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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:
Finance scholars' approach to capital-structure issues reflects a progression of thought over time. This note provides an overview of the current state of capital-structure theory. One perspective on capital-structure choice is to view it as posing trade-offs among five elements: (1) the tax benefits of financing, (2) the explicit costs of financial distress, (3) the agency costs of debt (including an array of indirect costs linked to financial distress), (4) the agency costs of equity, and (5) the signaling effect of security issuance. The first two elements reflect the "modern, traditional" balancing theory of capital structure. The third and fourth build on agency theory and imperfect information and emphasize the individual incentives of decision makers. The fifth element recognizes that the very act of issuing a security can convey new information to investors when there is imperfect information. While newer theories provide a rich array of insights into aspects of financial policy beyond how much debt the firm should undertake, the downside is that at present there is no overarching synthesis of these theories. As a result, practical application requires careful identification of how these particular theories are relevant to the business, the markets, and the situation at hand. This note is well suited to an advanced corporate-finance course after students have been exposed to the basic theory.

capital structure

Abstract:
This note focuses on the dividend discount model (DDM), or Gordon Growth Model, as it is sometimes called. In practice, the DDM appears in many forms. The note examines its role in estimating the intrinsic value of an equity security and as a model for estimating the required return on equity. The note also explores the DDM's link to price-earnings ratios, a widely followed market multiple, and the sustainable rate of growth.

cost of capital, equity valuation, price-earnings ratios, intrinsic value

Abstract:
This note focuses on the dividend discount model (DDM), or Gordon Growth Model, as it is sometimes called. In practice, the DDM appears in many forms. The note examines its role in estimating the intrinsic value of an equity security and as a model for estimating the required return on equity. The note also explores the DDM's link to price-earnings ratios, a widely followed market multiple, and the sustainable rate of growth.

cost of capital, equity valuation, price-earnings ratios, intrinsic value

Abstract:
This case provides an introductory exercise for estimating the cost of capital (cost of equity, weighted average cost of capital) for a firm contemplating a large increase in debt. Students are asked to compare the debt policy of MCI Communications with that of five other leading telecommunications companies in order to find MCI's optimal capital structure.

cost of capital, debt policy

Abstract:
This note explores how managers determine the proper amount of debt financing to use to fund a firm's operations. It examines the fundamental differences between debt financing and equity financing and the factors that drive the choice between them. The note is suitable for an introductory MBA course on corporate finance.

corporate financial strategy, capital structure, debt policy

Abstract:
This note explores how managers determine the proper amount of debt financing to use to fund a firm's operations. It examines the fundamental differences between debt financing and equity financing and the factors that drive the choice between them. The note is suitable for an introductory MBA course on corporate finance.

corporate financial strategy, capital structure, debt policy

Abstract:
This technical note describes the basic features of a new type of security called private investments in public equities (PIPEs). Increasingly, public companies in need of financing are raising capital through private-equity investors via PIPEs.

bond valuation, capital raising, venture capital, private equity

Abstract:
This technical note describes the basic features of a new type of security called private investments in public equities (PIPEs). Increasingly, public companies in need of financing are raising capital through private-equity investors via PIPEs.

bond valuation, capital raising, venture capital, private equity

Abstract:
This note describes the basic elements and pricing of financial derivatives. Financial derivatives are contracts whose value is derived from the value of some other underlying asset, such as a share of common stock, a commodity (e.g., coffee, oil, or wheat), or a bond. Each derivative has its own special features and provisions, and each is used for a special financial purpose.

option valuation, derivatives

Abstract:
This note describes the basic elements and pricing of financial derivatives. Financial derivatives are contracts whose value is derived from the value of some other underlying asset, such as a share of common stock, a commodity (e.g., coffee, oil, or wheat), or a bond. Each derivative has its own special features and provisions, and each is used for a special financial purpose.

option valuation, derivatives

Abstract:
This note addresses the methods used in valuing intellectual property, with a particular focus on patents. The note defines intellectual property and explains its growing importance. It also describes income methods, market approaches, discounted-cash-flow methods, and option-valuation methods.

option valuation, patents, valuation, intellectual property

Abstract:
This note addresses the methods used in valuing intellectual property, with a particular focus on patents. The note defines intellectual property and explains its growing importance. It also describes income methods, market approaches, discounted-cash-flow methods, and option-valuation methods.

option valuation, patents, valuation, intellectual property

Abstract:
This note covers several frequently used methods to value early-stage companies and discusses some of the issues and difficulties encountered more generally in valuing privately held assets. The basic assumptions underlying the venture-capital and the discounted-cash-flow methods of valuation are discussed in detail. In addition, the note attempts to provide some direction in making the appropriate trade-offs between the guidance provided by financial theory and the practical limitations posed by an illiquid-asset class. The note provides a numerical example to highlight the key differences between the techniques.

valuation, venture capital

Abstract:
This case puts the student in the shoes of the recently appointed treasurer of Polaroid Corporation, who must consider several matters concerning the firm's debt policy. An immediate concern is the company's outstanding $150 million 7.25% notes, due to mature in several months. Although investment bankers interested in doing business with Polaroid have been trying to present proposals for refunding the issue, the new treasurer believes that any refunding decision should be part of a larger review of the firm's financial policies. Accordingly, he has undertaken a review of the firm's overall debt policy, focusing primarily on the mix of debt and equity and on the maturity structure of the debt. The case asks students to consider how much flexibility Polaroid's business will require in future years and to pick a target debt ratio that provides the necessary flexibility. Students must evaluate, in addition to internal demands for funds, the role of bond ratings and investment-grade status in maintaining ongoing access to capital markets.

