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On August 21, 2001, Keane, Inc. announced the acquisition of Metro Information Services, Inc. This case analyzes the challenges facing firms and examines transactions whose major source of value creation hinges on intangible assets (e.g., people or knowledge).

This case follows the performance review and financial-statement-forecasting decisions of a Value Line analyst for the retail building-supply industry in October 2002. The case contrasts the strong operating performance of Home Depot with the strong stock-market performance of Lowe's. Students examine a financial ratio analysis for Home Depot that acts as a template to generate a comparable ratio analysis for Lowe's. The student ratio analysis is designed to build intuition with respect to interpreting individual ratios as well as ratio interrelationships (e.g., the DuPont framework). The historical-performance comparison suggests that investors are skeptical of the ability of Home Depot to maintain its performance trajectory, yet they project sustained improvements for Lowe's. Students are invited to scrutinize the analyst's five-year income-statement and asset-side balance sheet forecast for Home Depot. The case expressly focuses on the asset side of the balance sheet as a preview for other cases using free-cash-flow forecasting. The Home Depot forecast exercise exposes students to the mechanics of financial-statement modeling and sensitivity analysis, which they can use in building their own forecast for Lowe's. Finally, the strong-growth assumptions for Home Depot relative to the modest-growth forecast for the industry suggest that the company can be expected to capture massive and perhaps unreasonable market share in the near term. The exercise provides a striking example of the importance of comparing bottom-up business forecasting with top-down industry forecasts.

JDSU Uniphase Corporation is a high-technology company that designs and manufactures fibre-optic components for the telecommunications and cable television industries. The company announces a record high year-end loss; they contribute the losses primarily to the writedown of goodwill. Using accounting for acquisitions and goodwill, the company must reassess the value of its past acquisitions.

Weihai-Daewoo Electronics Co., Ltd., a joint venture between a Chinese company and Daewoo Electronics Co., Ltd., of Korea, is one of the leading colour monitor manufacturers in China. The company has the opportunity to secure new business through an open bidding process. However, the price asked for is lower than Weihai-Daewoo's cost of production using the full-cost method. The company needs the business and the chief executive officer believes that a long-term relationship could be profitable. He must decide whether to accept the order and examine the company's cost calculation system.

Sinopec Corporation is one of the largest integrated petroleum and petrochemical companies in China. The director of finance of the Pingyuan Oilfield Company of Sinopec must discuss with head office the division's production budget. He must do a breakeven analysis and consider the tradeoff for different accounting alternatives to determine how he will meet head office's proposed profit target and what strategy should be used for development.

Managers' desire to work with "a number," to plug in an average figure, is legendary. But using an average to represent an uncertain quantity usually yields a wrong answer, compromising decisions in accounting, investment, sales, and other areas. Simple software can help.

On July 30, President Bush signed into law the Sarbanes-Oxley Act addressing corporate accountability. A response to recent financial scandals, the law tightened federal controls over the accounting industry and imposed tough new criminal penalties for fraud. The president proclaimed, "The era of low standards and false profits is over." If only it were that easy. The authors don't think corruption is the main cause of bad audits. Rather, they claim, the problem is unconscious bias. Without knowing it, we all tend to discount facts that contradict the conclusions we want to reach, and we uncritically embrace evidence that supports our positions. The corporate-auditing arena is particularly fertile ground for self-serving biases. Because of the often subjective nature of accounting and the close relationships between accounting firms and their corporate clients, even the most honest and meticulous of auditors can unintentionally massage the numbers in ways that mask a company's true financial status. Solving this problem will require far more aggressive action than the U.S. government has taken thus far. What's needed are practices and regulations that recognize the existence of bias and moderate its effects. True auditor independence will entail fundamental changes to the way the accounting industry operates, including full divestiture of consulting and tax services, rotation of auditing firms, and fixed-term contracts that prohibit client companies from firing their auditors. Less tangibly, auditors must come to appreciate the profound impact of self-serving biases on their judgment.

