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This is an MIT Sloan Management Review article. Why do companies frequently make bad investment decisions and continue to blunder, even after the weaknesses in their capital budgeting analyses are evident? Because, according to the authors, they don't integrate capital budgeting into their overall strategy. The authors' capital budgeting framework has six key features: it is dynamic, it is integral to the firm's strategy, it recognizes sequences of options, it is cross-functional, it aligns employee compensation with capital allocation, and it emphasizes performance-based training. The three steps of this framework should take place simultaneously: First, identify a status quo strategy and how it must perform to maximize shareholder value. The strategy helps the company determine the trade-off in capital budgeting between cycle time and risk. Second, establish a system for evaluating projects and preparing capital allocation requests that is consistent with the strategy. Finally, develop a culture consistent with the strategy and the evaluation system.

A diversified global interests company, which is financed through medium and long-term loans, is preparing a US$1 billion bond offering. Students will have to figure the individual bond price, including the possible cost of the issue, while considering the receptiveness of the market, given the change in sovereignty over Hong Kong.

Spreadsheet Supplement for case 299016

This case examines a large bank trying to protect itself from the risks and capital requirement created by its loan portfolio. Considers a variety of ways available to the firm to offload the risks.

The senior officers of a national office supplies manufacturer and distributor are at odds over a slow payment, and perhaps insolvent, major distributor, and what the options are to collect the account and maintain sales in the region.

A bond portfolio manager is re-evaluating the funds position in government bonds. His team had attempted to take advantage of a mis-priced bond and was now in the process of re-examining the recent move in interest rates, the current shape of the yield curve, and the forecast for interest rate changes. This case introduces students to fundamental bond valuation and price change issues, including duration and convexity, as well as bond management styles.

Describes an Excel spreadsheet workbook that facilitates the analysis of PsiVest Capital.

A venture capital/private equity fund is preparing to negotiate with the two parties in a prospective PCS joint venture: the entrepreneur and AT&T Wireless. The negotiation will decide how equity and control are shared in the venture.

In this article, Bob Zider, president of the Beta Group, a California-based firm that invests in commercializing new technologies, presents an analysis of present-day venture capitalists and shows why its practitioners have a lot more in common with investment bankers than you might think. The popular mythology surrounding the U.S. venture-capital industry derives from a previous era. Venture capitalists who nurtured the computer industry in its infancy were legendary both for their risk taking and for their hands-on operating experience. But today things are different, and separating the myths from the realities is crucial to understanding this important piece of the U.S. economy. Today's venture capitalists are more like conservative bankers than the risk takers of days past. They have carved out a specialized niche in the capital markets, filling a void that other institutions cannot serve. They are the linchpins in an efficient system for meeting the needs of institutional investors looking for high returns, of entrepreneurs seeking funding, and of investment bankers looking for companies to sell. Venture capitalists must earn a consistently superior return on investments in inherently risky businesses. The myth is that they do so by investing in good ideas and good plans. In reality, they invest in good industries--that is, industries that are more competitively forgiving than the market as a whole. And they structure their deals in a way that minimizes their risk and maximizes their returns. Although many entrepreneurs expect venture capitalists to provide them with sage guidance as well as capital, that expectation is unrealistic. Given a typical portfolio of 10 companies and a 2,000-hour work year, a venture capital partner spends on average less than 2 hours per week on any given company. In addition to analyzing the current venture-capital system, the author offers practical advice to entrepreneurs thinking about venture funding.

The case describes the foreign exchange problems faced by Mr. John Christopher, in the spring of 1995. Christopher's company, TCAS, had just been awarded the bid to deliver and install a new management information software system and local area network computer system for a customer in Canada. TCAS is a US-based company with no previous international experience. The company, as a result of the bid award, was confronted with a very large foreign exchange exposure. TCAS has additional problems, including an operating loss in the previous year, and the potential of continuing losses in the current year in the absence of the subject sale. TCAS needs to make a profit on this contract, manage its foreign exchange exposure, and restructure its balance sheet.

