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Cover Page i Case Studies in Finance Managing for Corporate Value Creation Eighth Edition Robert F. Bruner Kenneth M. Eades Michael J. Schill Page ii CASE STUDIES IN FINANCE: MANAGING FOR CORPORATE VALUE CREATIONS, EIGHTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2002, and 1989. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LCR 21 20 19 18 17 ISBN 978-1-259-27719-1 MHID 1-259-27719-4 Portfolio Manager: Tim Vertovec Senior Product Developer: Jennifer Upton Marketing Manager: Trina Maurer Content Project Managers: Melissa M. Leick, Karen Jozefowicz Buyer: Susan K. Culbertson Content Licensing Specialist: Beth Thole Compositor: Aptara , Inc. All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: Bruner, Robert F., 1949-author. | Eades, Kenneth M., author. | Schill, Michael J., author. Title: Case studies in finance: managing for corporate value creation / Robert F. Bruner, Kenneth M. Eades, Michael J. Schill. Description: Eighth Edition. | Dubuque, IA : McGraw-Hill Education, [2018] | Series: The McGraw-Hill/Irwin series in finance, insurance, and real estate | Revised edition of the authors’ Case studies in finance, [2014] Identifiers: LCCN 2017023496| ISBN 9781259277191 (alk. paper) | ISBN 1259277194 (alk. paper) Subjects: LCSH: Corporations—Finance—Case studies. | International business enterprises— Finance—Case studies. Classification: LCC HG4015.5 .B78 2017 | DDC 658.15—dc23 LC record available at https://lccn.loc.gov/2017023496 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered ® https://lccn.loc.gov/2017023496 http://mheducation.com/highered Page iii The McGraw-Hill Education Series in Finance, Insurance, and Real Estate FINANCIAL MANAGEMENT Block, Hirt, and Danielsen Foundations of Financial Management Sixteenth Edition Brealey, Myers, and Allen Principles of Corporate Finance Twelfth Edition Brealey, Myers, and Allen Principles of Corporate Finance, Concise Second Edition Brealey, Myers, and Marcus Fundamentals of Corporate Finance Ninth Edition Brooks FinGame Online 5.0 Bruner, Eades, and Schill Case Studies in Finance: Managing for Corporate Value Creation Eighth Edition Cornett, Adair, and Nofsinger Finance: Applications and Theory Fourth Edition Cornett, Adair, and Nofsinger M: Finance Fourth Edition DeMello Cases in Finance Third Edition Grinblatt (editor) Stephen A. Ross, Mentor: Influence through Generations Grinblatt and Titman Financial Markets and Corporate Strategy Second Edition Higgins Analysis for Financial Management Twelfth Edition Ross, Westerfield, Jaffe, and Jordan Page iv Corporate Finance Eleventh Edition Ross, Westerfield, Jaffe, and Jordan Corporate Finance: Core Principles and Applications Fifth Edition Ross, Westerfield, and Jordan Essentials of Corporate Finance Ninth Edition Ross, Westerfield, and Jordan Fundamentals of Corporate Finance Twelfth Edition Shefrin Behavioral Corporate Finance: Decisions that Create Value Second Edition INVESTMENTS Bodie, Kane, and Marcus Essentials of Investments Tenth Edition Bodie, Kane, and Marcus Investments Eleventh Edition Hirt and Block Fundamentals of Investment Management Tenth Edition Jordan, Miller, and Dolvin Fundamentals of Investments: Valuation and Management Eighth Edition Stewart, Piros, and Heisler Running Money: Professional Portfolio Management First Edition Sundaram and Das Derivatives: Principles and Practice Second Edition Financial Institutions and Markets Rose and Hudgins Bank Management and Financial Services Ninth Edition Rose and Marquis Financial Institutions and Markets Eleventh Edition Saunders and Cornett Financial Institutions Management: A Risk Management Approach Ninth Edition Saunders and Cornett Financial Markets and Institutions Seventh Edition INTERNATIONAL FINANCE Eun and Resnick International Financial Management Eighth Edition REAL ESTATE Brueggeman and Fisher Real Estate Finance and Investments Sixteenth Edition Ling and Archer Real Estate Principles: A Value Approach Fifth Edition Financial Planning and Insurance Allen, Melone, Rosenbloom, and Mahoney Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches Tenth Edition Altfest Personal Financial Planning Second Edition Harrington and Niehaus Risk Management and Insurance Second Edition Kapoor, Dlabay, Hughes, and Hart Focus on Personal Finance: An active approach to help you achieve financial literacy Sixth Edition Kapoor, Dlabay, Hughes, and Hart Personal Finance Twelfth Edition Walker and Walker Personal Finance: Building Your Future Second Edition Page v Dedication In dedication to our wives Barbara M. Bruner Kathy N. Eades And to the memory of Mary Ann H. Schill and to our children Page vii Page vi About the Authors Robert F. Bruner is University Professor, Distinguished Professor of Business Administration and Charles C. Abbott Professor of Business Administration and Dean Emeritus of the Darden Graduate School of Business Administration at the University of Virginia. He has taught and written in various areas, including corporate finance, mergers and acquisitions, investing in emerging markets, innovation, and technology transfer. In addition to Case Studies in Finance, his books include Finance Interactive, multimedia tutorial software in Finance (Irwin/McGraw-Hill 1997), The Portable MBA (Wiley 2003), Applied Mergers and Acquisitions, (Wiley, 2004), Deals from Hell: M&A Lessons that Rise Above the Ashes (Wiley, 2005) and The Panic of 1907 (Wiley, 2007). He has been recognized in the United States and Europe for his teaching