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Abstract:
This note addresses the methods used to value companies in an M&A (mergers and acquisitions) setting. It provides a detailed description of the discounted-cash-flow (DCF) approach and reviews other methods of valuation such as book value, liquidation value, replacement cost, market value, trading multiples of peer firms, and comparable transaction multiples.

mergers and acquisitions, valuation

Abstract:
We test for firm-level asset investment effects in returns by examining the cross-sectional relation between firm asset growth and subsequent stock returns. As a test variable, we use the year-on-year percentage change in total assets. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks, a subgroup of firms for which other documented predictors of the cross-section lose much of their predictive ability. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns.

Firm asset growth, stock returns, market efficiency

Abstract:
This case examines the April 2002 decision of JetBlue management to price the initial public offering of JetBlue stock during one of the worst periods in airline history. The case outlines JetBlue's innovative strategy and the associated strong financial performance over its initial two years. Students are invited to value the stock and take a position on whether the current filing range of $22 to $24 a share is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 67% first-day rise in JetBlue stock from the $27 offer price. With such a backdrop, students are exposed to one of the well-known finance anomalies--IPO underpricing--and are invited to discuss various proposed explanations. The case provides opportunities for the instructor to develop any of the following teaching objectives: (1) review the instructional aspects of the equity-issuance transaction, (2) explore the costs and benefits associated with public share offerings, (3) develop an appreciation for the challenges of valuing unseasoned firms, (4) hone corporate-valuation skills, particularly using market multiples, and (5) evaluate the received explanations for various finance anomalies such as IPO underpricing.

valuation

Abstract:
We examine price behavior in the emerging Internet industry by comparing investor valuation of Internet subsidiary carve-outs with that of the parent. We provide examples of parent firms whose Internet carve-out holdings exceed the market value of the entire parent by a large amount and over an extended period of time. The results suggest that an important clientele of investors place greater value on direct Internet asset holdings than indirect holdings via the parent, and that arbitrage costs accommodate prolonged mispricing. We find that such price behavior is not exclusively an Internet sector result, but occurs in other emerging industries.

Abstract:
We examine price behavior in the emerging Internet industry by comparing investor valuation of Internet subsidiary carve-outs with that of the parent. We provide examples of parent firms whose Internet carve-out holdings exceed the market value of the entire parent by a large magnitude and over an extended period of time. We reject alternative tax, liquidity, and agency cost hypotheses previously proposed as explanations of a related phenomenon, the closed-end fund discount. We conclude that investors, or at least an important clientele of investors, value direct Internet asset holdings more richly than indirect holdings via the parent.

Abstract:
In markets with trading friction, the incorporation of information into market prices can be substantially delayed through a weakening of the arbitrage process. We re-examine the profitability of relative-strength, or momentum, trading strategies (buying past strong performers and selling past weak performers). We find that standard relative-strength strategies require frequent trading in disproportionately high-cost securities so that trading costs prevent profitable strategy execution. In the cross section, we find that those stocks that generate large momentum returns are precisely those stocks with high trading costs. We conclude that the magnitude of the abnormal returns associated with these trading strategies creates an illusion of profit opportunity when, in fact, none exists.

Trading Strategies, Momentum, Transaction Costs

Abstract:
Using a cross-section of effectively the entire universe of overseas listings across world markets, we examine the market preferences of firms listing their stock abroad. We find that geographic, economic, cultural, and industrial proximity plays the dominant role in the choice of overseas listing venue. Contrary to the notion that firms maximize international portfolio diversification gains in listing abroad, cross-listing activity is more common across markets for which diversification gains are relatively low. Our findings imply that the same proximity constraints that are believed to lead to "home bias" in investment portfolio decisions also exert a profound influence on financing decisions.

Cross-listings, Familiarity Bias, Diversification

Abstract:
A growing literature contends that, because returns are not normal, higher-order co-moments matter to risk-averse investors. Fama and French (1993, 1995) find that nonmarket risk factors based on size and book-to-market ratio are priced by investors. We test the hypothesis that the Fama-French factors simply proxy for the pricing of higher-order co-moments. Using portfolio returns over various time horizons, we show that adding a set of systematic co-moments (but not standard moments) of order 3 through 10 reduces the explanatory power of the Fama-French factors to insignificance in almost every case.

