中国经济管理大学《公司金融学》案例

Ecsy-Cola
Libby Flannery, the Regional Manager of Ecsy-Cola, the international soft drinks empire, was reviewing her investment plans for Central Asia. She had contemplated launching Ecsy-Cola in the ex-Soviet republic of Inglistan in 2004. This would involve a capital outlay of ＄20 million in 2004 to build a bottling plant and set up a distribution system three. Fixed costs (for manufacturing, distribution, and marketing) would then be ＄3 million per year from 2003 onward. This would be sufficient to make and sell 200 million liters per year-enough for every man, women, and child in Inglistan to drink 4 bottles to per week! But there would be few savings form building a smaller plant, and import tariffs and transport and costs in the region would keep all production within national borders.
The variable costs of production and distribution would be 12 cents per liter. Company policy requires a rate of return of 25 percent in nominal dollar terms, after local taxes but before deducting any costs financing. The sales revenue is forecasted to be 35 cents/liter.
Bottling plants last almost forever, and all unit costs and revenues were expected to remain constant in nominal terms. Tax would be payable at a rate of 30 percent, and under the Inglistan corporate tax code, capital expenditures can be written off on a straight-line basis over four years.
All these inputs were reasonable clear. But Mrs. Flannery racked her brain trying to forecast sales. Ecsy-Cola found that “1-2-4” rule works in most new markets. Sales typically double in the second year, double again in the third year, and after that remain roughly constant. Libby’s best guess was that, if she went ahead immediately, initial sales in Inglistan would be 12.5 million liters in 2005, ramping up to 50 million in 2007 and onward.
Ms. Flannery also worried whether it would be better to wait a year. The soft drinks market was developing rapidly in neighboring countries, and in a year’s time she should have a much better idea whether Ecsy-Cola would be likely to catch on in Inglistan. If it didn’t catch on and sales stalled below 20 million liters, a large investment probably would not be justified.
Ms. Flannery had assumed that Ecsy-Cola’s keen rival, Sparkly-Cola would not also enter the market. But last week she received a shock when in the lobby of the Kapitaliste Hotel she bumped into her opposite number at Sparkly-Cola. Sparkly-Cola would face costs similar to Ecsy-Cola. How would Sparkly-Cola respond if Ecsy-Cola entered the market? Would it decide to enter also? If so, how would that affect the profitability of Ecsy-Cola’s project.
Ms. Flannery thought again about postponing investment for a year. Suppose Sparkly-Cola was interested in the Inglistan market. Would that favor delay or immediate action? Maybe Ecsy-Cola should announce its plans before Sparkly-Cola had a chance to develop its own proposal. It seemed that the Inglistan project was becoming more complicated by the day.

中国经济管理大学《公司金融学》案例

      Waldo County
Wald County, the well-known real estate developer, worked long hours, and he expected his staff to do the same. So George was about to leave for a long summer’s weekend.
Mr. County’ s success had been built on a remarkable instinct for a good site. He would exclaim “location! location! location!” at some point in every planning meeting. Yet finance was not his strong suit. On this occasion he wanted George to go over the figures for a new ﹩90 million outlet mall designed to intercept tourists heading downeast toward Maine. “I’ll be in my house in Bar Harbor if you need me.”
George’s first task was to draw up a summary of the projected revenues and costs. The results are shown in Table 10.7. Note that the mall’ s revenues would come from two sources: The company would come from two sources: The company would charge retailers an annual rent for the space they occupied and in addition it would receive 5 percent of each store’s gross sales.
Construction of the mail was likely to take three years. The construction costs could be depreciated straight-line over 15 years starting in year 3. As in the case of the company’s other developments, the mall would be built to the highest specifications and would not need to be rebuilt until year 17. The land was expected to retain its value, but could not be depreciated for tax purposes.
Construction costs, revenues, operating and maintenance costs, and real estate taxes were all likely to rise in line with inflation, which was forecasted at 2 percent a year. The company’s tax rate was 35 percent and the cost of capital was 9 percent in nominal terms.
George decided first to check that the project made financial sense. He then proposed to look at some of the things that might go wrong. His boss certainly had nose for a good retail project, but he was not infallible. The Salome project had been a disaster because store sales had turned to be 40 percent below forecast. What if that happened here? George wondered just how far sales could fall short of forecast before the project would be underwater.  
TABLE 10.7
Projected revenues and costs in real terms for the Downeast Tourist Mall(figures in ﹩millions)
 YEAR
 0 1 2 3 4 5-17
Investment: 
Land  30 
Construction 20 30 10 
Operations: 
Rentals  12 12 12
Share of retail sales  24 2 24
Operating and maintenance costs 2 4 4 10 10 10
Real estate taxes 2 2 3 4 4 4
Inflation was another source of uncertainty. Some people were talking about a zero long-term inflation rate, but George also wondered what would happen if inflation jumped to, say, 10 percent.
A third concern was possible construction cost overruns and delays due to required zoning changes and environmental approvals. George had seen cases of 25 percent construction cost overruns and delays up to 12 months between purchase of the land and the start of construction. He decided that he should examine the effect that this scenario would have on the project’s profitability.
“Hey, this might be fun,” George exclaimed to Mr. Waldo’s secretary, Fifi, who was heading for Old Orchard Beach for the weekend. “I might even try Monte Carlo.”
“Waldo went to Monte Carlo once,” Fifi replied. “Lost a bundle at the roulette table. I wouldn’t remind him. Just show him the bottom line.”
“OK, no Monte Carlo,” George agreed. But he realized that building a spreadsheet and running scenarios was not enough. He had to figure out how to summarize and present his results to Mr. Country.

