 million of
common stock in >>< and repaid its long"term debt/
Class " /T:8rsa< O!t( @-1; 3o *lass 9conference:
Class 0 /T8esa<. O!t( @A1; .inancing !easonal Operations
Prepare; Toy World, Inc.
a.: What factors could ,r. ,c*lintock consider in deciding whether or not to adopt the
level production plan/
b.: What types of savings would be involved/
c.: What effect will shifting to level production have on the company(s need for a bank
loan/ ?ow would you go about estimating the change in funds re+uired and the
timing of the needs under level production/
d.: 5repare a financial forecast to estimate the company(s funding needs with level
production. .or simplicity assume that interest income and e%pense do not change
with the switch to level production.
e.: 4o you think it is feasible for Toy World to switch to level production/ ?ow does the
change in funding re+uirements affect the risk assumed by the various parties/
f.: What do you think ,r. ,c*lintock should do/
Class 4 /T:8rsa<. O!t( #$1; *ash .lows in a 8rowth .irm
Prepare; !erverFault: G0eliable, !ecure, and Wicked .astH
a.: 5repare a forecast of !erverFault(s !tatement of *ash .lows for the $6 months
starting Iuly #666 and ending 4ecember #66#.
b.: )sing your forecasting model, determine the re+uired cash investment in Iuly #666.
?ow long will a cash investment of as little as EA million or as much as EA million
permit the firm to have a positive cash balance/
c.: !hould !erverFault build a new facility/ 'nalyze the tradeoffs of this decision.
d.: If !erverFault decides to build a new facility, what are the key drivers of its success/
OPTI+A' CAPITA' STRUCTURE AN? 'ONG3TER+ FINANCING
Class A /T8esa<. O!t( #"1; Dong"Term .inancing 'lternatives
B
Rea; ?iggins, *hapter A
Prepare; 8eorgia 8ypsum 5roducts *orporation
a.: What are the advantages and disadvantages of the three methods 885 might use to
raise the needed e%ternal capital/
b.: 'ppraise the arguments of the various directors. 's ,r. !anford, how would
you respond to the arguments raised by the directors/
c.: Which of the financing methods best serves the interests of stockholders and
management/
Class 5 /T:8rsa<. O!t( #41; Target *apital !tructure" *hanging 4ebt 5olicy
Rea; ?iggins, *hapter B
Prepare; 4ebt 5olicy at )!T Inc.
a.: What are the primary business risks associated with )!T Inc./ What are the primary
attributes of )!T Inc./ @valuate from the viewpoint of a bondholder.
b.: Why is )!T Inc. considering such a dramatic change to their target capital structure
after such a long history of conservative debt policy/
c.: *alculate the marginal effect of the interest ta% shield from the E billion in debt on
)!T(s value, assuming that:
i.: the entire change in capital structure is implemented immediately 9Ian. , >>>:
ii.: the ta% rate is $=7
iii.: the E billion in new debt is constant and perpetual.
d.:What will be the likely bond rating on the new debt/ Why/
e.: )!T Inc. has paid uninterrupted dividends since >#. Will the change in capital
structure hamper future dividend payments/
f.: !hould )!T implement the change in debt policy/
Class @$ /T8esa<. No=( @1; Target *apital !tructure " Tradeoff Theory

Rea; ?iggins, pp. $6="$6
Prepare; ,*I *ommunications *orp.: *apital !tructure Theory

a.: What message is ,*I trying to send to financial markets/
b.: What will be the effects of issuing E# billion of new debt and using the proceeds to
repurchase shares on ,*I(s shares outstanding, book value of e+uity, stock price and
earnings per share/ -ase this analysis on the most recent fiscal year(s financials rather
than pro&ections.
c.: What is ,*I(s current 9prerepurchase: W'**/
d.: What would you e%pect to happen to ,*I(s W'** if it issues E# billion in debt and
repurchases stock/
e.: !hould ,*I increase debt/
Class @@ /T:8rsa<. No=( -1; Target *apital !tructure" Tradeoff Theory
<
Prepare; 4iageo plc
a.: ?ow has 4iageo historically managed its capital structure/
b.: ?ow would you apply the tradeoff theory of capital structure to 4iageo(s business
prior to the sale of 5illsbury and the spinoff of -urger Jing/
c.: Why is 4iageo selling 5illsbury and spinning off -urger Jing/ ?ow might value be
created through these transactions/
d.: -ased on the results of the model, what recommendation would you make for
4iageo(s future capital structure/ 4oes the model capture all of the important risk
factors faced by 4iageo/ ?ow might you ad&ust the recommendation from the model
to ad&ust for any missing risk factors/
Class @# /T8esa<. No=( A1; Dong"term .inancing and 4erivatives
Rea; ?iggins, 'ppendi% to *hapter A
Prepare; *orning Inc.: Kero"*oupon *onvertible 4ebentures 4ue 3ov. =, #6A 9':
a.: Why do you think *orning is issuing both convertible bonds and common stock at the
same time/ What are the advantages of convertible debt relative to straight debt and
to common stock/
b.: What insights can you derive from the comparative ratios in @%hibit A/
c.: 5lease value the convertible bond.
d.: In valuing the call option, does *oopers need to ad&ust the stock price for dividends/
Why/
e.: What should *oopers use as her assumption for volatility/ Is the call option value
highly sensitive to volatility/ Why is volatility so important/
f.: What does it mean to force conversion/ )nder what circumstances would *orning
attempt to force conversion/
g.: !hould Iulianna *oopers invest in this bond offering/
SPECIA' TOPICS IN 'ONG3TER+ FINANCING
Class @- /T:8rsa<. No=( @$1; 3ew Fenture .inancing
Prepare; *onor ,edsystems
a.: What business decisions is *onor ,edsystems facing/ ?ow will these issues affect
its funding needs/
b.: ?ow has *onor financed its growth so far/
c.: What are the current funding needs/ .or what purposes will the capital be used/
d.: What are the alternative sources of capital for the new funding round/ What are the
advantages and disadvantages of each/
e.: ?ow should Ditvack structure this round of funding/