Abstract:
A number of papers (notably Fama and French (1993, 1995)) find that non-market risk factors, such as size and the book-to-market ratio, are priced by investors. We test whether these other risk factors are merely proxies for omitted higher-order market-risk factors. Using size-sorted portfolio returns at daily, weekly, monthly, quarterly, and semi-annual intervals, we find in every case that the distribution of returns differs significantly from normality. Since returns are not normal, we expect higher-order co-moments to matter to investors. We show that adding systematic co-moments (but not standard moments) of order 3 through 10 reduces the explanatory power of the Fama-French factors to insignificance in almost every case.

Abstract:

Subject Areas: Long-term financing, initial public offerings, new enterprise valuation
Case Setting: September 1998, Silicon Valley, USA

Situation:

This case examines the Fall 1998 decision of eBay management to proceed with the company's initial public offering during the quietest IPO market in twenty years. In Case A, eBay's Chief Financial Officer considers the financial and competitive implications of delaying the offering, as well as the challenge of fairly pricing the shares of an emerging unseasoned Internet stock. The case provides an excellent forum for students to discuss the costs and benefits of going public. Case B reviews the events of eBay's first trading day and the associated 160 percent return on the shares. With such a backdrop, students are exposed to one of the well-known finance anomalies--the IPO underpricing phenomenon--and are invited to critically discuss various proposed explanations.

The case provides opportunities for the instructor to develop any of the following teaching objectives: (1) review the institutional aspects of the equity issuance transaction, (2) explore the costs and benefits associated with public share offerings, (3) examine the impact of market turbulence on the IPO market, (4) develop an appreciation for the difficulty of valuing unseasoned firms, and (5) evaluate the received explanations of various finance anomalies, such as the IPO underpricing anomaly.

Abstract:
This paper tests whether foreign equity listings are associated with permanent valuation gains and examines how market and firm characteristics influence any valuation effects. Using a global sample of 1676 listings placed in 25 countries, we find that much of the valuation gains to overseas listings are not permanent. The transitory nature of valuation gains holds for both average U.S. listings and average first-time firm listings. We find little evidence of a permanent effect on returns for firms that list abroad, even for firms' listings in markets that are more liquid, provide better legal protection, or have a larger shareholder base.

Overseas Listing, International Cost of Capital, Cross Listing

Abstract:
In this study, we identify waves in cross listing activity at the host market, home market, and industry level and find them to be positively correlated with relative financial and economic market performance. We use these waves to increase the power of tests on the valuation gains to cross listing based on the assertion that periods of foreign listing intensity should be associated by revealed preference with periods of particular gains to listing. We find no evidence of durable valuation gains, even during the periods of most intense listing activity. The long-term abnormal valuation ratio of firms listing abroad is no greater than that of firms that do not cross list regardless of time period, host market, home market, or industry. We do find evidence of temporary gains, particularly during periods of high intensity in host market listing, suggesting that it is these short-term gains that motivate listing abroad.

Firm valuation, Relative market development, Stock exchanges, Tobin's Q

Abstract:
This case examines issues of asset control for Ben & Jerry's Homemade, Inc., in light of the outstanding takeover offers by Chartwell Investments, Dreyer's Grand, Unilever, and Meadowbrook Lane Capital in January 2000. The case provides a unique opportunity to discuss fundamental firm objectives and the implications of a nontraditional corporate orientation; it reviews the development of Ben & Jerry's strong social consciousness and the takeover-defense mechanisms that maintain management's control of company assets. Students, in the role of outside board members, are invited to review management's performance, estimate the economic cost of its social agenda, and evaluate the implications of takeover-defense strategies. Ultimately, they must take a position on whether Ben & Jerry's should continue to pursue its social agenda independently or accept one of the attractive takeover offers and shift toward greater profit orientation. The case requires relatively little knowledge of finance, and is designed largely to provide a stimulating introduction to the principles of a traditional corporate finance curriculum.

milgram, takeovers, corporate objectives, asset control, corporate valuation, multiples

