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Peloton Interactive, a well-known venture-capital-backed unicorn in the connected fitness space, recently had gone public with a market capitalization of over $8.0 billion. However, in the weeks following its public debut, Peloton's stock price had fallen by over 25%. Taylor Knox, an enthusiastic Peloton subscriber, believed that connected fitness products were the future of exercise and he had been excited about the prospect of investing in Peloton. However, given the market's reaction to the company's IPO, Knox understood the need to determine the fundamental value of Peloton's shares, as well as to identify and to evaluate the key risks associated with its innovative business model. Reflecting on the situation, Knox wondered if this was an opportunity to invest in his favorite activity at a discount. Or, did market investors understand something he didn't?

On April 8, 2019, Occidental's CEO Vicki Hollub made a private offer to buy Anadarko Petroleum Corporation for $72 in cash and stock. Anadarko's CEO Al Walker said he would consider the offer, yet three days later, on April 11, he signed a merger agreement with Chevron in a deal worth $65 per share in cash and stock. This agreement included a $1 billion "break-up" (termination) fee payable to Chevron if Anadarko accepted another offer. To avoid losing the deal, Hollub then made an initial public offer to buy Anadarko for $76 per share in cash and stock on April 24. When Anadarko failed to respond, Hollub, revised her offer on May 5. Although the revised offer had the same stated value of $76 per share, it included substantially more cash ($59 per share instead of the original $38 per share). With competing offers on the table, Walker now had to decide whether to accept Chevron's $65 offer or pay the break-up fee and accept Occidental's $76 offer? Of course, once he had made up his mind, he would have to convince his board that it was the right offer to accept and the right price.

In July 2017, shares of Automatic Data Processing, Inc. (ADP) surged 12% following a report that the activist investor Bill Ackman had acquired a sizable stake in the company and planned to nominate his own slate of directors at the company's annual meeting in November. Over the months that followed, Ackman and ADP engaged in an increasingly acrimonious battle of words about the future of ADP. Ackman argued that the company was materially underperforming its potential and could substantially improve its operating margins. ADP vigorously rebutted Ackman's assertions, arguing that none of his ideas were new and that ADP shares had outperformed the market. As the November deadline loomed, ADP shareholders needed to decide whether to vote for Ackman's slate of directors or the company's slate. In making this choice, shareholders needed to consider a single, critical question: Is ADP achieving its maximum potential?

On June 21, 2016, Tesla Motors, Inc. announced its offer to acquire SolarCity, bringing CEO Elon Musk one step closer to completing his goal of moving the world from a hydrocarbon-based economy to a solar-electric one. Markets and analysts were mixed in their reaction to the announcement; some thought the deal would be a distraction to Tesla management at a critical time; others thought it was a "bailout" of SolarCity. Following weeks of due diligence, Tesla and SolarCity finalized their merger agreement and worked to justify the transaction. Joan Banister, a financial advisor, must prepare to address her clients' concerns about their various financial positions in Tesla and SolarCity.

In early 2015, Amy Hood, CFO of Microsoft, and the rest of the senior leadership team faced a set of fundamental choices. The firm had opportunities to serve customers in ways that would be associated with higher growth but lower margin. Some of these opportunities involved a shift from perpetual licensing to subscription sales. Whatever choices are made must be articulated to investors and employees.

This reading provides a solid foundation and consistent knowledge base for understanding the key insights from options theory. It begins by developing terminology and a framework for understanding the contractual rights and obligations embedded in financial option contracts. The framework is used to map out the future cash flows (payoffs) associated with specific types of option contracts. Using the associated payoff functions, the value of an option contract is motivated as the present value of the option's expected future payoffs and is derived as the value of the portfolio of securities that would replicate those payoffs. The reading then examines how option contracts can be combined to provide specific desired payoffs (hedging). The reading shows how the Black-Scholes formula extends the framework. Discussion of the model includes intuition, insights about parameters, and numeric examples. Finally, several corporate finance applications are discussed, including accounting for the cost of employee stock option grants, understanding and valuing contractual terms of an acquisition offer, and determining an appropriate yield-to-maturity on new corporate debt issue.