=
Class @2 /T8esa<. No=( @"1; 3ew Fenture .inancing

Prepare; W.0. ?ambrecht L *o: OpenI5O
Rea; GWhy I5Os !till )se the Old Way,H by 0andall !mith, The Wall Street Journal,
Iuly B, #66A, pp. *, *;.
G8oogle I5O 'ims to *hange the 0ules,H by Jevin 4elaney and 0obin !idel, The
Wall Street Journal, 'pril $6, #66;, pp. ', '6.
a.: What are some of the ma&or problems and concerns associated with the traditional
underwriting process/
b.: ?ow does the ?ambrecht OpenI5O process propose to address these problems/ ?ow
successful do you think this mechanism will be at addressing these problems, and why/
c.: What process did 8oogle use for its I5O/ To what e%tent was this process similar to
?ambrecht(s OpenI5O/ ?ow did it differ/
Class @" /T:8rsa<. No=( @41; 5ro&ect .inancing
Prepare; 5etrolera Kuata, 5etrozuata *.'.
a.: ?ow should 54F!' finance the development of the Orinoco -asin/ What are the
costs and benefits of using pro&ect finance instead of traditional internal debt finance/
b.: What are the most important risks and how are they mitigated/
c.: Will the bonds get an investment grade rating/ Why or why not/
d.: Which source of debt should the pro&ect target/
e.: Would you invest in 5etrozuata as *onoco/
Class @0 /T8esa<. No=( ##1; Deasing
Prepare; .inancing 55D *orporation(s 8rowth !trategy
a.: Will 55D be able to finance its growth internally/
b.: Why is !teve ,ay considering leases as a means of financing/ Why not issue straight
debt, common stock, or convertibles/
c.: On p. B there are a number of arguments in favor of leasing. 4o you agree with them/
Why or why not/
d.: What is the difference between a Gsynthetic leaseH and regular ones/ What are the
relative advantages and disadvantages/
e.: If you were !teve ,ay, what would you recommend to Iim 'bel/
Class @4 /T8esa<. No=( #51; 0estructuring

Prepare; !ealed 'ir *orporation(s Deveraged 0ecapitalization 9': 9M:
>
a.: Why did !ealed 'ir undertake a leveraged recapitalization/
b.: What other changes are happening at !ealed 'ir during this period/ ?ow are these
changes related/
c.: What are the alternative uses of e%cess cash/ Why did !ealed 'ir choose an
e%traordinary dividend rather than a share repurchase of comparable size/
d.: Why did !ealed 'ir(s investor base turnover completely after the recap/ Is this
something managers should be concerned about/
e.: 4o you think this transaction was a good idea for !ealed 'ir/ Would such an increase
in leverage be good for all companies/ Why or why not/
9M: If you choose to use this case for your group writeup, take the perspective of a research
analyst at the end of >=>. In addition to the above +uestions, would you recommend that
investors buy the stock/
Class @A /T:8rsa<. ?e!( @1; .inancial 4istress
Prepare; Williams, #66#
a.: @valuate the terms of the proposed E>66 million financing. What is the purpose of
each of the terms of the proposed financing/ What ma&or problems are the terms
attempting to solve/
b.: ?ow would you estimate the return to investors in this transaction/ ?ow does the
overall return to -erkshire ?athaway and Dehman look relative to the risks they must
assume/
c.: ?ow much money does Williams need/ To address this +uestion, estimate their cash
flows for the second half of #66#.
d.: ?ow did Williams get into this situation/ Is their distress primarily the result of
operating or financial decisions/
e.: What are Williams( options/ 're there any alternatives to the proposed deal/ What are
the ma&or advantages and disadvantages of these various choices/
f.: 4o you recommend accepting the proposed E>66 million financing offer/ If so, why/
If not, what alternative do you recommend, and why/
Class @5 /T8esa<. ?e!( 01; 5ayout 5olicy
Prepare; 4ividend 5olicy at Dinear Technology
Rea; GIt(s Time for the -ig 5ayout,H by -rier 4udley, The Seattle Times, 3ov. <, #66;,
pp. @, @=.

a.: 4escribe Dinear Technology(s payout policy.
b.: What are Dinear(s financing needs/ !hould Dinear return cash to its shareholders/
What are the ta% conse+uences of keeping cash inside the firm/
c.: If Dinear were to pay out its entire cash balance as a special dividend, what would be
the effect on value/ On the share price/ On earnings/ On earnings per share/ What
if Dinear repurchased shares instead/ 'ssume a $7 rate of interest.
d.: Why do firms pay dividends/ Why has the rate of dividend initiations changed over
6
time/
e.: What should 5aul *oghlan recommend to the board/

Class #$ / T:8rsa<. ?e!( A1; !ummary and *ourse Overview