Abstract:
We document a strong negative relationship between the growth of total firm assets and subsequent firm stock returns using a broad sample of U.S. stocks. Over the past 40 years, low asset growth stocks have maintained a return premium of 20% per year over high asset growth stocks. The asset growth return premium begins in January following the measurement year and persists for up to five years. The firm asset growth rate maintains an economically and statistically important ability to forecast returns in both large capitalization and small capitalization stocks. In the cross-section of stock returns, the asset growth rate maintains large explanatory power with respect to other previously documented determinants of the cross-section of returns (i.e., size, prior returns, book-to-market ratios). We conclude that risk-based explanations have some difficulty in explaining such a large and consistent return premium.

Asset growth, Cross-section of stock returns

Abstract:
This paper uses a new approach to assess return behavior after seasoned equity offerings. Our approach recognizes that sophisticated investors are motivated to correct mispricing, although the magnitude of their activity is influenced by arbitrage costs. This approach avoids inference problems due to model misspecification or data snooping. The evidence supports the contention that firms that conduct seasoned equity offerings are overpriced. Our findings imply that, since mispricing associated with seasoned equity offerings is persistent in the long-run, holding costs play an important role although transaction costs do not. In fact, holding costs dominate the size effect documented by previous research.

Seaoned equity offerings, arbitrage costs

Abstract:
For a broad sample of international corporate bond offerings, we find that some corporate borrowers make opportunistic currency choices, in that they denominate the currency of their bonds in a manner that is inconsistent with a belief in either covered or uncovered interest rate parity. Using firm-level tests, we identify a number of characteristics of firms that engage in opportunistic behavior. We observe that large issuers located in developed markets with investment-grade ratings and low cash flow characterize those firms that are responsive to covered borrowing rate differences across currencies. Corporate responsiveness to uncovered borrowing rate differences appears more general. We conclude that although the gains firms achieve through opportunistic currency denomination are economically significant, they may still be consistent with well-functioning markets.

Corporate borrowing, interest rate parity

Abstract:
We find that firms alter the currency composition of their international bond issues to respond to differences in borrowing rates across currencies. For a broad sample of international corporate bonds denominated in six major currencies, we find strong and consistent evidence that firms respond to apparent departures from both covered and uncovered interest parity in their financing decisions. Emerging market and non-investment grade issuers are less likely to respond to differences in covered yields consistent with their limited access to currency swap markets. Overall, the gains that firms achieve are economically significant but consistent with well-functioning markets.

Interest rate parity, international bonds, currency timing, opportunistic financing

Abstract:
In August 2002, the French retail giant Carrefour S.A. is considering alternative currencies for raising ¬750 million in the Eurobond market. Carrefour's investment bankers believe that the bonds can be issued at 5.25% in euros, 5.375% in British pounds, 3.625% in Swiss francs, and 5.5% in U.S. dollars. Despite the high nominal coupon rate and the lack of any material business activity in the United Kingdom, the British-pound issue appears to provide the lowest cost of funds. This case is designed to introduce topics in international finance such as interest-rate parity, currency risk management, and the Eurobond market. Students are tasked with exploring why forward-currency exchange rates vary from spot rates and proposing a Eurobond financing strategy for Carrefour.

debt policy, interest rates, international finance

Abstract:
In August 2002, the French retail giant Carrefour S.A. is considering alternative currencies for raising ¬750 million in the Eurobond market. Carrefour's investment bankers believe that the bonds can be issued at 5.25% in euros, 5.375% in British pounds, 3.625% in Swiss francs, and 5.5% in U.S. dollars. Despite the high nominal coupon rate and the lack of any material business activity in the United Kingdom, the British-pound issue appears to provide the lowest cost of funds. This case is designed to introduce topics in international finance such as interest-rate parity, currency risk management, and the Eurobond market. Students are tasked with exploring why forward-currency exchange rates vary from spot rates and proposing a Eurobond financing strategy for Carrefour.

debt policy, interest rates, international finance

Abstract:
This paper examines how market volatility affects corporate financing transactions. Firms face substantial uncertainty with respect to the price, demand, and aftermarket costs associated with raising public capital. The ability to hedge this risk effectively is critical to the efficient financing of firms' capital needs. Using monthly U.S. equity-related financing transactions from 1970 to 1998, I find that market volatility dampens financing transactions, particularly among small or unseasoned firms. Periods of above-normal market volatility are associated with a significant 13 percent decline in the frequency of IPO transactions and a 21 percent decline in the number of IPO dollars raised. Increased market volatility generates greater underwriting fees, but does not affect IPO underpricing. The findings are most consistent with Mandelker and Raviv's (1977) model of costly distribution risk-bearing.

