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• Applied Corporate Finance (4th Edition)
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The case allows you to apply the principles of capital budgeting to a hypothetical project. Your task is to assess whether you would invest in this project, given the information in the case.

When the case is ready, you can download the case in pdf format and the last exhibit as an excel .

After the case in analyzed in class, you can also download the presentation of the solution and the excel files containing the solution for the finite life and the infinite life. You can also download the summary sheet for group project.

• The Case (Download as pdf file)
• Comparable Companies (Download as excel file)

When the time comes, my analysis of the case (not necessarily the right one) will be below.

• Case analysis (excel file): Finite life and Perpetual life (Excel spreadsheet)
• Case presentation
• An explanation of the case grading (will come after I grade the cases)

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Case Studies for Corporate Finance

• By (author): 
• Harold Bierman, Jr ( Cornell )
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• Description
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Case Studies for Corporate Finance: From A (Anheuser) to Z (Zyps) (In 2 Volumes) provides a distinctive collection of 51 real business cases dealing with corporate finance issues over the period of 1985–2014. Written by Harold Bierman Jr, world-renowned author in the field of corporate finance, the book spans over different areas of finance which range from capital structures to leveraged buy-outs to restructuring. While the primary focus of the case studies is the economy of the United States, other parts of the world are also represented. Notable to this comprehensive case studies book are questions to which unique solutions are offered in Volume 2, all of which aim to provide the reader with simulated experience of real business situations involving corporate financial decision-making. Case studies covered include that of Time Warner (1989–1991), The Walt Disney Company (1995), Exxon–Mobil (1998), Mitsubishi's Zero Coupon Convertible Bond (2000), and Apple (2014).

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• Pilgrim's Pride (2003)
• Intel (1991)
• Marriott's Spin-Off (1992)
• Host Marriott (1998)
• LTCM (1998)
• Salomon: Share Repurchase (1997)
• Microsoft (2003–2004)
• Berkshire Hathaway, Inc.
• Florida Power & Light Company (FPL) (1994)
• DIRECTV (2011)
• Apple (2014)
• "Chain Saw" AL and Sunbeam (1995–1998)
• Sun Company, Inc. (1995)
• AutoNation (2006)
• Kerr–McGee and Icahn (2005)
• Pfizer–Zoetis (2013)
• Hoffman–Sterling–Kodak (1986)
• Bendix–Marietta–Allied (1982)
• E–II Holding Inc. (1987)
• LBO of RJR Nabisco (1988)
• RJR Nabisco (1993)
• RJR–KKR–Borden (1994)
• Hilton–ITT–Starwood (1997)
• Anheuser–Busch–InBev (2008)
• Merck–Shering Plough (2009)
• The Acquisition of by P&G (2005)
• P&G and the Gillette Company (2005)
• Time Warner (1989–1991)
• Income Deposit Security (IDS) (2004)
• ZYPs (1999) Bank Austria
• The Walt Disney Company (SPN) (1995)
• Media One Group (1998)
• Computer Associates: A Synthetic Convertible
• Philips Petroleum, Mesa and Icahn (1985)
• Marrietta Corporation (1994–1996)
• The Managerial Buyout of United States Can Company (2000)
• Metromedia (1984)
• Hertz (2006)
• Fortress Investment Group (2007)
• The Blackstone Group
• TIFD vs USA (Nov 2004) GECC
• DIMAR Company: A Lease or Buy Case(2006)
• Sale-Lease of 399 Park Avenue (2002)
• Guandong International Trust (1993)
• Marlin Water Trust (1998)
• Sanofi-Synthelabo and Aventis (2004)
• Merger Water Trust (1998)
• SAFRA Republic: Debenture (1997)
• Shinsei Bank (Japan 2000–2004)

FRONT MATTER

• Pages: i–xiii

https://doi.org/10.1142/9789813148895_fmatter

• About the Author
• Acknowledgment

Section 1: Capital Structure

• Pages: 3–63

https://doi.org/10.1142/9789813148895_0001

The four cases in this section all involve the common stock section of the capital structure. It is very difficult to generate value by implementing strategies just using common stock.