Introduces a discussion of management earnings disclosure and the growing use of pro forma reporting by corporations. Highlights the background of pro forma reporting, how it has been used in the past couple of years, and what the regulators at the capital markets think about this form of earnings disclosure. Also examines two companies' use of pro forma.

Spreadsheet Supplement for case 103005.

Spreadsheet Supplement for case 103018.

Krispy Kreme is a rapidly growing firm with a business model that has excited Wall Street.

Examines the valuation of United Parcel Service (UPS) at the time of its IPO in mid-1999. Offers students the opportunity to assess UPS's current performance relative to its major competitor, Federal Express (FedEx), and to judge whether that performance is sustainable. Students then make projections of UPS's future earnings performance, estimate on IPO price, and assess the reasonableness of their estimate compared to the valuation of FedEx and best-in-class leaders.

Spreadsheet supplement for case 103015.

Spreadsheet Supplement for case 103019.

The stockholders' equity section of the balance sheet illustrates details of accounting for stock offerings, common stock, and preferred stock. Accounting for dividends, both cash and stock dividends, and treasury stock is covered.

The president of Piele S.A., a manufacturer of natural leather products, is reviewing the results of the first half of the year. A team of consultants has been working with the firm to restructure the company's budgeting and reporting systems. The new systems have been in place for six months and the president must analyse the results before meeting with the management team to discuss what actions should be taken for the future.

In valuing any investment project or corporate acquisition, executives must decide what discount rate to use in their estimates of future cash flows. The traditional approach is to apply the capital asset pricing model (CAPM), which has remained fundamentally unchanged for 40 years. But the formula--in particular, its beta element--has long been a source of frustration. In fact, corporate executives and investment bankers routinely fudge their CAPM estimates, say the authors, because experience and intuition tell them the model produces inappropriate discount rates. CAPM has three main problems: First, beta is a measure of both a stock's correlation and its volatility; second, beta is based on historical data; and third, CAPM rates don't take into account the term of the investment. These factors together result in discount rates that defy common sense. As an alternative to CAPM and its beta element, the authors developed a forward-looking approach to calculating a company's cost of capital--the market-derived capital pricing model (MCPM). It does not incorporate any measure of historical stock-to-market correlation, relying instead on estimates of future volatility derived from the options market. This is helpful given that investor expectations from the options market are built into a company's current stock price. Using GE as an example, the authors give step-by-step instructions for how to calculate discount rates with MCPM. They also offer evidence from a range of industries to show that MCPM's discount rates are more realistic--especially from the corporate investor's perspective--than are CAPM's.

Siebel Systems is one of the fastest growing companies in America. Tom Siebel, the company's founder, has organized the business to accommodate growth and focus on the customer. Innovative information technology systems and clear accountability prove to be essential to this new approach to organization design. For example, a new employee must successfully pass an online test to demonstrate her understanding of Siebel's management systems and practices. This product can be used with the free Job Design Optimization Tool (JDOT), available at: hbsp.harvard.edu/jdot

Spreadsheet Supplement for case 103014.

Your company knows its investors pretty well, right? But do you know how they'll react to any particular strategic decision your company might make? Probably not. The consequences of not knowing can derail your strategy, leading you to miss out, for example, on acquisition opportunities. Authors Coyne and Witter claim that in most companies, the decisions of fewer than 100 investors typically account for about 70% of the changes in a company's share price. They also claim that a new approach to investor relations, drawing on the one used to manage customer relations, can help companies paint a more complete picture of their investors' behaviors and motivations. Investor-based finance first has you identify four groups of actual and potential key investors: large shareholders that suddenly become active, past shareholders that seem to be buying back in, smaller shareholders you think are poised to increase their holdings, and potential shareholders that own shares in comparable companies but not yours. By analyzing the patterns in the buying and selling behaviors of investors in those groups, you can ascertain which investors have the power to move your share price. Once you've determined who your key investors are, compare their horizon of analysis (long, medium, or short term) and the dominant content they analyze (information about organizational structure, strategy, or financials). In doing so, you'll come to understand what's most important to those investors, and you'll be able to predict how they'll likely react to different kinds of news and thus buy or sell shares in your company.