Equity Offerings, Market Volatility, Underwriting, Underpricing

Abstract:
Set in the fall of 1998, this case series (see also the B case, UVA-F-1358) examines the decision by eBay management to proceed with the company's initial public offering during the quietest IPO market in 20 years. In the A case, eBay's chief financial officer considers the financial and competitive implications of delaying the offering, as well as the challenge of fairly pricing the shares of an emerging, unseasoned Internet stock. The case provides an excellent forum for students to discuss the costs and benefits of going public. The B case reviews the events of eBay's first trading day and the associated 160% return on the shares. With such a backdrop, students are exposed to one of the well-known finance anomalies--IPO underpricing--and are invited to discuss various proposed explanations. The case series provides opportunities for the instructor to develop the following teaching objectives: (1) review the institutional aspects of the equity-issuance transaction, (2) explore the costs and benefits associated with public share offerings, (3) examine the impact of market turbulence on the IPO market, (4) develop an appreciation for the difficulty of valuing unseasoned firms, and (5) evaluate the received explanations of various finance anomalies, such as IPO underpricing.

internet, valuation, initial public offering

Abstract:
The negative correlation between asset growth and subsequent returns has been attributed variously to changes in risk and to mispricing. We find that firm idiosyncratic volatility, our measure of the arbitrage costs necessary to sustain mispricing, is a necessary condition for asset growth effects both in the cross section and time series and that a factor mimicking portfolio based on asset growth does not generate a risk premium once firm growth is acknowledged. Our findings suggest that the asset growth effect arises from systematic mispricing in stocks with high arbitrage costs.

Asset growth, investment, q theory, stock returns

Abstract:
This note introduces financial ratios and financial forecasting. It examines principles in the art and science of thoughtful financial forecasting. In particular, it reviews the importance of (1) understanding financial ratios, (2) grounding business forecasts, (3) modeling a base-case forecast that incorporates the expectations for business strategy, and (4) recognizing the potential for cognitive bias in the forecasting process. Forecasting is not the same as fortune-telling; unanticipated events have a way of making certain that specific forecasts are never completely correct. This note suggests, however, that thoughtful forecasts aid understanding of the key bets in any forecast and the odds associated with success. It closes with an example of financial forecasting based on the Maytag Corporation, a U.S. appliance manufacturer.

financial ratios, financial forecasting

Abstract:
This note reviews the fundamental terminology and pricing techniques for a simple risk-free bond contract. The note is intended to introduce students to the concept of the time value of money and the basic language of bond markets.

bonds, time value of money

Abstract:
This note reviews the fundamental terminology and pricing techniques for a simple risk-free bond contract. The note is intended to introduce students to the concept of the time value of money and the basic language of bond markets.

bonds, time value of money

Abstract:
Set in the fall of 1998, this case series (see also the A case, UVA-F-1357) examines the decision by eBay management to proceed with the company's initial public offering during the quietest IPO market in 20 years. In the A case, eBay's chief financial officer considers the financial and competitive implications of delaying the offering, as well as the challenge of fairly pricing the shares of an emerging, unseasoned Internet stock. The case provides an excellent forum for students to discuss the costs and benefits of going public. The B case reviews the events of eBay's first trading day and the associated 160% return on the shares. With such a backdrop, students are exposed to one of the well-known finance anomalies--IPO underpricing--and are invited to discuss various proposed explanations. The case series provides opportunities for the instructor to develop the following teaching objectives: (1) review the institutional aspects of the equity-issuance transaction, (2) explore the costs and benefits associated with public share offerings, (3) examine the impact of market turbulence on the IPO market, (4) develop an appreciation for the difficulty of valuing unseasoned firms, and (5) evaluate the received explanations of various finance anomalies, such as IPO underpricing.

