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In June 1996, executives of the multinational mining company RTZ-CRA contemplate bidding to acquire the Antamina copper and zinc mine in Peru. The Antamina project is being offered for sale by auction as part of the privatization of Peru's state mining company. RTZ-CRA has to determine what the mine is worth and decide whether and how it should bid in the upcoming auction. The bidding rules put in place by the Peruvian government dictate that each company's bid contain two components: an up-front cash amount and an amount the bidder will invest to develop the property if development is warranted after further exploration is completed.

Introduces the student to the recently developed concept of value-at-risk (VAR) in risk analysis. By working through a stylized example using spreadsheet tools, the student learns the conceptual framework of VAR and its implementation mechanics.

Presents the history and features of credit derivatives, a new class of securities. A stylized problem is also provided.

Spreadsheet Supplement for case 297069.

Spreadsheet Supplement for case 297086.

Spreadsheet Supplement for case 297086

In 1994, William Booth, a member of the management team of the Ontario Teachers' Pension Plan Board, was asked to re-examine the diversification strategy that the $30 billion fund had been pursuing since its inception and to determine an optimal long-term asset allocation policy for the fund. After inheriting a portfolio that consisted entirely of fixed-income securities in 1990, by the end of 1993, the allocation to equity was only 20% short of a 1995 interim policy target of 66%. Booth's primary task was to determine whether the shift in asset mix should stop at 66% equity in 1995, which was above the allocation to equities for the average pension plan, or whether it should continue to some higher amount (an independent consultant recommended an 80% allocation to equity). Booth knew that a higher allocation to equities would likely increase total returns over the long-term, thereby reducing the cost of funding the plan. However, equities exhibited greater volatility than bonds and a higher allocation to equities therefore created some risk that future funding costs might rise above current levels.

Didier Pineau-Valencienne (DPV), the CEO of Schneider SA, a leading French multinational company in the electrical distribution and industrial automation industry, is faced with the prospect of failure of joint venture discussions with the US company, Square D. The negotiations have already consumed two and one-half years. Mr. Pineau-Valencienne must decide whether to call off the discussion and go ahead with a tender offer for the US company, and if so, determine how much he should pay for Square D's equity. The case addresses issues of strategic fit between the bidder and the target, target performance, valuation (both base-case and synergies), financing decisions associated with the acquisition, and how the target's poison pills and anti-takeover amendments might affect outcomes in the battle for corporate control. An additional aspect of the case involves putting participants in the shoes of risk-arbitragers on Wall Street through a bidding game to make "buy-sell-hold" decisions. This involves forming judgments about Schneider's moves and Square D's counter moves, and DPV's (and their own) assessments of how high a price is likely to be paid if the acquisition goes through.

The Fojtasek Companies, a family business, faces several financing choices to address generational succession issues. Several buyouts have expressed interest in acquiring the firm outright; an investment bank has proposed a leveraged recapitalization; and a private equity group, Heritage Partners, has proposed a hybrid transaction.

In January 1996, the chief financial officer must fashion a response to a raider who claims that a major business segment of the company should be sold because it is not earning a satisfactory rate of return (ROR). The case recounts the debate within the company over the use of a single hurdle rate to evaluate all segments of the company versus a risk-adjusted hurdle rate system. The students' tasks are to resolve the debate, estimate weighted-average costs of capital (WACC) for the two business segments, and respond to the raider. Because the case was prepared to serve as part of an introduction to estimating investors' required rates of return, it would best follow one or two class sessions introducing techniques for estimating WACC. Although the numerical calculations required are light, some of the subtleties about the use of risk-adjusted hurdle rates will require time for the novice to absorb. The case can be used to pursue a variety of teaching objectives, including (1) extending risk return (i.e., mean variance) analysis to corporate finance; (2) surveying classic arguments for and against the use of risk-adjusted hurdle rate systems; (3) assessing the assumptions and limitations of risk-adjusted hurdle rate systems; (4) exercising the estimation of segment WACCs; and (5) considering possible organizational barriers to the implementation of risk-adjusted hurdle rates.

This note discusses the ranking of creditors in a bankruptcy, why financial institutions secure collateral when extending a loan and how a lender accesses collateral.

The case presents financial ratios for eight pairs of unidentified companies and asked to mate the description of the company with the financial profile apparent in the ratios. It provides a foundation for student discussion of financial ratios and the insights that may be gained through their use. Classroom discussion of the students' attempts to match results and companies reveals the strong influence of both industry and corporate strategy on the financial results and ratios for firms.

This transport privatization case describes the political complications that can accompany a privately-funded infrastructure project. The case tells the story of a Japanese construction firm and its relationship with the government of Thailand. The firm, Kumagai Gumi, is invited to build US$1 billion, 20-kilometer expressway in Bangkok, and to operate it as a toll road, under a 30-year concession contract. But a 1995 contract dispute prompts the Thai government to force Kumagai Gum first to open the road but then to sell it to Thai investors. The case allows for discussion of both a technical and political nature, focusing on the details of the contracting arrangement but also raising the question of domestic political dimensions in public projects involving non-domestic private investors. HKS Case Number 1401.0

The Common Fund, a nonprofit consortium of educational institutions, is deciding whether to create a fund of hedge funds for its members, and if it does, which hedge fund managers to select.

Spreadsheet Supplement for case 297014

Provides general background on the taxation of corporate securities, and shows how the inconsistent taxation of functionally-similar securities can permit financial engineers to bear tax risk to earn positive returns. Designed to be used with Times Mirror Co. PEPS Proposal Review, so that students can understand and calculate the tax-driven sources of value from Times Mirror's use of a PEPS to monetize its holdings in Netscape.

In 1988, USG was the world's largest gypsum producer and one of the world's largest building-products companies. On May 2, 1988, USG's board of directors announced a proposed leveraged recapitalization plan to thwart a hostile cash tender offer by Desert Partners. With only one week remaining before the tender offer was scheduled to expire, shareholders must decide whether to tender their shares or wait and vote in favor of the recapitalization plan.

Describes the content of the Corporate Financial Engineering (CFE) course at HBS. Used on the first day of class to let students know what the course will cover and the main ideas to be developed in CFE.

Students must estimate the weighted-average cost of capital (WACC) for two business segments and resolve the debate within a company over the use of a single hurdle rate versus a risk-adjusted hurdle rate performance evaluation system. In January 1996, Phon-Tech's CFO must fashion a recommendation regarding the company's use of segment hurdle rates. Phon-Tech had been the target of an active investor who charged that one segment was not paying its way. The case serves as part of an introduction to estimating investors' required rates of return (ROR). It would best following one or two class sessions introducing techniques for estimating WACC. Although the numerical calculations required are light, some of the subtleties about the use of risk-adjusted hurdle rates will require time for the novice to absorb.