Section 2: Excessive Use of Debt(also see Mergers: Raids)

• Pages: 67–70

https://doi.org/10.1142/9789813148895_0002

• Long-Term Capital Management (LTCM) (1998)

Section 3: Dividend Policy — Share Repurchase

• Pages: 73–125

https://doi.org/10.1142/9789813148895_0003

During investment from the stockholders after a dividend, the funds flow in a circle from the firm to investors and back to the firm. Thus, with a given investment policy, in the absence of taxes and transaction costs, logically dividend policy should not affect the value of a firm. Since investor taxes are necessary for dividend policy to matter, we shall focus on the interrelationship of dividend policy and tax regulations.

Section 4: Restructuring

• Pages: 129–232

https://doi.org/10.1142/9789813148895_0004

• “Chain Saw” AL and Sunbeam (1995–1998)
• Kerr-McGee and Icahn (2005)
• Pfizer-Zoetis (2013)

Section 5: Mergers: Raids: Use of Debt

• Pages: 235–394

https://doi.org/10.1142/9789813148895_0005

• Hoffman–Sterling–Kodak (1986)
• Bendix–Marietta–Allied (1982)
• E-II Holdings Inc. (1987)
• RJR–KKR–Borden (1994)
• Hilton–ITT–Starwood (1997)
• Anheuser-Busch–InBev (2008)
• Merck and Schering-Plough (2009)
• The Acquisition of Gillette by P&G (2005)
• P&G and the Gillette Company (2005)

Section 6: Use of Exotics

• Pages: 397–482

https://doi.org/10.1142/9789813148895_0006

In this section, we consider unusual financial instruments and strategies for corporations. It is interesting that none of the situations exploits directly capital structure or dividend policy, two of the more obvious areas of corporate strategy available for increasing shareholder value.

Section 7: Leveraged Buyouts

• Pages: 485–578

https://doi.org/10.1142/9789813148895_0007

A leveraged buyout may be executed by an individual, a group, one or more private equity firms, or a corporation. The buyer needs to have some investible capital and to have access to additional capital that can be borrowed so that the price being asked can be covered. The borrowed portion of the purchase price is the leveraged part of the LBO. Thus, with an LBO, a firm is being purchased and a significant part of the purchase price is being financed with borrowed (debt) capital.

Section 8: Non-Conventional Corporations

• Pages: 581–653

https://doi.org/10.1142/9789813148895_0008

The author actually invested in Fortress and Blackstone to gather information for this book. But in the summer of 2011, he received information from the two companies necessary for his 2010 tax reports. No expected return could reward him sufficiently for the increased complexity in filing his federal income tax forms.

Section 9: Buy vs. Lease

• Pages: 657–668

https://doi.org/10.1142/9789813148895_0009

Fundamental misunderstandings about the relative merits of the two modes of financing (buy or lease) continue to persist…

Section 10: An International Element

• Pages: 671–726

https://doi.org/10.1142/9789813148895_0010

• Balance-of-trade data and information and international trade theory.
• Currency exchange rate theory and institutions.
• The impact of currency exchange rate changes (actual or expected) on debt and investment decisions and on accounting measures.
• Tax considerations.

BACK MATTER

• Pages: 727–738

https://doi.org/10.1142/9789813148895_bmatter

Harold Bierman is the Nicholas H Noyes Professor Emeritus of Business Administration at Cornell University, USA. He has been a consultant for many public organizations and industrial firms and is the author of more than 200 books and articles in the fields of accounting, finance, investment, taxation and quantitative analysis. In 1985, he was named the winner of the prestigious Dow Jones Award of the American Assembly of Collegiate Schools of Business for his outstanding contributions to collegiate management education.

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White Square: A Perfect Storm in Moscow

Brian Patterson was the lead developer of a large office project in Moscow when the global financial crisis hit. His project, which had looked like it would be jaw-droppingly profitable just months before, was suddenly thrown into turmoil, and he faced trouble on all fronts. His local development partner wanted to sell in order to shore up its failing balance sheet, his world-class anchor tenant suddenly reneged on its pre-lease agreement, the contractor was running months behind schedule, and the project’s bank was looking for any excuse to pull the construction loan.

Just months earlier, the project pro forma had projected hundreds of millions of dollars in profit. Suddenly there were serious questions around whether the project could even be completed. And if it could, what rent and cap rate values could be assumed to determine if it made sense to continue development? Patterson needed to make some assumptions to determine whether or not to accept a sale offer that had been drudged up by his local partner. And if he decided to turn down the sale offer, he needed to find a way forward through a maze of (i) diverging interests amongst his partners and (ii) project development problems.