internet, valuation, initial public offering

Abstract:
Technical stock analysis uses past prices and trading volume or both to predict future prices. A broad range of techniques such as chart analysis, moving averages, and other filters and oscillators can be used to identify predictable patterns in stock prices. The conventional wisdom is that stock-price patterns emerge from systematic psychological behavior of market participants. This note provides an overview of some common analytical tools for identifying trading opportunities.

forecasting

Abstract:
This case follows the performance-review and financial-statement-forecasting decisions of a Value Line analyst for the retail-building-supply industry in October 2002. The case contrasts the strong operating performance of Home Depot with the strong stock-market performance of Lowe's. Students examine a financial-ratio analysis for Home Depot that acts as a template for generating a comparable ratio analysis for Lowe's. The student ratio analysis is designed to build intuition with respect to interpreting individual ratios as well as ratio interrelationships (e.g., the DuPont framework). The historical-performance comparison suggests that investors are skeptical of the ability of Home Depot to maintain its performance trajectory, yet they project sustained improvements for Lowe's. Students are invited to scrutinize the analyst's five-year income-statement and asset-side balance-sheet forecast for Home Depot. The case expressly focuses on the asset side of the balance sheet as a preview for other cases using free-cash-flow forecasting. The Home Depot forecast exercise exposes students to the mechanics of financial-statement modeling and sensitivity analysis, which they can use in building their own forecast for Lowe's. Finally, the strong-growth assumptions for Home Depot relative to the modest-growth forecast for the industry suggest that the company can be expected to capture massive and perhaps unreasonable market share in the near term. The exercise provides a striking example of the importance of comparing bottom-up business forecasting with top-down industry forecasts. The case may be used to develop any of the following teaching objectives: (1) exploring financial-statement and financial-ratio analysis; (2) reviewing the basics of financial forecasting as a platform for cash-flow forecasting, and building consideration of internal consistency of forecasting with respect to industry, peer, and own-firm comparisons; (3) investigating forecast-sensitivity analysis and value drivers; and (4) preparing students for thoughtful cash-flow forecasting in the context of capital budgeting and acquisition valuation.

financial ratios, financial-statement analysis, forecasting, investment analysis, security analysis, sensitivity analysis

Abstract:
This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program. The case is intended to provide an introduction to the Modigliani and Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the "pizza graphs" that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions.

capital structure, debt policy

Abstract:
This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt financed stock buyback program. The case is intended to provide an introduction to the Modigliani and Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the "pizza graphs" that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions.

The case serves to motivate the following teaching objectives:

1. Introduce the Modigliani-Miller intuition of capital structure irrelevance 2. Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered beta CAPM equation 3. Discuss interest tax deductibility and the valuation tax shields 4. Explore the importance of debt capacity in a growing business

An instructor spreadsheet and teaching note is available for instructors.

Business case, Capital structure, Debt policy, Tax shields

Abstract:
In October 1990, the president of the Bank of Tokyo (the ninth-largest in Japan and fifteenth-largest in the world) must design a financing plan with which to bring the bank into compliance with the new worldwide capital-adequacy standards of the Bank for International Settlements (BIS). The alternatives include (1) slowing the growth of the bank, (2) issuing equity, and (3) issuing convertible subordinated debentures. The tasks for the student are to compare and contrast the equity and convertibles tactics and to recommend a possible price or coupon rate for the convertible issue.

bank management, bonds, capital markets, commercial banking, diverse protagonist, Asian, option pricing, international case, diversity case, valuation, international

Abstract:
It is well known that corporations issue foreign currency-denominated debt to hedge foreign currency cash flows with offsetting interest payments. We test an alternative "opportunistic" motive for foreign currency-denominated borrowing. We do so by constructing a comprehensive sample of foreign currency-denominated bonds issued by sovereign government and agency issuers all of whose cash inflows are exclusively denominated in their respective local currencies. We find strong and consistent evidence that the prevailing covered and uncovered interest yields across currencies matter to these borrowers in choosing the currency in which to denominate their international debt. We estimate the average gains to opportunistic covered yield borrowing at 4 to 18 basis points. Interestingly, we also find that the average bond offering in our sample precedes a large and beneficial depreciation in the selected currency in the year following the issuance. These results support what has been a frequent conjecture in the foreign debt market.

