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Pepsico, Inc. spanned more than 190 countries and accounted for approximately one-quarter of the world's soft drinks. The vice president of finance for Pepsico East Asia had been collecting data on the firm's proposed equity joint venture in Changchun, People's Republic of China (PRC). Although Pepsico was already involved in seven joint ventures in the PRC, this proposal would be one of the first two green-field equity joint ventures with Pepsico control over both the board and day-to-day management. Every investment project at Pepsico had to go through a systematic evaluation process that involved using capital budgeting tools, such as new present value and internal rate of return. The vice president of finance needed to decide whether the proposed Changchun joint venture would meet Pepsico's required return on investment. He was also concerned what the local partners would think of the project. The final decision would be made after a presentation to the president of Pepsico Asia-Pacific.

On February 18, 2000, month-old Internet startup, Tom.com, began its initial public offering and would open for trading on March 1 on Hong Kong's Growth Enterprise Market. The Internet company, majority-owned by Mr. Li Ka-shing's Cheung Kong Holdings and Hutchison Whampoa, planned to catch the frenzy that Hong Kong's investors had for new Internet stocks. The huge demand for Tom.com shares raised Internet frenzy in Hong Kong to new levels reminiscent of the red chip fever of 1997. Many of the retail investors had no idea what the company did but were betting on the IPO being a winner largely because of Mr. Li's clout with China. In this case, the student is asked to serve as an investment advisor to a retail investor considering subscribing to Tom.com's IPO. The student will provide an analysis of the risks and opportunities of investing in Tom.com and make a recommendation on whether the client should buy Tom.com's shares at the offer price.

Student spreadsheet for case INS709.

Case supplement spreadsheet for case INS709.

This case teaches the student how to apply economic and NPV analysis to the fundamentals of a B2C transactional e-commerce business. It uses as an application how a new entrant online broker such as Ameritrade attacks incumbent financial service providers in the U.S. by unbundling its services, offering prices close to marginal production costs, and by expanding consumer choice and convenience, all supported by intensive investments in aggressive advertising. It analyses marketing expenses as an investment in the acquisition of customer accounts and deepens the understanding of the profit model of this B2C activity, reflecting on the relative importance of net income from transactions versus net income from margin loans and on the relevance of transaction costs and trading volumes. The emphasis of the case is on the particular free cash flows economics of many B2C business and the annuity free cash flow income stream to be collected from a customer. It allows estimating NPV and IRR of the marketing investments. It provides an opportunity for students to study the sensitivity of this NPV to the different account value drivers. This gives students an insight into the strategic threats and opportunities of the business, and into the economic reasons for the high volatility on Internet stocks during a period in which contenders compete intensively to gain significant first mover advantages and to be ahead on the power curve in order to attain a winner take all position.

Four Seasons Hotels and Resorts Inc. had grown significantly during the past 20 years, and most recently, had fundamentally changed the nature of its business from hotel ownership to hotel and resort management. The focus of the case is on what more could be done to enhance the value of the firm. Should an equity offering be undertaken? Was the timing right? Who should be the underwriters? What should be the criteria for selecting one underwriter over another? Should it be a global equity offering or should it be kept in Canada? Would debt refinancing be a better alternative? What would be the advantage of one over the other? Who should be the target buyers? What would the impact of each choice be on shareholder value?

This case introduces the field of project finance and supplies a statistical overview of the project finance market as of the mid=to late 1990s. It consists of four sections. The first section defines project finance and contrasts it with other well-known forms of financing. The second section describes the evolution of project finance from its origins in the 13th century in the mining industry, to the U.S. electric power industry in the 1970s and 1980s, and then to a much wider range of applications and locations in the 1990s. The third section provides a statistical overview of the project finance market as it exists today in terms of industry, project, and participant data. The final section discusses current and likely future trends. There is also an appendix that describes sources of industry data and other project finance information.

Spreadsheet Supplement for case 200028

The national flag-bearer of Germany, Lufthansa, purchased twenty 737 Boeing aircraft in January of 1985 for $500 million. The payment was due in January of 1986 upon delivery of aircraft from the U.S. manufacturer. At the time of the purchase, the U.S. dollar was at a record high versus the Deutschemark, it had been steadily appreciating against the Deutschemark for five years. The CEO of Lufthansa, Herr Heinz Ruhnau, was responsible for determining what hedging, if any, would e used in conjunction with the dollar exposure.

Provides an overview of the primary securities used in private equity, their structures, and the economic motivation behind their designs.

