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A turnaround expert must determine whether a firm in distress is worth more as a going concern than its liquidation value. If so, the finances of the firm must be restructured in a way consistent with the bargaining power of the holders of the various securities. The restructuring requires a delay in principal repayment, rate concessions, and a debt-for-equity swap.

Since the beginning of 1997, Vanguard's assets under management have increased more than 60% from $240 billion to almost $400 billion, making it second in market share only to Fidelity. Vanguard views this success as another vindication of its low-cost strategy of no-load funds, small expense ratios, candid client communication, high-quality service, and predictable performance. But the organization also is mindful of the unprecedented changes occurring in the financial services industry. Financial institutions have been rapidly consolidating, with firms such as Citigroup, UBS, and Merrill Lynch each now holding customer and other assets in excess of a trillion dollars. And technology-especially the Internet-is dramatically altering the creation, pricing, and delivery of financial services. Vanguard has to carefully consider its future, and faces key decisions such as expanding its range of products and offering asset management services in other countries.

Spreadsheet Supplement for case 299002

In this article, Timothy A. Luehrman explores how option pricing can be used to improve decision making about the sequence and timing of a portfolio of strategic investments. In financial terms, a business strategy is much more like a series of options than like a single projected cash flow. Executing a strategy almost always involves making a sequence of major decisions. Some actions are taken immediately while others are deliberately deferred so that managers can optimize their choices as circumstances evolve. While executives readily grasp the analogy between strategy and real options, until recently the mechanics of option pricing were so complex that few companies found this method practical to use when formulating strategy. But advances in both computing power and our understanding of option pricing over the last 20 years now make it feasible to apply real-options thinking to strategic decision making. To analyze a strategy as a portfolio of related real options, this article exploits a framework presented by the author in "Investment Opportunities as Real Options: Getting Started on the Numbers" (HBR July/August 1998). That article explained how to get from discounted-cash-flow value to option value for a typical project; in other words, it was about reaching a number. This article extends that framework, exploring how, once you've worked out the numbers, you can use option pricing to improve decision making about the sequence and timing of a portfolio of strategic investments. The author shows executives how to plot their strategies in two-dimensional "option space," giving them a way to "draw" a strategy in terms that are neither wholly strategic nor wholly financial, but some of both. Such pictures inject financial discipline and new insight into how a company's future opportunities can be actively cultivated and harvested.

The second in a four-part series, the case details the financial policies and practices at General Motors from 1990 to 1996. This part describes the stated financial policies of the firm, including its approach to capital structure, liability structure, equity structure, dividends, cash balances, and risk management.

The third in a four-part series, this case details the financial policies and practices at General Motors from 1990 to 1996. This part describes the firm's financial responses to the business stresses it faced in the 1992 time period.

The fourth in a four-part series, the case details the financial policies and practices at General Motors from 1990 to 1996. This case describes the set of financial decisions taken by the firm as its business recovered, and focuses on an immediate decision faced by GM's treasurer in 1996. He must decide whether to recommend that the board hold "excess" cash, disburse it to shareholders via a dividend increase, or repurchase shares. In addition, the repurchase alternative offers a number of tactical choices, including whether to engage in a put-writing program or an accelerated share repurchase.

This teaching note instructs on three major methods to value entrepreneurial companies and uses an example to illustrate each method. The three methods are Balance Sheet Valuations, Income Statement Valuations, and Discounted Cash Flow. For each of the three, the note explains the mechanics and highlights common problems with its use. Then, the note discusses when it is best to use each of the methods. Finally, the note discusses some other considerations, including the difference between financial and strategic buyers, the use of industry-specific operating metrics, and some other ways people value start-ups, including using comparables and required rates of return.

In May 1998, the director of Research at Zeus Asset Management is reflecting on the current performance evaluation of Zeus's mutual funds (which include an equity fund, a bond fund, a balanced fund, and an international fund) and ways to improve the measurement of performance. Zeus has become increasingly aware that absolute returns, or relative returns (returns relative to a benchmark), will not suffice as a measurement of performance and that a measurement (or a series of measurements) of risk-adjusted performance must be added. Performance evaluation is key to structuring compensation and incentive schemes in general, as well as strategic planning for the company's future. Given Zeus's relatively risk-averse clientele, the "correct" measurement of risk is imperative. Students are asked to compute several measures of risk-adjusted performance. Familiarity with running regression models in Excel is required; alternatively, the case can be used to pursue that objective. The case comes with an Excel spreadsheet containing the relevant data (time series of returns [net of risk-free rate] of three mutual funds and corresponding benchmark indices).

The purpose of the case is to provide an opportunity for students to evaluate the relative performance of portfolios. In the case, students are asked to select one portfolio from among eight possible choices. Here the selected portfolio will be included in a larger pan-European portfolio. This a good application of the Sharpe, Treynor and Jensen indexes in an international setting. It can be used to draw clear distinctions about when each of the different performance measures should be used. In addition to the performance evaluation, students must also ask how each of the candidate portfolios fit into the overall objectives of the larger portfolio. This case can be used in a portfolio management class to introduce the different performance measures.

Spreadsheet Supplement for UV0084

Spreadsheet supplement to case UV0084.

Spreadsheet supplement to case UV0084.

This note takes students step by step through the evaluation of an interest rate swap. It assumes students have a strong grounding in the concepts of forward rates and spot rates.

This brief note explains how to set up a Monte Carlo simulation using @Risk for the purpose of valuing options. It should be used in conjunction with the Excel spreadsheet Monte.xls.

In this article, Timothy A. Luehrman presents a framework that can bridge the gap between the practicalities of real-world capital projects and the higher mathematics associated with formal option-pricing theory. His step-by-step approach maps out the exact relationship between a project's characteristics and the five variables that determine the value of a simple call option on a share of stock. By going through these steps, executives not regularly steeped in finance can discover value hidden in their projects that their standard discounted cash flow analysis would overlook. The analogy between financial options and corporate investments that create future opportunities is both intuitively appealing and increasingly well accepted. Executives readily see that today's investment in R&D, or in a new marketing program, or even in a multiphased capital expenditure can generate the possibility of new products or markets tomorrow. But for many, the leap from the puts and calls of financial options to actual investment decisions has been difficult and deeply frustrating. The calculations required to value real options have been dauntingly complex, and practical how-to advice on the subject has been scarce and mostly aimed at specialists, preferably with Ph.D.s in finance. Luehrman's methodology is designed to be used by general managers, not technical specialists. It deliberately sacrifices absolute precision in order to generate a number "good enough" to provide executives with valuable insight into their most important and complex investment decisions.

This case is a relatively straightforward exercise in valuing a potential acquisition target. The case affords students an opportunity to use both discounted cash flow and multiples in their analyses. In addition, at the instructor's discretion, students can do a simple valuation of an option contract and analyze currency choice in a debt issue. The latter two objectives arise if the case is used as an examination. Case Exhibit 1 poses the relevant questions for student preparation.

This aggressive retailer is adding store space at the rate of 25% per year. The case presents an external financing requirement amounting to $1.4 billion over the next five years. Students must decide how to meet this requirement wisely, acknowledging the relationship between business strategy and financial policy. Analysis of the firm's share price reveals a substantial overvaluation in the market.