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Harley-Davidson Inc. (Harley-Davidson), the storied maker of iconic American motorcycles, was on the cusp of issuing its first bond not denominated in US or Canadian dollars-a so-called Reverse Yankee bond issue denominated in euros. Macroeconomic factors suggested that a euro issue could take advantage of the extremely low real rates of return in European markets that resulted from government monetary policies and a weak economy. On the other hand, there were reasons to believe a Harley-Davidson offer might encounter weak demand: the company was struggling with the effects of a trade war between the United States and Europe, its bonds had recently been downgraded, and it had no track record with European offerings. A key question in the case is how to calculate a dollar-equivalent yield on the euro issue so its economic benefit can be determined and compared to a US dollar issue. Using expected spot exchange rates based on inflation (an expected cost of funds) generates a cost of funds lower than the dollar issue, whereas using forward exchange rates based on interest rates (a hedged cost of funds) generates a rate somewhat higher. An analysis of peer company bond offerings suggests that Harley-Davidson is faced with a slightly higher credit spread in Europe, though the spread is not large enough to offset the lower real rate of return associated with a Reverse Yankee bond offering. As is often the case, therefore, the real rate differences across markets cannot be monetized if one hedges borrowing-related currency risk. This may not be a concern for Harley-Davidson, however, as it has substantial sales in Europe. This case can be used in a variety of ways, depending on which elements are emphasized. It has been used successfully at Darden in an MBA-level "International Corporate Finance" class to introduce interest-rate arbitrage and the hedged cost of funds. It could easily be used in a more general course to illustrate parity conditions with some of the

Spreadsheet Supplement for Case UV8728

Spreadsheet Supplement for Teaching Note UV8706

Lisa Jackson, vice president of Environment, Policy and Social Initiatives at Apple Inc. (Apple) and, previously, the first African American administrator of the Environmental Protection Agency, was preparing for questions that might arise in relation to Apple's upcoming 10-year $1 billion green bond issue, Apple's second such offering. The case explores the economics of bond pricing in general, and green bonds in particular, by describing the results of the first issue, focusing on possible reactions to the second issue, and surfacing concerns that arise in connection with green bond markets. The possible positive impact on the environment from green bond issues is contrasted to concerns about greenwashing and the stark reality that Apple's first green bond exhibited at best a very small reduction in yields relative to comparable conventional bonds (a very small so-called greenium). The case provides a basis for discussion of green bond markets and enough information to estimate a yield for the new bond. Case data allow a yield estimate based on the yield curve of Apple's outstanding issues, bonds of comparable firms, and Apple's bond rating. All comparable yields are provided so the case discussion can focus on the underlying drivers of yields: a baseline risk-free rate that can vary by time to maturity, an added risk premium, and adjustments based on other characteristics that might affect supply and demand. While not central to the case, sufficient information is provided to critically evaluate Apple's bond rating at the time and comment on Apple's growing use of debt financing. This case has been used successfully to generate a discussion of green bond markets in an elective course and as an introduction to bond pricing in a core finance class. It has also been used successfully in an Executive Education program to explore the advantages and disadvantages to a firm of employing green bonds in financing investments.

Spreadsheet Supplement for Case UV8644

Angus MacIntyre, CEO of Dumbarton Bearing Supply, LLC (Dumbarton), is deciding whether to introduce a new ceramic ball-bearing product line and whether to produce those bearings by refitting an existing production line or by building a new production line. The initial analysis favors a refit-despite a much higher variable cost, the investment is relatively small, and as a result this approach poses little risk. However, this analysis does not recognize the possibility that Dumbarton could abandon the new product line and recoup much of its investment in scenarios where demand for the new bearings is low. The ability to abandon the product line at a later date is a classic "real option." When properly recognized, this real option flips the conclusion on the production choice-it allows Dumbarton to capture the benefits of a newly built line's very low marginal cost while mitigating the risk created by a larger investment. The case provides insights into option-like features of decisions without any use of option-pricing tools. This case has been used successfully to introduce real options in Darden's core finance curriculum, a specialty master's degree program in data analytics, and an Executive Education program. It would be appropriate either in a sequence of cases covering optionality or as a later case in a sequence of cases on net present value (NPV) analyses. Any student with an understanding of basic NPV analysis can execute the required work, so the case can be used in a wide variety of settings. The emphasis can be easily shifted from technical modeling (advanced techniques in valuation) to intuition (strategic choices) as needed.