中国经济管理大学《公司金融学》案例

M  I  N  I  C  A  S  E
New Economy Transport
The New Economy Transport Company (NETCO) was formed in 1952 to carry cargo and passengers between ports in the Pacific Northwest. By 1998 its fleet had grown to four vessels, one of which was a small dry-cargo vessel, the Vital Spark.
The Vital Spark is badly in need of an overhaul. Peter Handy, the finance director, has just been presented with a proposal, which would require the following expenditures:
Install new engine and associated equipment    $185000
Replace radar and other electronic equipment     50000
Repairs to hull and superstructure              130000
Painting and other maintenance                 35000  
                                         $400000

NETCO’s chief engineer, McPhail, estimates the postoverhaul  operating costs as following:14
Fuel                $450000
Labor and benefits     480000
Maintenance          141000
Other                110000        
                   $1181000

The Vital Spark is carried on NETCO’s books at a net value of only $30000, but could probably be sold “as is,” along with an extensive inventory of spare parts, for $100000. The book value of the spare parts inventory is $40000.
The chief engineer has also suggested installation of a more modern navigation and control system, which would cost an extra $200000.15  This additional equipment wouldn’t not substantially reduce the Vital Spark’s performance, but it would result in the following reduced annual fuel, labor ,and maintenance costs:
Fuel                $420000
Labor and benefits      405000
Maintenance            70000
Other                  90000       
                     $985000
                                 
                          
There is no question that the Vital Spark needs a new engine and general overhaul soon. However, Mr. Handy feels it unwise to proceed without also considering the purchase of a new boat. Cohn and Doyle, I nc., a Wisconsin shipyard, has approached NETCO with a new design incorporating a Kort nozzle, extensively automated navigating and power control systems, and much more comfortable accommodations for the crew. Estimated annual operating costs of the new boat are
Fuel              $370000
Labor and benefits   330000
Maintenance         70000
Other               74000           
                  $844000
The crew would require additional training to handle the new boat’s more complex and sophisticated equipment and this would probably require an expenditure of $50000 to $100000.
The estimated operating costs for the new boat assume that it would be operated in the same way as the Vital Spark, However, the new boat should be able to handle a larger load on some routes, and this might generate additional revenues, net of additional out-of –pocket costs, of as much as $100000 per year. Moreover, a new boat would have a useful service life of 20 years or more. The Vital Spark, even if rehabilitated, could not last that long-probably only 15years. A t that point it would be worth only its scrap value of about $40000.
Cohn and Doyle offered the new boat for a fixed price of $2000000, payable half immediately and half on delivery in nine months. Of this amount $600000 was for the engine and associated equipment and $510000 was for navigation, control, and other electronic equipment.
NETCO was a private company, soundly financed and consistently profitable. Cash on hand was sufficient to rehabilitate or improve the Vital Spark but not to buy the new boat could be financed with medium-term debt, privately placed with an insurance company. NETCO had borrowed via a private placement once before when it negotiated a fixed rate of 12.5 percent on a seven–year loan. Preliminary discussions with NETCO’s banks led Mr. Handy to believe that the firm could arrange an 8 percent fixed-rate medium-term loan.
NETCO had traditionally estimated its opportunity cost of capital for major business investments by adding a risk premium of 10 percentage points to yields on newly issued Treasury bonds .16  Mr. Handy thought this was a reasonable rule of thumb for the dry cargo business.
14All estimated of costs and revenues ignore inflation. Mr. Handy’s banks have suggested that inflation will average 3 percent a year.
15All investments quality for the 7-year MACRS class.
16In 1998 Treasury bonds were yielding percent.