In April 2013, Procter & Gamble (P&G), the world's largest consumer packaged goods (CPG) company, announced that it would extend its payment terms to suppliers by 30 days. At the same time, P&G announced a new supply chain financing (SCF) program giving suppliers the ability to receive discounted payments for their P&G receivables. Fibria Celulose, a Brazilian supplier of kraft pulp, joined the program in 2013, but is re-evaluating the costs and benefits of participating in the SCF program in the summer of 2015. The firm's treasury group must decide whether to keep using the program and, if so, whether to keep their existing SCF banking relationship or start a new relationship with another global SCF bank.

In April 2013, Procter & Gamble (P&G), the world's largest consumer packaged goods (CPG) company, announced that it would extend its payment terms to suppliers by 30 days. At the same time, P&G announced a new supply chain financing (SCF) program giving suppliers the ability to receive discounted payments for their P&G receivables. Fibria Celulose, a Brazilian supplier of kraft pulp, joined the program in 2013, but was re-evaluating the costs and benefits of participating in the SCF program in the summer of 2015. The firm's treasury group and its US country manager must decide whether to keep using the program and, if so, whether to keep their existing SCF banking relationship or start a new relationship with another global SCF bank.

In December 2015, Canadian Pacific Railroad (CPR) has just made its third bid to acquire Norfolk Southern Corporation (NSC), one of the largest railroads in the United States. Having rejected the prior offers, NSC's CEO James Squires and the NSC board must now value the current offer including the projected merger synergies as well as a recently-added contingent value right (CVR) designed to "sweeten" the offer, and decide how to respond.

Spreadsheet supplement for case 216123. In December 2015, Canadian Pacific Railroad (CPR) has just made its third bid to acquire Norfolk Southern Corporation (NSC), one of the largest railroads in the United States. Having rejected the prior offers, NSC's CEO James Squires and the NSC board must now value the current offer including the projected merger synergies as well as a recently-added contingent value right (CVR) designed to "sweeten" the offer, and decide how to respond.

Spreadsheet supplement for case 215058.

Spreadsheet supplement for case 215058.

This case analyzes IBM's financial performance and its capital allocation decisions over a 10-year period from 2004-2013, during which IBM returned more than $140B to shareholders through a combination of dividends and share repurchases. During this time, CEO Sam Palmisano's created, announced, and then regularly updated a long-term financial "roadmap" as part of the firm's strategic transformation. The roadmap showed both a destination (a target EPS number) and a detailed path to that destination in terms of revenue growth, margin expansion, and share repurchases. After successfully achieving its first roadmap, the firm announced a second 5-year roadmap known as the "2015 EPS roadmap". The case is set in May 2014, just after IBM's annual investor briefing. Despite more than 10 years of strong financial performance, IBM reported relatively weak financial results in the first quarter of 2014. Sophia Johnson, an equity analyst, must decide whether to revise her investment recommendation based on what she heard that day.

This case updates the events in "Generating Higher Value at IBM (A)," HBS case 215-058.

In August 2011, Morgan Brothers Bank was issuing a $2.5 million reverse convertible note with payoffs linked to the price of Molycorp's common stock. These financially engineered securities were just one of many kinds of structured notes available in the retail market. Investors must decide whether the notes were fairly priced and whether they offered a favorable risk-return trade-off.

Molycorp, the Western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expansion in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. After reporting lower than expected revenues and earnings for the second quarter of 2012, management needed to design a new funding strategy for the firm. In August 2012, Molycorp announced it would issue $120 million of equity and $360 million of convertible debt. To facilitate the issuance of convertible debt, the firm entered a ''share lending agreement'' with Morgan Stanley whereby Morgan Stanley would borrow shares from Molycorp in a transaction referred to as a ''Happy Meal''. The goal was to help convertible debt investors ''hedge their respective investments through short sales.'' The challenge of the case is to understand why Molycorp used this financing strategy and what impact it would likely have on the firm, its prospects, and its stock price.

Molycorp, the western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expenditure project in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. Yet it had just reported lower than expected revenues and earnings for the second quarter of 2012. In response to the announcement, its stock price fell 29% (its stock price had fallen from $77 to $11 in the past 18 months). The weakening financial performance was due in large part to falling prices for rare earth minerals. With less internally-generated cash flow available to fund the project, management had to decide: how much capital to raise, what kind to raise, and when to raise it. These decisions would determine its capital structure, at least in the short term, as well as its ability to implement its business strategy.

Spreadsheet supplement to case 214054.