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Level 3's unique compensation plan rewarded managers for the firm's performance only if the firm's stock price movement exceeded that of the market. This design was intended to maximize shareholder value by tying manager's performance more closely to that of the firm, rather than tying it to the level of the overall market. The past year had been a difficult one for the telecommunications sector, and Level 3, like many other firms, was concerned about both retaining employees and adequately compensating them. Moreover, Level 3 needed to hire a substantial number of employees over the coming year, and the firm's compensation plan would play a significant role in attracting good employees. With the annual compensation committee meeting approaching, the CEO must reevaluate whether the plan was successful and whether any changes were warranted. Possible changes included changing its benchmark index from the S&P 500 to another (perhaps more specialized) index and adjusting the size of the indexed option grant and its cash/option mix to produce the right incentives in light of falling stock prices.

Spreadsheet Supplement for case 202084

After initiating a hedging strategy, Apache Corp. is interested in revisiting its decision to determine if hedging is value-adding. This case investigates how the company initially decided to hedge against commodity price risk and how it implemented its hedging practice. It also examines when financial theory argues hedging is value-adding.

Spreadsheet Supplement for case 201113.

This case describes how multiple sources of uncertainty can be incorporated into a real-options-based analysis. It works through an example of a two-stage problem where a company has both an option to explore and an option to develop oil reserves.

Discounted cash flow valuation calls for using expected future prices of inputs or outputs. This case describes the relationship between spot prices, forward/future prices, and expected future prices. Knowing current forward and future prices alone is not enough to estimate expected future prices, so the forward or future prices are not in general a good estimate of the expected future price.

The flows-to-equity or equity cash flows valuation method is a discounted cash flow method used to estimate the equity portion of the capital structure. It is closely related to the venture capital/buyout valuation method, which estimates the IRR of the stream of cash flows accruing to equity holders. Both of these methods are likely to result in an estimate of equity value that is too low when the firm's debt is risky (or, equivalently, an IRR that is too high, depending on the method used to estimate terminal value). This case describes a method for estimating the size of this bias, drawing insight from option-pricing.

Through an innovative new policy forged with a single insurer, Honeywell is consolidating risks as diverse as fire protection and currency fluctuations--and saving a bundle.

Some of the senior managers at Ameritrade, an Internet brokerage firm, are selling their holdings in the firm. Why are the managers selling, how will it affect shareholders, and what should the CEO do about it? The CEO is concerned that the market will interpret managerial sales as a signal that the managers believe the firm to be overvalued. He also wonders whether the sales might interfere with the firm's plan to raise funds in the capital markets. Finally, he thinks that, at a minimum, such sales undermine a carefully thought-out compensation plan that pays managers with stock options to align managers' incentive with those of the shareholders.

Honeywell was the first to introduce an integrated risk management program that combined traditionally insured risks with other risks in an insurance contract. This case identifies the benefits of integrating risks and shows how such an approach might be valuable.

Spreadsheet Supplement for case 200036

In 1997, Kmart received an offer from retail buyout specialists Leonard Green & Partners for the purchase of its ailing 162-store home improvement chain, Builders Square. Green's offer included a $10 million cash payment, a warrant to purchase a 28% stake in the new entity in the future, and the assumption of approximately $1.5 billion in noncancelable Builders Square lease obligations. Kmart would remain contingently liable for the lease payments if the new entity were to fail. In the midst of the fiercely competitive home improvement retail industry, the questions posed include (1) what is the value of the Builders Square subsidiary?,(2) is the Green offer a good deal for Kmart?,and (3) should Kmart accept the offer or hold out for a higher offer or more offers?

In March 1990, Baring Capital Investors faced a decision about whether and how much to bid for Acova Radiateurs, a subsidiary of Source Perrier. Source Perrier had decided to sell Acova, and Baring Capital Investors thought it might make a good leveraged buyout candidate.

Spreadsheet Supplement for case 295150

Spreadsheet Supplement for case 293117

Richard Munro, Time Inc.'s chairman and CEO, must respond to a hostile tender offer from Paramount Communications. Paramount conditioned its bid on cancellation of Time's plans to merge with Warner Communications. Several months before the hostile Paramount bid, Time had announced its plans to merge with Warner after careful consideration of a comprehensive list of possible partners, including Paramount. The Board endorsed Munro's decision to merge with Warner because the two firms held a wide range of complementary assets. If Time continued with its plans to merge with Warner, Time's shareholders would forgo at least $175 per share in cash, and possibly more. On the other hand, a merger with Paramount was not part of Time's long-term strategy. Munro must recommend a specific course of action to the Board at its emergency session. The case is written from the viewpoint of Time's managers. Should Time's managers resist the Paramount bid?

Supplements the (A) case. Designed as a class handout. Allows students to evaluate the Board's response.