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Practitioners of a new technical specialty--financial engineering--can help senior managers achieve their objectives. Financial engineering can not only reduce the cost of existing activities but also make possible the development of new products, services, and markets. Peter Tufano presents five case studies that illustrate innovative applications of financial engineering and help managers determine when such techniques are appropriate.

Requires students to value Boston Beer's IPO. Set in Boston in 1995, Jim Koch, the founder of Boston Beer, must determine the appropriate price for his firm's stock in its IPO.

Supplements the (A) case.

FOX Venture Partners (FVP) is a proposed "Fund-of-Funds" that will enable wealthy individuals to invest in venture capital. While several leading venture capitalists are enthusiastic about the concept, FVP's general partners are finding it difficult to invest individually in the fund.

Rick Melnick oversees the Student Educational Loan Fund (SELF), which provides loans to Harvard Business School students. SELF is changing the terms of student loans from variable-rate with semiannual payments to fixed-rate loans with equal monthly payments. Melnick must decide how to finance SELF in light of the new loan mix. SELF can use a wide range of interest-rate derivative products to modify the terms of its existing financing.

Melissa Simpson, a loan officer at the St. Thomas Alliance Trust Company, has to decide about a $100,000 loan request for a new restaurant, The Ugly Dog Pizza Company. The operators, Pete Bates and John Symonds, have some experience in food management, but neither of them has ever started and operated a restaurant. Other factors contributing to her difficult decision include minimal collateral coverage, a recent approval from the federal government for a business loan and a fiercely competitive restaurant marketplace.

The owner of Garlic's restaurant in London, Ontario, must make some quick decisions to ensure her first month's high sales figures would translate into long-term success. She needs to improve the current dinner reservation system to ensure customer satisfaction. Other options to meet or suppress demand include expansion or price increases. Operationally, the food being served is not as hot as customers expect and two alternatives to solving this problem - hiring a bus person or buying a plate warmer - are examined. Cost benefit analysis along with their impact on the financial statements need to be elaborated.

This note provides the reader with typical clauses to be found in shareholders' agreements along with an explanation of the purpose of each clause.

Yale University's investment office was responsible for managing its endowment, which totaled nearly $4 billion in June 1995. Yale had developed a rather different approach to endowment management, including substantial investments in "less efficient" equity markets such as private equity, real estate, and "absolute return" investments. The investment office was now considering devoting even more of their assets to these markets.

This case and its companion (UVA-F-1102) provide comprehensive coverage of a firm's decision to undertake an initial public offering (IPO). The company is a nonregulated financial firm in a rapidly growing area of consumer finance (high credit-risk automobile loans). The A case follows the firm from its first meeting with investment bankers to the determination of a preliminary IPO price range. In the B case, the firm's "road show" encounters a "cold-issue" market, and Eagle is unable to sell its shares at a price near the preliminary file range. Management is confronted with the tough choice of whether to proceed with the IPO or cancel it. The cases provide a rich opportunity to compare management's internal valuation of the firm (derived from market multiples and discounted cash-flow analysis) with the market's assessment of value. Excel spreadsheet files are available for use with this case (UVA-S-F-1095) and its teaching note.

Spreadsheet for case UV2374.

Acme Investment Trust is considering investing in a private equity partnership that is seeking only 15% of the profits, instead of the standard 20%. The management fee requested, however, is higher than in its earlier fund. The pension managers must consider the financial and organizational consequences of this shift.

Bob O'Connell, CFO of General Motors, is considering a variety of equity alternatives to fund a large shortfall over the next couple of years. His tasks are to map out a financing strategy for the long term and to choose the equity instrument to be issued immediately. Of particular interest to O'Connell is a new security called PERCS (preferred equity redemption cumulative stock).

The senior financial analyst for Kingston-Murray Enterprises, must decide what funding technique to recommend to the company's chief financial officer. The firm's recent discoveries of gold and sulfur reserves have created a need for $500 million in operating cash. Because of the company's low credit rating and high cost of borrowing, senior management has restricted the financing choices to either common stock or convertible bonds. The zero-coupon convertible under consideration is a LYON (liquid-yield option note). Before recommending whether to issue LYONs, the analyst wants to understand fully the details of these subordinate, zero-coupon, callable, putable, convertible notes.

The setting for the case is a rate hearing to determine the cost of capital for a gas utility. The case provides an opportunity for a full discussion of the issues in estimating the cost of capital for both regulated and unregulated firms. The situation has an added twist in that the company just became a wholly owned subsidiary of British Gas.

The Independent Committee of the Board of Directors of Goodyear Canada Inc. must assess the fairness of the proposed Going Private amalgamation received from Goodyear Canada's parent, The Goodyear Tire & Rubber Company of Akron, Ohio. The Goodyear Tire & Rubber Company offered to buy all the common shares of Goodyear Canada not already owned by them (11.2% of the shares issued were in public hands) for $48.00 (CDN) in cash per share. This represented a 22% premium over the closing price on the Toronto Stock Exchange on the previous afternoon.

The bank has to decide if and how it will help Columbia Pine Pulp Company (CRP). The bank must evaluate CRP's projections, capital structure, security, proposed design of the financing, interest rate hedging, and other financial decisions. The company is proposing a greenfield pulp mill on the site of a sister pulp mill and an affiliated paper mill. Students are required to develop a financial strategy. (Two related cases bearing the same name examine recapitalization and interest rate hedging - cases 9A90B036 and 9A90B037.)

The purpose of this case is to permit a discussion about value creation, performance assessment, the case method and corporate finance. It is intended to be used in the first class in a corporate finance course.

Spreadsheet Supplement for case 296033.