中国经济管理大学《公司金融学》案例

M   I   N   I   C   A   S   E
Reeby Sports
Ten years ago, in 1990, George Reeby founded a small mail-order company selling high-quality sports equipment. Reeby Sports has grown steadily and been consistently profitable (see Table 4.6). The company has no debt and the equity is valued in the company’s books at nearly $41 million (Table 4.7). It is still wholly owned by George Reeby.
George is now proposing to take the company public by the sale of 90000 of his existing shares. The issue would not raise any additional cash for the company, but it would allow George to cash in on part of his investment. It would also make it easier to raise the substantial capital sums that the firm would later need to fiancé expansion.
George’s business has been mainly in the East coast of the United States, but he plans to expand into the Midwest in 2002. This will require a substantial investment in new warehouse space and inventory. George is aware that it will take time to build up a new customer base, and in the meantime there is likely to be a temporary dip in profits. However, if the venture is successful, the company should be back to its current 12 percent return on book equity by 2007.
George settled down to estimate what his shares are worth. First he estimates the profits and investment through 2007(Table 4.8 and 4.9). The company’s net working capital includes a growing proportion of cash and marketable securities which would help to meet the cost of the expansion into the Midwest. Nevertheless, it seemed likely that the company would needs to raise about $4.3 million in 2002 by the sale of new shares.(George distrusted banks and was not prepared to borrow to finance the expansion.)
Until the new venture reached full profitability, dividend payments would have to be restricted to conserve cash, but from 2007 onward George expected the company to pay out about 40 percent of its net profits. As a first stab at valuing the company, George assumed that after 2007 it would earn 12 percent on book equity indefinitely and that the cost computed a more conservative valuation, which recognized that the mail-order sports business was likely to get increasingly competitive. He also looked at the market valuation of comparable business on the West coast, Molly Sports. Molly’s shares were currently priced at 50 percent above book value and were selling on a prospective price-earnings ratio of 12 and a dividend yield of 3 percent.
George realized that a second issue of shares in 2002 would dilute his holdings. He set about calculating the price at which these shares could be issued and the number of shares that would need to be sold. That allowed him to work out the dividends per share and to check his earlier valuation by calculating the present value of the stream of per-share dividends.
T  A  B  L  E   4. 6
Summary income data (figures in $millions)
 1996 1997 1998 1999 2000
Gross profits 5.84 6.40 7.41 8.74 9.39
Depreciation 1.45 1.60 1.75 1.97 2.22
Pretax profits 4.38 4.80 5.66 6.77 7.17
Tax  1.53 1.68 1.98 2.37 2.51
After-tax profits 2.85 3.12 3.68 4.40 4.66
Note: Reeby Sports ha never paid a dividend and all the earnings have been retained in the business.
T  A  B  L  E  4. 7
Summary balance sheet for year ending December 31st (figures in $millions)
ASSETS                   LIABILITIES AND EQUITY
                  1999       2000                     1999      2000
Cash & securities 3.12 3.61 Current Liabilities 2.90 3.20
Other current assets 15.08 16.93   
Net fixed assets 20.75 23.38 Equity 36.05 40.71
Total 38.95 43.91 Total 38.95 43.91
T  A  B  L  E  4. 8
Forecasted profits and dividends (figures in $millions)
                  2001   2002   2003    2004   2005    2006   2007
Gross investment   10.47   11.87    7.74    8.40    9.95    12.67  15.38
Depreciation       2.40    3.10    3.12    3.17    3.26    3.44    3.68 
Pretax profits      8.08    8.77     4.62    5.23    6.69    9.23   11.69
Tax              2.83    3.07    1.62     1.83    2.34    3.23   4.09
After-tax profits    5.25     5.70    3.00    3.40     4.35    6.00   7.60
Dividends        2.00     2.00    2.50    2.50     2.50     2.50   3.00
Retained profits    3.25    3.79     .50      .90    1.85     3.50   4.60
T  A  B  L  E  4. 9
Forecasted investment expenditures (figures in $millions)

