A government official in a developing country requests cash to purchase an air ticket to make a personal trip and to purchase the services of a prostitute in return for overlooking a safety and environmental violation.
Recent contributions to strategic management and the theory of the firm collectively known as the "resource-based view of the firm" provide illuminating insights into the sources of profitability and the nature of competitive strategy. This article argues that internal resources rather than the market environment should provide the foundations for a firm's strategy. On the basis of an analysis of the relationships among resources, capabilities, competitive advantage, and profitability, this article advances a framework for a resource-based approach to strategy formulation.
This note outlines a simple but powerful model, in managerial language, for understanding why people behave the way they do. The model builds a set of relationships among perceptions, beliefs, conclusions, defense mechanisms, and behavior. The note provides a framework that has been useful in a variety of settings for practicing managers.
In January 1990, the chief executive of this small yarn-production company must resolve a surprising cash shortage. The tasks for the student are to evaluate the causes of this shortage (using a complete base case forecast given in the case) and then to assess the usefulness of various possible remedies suggested by company managers. In essence, the company is unable to liquidate a seasonal working-capital loan for the requisite 30 days each year. This situation arises from two classic causes: secular growth of the company, and declining profitability. Possible remedies include reducing finished-goods inventory through more efficient transportation and warehousing, reducing credit terms to customers, just-in-time (JIT) raw-materials supply, and switching from seasonal to level production. This case provides a thorough exercise of working-capital analysis and concepts.
This note is an introduction to the concept of cost of capital as an opportunity cost and how to compute weighted-average cost of capital for a corporation.
This note introduces the student to the FRICTO framework for evaluating alternative financial tactics. Elements of the framework are flexibility, risk, income, control, timing, and other. A simple instruction is provided.
This note explores the interaction between the use of debt and firm value and provides a brief perspective on the use of debt. It also introduces the notions of financial and operating leverage. In addition, it covers the impact of the use of debt in the presence of no taxes, corporate taxes only, and both personal and corporate taxes.
This note is designed to introduce the binomial option-pricing model. It covers the basic concepts using a one-period model and then provides an example of a two-period model. The note focuses on a conceptual approach to binomial option pricing rather than formulas.
This note explains how a financial institution should develop its corporate strategy and the factors it should take into account in developing that strategy.
This note introduces the principal alternative methods for estimating the cost of equity, including the dividend growth model, the earnings capitalization model, and the CAPM.
As the maturity date for General Motors' Class E contingent notes approaches, the GM treasury staff must estimate the potential impact of the liability on corporate cash flows. The student is asked to value the contingent notes and express the value in terms of the cash flows GM might have to pay. The primary objective of the case is for students to draw the parallel between the determinants of value for exchange-traded options and for such nontraded options as the contingent notes. A student worksheet file is available for use with this case.
Students must estimate the selling price of Colt stock on the day following the announcement of a drastic financial restructuring, estimating the value of the debt's tax shield. Colt stock has been selling for $66.75 per share, and Colt has just announced a plan calling for shareholders to receive $85 and one new share of stock in the recapitalized Colt for each share of existing stock held. The cash payout is to be financed by issuing $1.5 billion of new debt.
This note discusses the relative strengths and weaknesses of three primary methods of valuing a firm: (1) accounting approaches (e.g., book value); (2) multiples of earnings (e.g., p/e); and (3) discounted cash flow and related models.
Financial risk is, in good measure, related to the uncertainty of profit coverage of interest payments and principal repayments. This note examines the effects of cyclical changes in volume on financial safety and on stockholder income and illustrates the factors that have more profound effects on income/risk considerations in a financial decision. The note is divided into three parts. The first section considers the impacts of leverage (both operating and financial), sales volatility, and growth on profits after taxes (a step away from shareholder income). The next part traces the relationship of these variables to burden coverage. These terms will be defined as appropriate. A final section illustrates financial risk from the equity shareholder's point of view.
An introduction to estimating the cost of capital, this case provides sufficient data for using a variety of methods for estimating the cost of equity, including the capital-asset-pricing model, and allows students to use their cost of capital in analyzing several investment projects. See also the B case (UVA-F-0684).