Equity, debt policy, financial policy, restructuring

Abstract:
This case puts the student in the shoes of the recently appointed treasurer of Polaroid Corporation, who must consider several matters concerning the firm's debt policy. An immediate concern is the company's outstanding $150 million 7.25% notes, due to mature in several months. Although investment bankers interested in doing business with Polaroid have been trying to present proposals for refunding the issue, the new treasurer believes that any refunding decision should be part of a larger review of the firm's financial policies. Accordingly, he has undertaken a review of the firm's overall debt policy, focusing primarily on the mix of debt and equity and on the maturity structure of the debt. The case asks students to consider how much flexibility Polaroid's business will require in future years and to pick a target debt ratio that provides the necessary flexibility. Students must evaluate, in addition to internal demands for funds, the role of bond ratings and investment-grade status in maintaining ongoing access to capital markets.

Equity, debt policy, financial policy, restructuring

Abstract:
This paper examines financial contracting theories using the market for private investments in public equity (PIPEs). Variation in the risks of issuers and contract terms makes this market well suited to examine these theories. We document that the use of terms that are contingent on an issuer’s future performance increases with issuer risk. Among firms with poorer stock performance, higher cash burn rates, and more uncertain investment prospects, contracts that include only purchase discounts are uncommon and contingent contracting terms are used more extensively. Contingent terms that can shift control to investors are used by issuers in the poorest financial condition. The findings support theories that suggest contingent terms are used by investors to help manage contracting problems that can arise when funding firms with greater risks.

private placements, financial distress, contracting costs, equity issuance

Abstract:
This note outlines the link between shareholder-return requirements and a firm's use of debt. It explores the theoretical arguments concerning how the cost of equity changes with the use of debt and discusses the limitations of each view. It also provides conceptual and practical guidance on the use of "levered" and "unlevered" betas.

corporate financial strategy, capital structure, debt policy

Abstract:
This note outlines the link between shareholder-return requirements and a firm's use of debt. It explores the theoretical arguments concerning how the cost of equity changes with the use of debt and discusses the limitations of each view. It also provides conceptual and practical guidance on the use of "levered" and "unlevered" betas.

corporate financial strategy, capital structure, debt policy

Abstract:
We examine initial public offerings (IPOs) by foreign firms in the U.S. market between 1990 and 1997, and compare their direct and indirect issue costs to IPOs by U.S. firms. Our results indicate that foreign IPOs involve approximately the same costs on average as domestic IPOs, for all except those experiencing strong demand and upward revisions in the offer price over the course of the road show. For upwardly revised IPOs, foreign IPOs have significantly lower underpricing compared to domestic IPOs. For these offers, we find that lower underpricing is associated with less risk due to the generally greater quality of foreign issuers. It is also the case that these offers are sold more frequently in multiple markets. In addition, we observe lower underpricing for IPOs from emerging markets, which is consistent with demand being driven to some extent by diversification. Overall, we uncover no evidence to suggest that foreign IPOs experience greater capital raising costs than domestic IPOs.

Abstract:
We examine the in-roads commercial banks have made into equity underwriting over 1990-2002. While banks end the period handling upwards of 25% of equity underwriting, most of this increase results from acquisitions of investment banks with an already established market share of equity underwriting. These acquisitions provide an opportunity to gauge the potential advantages of bank affiliation to equity underwriting. We find a significant decline on average in the market share of equity underwriting that banks acquired in the post-merger period. This decline in market share is larger than that experienced by investment banks of comparable reputation. Among the reasons why banks lose market share is that post-merger they originate fewer IPOs and their IPOs have a lower incidence of follow-on SEOs compared to independent investment banks. Following the merger, banks experience a large fall-off in their ability to retain follow-on SEOs and are less successful in winning SEO mandates when an issuer switches from its IPO underwriter. Taken together, the findings indicate that banks have not been able to achieve scope economies in equity underwriting.

equity issuance, investment banking, IPOs, SEOs

Abstract:
The purpose of this note is to offer a general profile of private equity investment firms and practices in Latin America as of early 2001. The findings are developed from field interviews conducted by the authors with 20 local and regional funds during December 2000 and January 2001 in the four most prominent countries of the region: Argentina, Brazil, Chile, and Mexico. The sample of sponsors was selected based on their strategy, number of investments, capital under management, and background, and was intended to be as diverse as possible to cover a broad range of practices rather than to focus on a homogeneous subset.

financial institutions, international finance, investment analysis, valuation

Abstract:
The purpose of this note is to offer a general profile of private equity investment firms and practices in Latin America as of early 2001. The findings are developed from field interviews conducted by the authors with 20 local and regional funds during December 2000 and January 2001 in the four most prominent countries of the region: Argentina, Brazil, Chile, and Mexico. The sample of sponsors was selected based on their strategy, number of investments, capital under management, and background, and was intended to be as diverse as possible to cover a broad range of practices rather than to focus on a homogeneous subset.

financial institutions, international finance, investment analysis, valuation

Abstract:
In April 1990 the SEC approved Rule 144A, a reform permitting firms to raise capital from "qualified institutional buyers" without requiring registration of the securities and compliance with U.S. GAAP. The rule was intended to help international firms reduce the costs of meeting U.S. disclosure standards. We examine the borrowing costs of international firms in the 144A market. Investment grade debt offered in the 144A market has significantly higher yield spreads, whereas high yield debt has yield spreads comparable to public debt. The results suggest a bifurcation of the markets, where high quality firms issue in both markets but face higher yield spreads in the 144A market and low quality firms issue only in the 144A market.

