Applied Corporate Finance 465

Course Title APPLIED CORPORATE FINANCE

Course Code ACF 465

Introduction

The objective of this course is to reinforce and expand on the previous financial analysis and corporate finance/intermediate finance courses. Many of the topics covered are the same, but the emphasis is different. By using the case-method methodology the emphasis shifts from learning financial techniques to applying them to make managerial decisions,

Textbook

Since the topics covered in this course are those that are contained in any standard text of corporate finance, therefore, no text is assigned for this course. You may use your Brigham and Gapenski text for review and reference.

Grading: CP 40 %

Quizzes 10 %

Mid-term 25 %

Final 25 %

Session 1

Case: Butler Lumber Company

Assignment Questions

1. Why does Mr. Butler have to borrow so much money to support this profitable business?

2. Do you agree with his estimate of the company's loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991sales volume of $3.6 million)?

3. As Mr. Butler's financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butler's loan request, and, if so, what conditions would you put on the loan?

Session 2

Case: Toy World, Inc.

Assignment Questions

1. What factors could Mr. McClintock consider in deciding whether or not to adopt the level production plan?

2. What savings would be involved?

3. Estimate the amount of added funds required and the timing of the needs under level production. Prepare pro forma income statements and balance sheets (rather than a cash budget) to make this estimate. Ignore interest expense in making these estimates.

4. Compare the liabilities patterns feasible under the alternative production plans. What implications do their differences have for the risk assumed by the various parties?

Session 3

Case: Hampton Machine Tool Company

Suggested Questions

1. Why can't a profitable firm like Hampton repay its loan on time and why does it need more bank financing? What major developments between November 1978and August 1979 contributed to this situation?

2. Based on the information in the case, prepare a projected cash budget for the four months September through December 1979, a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979.

3. Review the results of your forecast. Do the cash budgets and the pro forma financial statements yield the same results? Why?

4. Critically evaluate the assumptions on which your forecasts are based. What developments could alter your results? Is Mr. Cowins correct in his belief that Hampton can repay the loan in December?

5. What action should Mr. Eckwood take on Mr. Cowins' loan request? What are the major risks associated with the proposed loan? What other alternatives does Mr. Eckwood have, and what are their pros and cons? What would you do?

6. Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of this repurchase on Hampton's financial performance? Critically assess Hampton's dividend policy. Do you agree with Mr. Cowins' proposal to pay a substantial dividend in December?

Session 4

Case: Tree Values

Assignment Questions

1. Assume that the appropriate cost of capital is 240 basis points (2.4%) above the ten-year government bond rate. To calculate the cost of capital, should you add the 240 basis points to a ten-year Treasury Bond