FINANCIAL TOOLS FOR BANKERS

SESSION ONE

Topic: INTRODUCTION, VALUE DRIVERS, PERFORMANCE MEASURES

Learning Objective:
Discuss the organization of the course and the associated extension
problem. The class discussion will largely concern the process of creating value
through the assumption and/or creation of reasonable levels of operating and
financial risk. We will look at some of the analytical techniques to be used in the
next class period in addition to addressing some of the issues concerning the pros
and cons of shareholder wealth maximization as a goal.

Readings: If you have not had an opportunity to look over the material on financial analysis
and firm objectives in the Financial Management Toolbox (FMT), this might be a
good time to do so.
 FINANCIAL TOOLS FOR BANKERS

SESSION TWO

Topic: FINANCIAL ANALYSIS AND INDUSTRY CHARACTERISTICS

Case: Distinguishing Characteristics

Questions:
1. The case is contained in your notebook. Match the financial information with
the industries shown on the first page of the case.

2. Why does each industry have its own unique pattern of asset use? Financing?
Profitability? What does this tell us about the roles and activities of financial
managers in these industries?

3. How is each of these firms creating shareholder value? Where and why do
they differ?

Learning Objective:
We will discuss financial analysis techniques as well as the role of
industry practices on financial characteristics and structures. The class
discussion will consider the measurement and evaluation of different strategies
designed to enhance shareholder value. We will also discuss the financial ratios
in the case and others that you might find useful. A brief review of some
forecasting techniques appropriate to the assignment for Session Three will
conclude the class period.

Readings: I would suggest that you review Sections One and Two in FMT if you did
not have the opportunity to do so for Session One.
 FINANCIAL TOOLS FOR BANKERS

SESSION THREE

Topic: FINANCIAL FORECASTING; MANAGEABLE GROWTH AND FINANCIAL

FLEXIBILITY.

Learning Objective:
We will discuss forecasting techniques as well as the measurement of growth a firm can
manage given decisions made relative to growth drivers. The link between growth and
ROE will be explored since these concepts have a direct impact on forecasted statements
developed by a firm as part of its planning process. We will also concern ourselves with
the link between planning tools and the organizational structure of the non-financial firm.
Finally, we will visit the A.M. Best article on banking to discuss the relationship between
this information and some current market issues.

Readings: Section 3 in FMT.

“Best’s Special Report on U.S. Banking”

“Why Budgeting Kills Your Company”

 FINANCIAL TOOLS FOR BANKERS

SESSION FOUR

Topic: MANAGING GROWTH AND MAINTAINING FINANCIAL FLEXIBILITY

Case: Jones Electrical Distribution

Questions:
1. How well is Jones Electrical Distribution performing? What must Jones do well to
succeed?
2. Why does a business that profit of $30,000 per year need a bank loan?
3. What drove the increase in Jones’s accounts receivable and inventory balances in
2005 and 2006?
4. Is Nelson Jones’s estimate that a $350,000 line of credit is sufficient for 2007
accurate?
5. When will Jones be able to repay the line of credit?
6. What could Jones do to reduce the size of the line of credit he needs?
7. What are the implications for Jones’s lifestyle of accepting the new, larger line of
credit?

Learning Objective:
A case problem relating to the mechanical techniques of forecasting as well as
the impact of growth on financing requirements. We will consider the impact of
operating decisions on financing requirements and the level of growth that the firm can
comfortably sustain.

Readings: You might review the material from Session Three in terms of making the
forecasts required for the Jones Electrical case. The material in the FMT section on
financial forecasting would be of value to your understanding of this material.
 FINANCIAL TOOLS FOR BANKERS

SESSION FIVE:

Topic: CONCEPTS AND TECHNIQUES IN CAPITAL BUDGETING

Learning Objective:
We will discuss the concept and application of measures associated with the time
value of money. This material may be familiar to many of you, but we will spend
some time with the basics to make sure everyone is on a level playing field as the
techniques are fundamental to the valuation of asset investment projects and to
the valuation of the overall firm.

Readings: The first part of “Asset Selection” in FMT would be useful. If you are
new to a finance calculator or to using EXCEL for time value calculations, you
might want to spend some time with the Calculator Tutorial link. If there is
sufficient need or interest, I would be delighted to schedule a separate review
(outside of class)
so we don’t use precious class time on those issues.