International finance, debt issuance, regulation, transparency

Abstract:
This case examines a proposed $2 billion asset-backed securitization offering that is to be supported by Formula One's television broadcasting rights. The case is written from the perspective of Steve Din, executive director of Securitization for Morgan Stanley Dean Witter, who is responsible for placing the securities in September 1998. The proposed Eurobond issuance for Formula One (F1) follows a delayed initial public offering (IPO) in 1997 that failed to materialize owing to disputes with the Formula One teams. In the wake of the delayed IPO, Morgan Stanley Dean Witter replaced Salomon Brothers as the adviser to Bernie Ecclestone, the eccentric billionaire owner of the F1 trademarks, and became the lead manager for the $2 billion structured finance placement meant to bridge Formula One to an eventual IPO. Students are asked to recommend a course of action to meet the challenges of marketing the new issue. The case is designed for use in finance electives focusing on financing methods, investment banking, securitization, or other advanced topics in corporate finance.

assets, debt policy, intangible assets

Abstract:
This case invites students to estimate the costs of a new debt issue. Designed as an introductory case for use early on in an MBA course, it requires students to compute the yield-to-maturity on the WorldCom bonds from price data and from spreads over Treasury securities for bond-rating categories. The exercise allows for discussion of benchmarking in the context of credit markets.

bonds, capital markets, cost of capital

Abstract:
This note explores the financing implications of leveraged ESOP financing. Depending on the changes made in employee compensation, leveraged ESOP financing can be the equivalent of conventional debt or conventional equity financing.

compensation, employee, employee stock ownership, ESOPs

Abstract:
This note covers alternative methods for issuing securities in the U.S. public markets. It focuses on the basic institutional requirements of an underwritten security offering and the role of investment bankers. Two regulatory reforms of the U.S. Securities and Exchange Commission, Rules 415 and 144a, are also discussed.

capital markets, investment banking, securities

Abstract:
This note covers alternative methods for issuing securities in the U.S. public markets. It focuses on the basic institutional requirements of an underwritten security offering and the role of investment bankers. Two regulatory reforms of the U.S. Securities and Exchange Commission, Rules 415 and 144a, are also discussed.

capital markets, investment banking, securities

Abstract:
In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations to the companys board of directors regarding the firms financial policy. Special considerations are the mix of debt and equity and the maintenance of financial flexibility.

bond ratings, cost of capital, financial policy, leverage

Abstract:
In November 2002, a California state court required the California Public Employees' Retirement Systems (CalPERS) to report publicly its returns on private-equity investments. This case examines the controversy surrounding the disclosure of private-equity returns mandated by the court decision. It includes discussions of the reaction of general and limited partners and the issues surrounding the sizable amounts of pension money placed in alternative investments. The CalPERS decision dovetailed with efforts by the Association for Investment Management and Research (AIMR) and the British and European Venture Capital Associations to reach greater agreement on disclosure standards in reporting the results of private-equity investments. The case details one set of standards, AIMR's Global Investment Performance Standards (GIPS), which became effective January 1, 2005. Students are asked to calculate the proposed metrics for a typical fund and assess their usefulness to a prospective investor. More broadly, the case addresses the type of information necessary to benchmark private-equity returns properly and the consequences of this type of disclosure to the industry.

entrepreneurship, investment analysis, performance effectiveness, valuation, venture capital

Abstract:
This case is suitable for courses on corporate finance at the graduate or advanced undergraduate level that cover banking, financing, security design, capital structure, or capital markets. The case covers the events that led to the collapse of Bear Stearns’s (Bear’s) hedge funds in July 2007 and traces management’s response to the situation through January 2008. These events include macroeconomic factors that fueled the housing boom, the growth of securitization, structured products, and credit default swaps, and the maturity mismatch of financial institutions’ funding strategies. The case provides a rich setting for students to understand the increasingly interrelated nature of banking activities, which poses large systemic risk to the financial sector. Two key questions are posed: “What factors were responsible for the collapse of Bear’s hedge funds?” and “Was the response by Bear’s management adequate in light of the collapse and the credit problems that ensued?” John Corso is a hedge fund manager with large cash balances in a prime brokerage account at Bear. In January 2008, he receives a call from a senior Bear executive reassuring him that the firm is in good hands following a shakeup of top management. The previous summer, two Bear hedge funds collapsed as a result of their investments in collateralized debt obligations (CDOs) that were backed by subprime mortgages. As a longtime client of Bear, Corso must evaluate whether the steps taken by management have been sufficient to resolve its credit problems or whether now is the time to remove his funds from the firm.

investment banking, liquidity planning

Abstract:
Set in late 2004, this case concerns a cashed-out entrepreneur in the health-sciences industry who decides to pursue private-equity angel investing as a means to fulfill her professional, financial, and personal objectives. Jocelyn Chang investigates three different types of angel organizations: the Band of Angels, Tenex Medical Investors, and the Washington Dinner Club. As part of her research into private-equity investing, she explores recent (postbubble) developments in both angel investing and the venture-capital industry.

entrepreneurs, venture capital, innovation

Abstract:
In November 2000, Kohlberg, Kravis, and Roberts (KKR) purchased Rockwood Specialties, Inc., a specialty chemicals company, in a $1.2 billion buyout. Spurred by the favorable market conditions in the first half of 2003, KKR was contemplating refinancing its buyout debt in June 2003. Merrill Lynch, its underwriter, proposed to refinance the earlier funding, in part, with a $375 million issue of senior subordinated notes. Although there had been a favorable interest-rate environment and a strong volume of debt issuance in the first half of 2003, the Rockwood offering still posed some significant challenges. First, it was a first-time issue by a privately held company. Second, KKR's motivation for the offering and the complex financial structure surrounding it had resulted in a preliminary credit rating of Caa from Moody's. Students are asked to evaluate and price the high-yield issue. The case discusses how credit ratings, market conditions, and organizational structure affect bond yields. There is a brief history of how the high-yield market evolved from the mid-1980s through 2003.

