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Case Problems
in Finance
Twelfth Edition

Edited by
W. Carl Kester
Mizuho Financial Group Professor
of Finance

Richard S. Ruback
Willard Prescott Smith Professor
of Corporate Finance

Peter Tufano
Sylvan C. Colernan Professor
of Financial Management

All of Harvard Business School

McGraw-Hill
Irwin
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Contents
PART ONE Credit Ratings and Access to Debt Markets
FINANCING CURRENT Hospital Corporation of America (A) 151
OPERATIONS 1 Equity Financing
Stone Container Corporation (A) 165
Equity-Linked Securities
Introductory Exercises 3 MCI Communications Corporation (1983) 179
Financial Ratio Analysis Cox Communications, Inc. (1999) 193
Assessing a Firm's Future Financial Health 3 Cross-Border Financing
Forecasting Pro Forma Financial Statements Compania de Telefonos de Chile 211
Tire City, Inc. 17 Cash Distribution
Dividend Policy at FPL Group, Inc. (A) 225
Recapitalization
Estimating Funds Requirements— Ford Motor Company's Value Enhancement
Short-Term Sources of Funds 21 Plan (A) 243
Funding Growth Event Risk
Butler Lumber Company 21 Marriott Corporation (A) 261
Note on Bank Loans 25
Funding Seasonal Needs Derivative Instruments and Risk
Toy World, Inc. 39 Management 277
Funding Cyclical Needs Basic Derivative Instruments
SureCut Shears, Inc. 45 Introduction to Derivative Instruments 277
Managing Working Capital Valuing Derivatives
Dell's Working Capital 53 Sally Jameson: Valuing Stock Options in a
Cash Budgeting Compensation Package (Abridged) 297
Hampton Machine Tool Company 59 Interest Rate Derivatives
Student Educational Loan Fund, Inc. (Abridged) 301
PART TWO Options and Security Design
CAPITAL STRUCTURE, LONG-TERM Arley Merchandise Corporation 311
FINANCING, AND RISK Pension Fund Risk Management
MANAGEMENT 65 The Pension Plan of Bethlehem Steel (2001) 319
Risk Identification and Selection of Risk-Management
Techniques
Debt Policy and Long-Term Financing 67
Tiffany & Company (1993) 337
Target Debt Policy United Grain Growers Limited (A) 347
E. I. Du Pont de Nemours and Company (1983) 67
Costs of Financial Distress PART THREE
Williams, 2002 79 VALUATION AND INVESTMENT 363
The Loewen Group, Inc. (Abridged) 93
Capital Structure Decisions
Valuing and Selecting Investment
American Home Products Corporation 107
Opportunities 365
Debt Policy at UST Inc. 113
Diageoplc 129 Discounted Cash Flow Analysis
Earnings Impact of Leverage Valuing Capital Investment Projects 365
Continental Carriers, Inc. 143 Introduction to Decision Trees
Pricing Debt Instruments Merck & Company: Evaluating a Drug Licensing
Fixed Income Valuation 147 Opportunity 371
ix
x Contents

Basic Value Creation Valuing Companies

Tree Values 377 Adecco SA 's Acquisition of Olsten Corporation 549
Identifying Incremental Cash Flows Cooper Industries, Inc. 565
The Super Project 381 Interco 573
Forecasting Expected Cash Flows Initial Public Offering
NetFlix.com, Inc. 395 Eskimo Pie Corporation (Abridged) 589
A-Rod: Signing the Best Player in Baseball 405 Netscape's Initial Public Offering 601
Capital Budgeting Hostile Takeovers
Ocean Carriers 419 Gulf Oil Corporation—Takeover 611
Whirlpool Europe 425 Philip Morris Companies and Kraft, Inc. 619
Multiples Highly Leveraged Transactions
Health Development Corporation 431 John M. Case Company 637
Congoleum Corporation (Abridged) 649
Cost of Capital and Valuation 435 RJR Nabisco 667
Real Options
Cost of Capital Laura Martin: Real Options and the Cable
Diversification, the Capital Asset Pricing Model, and the Industry 677
Cost of Equity Capital 435 Arundel Partners: The Sequel Project 693
Capital Asset Pricing Model and the Cost of Equity Capital Projects as Real Options: An Introduction 713
Capital
Cost of Capital at Ameritrade 447 PART FOUR
Risk and the Opportunity Cost of Capital REVIEW AND SYNTHESIS 725
Pioneer Petroleum Corporation 467
Leveraged Betas Integrated Financial Decisions and
Leveraged Betas and the Cost of Equity 473 Comprehensive Review 727
Weighted Average Cost of Capital
Marriott Corporation: The Cost of Capital Staged Equity Financing
(Abridged) 483 Pharmacy dies: Financing Research and
Lex Service PLC—Cost of Capital 493 Development 727
Valuation Alternatives Business Plan Evaluation
Sampa Video, Inc. 503 Valuing Project Achieve 739
Capital Cash Flows: A Simple Approach to Valuing Management Buyout
Risky Cash Flows 505 Seagate Technology Buyout 755
Merger and Acquisition
Friendly Cards, Inc. 771
Advanced Valuation 523 Pinkerton 's (A) 781
Valuing Projects and Businesses Vodafone AirTouch 's Bid for Mannesmann 787
Radio One, Inc. 523
American Chemical Corporation 537 Index of Cases 805