In August 2005, an investment manager of a hedge fund is considering purchasing an equity interest in a start-up biotechnology firm, Arcadian Microarray Technologies, Inc. The asking price is $40 million for a 60 percent equity interest. Managers of the firm are optimistic about the firm's future performance; the investment manager is more conservative in his expectations. He calls on the help of an analyst with her firm to fashion a counterproposal to Arcadian's management. The tasks for the student are to apply the concept of terminal value, interpret completed analyses and data, and derive implications of different terminal-value assumptions in an effort to recommend a counterproposal. Very little numerical figure-work is required of the student.

This note provides an introduction to financial ratios and financial forecasting. It examines principles in the art and science of thoughtful financial forecasting. In particular, it reviews the importance of understanding financial ratios.

In June 2004 Purinex, Inc., a pharmaceutical company with several clinically and commercially promising drugs in development, expected to secure a partnership with a major pharmaceutical company sometime in the next four to 12 months. That partnership, if secured, would enable Purinex to develop one of its leading compounds as a drug. The company, however, had no sales or earnings and only 11 months of cash on hand. The student must assess whether the company should attempt to secure financing now or wait until it consummated a partnership deal. The tasks for the student include evaluating the probabilities that a collaboration with a pharmaceutical company would actually happen; determining whether the company stay above water until such occurred; and analyzing the other risks to the company under these circumstances.

In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations to the company's board of directors regarding the firm's financial policy. Special considerations are the mix of debt and equity and the maintenance of financial flexibility.

Spreadsheet supplement for case UV1388.

In 1906, C.W. Post had to move his latest breakfast product--corn flakes--from store shelves into cereal bowls nationwide. Post genuinely believed his corn flakes and other breakfast foods would make people well. Through sampling and other innovative sales and marketing techniques, Post convinced consumers and grocers to buy Postum and Grape-Nuts--which generated millions in profits for the Postum Cereal Co. But not Elijah's Manna--the brand name that Post put on his corn flakes boxes when his company introduced the product in 1904. Two years later, it was clearly not selling. To make matters worse, other cereal companies in the burgeoning Battle Creek area where Post's foods were manufactured were cornering the market, in particular, Kelloggs. How was Post going to convince consumers that his corn flakes were better than the rest?

In the months after Ben & Jerry's was acquired by Unilever, Ben & Jerry's head social mission faces challenges and opportunities unique in the company's history, including: how to manage employee morale; whether to include synthetic ingredients to meet consumer preferences; how to preserve the company's tradition of speaking out on public issues; and how to maintain the company's distinctive brand image. Also, depicts an innovative corporate governance model with an external board comprising former Ben & Jerry's executives to advise the new CEO on managing the company's distinctive brand and values.

A venture capitalist must prepare a memorandum for his investment committee outlining the opportunities and challenges presented by financing a leveraged management buyout of Grace Bioremediation Technologies, a company involved in developing manufacturing and marketing soil and water bioremediation technologies. He must decide the appropriate rate of return, assess risks and opportunities and design a term sheet containing the details of a deal structure that includes major clauses required for any loan and shareholders' agreements.

New Century Brewing: Moonshot Caffeinated Beer discusses the introduction of a completely new beverage to the U.S. market. New Century Brewing, which is owned by one of the founders of Boston Beer Company, is a small brewer that outsources production to third party brewers. It has two products, a light craft beer sold in upscale shops and restaurants, and a caffeinated beer, which is oriented towards younger drinkers mainly between 21 and 25 years of age. Moonshot, created by the legendary masterbrewer, known as the father of light beer, became the first caffeinated beer in the world. The company follows a differentiation strategy that attempts to appeal to a small niche of customers traditionally ignored by large brewers. Shortly after the introduction of each of its products, large competitors introduced similar products. Nevertheless, Moonshot has a first-to-market advantage that could potentially be leveraged.

Sight Savers International is a not-for-profit organization that provides services in prevention and cures for blindness in developing countries. The organization must determine how it can make long range commitments today with its current environment of unpredictable donor funding and expenditures. Students will be introduced to the difficulty of using budgetary controls in an environment of considerable uncertainty; and to provide discussions on the appropriateness of principles, and implications for control systems.

The chief information officer of Regent Street Bank is trying to weighing the merits of installing word recognition software at Regent. In light of recent financial scandals, a compliance tool like word recognition software would enable Regent to electronically monitor transactions between employees and clients. From a business standpoint, the ability to reduce the risk of illegal activities would reassure stakeholders in the bank: employees, clients and investors. Besides, Regent's email policy, available to all employees, clearly stipulated that electronic mail systems provided by Regent are its property and that the bank reserves the right to access, monitor and archive all email messages without prior notice. On the other hand, what if the word recognition software flagged a personal email message, resulting in his or her direct manager finding out about a private situation? After all, Regent's email policy did allow employees to use email for personal reasons. More importantly, how should the CIO consider the potential ethical issues, such as privacy.