bonds, securities

Abstract:
In November 2000, Kohlberg, Kravis, and Roberts (KKR) purchased Rockwood Specialties, Inc., a specialty chemicals company, in a $1.2 billion buyout. Spurred by the favorable market conditions in the first half of 2003, KKR was contemplating refinancing its buyout debt in June 2003. Merrill Lynch, its underwriter, proposed to refinance the earlier funding, in part, with a $375 million issue of senior subordinated notes. Although there had been a favorable interest-rate environment and a strong volume of debt issuance in the first half of 2003, the Rockwood offering still posed some significant challenges. First, it was a first-time issue by a privately held company. Second, KKR's motivation for the offering and the complex financial structure surrounding it had resulted in a preliminary credit rating of Caa from Moody's. Students are asked to evaluate and price the high-yield issue. The case discusses how credit ratings, market conditions, and organizational structure affect bond yields. There is a brief history of how the high-yield market evolved from the mid-1980s through 2003.

bonds, securities

Abstract:
This case focuses on a large-scale corporate restructuring that involves changes to United Airlines' operating strategy and financing. Through a recapitalization of the company, its pilots, machinists, and salaried workers become majority shareholders of the firm.

employee stock ownership, labor relations, diversity in the workplace, human relations, restructuring, employee benefits

Abstract:
At a critical decision point in a firm's investment history, students are asked to evaluate a new form of venture financing called private investments in public enterprises (PIPE). PIPEs differ from conventional floating-rate convertibles in that the conversion price in most cases can only be adjusted downward. The case considers both the pros and cons of these investments. In mid-June 2000, Michael Saylor, the CEO of MicroStrategy, is considering an investment of $125 million of convertible preferred stock in his firm by a group of private investors including Citadel Investment Group LLC. The offer comes at a difficult time for the company, as only three months earlier, its stock had reached a record price of $300 per share. At that point the company had registered a $1 billion seasoned equity offering. Shortly thereafter, the company was forced to restate its earnings after running afoul of the U.S. Securities and Exchange Commission (SEC) for its revenue-recognition practices. Although the restatement did not change the company's cash-flow position, it did result in an SEC investigation and the cancellation of the stock offering. To meet Saylor's ambitious plans for MicroStrategy, additional funding must be obtained. With public-market funding sources shut off, students must evaluate what the best course of action is for the firm at this moment.

bonds, capital budgeting, venture capital, private equity

Abstract:
At a critical decision point in a firm's investment history, students are asked to evaluate a new form of venture financing called private investments in public enterprises (PIPE). PIPEs differ from conventional floating-rate convertibles in that the conversion price in most cases can only be adjusted downward. The case considers both the pros and cons of these investments. In mid-June 2000, Michael Saylor, the CEO of MicroStrategy, is considering an investment of $125 million of convertible preferred stock in his firm by a group of private investors including Citadel Investment Group LLC. The offer comes at a difficult time for the company, as only three months earlier, its stock had reached a record price of $300 per share. At that point the company had registered a $1 billion seasoned equity offering. Shortly thereafter, the company was forced to restate its earnings after running afoul of the U.S. Securities and Exchange Commission (SEC) for its revenue-recognition practices. Although the restatement did not change the company's cash-flow position, it did result in an SEC investigation and the cancellation of the stock offering. To meet Saylor's ambitious plans for MicroStrategy, additional funding must be obtained. With public-market funding sources shut off, students must evaluate what the best course of action is for the firm at this moment.

bonds, capital budgeting, venture capital, private equity

Abstract:
Finance scholars' approach to capital-structure issues reflects a progression of thought over time. This note provides an overview of the current state of capital-structure theory. One perspective on capital-structure choice is to view it as posing trade-offs among five elements: (1) the tax benefits of financing, (2) the explicit costs of financial distress, (3) the agency costs of debt (including an array of indirect costs linked to financial distress), (4) the agency costs of equity, and (5) the signaling effect of security issuance. The first two elements reflect the "modern, traditional" balancing theory of capital structure. The third and fourth build on agency theory and imperfect information and emphasize the individual incentives of decision makers. The fifth element recognizes that the very act of issuing a security can convey new information to investors when there is imperfect information. While newer theories provide a rich array of insights into aspects of financial policy beyond how much debt the firm should undertake, the downside is that at present there is no overarching synthesis of these theories. As a result, practical application requires careful identification of how these particular theories are relevant to the business, the markets, and the situation at hand. This note is well suited to an advanced corporate-finance course after students have been exposed to the basic theory.

capital structure

Abstract:
This case is designed for use in JD/MBA programs or in contexts where mutual understanding of legal and financial issues is required. The case focuses on an entrepreneur in the security-software industry who is attempting to raise a first round of financing in October 2000. The firm was unsuccessful in attracting funding from venture capitalists, and has relied on a small seed round and bridge loan from angel investors. The angels have now proposed investing $1.4 million in Series A convertible preferred stock. The entrepreneur must decide whether to accept the angel investors' proposal or revisit the issue of seeking venture capital. The case incorporates the stockholder agreement for the proposed Series A round, the capitalization of the company after the seed round, and five years of cash-flow projections for the firm. The case can be used in a law-school setting as a contract-drafting exercise and as an introduction to valuation. In a business-school setting, the case can help students understand the complex contract terms associated with a plain-vanilla form of venture capital. Valuation can be taught at an introductory level, or it can be made more complex if students are asked to incorporate what-if contract conditions into their analysis.