Foreign debt, Interest rate parity, Timing, Foreign currency

Abstract:
This note addresses the methods used to value companies in an M&A (mergers and acquisitions) setting. It provides a detailed description of the discounted-cash-flow (DCF) approach and reviews other methods of valuation such as book value, liquidation value, replacement cost, market value, trading multiples of peer firms, and comparable transaction multiples.

mergers and acquisitions, valuation

Abstract:
We consider the expanding evidence for a negative correlation between firm asset growth and subsequent stock returns with respect to two rational explanations: compensation for risk and costly arbitrage. We observe that the growth rate in total assets is the dominant asset growth rate variable in explaining the cross-section of stock returns. We show that a factor sensitivity to systematic asset growth does not generate a significant risk premium beyond the simple firm growth effect. We find that firm idiosyncratic volatility, which we use as a measure of the cost of holding a position in the stock per unit of time, explains substantial variation in the asset growth effect in the cross section of returns. Furthermore, time series patterns in alphas and factor loadings related to asset growth are associated with high idiosyncratic risk. Our findings highlight the magnitude of the impact of costly arbitrage on stock returns.

Arbitrage risk, Asset Growth, Mispricing, Transaction costs, Holding costs

Abstract:
This case examines the investment-strategy decisions of a Darden Capital Management student-portfolio management team in 2004. Case materials allow students to estimate CAPM-based expected returns using market data. The case focuses on introducing the portfolio-allocation decision; exploring the relevance of various investment-risk metrics; developing intuition for diversification, market risk, and the Capital Asset Pricing Model (CAPM); building judgment on how to estimate the CAPM parameters appropriately, using available market data; and discussing the fundamental concepts of market efficiency.

capital asset pricing model, investment analysis

Abstract:
Financial theory seeks to explain how buyers and sellers in financial markets price contracts to exchange money across time and across risk profiles. Using rules of agent behavior, theory generates financial models that attempt to predict the fair prices of the securities in financial markets. To make the models simple enough to be used in practice, theorists make simplifying assumptions about the characteristics of markets and market participants. The simplifying assumptions used to model agent behavior are hotly debated among theorists and practitioners. The argument is made that the practical use of the models only proves helpful to the extent that the simplifying assumptions upon which the models are built represent close approximations of market reality. This note reviews the simplifying assumptions that form the basis of classical finance models.

finance, introduction

Abstract:
This paper tests models of mutual fund market timing that (1) allow the manager's utility function to depend on returns in excess of a benchmark; (2) distinguish timing based on lagged, publicly available information variables from timing based on finer information; and (3) simultaneously estimate the parameters which describe the public information environment, the risk aversion and the precision of the fund's market timing signal. Using a sample of more than 400 U.S. mutual funds for 1976-94, the estimates imply that mutual funds behave as risk averse, benchmark investors. Conditioning on public information variables improves the model specification, and after controlling for the public information we find no evidence that funds have significant market timing ability.

Abstract:
This case examines issues of asset control for Ben & Jerry's Homemade, Inc., in light of the outstanding takeover offers by Chartwell Investments, Dreyer's Grand, Unilever, and Meadowbrook Lane Capital in January 2000. The case provides a unique opportunity to discuss fundamental firm objectives and the implications of a nontraditional corporate orientation; it reviews the development of Ben & Jerry's strong social consciousness and the takeover-defense mechanisms that maintain management's control of company assets. Students, in the role of outside board members, are invited to review management's performance, estimate the economic cost of its social agenda, and evaluate the implications of takeover-defense strategies. Ultimately, they must take a position on whether Ben & Jerry's should continue to pursue its social agenda independently or accept one of the attractive takeover offers and shift toward greater profit orientation. The case requires relatively little knowledge of finance, and is designed largely to provide a stimulating introduction to the principles of a traditional corporate finance curriculum.