Spreadsheet Supplement for case 299020

Farallon Capital Management, an investment firm that specializes in risk arbitrage, has taken significant long and short positions in MCI Communications and British Telecommunications, respectively, in the belief that the proposed merger of these firms will be successfully completed. Raises the issues facing Farallon as positive and negative events relating to the merger unfold. Provides a rich institutional setting for understanding certain investment strategies involving short selling, and for understanding merger arbitrage and its function in the capital markets.

Farallon Capital Management, an investment firm that specializes in risk arbitrage, has taken significant long and short positions in MCI Communications and British Telecommunications, respectively, in the belief that the proposed merger of these firms will be successfully completed. Raises the issues facing Farallon as positive and negative events relating to the merger unfold. Provides a rich institutional setting for understanding certain investment strategies involving short selling, and for understanding merger arbitrage and its function in the capital markets.

Farallon Capital Management, an investment firm that specializes in risk arbitrage, has taken significant long and short positions in MCI Communications and British Telecommunications, respectively, in the belief that the proposed merger of these firms will be successfully completed. Raises the issues facing Farallon as positive and negative events relating to the merger unfold. Provides a rich institutional setting for understanding merger arbitrage and its function in capital markets.

Provides an overview of key information sources about venture capital and private equity.

Spreadsheet Supplement for case 299018.

This note focuses on the dividend model (DDM), or Gordon Growth Model, as it is sometimes known. The DDM appears in many forms in practice. The note examines its role in estimating the intrinsic value of an equity security and as a model for estimating the required return on equity. It also explores the DDM's link to price-earnings ratios, a widely followed market multiple, and the sustainable rate of growth.

Petrozuata is a proposed $2.5 billion oil-field development project in Venezuela. The case is set in 1997 as the project sponsors, Conoco and PDVSA (Venezuela's national oil company), are planning to meet with various development agencies and rating agencies regarding the proposed financial structure. The sponsors hope to raise a portion of the $1.5 billion debt in the capital markets, which will require an investment-grade rating. The key questions are whether the project will achieve an investment-grade rating and, if not, how to finance the project. Describes what turned out to be an extremely well-crafted financial transaction, one that was named "Deal of the Year" in 1997 by virtually every journal covering project finance.

The French mineral water company, Perrier SA, has recently undergone financial and stock price difficulties, resulting from its famous benzene scandal. This leads to an opportunistic bid from the owners of Fiat SpA, the Agnellis of Italy, The Agnelli bid is actually effected indirectly, through two French companies with whom they are allied: Exor and Saint Louis. The bid is contested by the Swiss-based food giant Nestle and its French ally, BSN. Although attempting to outflank the Agnelli camp, Nestlé's chances of success seem slim, since the Angellis and their allies' control nearly 50% of Perrier.

In an average week, more than 300 companies fail. And more than 75% of those desperate firms file for a "liquidation bankruptcy," agreeing to a complete distribution of their assets to creditors. The remaining 25% refuse to surrender until a final option is exhausted: petitioning the courts for a "reorganization bankruptcy," trying to persuade its creditors to freeze their claims temporarily while it reorganizes to rebuild profitable operations. Proper and timely use of reorganization bankruptcy can bring relief from otherwise devastating indebtedness; chosen for the right reasons and correctly implemented, it can provide a financially, strategically, and ethically sound basis for serving the interests of all stakeholders. A model is offered for analysis of the bankruptcy situation and the turnaround response. The successful integration of reorganization bankruptcy as a key component of a strategic plan is based on an understanding of bankruptcy law and how its provisions affect the company, as well as the timely use of Chapter 11 protection as it was intended--to retrench systematically and put together a new strategy that evokes support of all stakeholders. It should never become a popular strategic choice; but if properly exercised, it can revive a deserving organization.