investing, entrepreneurial finance, valuation, private equity

Abstract:
This case is a team-based merger simulation of the British Petroleum-Amoco Oil combination in August 1998. See also its companion case, "Amoco Corporation" (UVA-F-1262).

mergers and acquisitions, bargaining and negotiating, valuation

Abstract:
This case is a team-based merger simulation of the British Petroleum-Amoco Oil combination in August 1998. See also its companion case, "Amoco Corporation" (UVA-F-1262).

mergers and acquisitions, bargaining and negotiating, valuation

Abstract:
Founded in February 2003, PluroGen Therapeutics is a start-up pharmaceutical firm that is in the process of developing a topical antimicrobial gel (TAG) to prevent and treat burn and skin-ulcer infections. In contrast to most new pharmaceutical compounds that have no clinical history, TAG has been used by thousands of patients at a large university hospital over the past 10 years. Based on the favorable clinical response, the two founding doctors want to start a company and make the drug available to the greater medical community. Although the doctors are recognized authorities in the field of wound care and holders of several patents, neither has extensive business experience. PluroGen is currently seeking $1.5 million in financing from angel investors to initiate the drug-approval process and subsequently plans to seek $6.5 million in funding from a strategic partner to complete Phase III trials and gain final approval from the U.S. Food and Drug Administration. Students are asked to evaluate whether TAG is attractive enough to be of interest to experienced investors and, if so, what percentage of equity investors would demand in return for the $1.5 million. Because of the presumed future funding by a strategic partner, the angel investors must carefully weigh the effects of the next round of financing on the terms they are demanding now.

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:
This case concerns an entrepreneur's attempt to raise a first round of venture capital. The founder's valuation and the venture fund's valuation differ by a large amount. The founder must decide whether to accept this offer or continue searching. The case is designed to help students compare frequently used valuation frameworks, including the venture-capital method and the discounted-cash-flow method.

start-up, valuation, venture capital

Abstract:
This case and its companion (UVA-F-1102) provide comprehensive coverage of a firm's decision to undertake an initial public offering (IPO). The company is a nonregulated financial firm in a rapidly growing area of consumer finance (high credit-risk automobile loans). The A case follows the firm from its first meeting with investment bankers to the determination of a preliminary IPO price range. In the B case, the firm's "road show" encounters a "cold-issue" market, and Eagle is unable to sell its shares at a price near the preliminary file range. Management is confronted with the tough choice of whether to proceed with the IPO or cancel it. The cases provide a rich opportunity to compare management's internal valuation of the firm (derived from market multiples and discounted cash-flow analysis) with the market's assessment of value. Excel spreadsheet files are available for use with this case (UVA-S-F-1095) and its teaching note.

consumer loans, security analysis, valuation

Abstract:
This case and its companion (UVA-F-1095) provide comprehensive coverage of a firm's decision to undertake an initial public offering (IPO). The company is a nonregulated financial firm in a rapidly growing area of consumer finance (high credit-risk automobile loans). The A case follows the firm from its first meeting with investment bankers to the determination of a preliminary IPO price range. In the B case, the firm's "road show" encounters a "cold-issue" market, and Eagle is unable to sell its shares at a price near the preliminary file range. Management is confronted with the tough choice of whether to proceed with the IPO or cancel it. The cases provide a rich opportunity to compare management's internal valuation of the firm (derived from market multiples and discounted-cash-flow analysis) with the market's assessment of value. Excel spreadsheet files are available for use with this case and its teaching note (UVA-S-F-1102).

security issuance, equity valuation, initial public offering

Abstract:
This case examines the use of an American Depositary Receipt (ADR) program in the context of an overall restructuring plan that students are asked to evaluate. A New Zealand-based conglomerate's stock in recent months has underperformed in the New Zealand market. Analysts have begun to speculate that the company suffers from the well-known "conglomerate discount." In June 2000, in an attempt to improve the situation, Deutsche Bank Alex Brown (DBAB) is asked to conduct a strategic review of the company.

strategy/structure, strategic thinking

Abstract:
This case is a team-based merger simulation of the British Petroleum-Amoco Oil combination in August 1998. See also its companion case, "British Petroleum, Ltd." (UVA-F-1263).

mergers and acquisitions, bargaining and negotiating, valuation

Abstract:
This case is a team-based merger simulation of the British Petroleum-Amoco Oil combination in August 1998. See also its companion case, "British Petroleum, Ltd." (UVA-F-1263).

mergers and acquisitions, bargaining and negotiating, valuation

Abstract:
In August 2005, The Carlyle Group and its partners (Clayton, Dubilier & Rice, and Merrill Lynch Global Private Equity) must finalize the terms of a bid to purchase the Hertz Corporation. The Ford Motor Company had put Hertz, a wholly owned subsidiary, up for sale in April 2005, and in June 2005, entered a dual-track process, which would result in its sale or an initial public offering (IPO). The case provides detailed pro forma projections for the transaction that allow students to examine the synergies of the deal and estimate a value and bid for Hertz. Students must consider whether their bid provides an adequate return to the sponsors, can produce in a higher value for Hertz than an IPO, and can best that of a rival bidding group. The case is appropriate for use in courses on corporate finance, private equity, or deal valuation. Because of the rich range of issues that can be considered, the case also works well as a capstone case or in a case competition. For instructors wishing to provide students an overview of the role and practices of private equity, we recommend combining the Hertz LBO case with its companion case, "Investing in Sponsor-Backed IPOs: The Case of Hertz" (UVA-F-1561). The Hertz IPO was announced in July 2006 just seven months after the LBO was completed. The two cases cover a wide range of issues that arise over the course of entry and exit of private equity investments.