Spreadsheet Supplement for case 100015

The owner of a metal furniture manufacturing company is seeking funds to help finance his firm's expansion. He has arranged a mortgage with a life insurance firm to finance the addition to his plant. He is now trying to arrange a working capital loan with his bank manager. There were heavy pressures on manufacturers of metal furniture in recent years and the cost/price squeeze has forced out many weaker manufacturers. Talich Fabricating Inc. survived due to the managerial competence of the owner who anticipates a big sales increase, since the number of competitors has decreased considerably. He believes that this decreased pressure will enable him to increase prices to improve his profitability, which has suffered during the industry shake-out. The loan proposal must be evaluated by the bank manager in view of a head office memo suggesting the loans be limited to proposals offering the highest return with the least risk. As the bank manager, students should evaluate the loan proposal considering the character of the owner/manager, business conditions, capacity to repay, and available collateral. Talich Fabricating Inc. is a complex case, and should be used near the end of an introductory finance segment.

A machine tools distributor is planning to build an extension onto its warehouse. The owner is concerned how to source the $100,000 required to finance the expansion. Options include borrowing from a bank, borrowing from a private lender, or issuing shares. This case is intended to introduce students to financial analysis. The concepts of ratio analysis, projected statements and debt repayment are central to the case. The case requires students to draft a set of projected statements to determine the amount of required financing, assess the financial health of the company and its ability to take on more debt.

Dawson Lumber Company, experiencing rapid growth in the mid-1990s, has requested a $10.8 million working capital loan from the National Bank of Canada. This loan request is based on the assumption that Dawson's growth will continue at an increasing rate. The vice president of the bank must analyze Dawson's performance and give a reply. This case is a good vehicle to reinforce or introduce financial analysis. It synthesizes the relationship between ratio analysis and projected financial statement development. It also presents an interesting perspective in which the bank must balance risk with the effort it extended to acquire Dawson as a client.

CBL & Associates is trying to decide whether to go ahead with the development of a 790,000 square-foot power center with retailers such as Home Depot and Barnes & Noble. The costs are such that the developer needs to renegotiate its land acquisition price. Then the project must be presented to its board of directors for approval.

It is June 1997, and a team from the International Finance Corp. (IFC) is recommending that the board approve a $120 million investment in a $1.4 billion aluminum smelter in Mozambique, known as the Mozal project. Four factors make the investment controversial: it would be the IFC's largest investment in the world, total investment is almost the size of Mozambique's gross domestic project (GDP), Mozambique had only recently emerged from 20 years of civil war, and several key contractual issues were still undecided. Because commercial bankers have refused to finance the deal unless the IFC is involved, the sponsors have requested IFC participation. Whether the IFC's board will agree that it is the right time and the right place to make such a large investment remains to be seen.

Although inexperienced in real estate, Edward Alexander hopes in June 1999 that youthful enthusiasm and an $80,000 inheritance will help him enter the real estate business. His experience chronicles the process of finding, evaluating, and acquiring a four-unit brownstone in need of renovation in the Beacon Hill area of Boston. The case also identifies the various players in the process. A rewritten version of an earlier case.

Long-Term Capital Management, L.P. (LTCM) was in the business of engaging in trading strategies to exploit market pricing discrepancies. Because the firm employed strategies designed to make money over long horizons--from six months to two years or more--it adopted a long--term financing structure designed to allow it to withstand short-term market fluctuations. In many of its trades, the firm was in effect a seller of liquidity. LTCM generally sought to hedge the risk--exposure components of its positions that were not expected to add incremental value to portfolio performance and to increase the value-added component of its risk exposures by borrowing to increase the size of its positions. The fund's positions were diversified across many markets. This case is set in September 1997, when, after three and a half years of high investment returns, LTCM's fund capital had grown to $6.7 billion. Because of the limitations imposed by available market liquidity, LTCM was considering whether it was a prudent and opportune moment to return capital to investors.

Long-Term Capital Management, L.P. (LTCM) was in the business of engaging in trading strategies to exploit market pricing discrepancies. Because the firm employed strategies designed to make money over long horizons--from six months to two years or more--it adopted a long--term financing structure designed to allow it to withstand short-term market fluctuations. In many of its trades, the firm was in effect a seller of liquidity. LTCM generally sought to hedge the risk--exposure components of its positions that were not expected to add incremental value to portfolio performance and to increase the value-added component of its risk exposures by borrowing to increase the size of its positions. The fund's positions were diversified across many markets. This case is set in late August 1998. LTCM's fund was down nearly 40% since the beginning of 1998, with most of this loss having occurred in recent weeks. LTCM was evaluating the fund's liquidity and considering alternative courses of action. Possible choices included attempting a rapid reduction of many of the fund's positions and trying to raise additional capital.

Marisa Caris oversees real estate investments for the IBET Pension Fund. She must value each of the existing eight properties and determine a strategy for going forward. A rewritten version of an earlier case.