As the economic and financial system faced global turmoil and threatened collapse, Patterson had to decide whether to keep developing the project – at significant risk to both the project and his personal career – or to sell for a modest profit and live to fight another day.

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Principles of Corporate Finance – A Tale of Value

Moscow Institute of Physics and Technology and American Institute of Business and Economics via Coursera Help

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• Why Finance Matters? Net Present Value. How to Calculate NPV
• In Week 1 we propose the game plan for our study of value. Then we analyze the key assumptions for the general valuation model. We focus on the understanding of the sources of value and the fundamental ideas of investor’s choice, the opportunity cost of capital, risk and return. We discuss the importance of time and expectations in determining value. Then we discuss the present value approach to studying the projects’ value and choice. We present the general PV formula and introduce the key concept of net present value (NPV) as a criterion of the choice of good investment projects. Then we study some most widely used shortcuts and apply the formulas to find the NPV’s of certain projects that play a special role in valuation. We end up with the general NPV formula and discuss the challenges in using it.
• Applications of NPV. Valuing Bonds and Stocks
• Week 2 of the Course is devoted to the applications of NPV. In the first part of the week we use NPV to study riskless debt. Of special attention will be the challenges in valuing even riskless bonds. We discuss bond parameters and the special role of yield to maturity. Then we demonstrate how the NPV approach helps determine spot and forward interest rates. The second part of Week 2 deals with the core concepts in valuing equity. We introduce the idea of the common stock value as a function of its cash disbursements. Then we present some formulas that are used to value common stock on the basis of NPV. We focus on growth as a major contributor to the stock value. We analyze growth drivers and the mechanism of growth. On an example we reveal the influence of investments on the stock value. Finally, we pose some questions with respect to NPV approach.
• Making the Choice of Good Investment Projects. NPV and Other Criteria. Why Is NPV Better?
• We start Week 3 of the Course by the discussion of criteria of choosing investment projects. Beside NPV, the internal rate of return (IRR) and other approaches are introduced. We show why the NPV criterion is the best and why the application of others may lead to wrong investment decisions. Then we focus on the main ideas to be taken into account while setting up cash flow patterns and making the choice of project on the basis of NPV. We mention some special issues – relevant costs, depreciation, inflation. We present the concept of equivalent annual cost (EAC) as a method of comparing projects of different length. Then we study the application of EAC in greater detail in a case.
• Risk and Return – From Basics to Reality
• In Week 4 we study risk and return. We present a stochastic mathematical model of risk and apply it to find the returns and standard deviations of portfolios of assets. We discuss diversification and the role of special portfolios – the riskless portfolio and the market portfolio – in approaching asset risk. We demonstrate how any asset contributes to the market risk and introduce the β coefficient. Then we derive the capital asset pricing model (CAPM) and study how it is used on examples. We discuss the application of the company cost of capital (CCC) rule to choosing investment projects. Then we use CAPM to determine the cost of capital – first, for an equity-financed company and then in the general case with debt and equity. We present the weighted average cost of capital (WACC) formula and discuss it. Finally, on an example we study the steps in applying CAPM.
• Options – Idea, Role, and Valuation
• Week 5 of the Course is devoted to options – one of the most interesting and advanced areas in finance. We start with definition, charts, payoffs – the basics of options. Then we move on to option valuation. We discuss replication and risk-neutral approaches and show on clear examples how they allow finding the option’s value under simplifying assumptions. We go further and discuss the generalizations of the simple approaches that lead to the Black–Scholes and binomial option valuation methods. Then we discuss the application of the option theory to valuing real investment projects that contain some options – the timing of investment, the abandonment, the follow up options. We show how decision trees and the option identification contribute to the better choice of investment projects. Finally, we briefly describe one of the most advanced topics in finance – the valuation of fixed-income instruments with embedded options and fixed-income derivatives including mortgage-backed securities and CMO’s.
• What We Learned About Finance. Some Conclusions. Corporate Finance and Career Tracks
• In the first part of Week 6 we revisit the NPV criterion and compare it to two other very popular project assessment methods – economic value added (EVA) and market value added (MVA). Then we draw conclusions to the Course focusing on the project valuation road map and the role of options in valuation of projects and securities. We also address some major unanswered questions in corporate finance. The second part of Week 6 is devoted to the practical application of corporate finance. We discuss how the learners may profit from learning corporate finance. Then we describe popular career tracks in which the knowledge and skills obtained in the Course may prove instrumental for success. Those include sales and trading, analysis and research at a finance company, as well as financial management at a non-financial corporation.