valuation, private equity

Abstract:
This case examines the acquisition of a French printing company by a U.S. firm. Students are asked to value the foreign entity on a stand-alone basis and with the proposed merger synergies.

mergers and acquisitions

Abstract:
This note covers several frequently used methods to value early-stage companies and discusses some of the issues and difficulties encountered more generally in valuing privately held assets. The basic assumptions underlying the venture-capital and the discounted-cash-flow methods of valuation are discussed in detail. In addition, the note attempts to provide some direction in making the appropriate trade-offs between the guidance provided by financial theory and the practical limitations posed by an illiquid-asset class. The note provides a numerical example to highlight the key differences between the techniques.

valuation, venture capital

Abstract:
This case examines the exchange-rate risk of a U.S.-based manufacturer of women's luxury shoes that has recently introduced its product in Japan. Students are asked to evaluate the extent of the firm's exposure to currency risk and whether hedging via forward contract or currency option is advisable.

Exchange rate risk, forward contracts

Abstract:
This case examines the exchange-rate risk of a U.S.-based manufacturer of women's luxury shoes that has recently introduced its product in Japan. Students are asked to evaluate the extent of the firm's exposure to currency risk and whether hedging via forward contract or currency option is advisable.

Exchange rate risk, forward contracts

Abstract:
This case examines an innovative use of asset securitization, and offers students the opportunity to consider the benefits and limitations of securities and security markets in creating shareholder value. The case focuses on the decision by California Federal Savings Bank (CalFed) to create a new security that distributes a portion of the potential recovery from its pending lawsuit against the U.S. government to its shareholders. CalFed's suit arose from the passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989. The case explores the motives of management to "decouple" the value of the lawsuit from the bank's operations.

assets, securities, security analysis

Abstract:
This case explores the alternatives that Signet faced in 1995 as it attempted to restructure itself; the market perceived Signet to be undervalued, especially in light of the strong performance of its credit-card division. Students must choose among several competing proposals to enhance shareholder value.

corporate restructuring, financial services, valuation

Abstract:
This case explores the alternatives that Signet faced in 1995 as it attempted to restructure itself; the market perceived Signet to be undervalued, especially in light of the strong performance of its credit-card division. Students must choose among several competing proposals to enhance shareholder value.

corporate restructuring, financial services, valuation

Abstract:
In July 2004, J.P. Morgan Partners (JPMP), the private equity arm of JPMorgan Chase & Co., was in the midst of formulating the final terms of a public-to-private buyout proposal for AMC Entertainment Inc. (AMCE), a publicly traded movie theater company.

valuation, private equity

Abstract:
Alice Handy, an investment professional with three decades of experience as head of the University of Virginia Investment Management Company, has opened a new asset management firm targeted at midsized endowments and nonprofit institutions in January 2004. Her business, Investure, LLC, offered outsourced investment services to institutions with $150 million to $1 billion in assets and access to top-performing managers at lower cost than a fund of funds (FoF). Smith College, a prestigious liberal arts college with a nearly $1 billion endowment, is interested in increasing its current allocation to private equity. Handy and her partner are preparing to meet with Smiths trustees in an attempt to win Smith College as Investures first client. The case presents three different approaches to private equity investing: direct investment through a traditional limited partnership, investment through a fund of funds, or investment through Investures outsourced model. The class discussion presents an opportunity to evaluate the advantages and shortcomings of each approach, introduce key terminology, and to discuss the current trends in the private equity market. Students are given the cash inflows and outflows for a representative investment in a venture capital fund of the type Handy hopes to invest in on behalf of Smith College. The main analytical task requires students to evaluate the expected gross and net returns generated by the representative investment under each of the different approaches and fee structures. This case was written for an opening or early class in courses focusing on entrepreneurial finance, venture capital, or private equity. It can also be used in specialized courses for fund trustees interested in alternative assets. Objectives " To provide an overview of private equity investing and the advantages and disadvantages of private-equity investing. " To introduce students to the structure of private equity partnerships and key terms (e.g., general partner, limited partner, committed capital, carried interest, fees.) " To explore the different approaches to investing in private equity and evaluate the benefits and shortcomings of each. " To consider the portfolio implications of private equity investments. " To examine issues of fit for an endowment.

investment management, nonprofit organizations, venture capital, private equity

Abstract:
The "TRX, Inc.: Initial Public Offering" case provides comprehensive coverage of a firm’s decision to undertake an initial public offering (IPO) and the process of going public. The case follows the sequence of events from the company’s incorporation in 1999 through the completion of an IPO in September 2005. In addition to raising capital, the TRX IPO case also includes consideration of another motivation for going public. At the time of its incorporation in November 1999, TRX attempted to go public but in the ensuing dot-com collapse, the IPO was never completed. In response to the failed IPO, TRX president and CEO, Trip Davis, turned to strategic investors to raise $20 million in a note convertible into equity at $11 per share. Although Davis had hoped the strategic investors would provide guidance and business opportunities for TRX, they never materialized. By 2004, he had come to believe that the largest strategic investor, Sabre, Inc. was not working in TRX’s best interest. Thus, the IPO is motivated by a twofold purpose: to raise money and to provide for a strategic reorganization of the firm’s ownership structure.