milgram, takeovers, corporate objectives, asset control, corporate valuation, multiples

Abstract:
Set in May 2008, this case reflects the separate perspectives of chief executive officers Tom Eliot and Bill Flinder as they approach the negotiations of RSE International Corporation to acquire Flinder Valves and Controls Inc. The task for the student is to complete a valuation analysis of the target and buyer and to negotiate a price and exchange ratio with the counterparty. The intent of the case design is for students to be organized into teams and assigned to play the part of either Flinder Valves or RSE International in the negotiation. The case provides supplementary private information for each side of the transaction. Therefore, a unique element of the case is negotiating the terms of acquisition in an environment of asymmetric information. The case is relatively simple and provides a first exercise in the negotiation of an acquisition. It could also be taught in the usual case-discussion fashion instead of the intended joint-negotiation exercise.

mergers and acquisitions, negotiation

Abstract:
This case examines the April 2007 decision of British music company EMI to suspend its annual dividend as the company struggled to respond to the effect of digital audio distribution on its core business. The EMI case is intended to serve as an engaging introduction to corporate financial policy and themes in managing the right side of the balance sheet. The case contrasts EMI’s storied success with artists such as the Beatles, the Beach Boys, Pink Floyd, and Norah Jones with its recent inability to succeed in financial markets. In light of takeover threats and restructuring costs, EMI’s CFO Martin Stewart must recommend EMI’s dividend policy.

dividend policy

Abstract:
This case examines the investment-strategy decisions of a Darden Capital Management student-portfolio management team in 2004. Case materials allow students to estimate CAPM-based expected returns using market data. The case focuses on introducing the portfolio-allocation decision; exploring the relevance of various investment-risk metrics; developing intuition for diversification, market risk, and the Capital Asset Pricing Model (CAPM); building judgment on how to estimate the CAPM parameters appropriately, using available market data; and discussing the fundamental concepts of market efficiency.

capital asset pricing model, investment analysis

Abstract:
Set in the fall of 1998, this case series (see also the A case, UVA-F-1357) examines the decision by eBay management to proceed with the company's initial public offering during the quietest IPO market in 20 years. In the A case, eBay's chief financial officer considers the financial and competitive implications of delaying the offering, as well as the challenge of fairly pricing the shares of an emerging, unseasoned Internet stock. The case provides an excellent forum for students to discuss the costs and benefits of going public. The B case reviews the events of eBay's first trading day and the associated 160% return on the shares. With such a backdrop, students are exposed to one of the well-known finance anomalies--IPO underpricing--and are invited to discuss various proposed explanations. The case series provides opportunities for the instructor to develop the following teaching objectives: (1) review the institutional aspects of the equity-issuance transaction, (2) explore the costs and benefits associated with public share offerings, (3) examine the impact of market turbulence on the IPO market, (4) develop an appreciation for the difficulty of valuing unseasoned firms, and (5) evaluate the received explanations of various finance anomalies, such as IPO underpricing.

internet, valuation, initial public offering

Abstract:
This paper tests whether foreign equity listings are associated with permanent valuation gains and examines how market and firm characteristics influence any valuation effects. Using a global sample of 1,676 listings placed in 25 countries, we find that much of the valuation gains to overseas listings are not permanent. The transitory nature of valuation gains holds for both average US listings and average first-time firm listings. We find little evidence of a permanent effect on returns for firms that list abroad, even for firms’ listings in markets that are more liquid, provide better legal protection, or have a larger shareholder base.

G14, G15

Abstract:
Motivated by both theoretical and empirical work on expected returns and asset growth, we test for a systematic negative relationship between the cross-section of expected returns and a comprehensive measure of asset growth, the year-on-year growth-rate-in-total-assets. Forming portfolios on annual growth rates, we find that firms in the highest decile of growth earn annualized raw returns of approximately 6%, and firms in the lowest decile of growth earn annualized raw returns of approximately 26%, a spread of 20% per year. When we compete asset growth rates with other important determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, and momentum), we find that asset growth has the strongest effect. We propose several explanations as to the underlying cause of the relationship. A firm's annual growth-rate-in-total-assets appears to be the most important variable in predicting the cross-section of US equity returns.