Konstantin Kontor

• united states

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Skolkovo: A Case Study in Government-supported Innovation

December 20, 2013 • 12 min read.

Acknowledging insufficient innovation and development spending, Russian Prime Minister Dmitry Medvedev established the Skolkovo Innovation Center three years ago as a way to wean Russia off natural-resource commodities and nurture a knowledge-based economy. Its track record has been mixed.

• Public Policy

Entrepreneurial activity and innovation are imperative for sustained development and growth in any economy. Despite its nascent status as a capitalist nation,Russia’s economy by many measures is fairly advanced. In 2012, the country’s GDP was eighth in the world, at just over US$2.0 trillion. Its population of 143 million is well-educated, with a literacy rate of 99% and nearly 70% enrolled in post-secondary education. Russia also boasts the largest Internet market in Europe, with 59.7 million users, and an astounding 230.5 million mobile phones, or 1.6 mobile phone numbers per person.

Despite these figures, however, private investment in early-stage business projects in Russia is still about US$300 million per year, roughly 1/70 th that of similar investment in the U.S. According to the Global Entrepreneurship Monitor, only about 5% of the Russian adult population is engaged in early-stage entrepreneurship, the lowest level among countries with a comparable GDP per capita. The abundance of natural resources — such as oil, gas, coal, and timber — and the economy’s resulting dependence on these commodities for export earnings have led to a natural resource curse, whereby most public and private capital is funneled to support those industries, at the expense of nearly all other sectors of the economy.

In Russia, this is exacerbated by the fact that state ownership is present in 81% of the top firms, which places the country third in the category behind only China and the UAE. To sustain short-term economic growth and satisfy the country’s recent fast-growing consumer market, where GDP per capita has grown about 13% annually from 1999 through 2010, politicians continue to funnel outsized portions of capital to these natural-resource-related industries.

Moreover, with very little foreign or domestic competition, Russian manufacturers do not see a reason to innovate, further increasing inefficiency and putting a strain on long-term economic development. For example, in 2011, overall R&D expenditures by businesses in Russia represented just over 1% of GDP, compared to expenditures of about 3% in the U.S. Furthermore, the number of researchers in Russia has decreased nearly three-fold since the late Soviet period. In addition, due in large part to its geographic vastness, isolation and political and economic barriers with other nations, very few industrial products (outside those used for natural resources) enter Russia’s borders. As a result, with no internal demand for innovation, much of the nation’s industrial technology has become dangerously outdated and inefficient. In fact, many industries continue to use legacy Soviet-era equipment and machinery. Finally, political instability, the economic crash in the 1990s, and a general lack of opportunity caused a “brain drain.” It is estimated that 1.25 million people emigrated from Russia in the first decade of the twenty-first century alone.

A Startup Incubator Is Born

In 2010, recognizing this overall void in innovation and development spending, former President and current Prime Minister Dmitry Medvedev established the Skolkovo Innovation Center just outside Moscow. Billed as Russia’s version of Silicon Valley, Skolkovo calls for a 400-hectare (1,000-acre) site with 25,000 permanent residents, business and engineering schools, housing, a Technopark, and mass-transit connections, all to be completed by 2020. This complex is a hallmark of Medvedev’s efforts as president to wean Russia off natural-resource commodities and nurture a knowledge-based economy. The Technopark, in particular, serves as a startup incubator that supports its residents in developing products with the end goal of establishing them in the Russian and global markets.

In 2011, overall R&D expenditures by businesses in Russia represented just over 1% of GDP compared to expenditures of about 3% in the U.S.