initial public offering

Abstract:
In November 2006, Alec Berg, a successful hedge fund manager, must decide whether to invest in the initial public offering (IPO) of the Hertz Corporation. The IPO followed a leveraged buyout (LBO) of Hertz that was completed in December 2005 by three prominent private equity firms that had combined to purchase Hertz from the Ford Motor Company for $14.9 billion. The LBO sponsors had borrowed an additional $1 billion on top of the buyout financing to pay themselves a special dividend in June 2006. This loan would be repaid with the IPO proceeds and any remaining proceeds from the IPO would go to the sponsors. The IPO generated widespread criticism with respect to the speed with which the IPO was conducted and the payment of special dividends. In the face of this criticism, the demand for the Hertz IPO weakened, and the offer price was reduced from the initial file price range of $16-$18 to just $15. Berg must assess whether at $15 per share, Hertz offers an attractive investment for this fund. The case provides the necessary information for students to analyze the sponsors’ returns on their investment in Hertz and the attractiveness of the $15 offer price to public shareholders. The case also offers an opportunity for students to discuss the controversy surrounding the payment of special dividends and the claim that private equity sponsors invest with a long-term perspective that creates value for the company.

private equity

Abstract:
This case examines a proposed $2 billion asset-backed securitization offering that is to be supported by Formula One's television broadcasting rights. The case is written from the perspective of Steve Din, executive director of Securitization for Morgan Stanley Dean Witter, who is responsible for placing the securities in September 1998. The proposed Eurobond issuance for Formula One (F1) follows a delayed initial public offering (IPO) in 1997 that failed to materialize owing to disputes with the Formula One teams. In the wake of the delayed IPO, Morgan Stanley Dean Witter replaced Salomon Brothers as the adviser to Bernie Ecclestone, the eccentric billionaire owner of the F1 trademarks, and became the lead manager for the $2 billion structured finance placement meant to bridge Formula One to an eventual IPO. Students are asked to recommend a course of action to meet the challenges of marketing the new issue. The case is designed for use in finance electives focusing on financing methods, investment banking, securitization, or other advanced topics in corporate finance.

assets, debt policy, intangible assets

Abstract:
The typical term sheet for a venture-capital investment contains a host of contract provisions designed to protect the value of an investor’s capital. The purpose of this note is to focus on a few key terms (namely, antidilution, liquidation preference, dividends, redemption, and control rights) and to discuss the ways in which these terms may be made more investor-friendly or entrepreneur-friendly. The terms discussed in this note are widely regarded by practitioners as having the greatest ability to affect the economic returns for the parties involved in an early-stage investment. At the end of the discussion of each term, a chart highlights the various ways in which these terms may be structured. The examples, though not meant to be exhaustive, offer a perspective on the various ways a term might be worded in order to confer different rights on the parties.

venture capital, private equity

Abstract:
This case invites students to estimate the costs of a new debt issue. Designed as an introductory case for use early on in an MBA course, it requires students to compute the yield-to-maturity on the WorldCom bonds from price data and from spreads over Treasury securities for bond-rating categories. The exercise allows for discussion of benchmarking in the context of credit markets.

bonds, capital markets, cost of capital

Abstract:
In November 2003, John Fruehwirth, a principal at Allied Capital was considering a $20 million mezzanine investment in growth capital for the Elephant Bar Restaurant, a California restaurant chain. Elephant Bar had had some initial success in California but now Allied’s investment committee had to wrestle with the question of whether the restaurant concept was strong enough to travel and become a national brand or whether it was mainly a "California Concept." And if the concept was strong enough to travel, would Allied Capital be able to meet its underwriting standards? Because Elephant Bar is a company with aggressive growth plans, it is significantly riskier than traditional mezzanine investments. The case can be used in courses on venture investing, to illustrate another funding source available to young companies. Traditional mezzanine financing is often used to provide a portion of the funding for late stage investments, such as leverage buyouts. The case can also be used in courses on private equity, to illustrate the perspective, risk mitigation strategies, and return expectations of mezzanine investors.

private equity

Abstract:
Concierge Club is an early-stage company looking to raise $6 million of additional funding in a Series A financing in December 1999. Mary Naylor, the founder and CEO of Concierge Club, is a dynamic and energetic leader who has previously received backing from a Washington, D.C.-- based angel investor group. She established her business in 1987 as an on-site "brick and mortar" concierge service providing concierge services to commercial office buildings, residential buildings, and corporate headquarters. With the subsequent growth in on-line technology, Naylor is seeking funding in 1999 to become the "first nationwide concierge service to offer full Internet capabilities to companies seeking to offer these services as a customer or employee benefit." The case includes materials from Concierge Club's business plan and pitch to investors, which allows students to assess the reasonableness for her forecasts, the level of competition, the adequacy of the $6 million in funding, and the value of the company. A key issue is whether the company can perform on the national level with a service based on exceptional local knowledge and assistance. The case is designed as a negotiation exercise in which teams of students are assigned to play the role of investor and entrepreneur (Naylor).

entrepreneurship, negotiation, valuation

Abstract:
This case is designed as an introductory exercise to familiarize students with several methods used to value early-stage companies. The value of a young biotech company is compared under the venture capital (VC), discounted cash flow (DCF), and real option methods of valuation. Students are asked to value the firm under the VC and DCF methods and then compare those values to the value obtained under the real option method. It is suggested that the student spreadsheet (UVA-S-F-1584) be assigned in advance of the class with instructions to have students value the firm under the VC and DCF methods. A separate worksheet in the file (which can be hidden at the instructor’s discretion) provides the option valuation for later discussion purposes. A technical note, "Valuing the Early-Stage Company" (UVA-F-1471), covering the basics of the VC and DCF methods of valuation can be assigned with the case.