and case writing. BusinessWeek magazine cited him as one of the “masters of the MBA classroom.” He is the author or co-author of over 400 case studies and notes. His research has been published in journals such as Financial Management, Journal of Accounting and Economics, Journal of Applied Corporate Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and Journal of Money, Credit, and Banking. Industrial corporations, financial institutions, and government agencies have retained him for counsel and training. He has been on the faculty of the Darden School since 1982, and has been a visiting professor at Harvard, Columbia, INSEAD, and IESE. Formerly he was a loan officer and investment analyst for First Chicago Corporation. He holds the B.A. degree from Yale University and the M.B.A. and D.B.A. degrees from Harvard University. Copies of his papers and essays may be obtained from his website, http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Robert-F-Bruner/ He may be reached via email at
[email protected]. Kenneth M. Eades is Professor of Business Administration and Area Coordinator of the Finance Department of the Darden Graduate School of Business Administration at the University of Virginia. He has taught a variety of corporate finance topics including: capital structure, dividend policy, risk management, capital investments and firm valuation. His research interests are in the area of corporate finance where he has published articles in The Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and Financial Management. In addition to Case Studies in Finance, his books include The Portable MBA (Wiley 2010) Finance Interactive, a multimedia tutorial software in Finance (Irwin/McGraw-Hill 1997) and Case Studies in Financial Decision Making (Dryden Press, 1994). He has authored or co-authored over 70 case studies as well as a web-based, interactive tutorial on the pricing of financial derivatives. He has received the Wachovia Award for Excellence in Teaching Materials and the Wachovia Award for Excellence in Research. Mr. Eades is active in executive education programs at the Darden School and has served as a consultant to a number of corporations and institutions; including many commercial banks and investment banks; Fortune 500 companies and the Internal Revenue Service. Prior to joining Darden in 1988, Professor Eades was a member of the faculties at The University of Michigan and the Kellogg School of Management at Northwestern University. He has a B.S. from the University of Kentucky and Ph.D. from Purdue University. His website is http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Robert-F-Bruner/ mailto:
[email protected] http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Kenneth-M-Eades/ and he may be reached via email at
[email protected]. Michael J. Schill is Professor of Business Administration of the Darden Graduate School of Business Administration at the University of Virginia where he teaches corporate finance and investments. His research spans empirical questions in corporate finance, investments, and international finance. He is the author of numerous articles that have been published in leading finance journals such as Journal of Business, Journal of Finance, Journal of Financial Economics, and Review of Financial Studies, and cited by major media outlets such as The Wall Street Journal. He has been on the faculty of the Darden School since 2001 and was previously with the University of California, Riverside, as well as a visiting professor at Cambridge and Melbourne. He is the current course head for Darden’s core MBA finance course. He is the author or co-author of over 40 cases and technical notes, as well as a financial market simulation entitled Bond Trader. Prior to his doctoral work, he was a consultant with Marakon Associates in Stamford and London. He received a B.S. degree from Brigham Young University, an M.B.A. from INSEAD, and a Ph.D. from University of Washington. More details are available from his website, http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Michael-J-Schill/ He may be reached via email at
[email protected]. http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Kenneth-M-Eades/ mailto:
[email protected] http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/Michael-J-Schill/ mailto:
[email protected] Page viii Contents Dedication v About the Authors vi Contents viii Foreword xi Preface xii Note to the Student: How To Study and Discuss Cases xxiii Ethics in Finance xxx 1 Setting Some Themes 1 Warren E. Buffett, 2015 To think like an investor 3 2 The Battle for Value, 2016: FedEx Corp. vs. United Parcel Service, Inc. Value creation and economic profit 23 3 Larry Puglia and the T. Rowe Price Blue Chip Growth Fund Market efficiency 43 4 Genzyme and Relational Investors: Science and Business Collide? Value creation, business strategy a nd activist investors 63 2 Financial Analysis and Forecasting 5 Business Performance Evaluation: Approaches for Thoughtful Forecasting Financial forecasting princ iples 89 6 The Financial Detective, 2016 Financial ratio analysis 107 7 Whole Foods Market: The Deutsche Bank Report Financial performance forecasting 113 8 Horniman Horticulture Financial forecasting and bank financing 127 9 Guna Fibres, Ltd. Forecasting seasonal financing needs 133 3 Estimating the Cost of Capital 10 “Best Practices” in Estimating the Cost Estimating the cost of capital 145 of Capital: An Update 11 Roche Holdings AG: Funding the Genentech Acquisition Cost of debt capital 173 12