Today each startup at Skolkovo falls into one of five clusters that the state deems essential to innovation: information technologies, energy-efficient technologies, nuclear technologies, biomedical technologies, and space technologies and telecommunications. According to the Skolkovo Foundation, which oversees the Innovation Center and Technopark, during the first half of 2013 resident companies generated about 4.6 billion rubles (US$145 million) in revenues and submitted 204 applications to register intellectual property.

Once admitted through an application process, residents enjoy benefits such as highly subsidized rent and reductions in payroll and value-added taxes. They also have the opportunity to apply for monetary grants from the Skolkovo Foundation, but many choose not to because of the significant additional reporting requirements. International participants in Skolkovo Technopark are also afforded easier access to work visas.

In reality, the residents’ incentives go beyond mere finances. Vladimir Bernstein, CEO of Board Maps, in the IT cluster, came upon Sberbank, which he hopes will become an important client, through a Skolkovo contact. Pavel Smirnoff, CEO of Optogard, in the nuclear-technology sector, hopes to gain access to Russian railroads through another Skolkovo connection. Optogard, which uses a unique laser-plasma system to increase the strength and durability of metal surfaces, also utilizes Skolkovo’s vast array of hardware technology and the advanced testing center — both of which are freely available to all residents — to analyze various metal surfaces. Another founder, in the Energy cluster, who prefers to remain anonymous, wound up at Skolkovo by accident, but loves the culture of innovation, frequently attending meet-and-greet events to network and share best practices.

Residents of Skolkovo can retain their benefits for either 10 years or until they exceed an annual revenue of 1 billion rubles (US$31 million) — whichever comes first. This allows time for proper R&D to build and test the product but may also serve as a moral hazard.

Another concern is how Skolkovo Technopark plans to reconcile the need for innovation with commercial viability. Skolkovo recently hosted StartupVillage, an Entrepreneurship and Innovation Conference, whose goal was to connect startups with investors, tech companies, and experts in their respective fields. The first-place winner was the eTrike from Bravo Motors, a business in the energy-efficiency cluster that focuses on research to extend the life of rechargeable batteries in electric cars. It received a 900,000 rubles (US$30,000) prize and was named best Russian startup by Forbes. Bravo Motors’ main challenge now is to raise 42 million rubles (US$1.4 million) for field testing and initiating production. As an anonymous source close to the matter says, the success of Skolkovo will not be measured by companies like Bravo Motors. Rather, “the success of Skolkovo should be assessed on the basis of whether it manages to create a huge and successful business like Yandex [Russia’s largest search engine] and Mail.ru [Russian email].”

Operating within the current Russian investment climate presents another challenge. The current legal system is still developing and lacks important elements, such as fundamental protection for minority shareholders. As a result, many companies choose to incorporate in Luxembourg or Cyprus and hold overseas bank accounts. Businesses also seek to partner with international firms to share expertise, which is often lacking within Russia; and many seek international clients. Consequently, the benefit to Russia and its economy is diluted, and these startups are effectively Russian only in name. Outside of adequate access to capital and legal uncertainty, the lack of concrete corporate governance and the dearth of qualified people echo over and over as the main problems these startups face.

Since 2012, Skolkovo’s name has been mired in a number of widely publicized criminal cases involving its executives.

Sergei Sedyh, who has been involved in three startups at Skolkovo, questions whether companies in Russia can truly innovate and create a disruptive breakthrough. He describes the investors’ general sentiment as, “if they haven’t already done it in America, it probably won’t work,” and adds that “Russia is an investment desert.” He also worries that the government is using Skolkovo as a political puppet for its own ends.

Misspending and Illegal Payment Allegations

Since 2012, Skolkovo’s name has been mired in a number of widely publicized criminal cases involving its executives. In February 2012, the Investigative Committee, a top law-enforcement body, said it was investigating the misspending of 3.18 billion rubles (US$106 million) the government had provided to Skolkovo. The committee also announced that it had opened one criminal case against two Skolkovo managers over the alleged theft of 21.6 million rubles (US$720,000), and a second case, accusing Skolkovo vice president Alexei Beltyukov of allegedly making illegal payments of 22.5 million rubles (US$750,000) to opposition lawmaker Ilya Ponomarev for preparing a series of lectures about Skolkovo. In total, three ministers in Medvedev’s cabinet have been fired or forced out since October 2012, most recently Deputy Prime Minister Vladislav Surkov, the government’s chief of staff. Announcement of his resignation in May 2013 came after he publicly criticized the criminal investigations into the use of state funds at Skolkovo, which he had overseen.