start-up, valuation, venture capital

Abstract:
We examine 245 international firms making initial public offerings (IPOs) in the United States between 1991 and 1999, and compare their underwriting fees and indirect costs of underpricing to the IPOs of domestic U.S. issuers. Our results indicate that foreign IPOs experience approximately the same costs on average as domestic IPOs. The risk of foreign IPOs arising from asymmetric information and high country risk is offset by characteristics that reduce their risk relative to domestic U.S. IPOs. Foreign U.S. IPO issuers are larger firms with tangible assets that originate from countries sharing a common border and language with the United States. These issues occur following periods of strong home market equity performance and stable currency conditions, which help to alleviate country risk.

Abstract:
This case and its companion (UVA-F-1102) provide comprehensive coverage of a firm's decision to undertake an initial public offering (IPO). The company is a nonregulated financial firm in a rapidly growing area of consumer finance (high credit-risk automobile loans). The A case follows the firm from its first meeting with investment bankers to the determination of a preliminary IPO price range. In the B case, the firm's "road show" encounters a "cold-issue" market, and Eagle is unable to sell its shares at a price near the preliminary file range. Management is confronted with the tough choice of whether to proceed with the IPO or cancel it. The cases provide a rich opportunity to compare management's internal valuation of the firm (derived from market multiples and discounted cash-flow analysis) with the market's assessment of value. Excel spreadsheet files are available for use with this case (UVA-S-F-1095) and its teaching note.

consumer loans, security analysis, valuation

Abstract:
This case and its companion (UVA-F-1095) provide comprehensive coverage of a firm's decision to undertake an initial public offering (IPO). The company is a nonregulated financial firm in a rapidly growing area of consumer finance (high credit-risk automobile loans). The A case follows the firm from its first meeting with investment bankers to the determination of a preliminary IPO price range. In the B case, the firm's "road show" encounters a "cold-issue" market, and Eagle is unable to sell its shares at a price near the preliminary file range. Management is confronted with the tough choice of whether to proceed with the IPO or cancel it. The cases provide a rich opportunity to compare management's internal valuation of the firm (derived from market multiples and discounted-cash-flow analysis) with the market's assessment of value. Excel spreadsheet files are available for use with this case and its teaching note (UVA-S-F-1102).

security issuance, equity valuation, initial public offering

Abstract:
This case examines the use of an American Depositary Receipt (ADR) program in the context of an overall restructuring plan that students are asked to evaluate. A New Zealand-based conglomerate's stock in recent months has underperformed in the New Zealand market. Analysts have begun to speculate that the company suffers from the well-known "conglomerate discount." In June 2000, in an attempt to improve the situation, Deutsche Bank Alex Brown (DBAB) is asked to conduct a strategic review of the company.

strategy/structure, strategic thinking

Abstract:
We investigate the motivations and the returns to the firms and investors using Private Investments in Public Equities (PIPE) financing, an increasingly common form of equity-based financing. From 1995-2000, 1,466 firms raised more than $29 billion through 2,626 PIPE issues. We find that PIPE issuers are poorly performing firms, urgently in need of cash that, as a consequence, are without access to traditional forms of financing. The contract terms and embedded options in PIPEs allow investors to alter their exposure to post-issue movements in the value of the issuer’s equity. As a result, the returns earned by investors substantially exceed those of shareholders. Hence PIPEs provide incentives for investors to make investments in firms with substantial operating uncertainties, enabling companies barred from traditional capital markets to obtain much needed financing.

Abstract:
This paper investigates the motivations for and consequences of including a broad group of employees in leveraged buyouts. We compare employee buyouts (EBOs) to buyouts where only top level management participates (MBOs). We find that the pre-buyout characteristics of EBOs and the structure of these transactions are consistent with predictions about the costs and benefits of employee participation both from a labor contract and corporate finance perspective. EBOs tend to occur in poorly performing firms with lower pre-buyout debt capacity and in circumstances where employees are more likely to be concerned about the appropriation of their firm-specific capital. Consistent with an effort to control the costs associated with employee ownership, EBOs tend to have lower employee risk-bearing costs and employees are given limited control rights in the early post-buyout years.

Abstract:
If global capital markets are less than completely integrated, firms can create value for investors by issuing equity in foreign markets. We develop a theoretical framework to show that the offer price for an issuer's shares is increased by wider distribution of the shares in multiple markets. Using a sample of 276 global equity offerings from 1985 to 1992, we compare global equity issues to a control group of issues offered exclusively in the domestic U.S. market. We provide evidence on the direct issue costs (underwriting costs and fees) and the indirect information costs of these offers. After controlling for firm and issue characteristics, we find that the direct costs of issue are significantly lower on average for global issues. In addition, the negative stock price reaction that equity issue typically evokes is reduced when firms have a foreign tranche in their offer. Overall, the results suggest that the segmentation of international markets offers certain issuers an opportunity to raise equity capital at advantageous terms.

Abstract:
The aggregate volume of equity issues is used to search for periods when seasoned equity capital can be raised at favorable terms. We find that the price reaction to equity issue announcements in high equity issue volume (HOT) periods is approximately 200 basis points lower on average than in low equity issue volume (COLD) periods. The lower price reaction in hot markets is economically important and is independent of the macroeconomic characteristics of hot and cold markets. The evidence supports the existence of windows of opportunity for equity issues that result at least partially from reduced levels of asymmetric information.