Note: Be sure to bring your finance calculator or computer to class with you.
 FINANCIAL TOOLS FOR BANKERS

SESSION SIX

Topic: CAPITAL BUDGETING

Case: Capital Budgeting Exercises

Questions: Contained in the exercise

Learning Objectives:
We will use this material to raise issues relevant to the
process of allocating scarce capital within the firm. Included topics will be
evaluation measures such as payback period, average rate of return, net present
value (NPV), internal rate of return (IRR) , profitability index (PI) and Economic
Value Added (EVA). We will examine the estimation of relevant cash flows
and introduce some ideas associated with adjusting a capital budgeting analysis
for risk.

Readings: “Capital Budgeting Exercises” contained in your course materials

The remainder of “Asset Selection” in FMT

 FINANCIAL TOOLS FOR BANKERS

SESSION SEVEN

Topic: CAPITAL BUDGETING

Case: Hansson Private Label, Inc.

Questions:
1. How would you describe Hanson Private Label, Inc. and its position within the
private label personal care industry?

2. Using assumptions made by Executive VP of Manufacturing, Robert Gates,

estimate the projects Free Cash Flows. Are Gates’ projections realistic? If not,
what changes might you incorporate?

3. Using CFO Sheila Dowling’s projected WACC schedule, what discount rate
would you choose? What flaws, if any, might be inherent in using the WACC as
the discount rate?

4. Estimate the project’s NPV, IRR, MIRR and EVA. Would you recommend that
Tucker Hansson proceed with the investment?

Learning Objective:
This case provides an opportunity to address the application of
capital budgeting techniques. Opportunities exist to consider the development of
cash flow information, the effect of taxes and depreciation on cash flows, the
treatment of additional required working capital, and the implementation of
valuation metrics discussed in previous sessions.
 FINANCIAL TOOLS FOR BANKERS

SESSION EIGHT

Topic: CAPITAL COSTS AND CAPITAL INVESTMENTS

Learning Objective:
We will examine issues associated with calculating and using a
firm’s estimated capital costs. The issue is pricing the “basket” of funds used to
provide for the acquisition of assets and the use of that price in making capital
allocation decisions.

Readings: Material on “Financing” in FMT.

“Market Risk Premium Used in 2010….”

 FINANCIAL TOOLS FOR BANKERS

SESSION NINE:

Topic: CAPITAL STRUCTURE ISSUES

Case: Blaine Kitchenware, Inc.

Questions:
1. Do you believe Blaine’s current capital structure and payout policies are appropriate?
Why or why not?

2. Should Dubinski recommend a large share repurchase to Blaine’s board? What are the
primary advantages and disadvantages of such a move?

3. Consider the following share repurchase proposal: Blaine will use $209 million of cash
from its balance sheet and $50 million in new debt which will bear interest at the rate of
6.75% in order to repurchase 14.0 million shares at a price of $18.50 per share. How
would such a buyback affect Blaine? Consider the impact on, among other things, BKI’s
earnings per share and ROE, its interest coverage and debt ratios, the family’s ownership
interest, and the company’s cost of capital.

4. As a member of Blaine’s controlling gamily, would you be in favor of this proposal?

Would you be in favor of it as a non-family shareholder?

5. How does the proposal sketched above differ from a special dividend of $4.39 per share?

Learning Objective:
Issues related to the financing mix employed by a firm. Illustrate weighted average cost
of capital (WACC) and interest tax shelter calculations. How can financing add value to
the firm? How do investment project risk/return measures relate to financing decisions?
How would you assess the Costs of Financial Distress for a firm such as Blaine?

Readings: FMT material under “Financing” tab

 FINANCIAL TOOLS FOR BANKERS

SESSION TEN

Topic: VALUATION, RESTRUCTURING AND DISTRIBUTING VALUE

Learning Objective:
This session will bring us full circle to our opening consideration of creating value in the
firm. We will look at integrating some of the concepts addressed throughout earlier
discussions in the valuation of both specific investments and the overall firm. We will
also address some of the difficult issues faced by the firm in creating and implementing a
policy regarding the distribution of gains to its owners.

We will also take a few minutes at the end of class to address any general questions you
might have regarding the extension problem. (Short of providing correct solutions!)

Readings: FMT section on “Rewards”