After the U.S. sales manager of a large multinational company emails his supervisor regarding the supply of a new product, the message is forwarded to two others. The final recipient, the president of the Franco-Japanese joint venture partner that is manufacturing the new product, is offended by what he perceives as unfair criticism. The supplemental case, Charles Foster Sends an Email (B), product number 9B05C020, includes the sales manager's response to the president, and the ensuing correspondence from the joint venture. Together, the (A) and (B) cases present a setting for discussing three issues; the relationship between a communication situation and the medium chosen to deliver it, the effects on business relationships when an inappropriate communications medium is chosen and the processes needed to communicate effectively in multicultural business relationships.

After the U.S. sales manager of a large multicultural company emails his supervisor regarding the supply of a new product, the message is forwarded to two others. The final recipient, the president of the Franco-Japanese joint venture partner that is manufacturing the new product, is offended by what he perceives as unfair criticism. The sales manager draws on his recent training in intercultural management to try to salvage the situation. The companion case, Charles Foster Sends and Email(A), product number 9B05C019, includes the complete series of email. Together, the (A) and (B) cases present a setting for discussing three issues: the relationship between a communications situation and the medium chosen to deliver it, the effects on business relationships when an inappropriate communications medium is chosen and the processes needed to communicated effectively in multicultural business relationships.

Several new developments were threatening the success of Big Pharma. The patents on well-known blockbusters were reaching expiry, and generic manufacturers were eagerly waiting to produce lower-priced copies. Throughout the world, governments were taking a more active role in determining the prices at which drugs could be sold. The expansion of government insurance programs was adding to the complexity of the marketing challenges. Another change involved a shift towards direct-to-customer advertising, including the proliferation of information on the Internet, in addition to the traditional process of sales visits to family doctors. Research funding had doubled since 1991, but the number of new drugs emerging each year had fallen by half. The research and development process was also changing dramatically. Whereas blockbuster drugs had been developed as general treatments for common conditions, it was becoming increasingly apparent that not all patients reacted in the same ways to these drugs, and some - although a very small percentage - suffered serious side effects. This reality was expected to lead to the creation of a much larger number of niche drugs, each one targeted at a narrower group of patients. Related to this development was the growth of biopharma in which new biotech companies were creating drugs that could attack specific cells. Some analysts felt that Big Pharma was in a peculiar predicament in that profits were still very large, and this served as a barrier to necessary changes in strategy.

The president of the board of directors of the London Youth Symphony is contemplating how to ensure the survival of the orchestra. On the verge of bankruptcy in 2001, the symphony now has more than $40,000 in the bank, but must address the reality that the orchestra might not survive due to a lack of musicians. Students must develop projected financial statements subject to given minimum balance and breakeven constraints. There is much room for judgment in developing the strategic plan; while many of the numbers are alluded to, many assumptions must also be made. Additionally, students will be exposed to some of the issues that may arise with volunteer boards of directors and not-for-profit organizations.

A first year business school student has obtained a summer job as an analyst at a top investment bank in Los Angeles, California. His first assignment was the pricing of MicroComp's junk-bonds in the market place. Looking at the market value balance sheets, it was very clear that MicroComp was in financial distress. MicroComp's dept totaled $150 million, while the market value of its assets were $80 million. If MicroComp was required to repay its debt immediately, it would be forced into bankruptcy. Clearly, MicroComp was in effective default, why did its market capitalization remain at $5 million? Why had it not fallen to zero? Students will use option theory to answer these questions.

The manager of a billion dollar hedge fund had just been approached by a syndicate of funds to gauge her interest in a bid to purchase RamSync Incorporated, a Silicon-Valley manufacturer of memory chips. Using a traditional discounted cash flow analysis (the APV method), the manager quickly determines that at a purchase price of $900 million, RamSync has a negative NPV of $33 million. However, purchasing RamSync, which currently produces SDRAM, would allow the owner to enter the much-anticipated MRAM market at a future period in time. The manager is now forced to reconsider how to value RamSync considering the hidden call option it has on the MRAM market.

A derivative is a financial instrument that's value, as its name suggests, is derived from the value of an underlying asset or security. There are many different derivative securities available, including: forwards, futures, options, rights, warrants, convertibles and swaps. This note introduces some of the key concepts, terminology and strategies associated with these derivatives.

When valuing the premium to be paid for put or call options, the underlying security is only one of several factors that can determine the option's value. By calculating the impact and value of all the determinants, an option's price more accurately reflects its value. This note examines the effects of various determinants on the price of an option and introduces two models that use options equivalents: the Black-Scholes Option Pricing Model and the Binomial Option Pricing Model.

The real options approach to capital budgeting uses an options-based analysis to evaluate the real (as opposed to the financial) potential of projects. By charting the options as a series of decision points and events, managers can understand the risks and rewards of the projects, and more fully assess their opportunities. This note introduces the real options approach and describes the four main categories: expansion and follow-on options, timing and delay options, abandonment options and options that introduce flexibility into production. The expansion option is discussed in detail, including sample calculations and decision trees.