Skolkovo is widely regarded as an endeavor of former president Medvedev. While current President Vladimir Putin’s public comments about the project have been largely supportive, his enacted policies have been mixed, and his administration recently reversed certain preferential treatments for the center. Gleb Pavlovsky, an ex-Kremlin adviser who heads the Moscow-based Effective Policy Foundation, says that “the idea of the project itself is anathema to the leadership because of its special status and independence. Without Medvedev able to protect it, it can’t survive.”

Beyond the shameful publicity that highlights the country’s political instability, these events have led to hesitation among multinational corporations looking to invest in Russia. Many prominent global corporations — including Alstom, Intel, Microsoft, Samsung Electronics, and Siemens — originally backed Skolkovo and pledged nearly 15 billion rubles (US$500 million) in investments. Conor Lenihan, a former Irish science minister tasked with attracting foreign companies to Skolkovo, notes that the center offers “alignment with a flagship project and a safe harbor where [the corporations] can locate R&D and receive protection for their intellectual property.” However, with the current instability, many investors can still withdraw their financial support, especially if the projected state funding does not materialize.

Direct government involvement creates a number of questions about conflicts of interest regarding independence and financial control, as well as interpretation of the law.

The environment of political uncertainty compounds Skolkovo’s fragility. The Technopark and innovation center are almost exclusively government-funded and are administered through Federal Law No. 244-FZ. The Skolkovo Foundation, whose board of directors oversees the Technopark, claims to be independent of the government. However, this direct government involvement creates a number of questions about conflicts of interest regarding independence and financial control, as well as interpretation of the law. Article 10, for example, states that, as of January 2014, all business residents must be physically present in Skolkovo. However, construction of the facilities is not complete. As a result, some of the startups are worried about their logistical ability to comply with the law.

Gleb Daviduk, managing partner of iTech capital, a private equity firm that invests primarily in technology companies in Russia, is optimistic about Skolkovo, noting, “the Russian startup scene seems largely to have been spared by corruption. In the digital sphere, greedy civil servants don’t know what to look for — or where. This helps the industry to stay below various radar screens.” He believes all attempts at innovation are good and that Russia needs Skolkovo, no matter how inefficiently it is run. Skolkovo does not need to work for results specifically, he adds, but for the sake of being there to promote innovation.

Viktor Vekselberg, the Russian oligarch who heads the innovation center, points out that government involvement is unavoidable. He notes, “When it comes to innovation,Silicon Valley appeared thanks to the government…. Let’s not have illusions about this. It appeared in the first instance thanks to serious contracts from the military-industrial complex. And to this day,Silicon Valley — don’t try to twist things around — still relies heavily on the state…. Wherever you look, if we take other examples, the state always plays a dominant role. Singapore: The state plays a dominant role in an analogous project. India: huge involvement of the state.”

For at least the near term, the Russian government has reaffirmed its commitment to Skolkovo. In August 2013, the Duma allocated 502 billion rubles (about US$15.5 million) through 2020. According to Vekselberg, this action demonstrates the government’s “faith in the future of the Skolkovo project.” According to the foundation’s estimates, by 2020, the Skolkovo project will help establish 1,000 startups in Russia, which will contribute 213 billion rubles (US$7.1 billion) to the Russian economy. Vekselberg notes that “In total, efficiency from investment in the project needs to be calculated by 2030, when it reaches full operating capacity. According to preliminary calculations, the project will contribute up to 1.5 trillion rubles to GDP.”

By virtue of a rotund bureaucracy and the large role state-owned enterprises play, every Skolkovo resident relies on the foundation for access to one branch of government or another — be it Russian railways, state-owned Sberbank (Russia’s largest commercial bank), or a regional government office. It is the magic ingredient in Russian entrepreneurship and is ubiquitously termed the “administrative resource.” As Vekselberg notes, “It is true that in Russia it is difficult to get anything done without state support.” It remains to be seen how the state will follow through on its commitment to Skolkovo and innovation in general, but Russia needs its continued development in order to avoid the Dutch disease of overreliance on natural resources.

This article was written by Eugene Bord and Natalya Guseva, members of the Lauder Class of 2015.

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