 2001 2002 2003 2004 2005 2006 2007
Gross investment in fixed assets 4.26 10.50 3.34 3.65 4.18 5.37 6.28
Investments in net working capital 1.39 .60 .28 .41 .93 1.57 2.00
Total  5.65 11.10 3.62 4.07 5.11 6.94 8.28

中国经济管理大学《公司金融学》案例

M    I     N    I     C    A    S    E
The Jones Family, Incorporated
The Scene: Early evening in an ordinary family room in Manhattan, Modern furniture，with old copies of The Wall Street Journal and the Financial Times scattered around. Autographed photos of Alan Greenspan and George Soros are prominently displayed. A picture window reveals a distant view of lights on the Hudson River. John Jones sits at a computer terminal, glumly sipping a glass of chardonnay and trading Japanese yen over the Internet. His wife Marsha enters. 
Marsha: Hi, honey. Glad to be home. Lousy day on trading floor, through. Dullsville. No volume. But I did manage to hedge next year’s production from our copper mine. I couldn’t get a good quote on the right package of futures contracts, so I arranged a commodity swap.
John doesn’t reply.
Marsha: John, what’s wrong? Have you been buying yen again? That’s been a losing trade for weeks.
John: Well, yes. I shouldn’t have gone to Goldman Sachs’s foreign exchange brunch. But I’ve got to get out of the house somehow. I’m cooped up here all day calculating covariance’s and efficient risk-return trade-offs while you’re out trading commodity futures. You get all the glamour and excitement.
Marsha: Don’t worry dear, it will be over soon. We only recalculate our most efficient common stock portfolio once a quarter. Then you can go back to leveraged leases.
John: You trade, and I do all the worrying. Now there’s a rumor that our leasing company is going to get a hostile takeover bid. I knew the debt ratio was too low, and you forgot to put on the poison pill. And now you’re made a negative-NPV investment!
Marsha: What investment?
John: That fancy new Mercedes horse transporter. The caretaker on our Connecticut estate told me it arrived today. He said it cost $35000! Sometimes I think you love that horse Kosak more than you love me!
Marsha: There, there, don’t you believe it. You always come first. But after all, Kosak is a champion Hanoverian gelding. We can’t show up at the dressage competitions in a ratty rented horsebox.
John and Marsha’s teenage son Johnny bursts into the room.
Johnny: Hi, Dad! Hi, Mom! Guess what? I’ve made the junior varsity derivatives team! That means I can go on the field trip to the Chicago Board Options Exchange. (Pauses. ) What’s wrong?
John: Your mother has made another negative-NPV investment.  A horse transporter.
Johnny: That’s OK, Dad. Mom told me about it. We’ll save on the rentals. Remember, Mom goes to dressage every other week, and a rented transporter costs $200 per day plus $1.00 per mile. Most of the trips are 40 or 50 miles one-way. And then we usually give the driver a $40 tip.  With the new transporter, we’ll only have to pay for diesel fuel and maintenance-probably only about $.45 per mile.
John: What about insurance? What about depreciation?
Marsha: Insurance is only $1200 per year. And by the way, the transporter isn’t new, it’s reconditioned. It’s a Troja horsebox on a Mercedes truck chassis. It’ll hold its value pretty well. The salesman said we could probably resell it for $15000 after eight years, when Kosak will be ready to retire-and that assumes no inflation. I think inflation will be at least 4 percent per year.
John: Operating costs will inflate too. So what’s the NPV?
Marsha: Well, I didn’t calculate…convenience is worth something, you know.
Johnny: I’ll do the calculation, Dad. I was going to do it yesterday, but my corporate finance teacher asked us to calculate default probabilities for a sample of junk bonds. Is a 9 percent nominal cost of capital OK?
Marsha: Sure, Johnny.
John: I just wish we could make your horse into a tax shelter.(Takes a deep breath and stands up.) Anyway, how about a nice family dinner? I’ve reserved our usual table at the Four Seasons.
Everyone exits.
Announcer: Was the horse transporter really negative-NPV? Will John and Marsha have to fight a hostile takeover? Will Johnny’s derivatives team use Black-Scholes or the binomial method? Find out in the next episode of The Jones Family, Incorporated.
You may not aspire to the Jones family’s way of life, but you will learn about all their activities, from futures contracts to binomial option pricing, later in this book. Meanwhile, you may wish to replicate Johnny’s NPV analysis.