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This technical note presents an overview of the process by which an analyst can assess the financial policy of a firm. It defines several dimensions of financial policy, offers three benchmarks against which to evaluate the policy, and reviews the FRICTO framework with which to assess proposals for future financial policy.

Spreadsheet Supplement for case 294109

Provides a basic understanding of real options in corporate finance. Traditional discounted cash flow techniques (NPV) do not deal well with managerial flexibility or future response to uncertainty. The value of this flexibility can be significant and is handled well by option-pricing techniques. A description and taxonomy of real options is followed by several examples of valuing and using real options to make better value-enhancing decisions.

Conventional finance theory demonstrates that, under simplistic assumptions, firms cannot add to shareholder value through the use of risk management activities. Modern finance theory has begun to carefully consider and examine those circumstances under which firms can add to shareholder value. This note briefly reviews the major ideas prevalent in both conventional and modern finance literature regarding the potential benefits of risk management.

Jonathan Potter is considering an investment in the newly formed McArthur/Glen Real Estate Investment Trust. The case gives some background on real estate investment trusts and their history. Also discusses manufacturers' outlet shopping centers, the type of real estate that McArthur/Glen Realty owns and develops. The REIT industry is experiencing explosive growth, and it is important to assess its role and viability both as part of the real estate industry and as part of the overall market for public securities.

Intensifying competition and change in the U.S. health care industry force a large integrated health-care provider to reassess its strategy of operating both hospitals and health insurance plans (HMOs). In an attempt to increase its stock price and operating performance, the company considers a number of alternative restructuring strategies for separating the two businesses, including a corporate spinoff.

Spreadsheet Supplement for case 294062

Spreadsheet Supplement for case 294076

Spreadsheet Supplement for case 294098

The CEO of Enron Gas Services (EGS), a subsidiary of the largest U.S. integrated natural gas firm, considers the risks and opportunities of selling a variety of natural gas derivatives, both embedded in gas delivery contracts and as free-standing financial contracts. In its three years of existence, EGS had been successful by offering buyers and sellers of natural gas a variety of innovative pricing contracts. In order to mitigate the risks of having mismatch between its commitments to buy and sell gas, EGS established a system to decompose all of its commitments into a handful of different risks of exposures. Its centralized risk-management group not only measures the firm's exposures but also enters into financial contracts to offset the exposure brought about by the firm's business activities.

Fremont Financial is an asset-based lender to middle-market companies. This case considers two options for Fremont to raise capital to finance its loan portfolio. Fremont can: 1) extend its existing bank line of credit, or 2) issue commercial paper through a special purpose conduit. The case emphasizes comprehension of Fremont's business as a non-bank lender and the manner by which these two financing choices address asymmetric information and moral hazard problems endemic to financial intermediation.

Fremont has a third option to finance its loan portfolio, which involves securitizing and selling the small-business loans into the capital markets. Emphasizes asymmetric information and moral hazard problems involved in designing an asset securitization. When used in conjunction with the (A) case, the sequence highlights the relative strengths and weaknesses of institutions and markets in providing solutions to funding problems.

Deals with the decision of whether to split Marriott into two companies Marriott International and Host Marriott. Marriott has run into problems owing to the decline in real estate valuation. At the time of the case, it has a significant percentage of assets in hotels it planned to sell. The problem makes it difficult for Marriott to pursue growth strategies. Furthermore, the market price of the company has declined significantly. The reorganization proposed in the case is meant to deal with these problems.

Spreadsheet Supplement for case 294090

Introduces and explains the six major interest rate derivative products: swaps, forward rate agreements, Eurodollar futures, bond options, caps/floors/collars, and swap options.

This technical note shows how to structure a financing deal which meets the needs of the owners of a firm, existing suppliers of capital and proposed new suppliers of capital.

Spreadsheet Supplement for case 294079

Banc One's share price has been falling recently due to analyst and investor concern over the bank's heavy use of interest rate derivatives. Dick Lodge, chief investment officer in charge of the bank's investment and derivative portfolio, must recommend to the CEO a course of action to allay investors' fears and communicate to the market the reasons for Banc One's use of derivatives. The bank uses interest rate swaps to manage the sensitivity of its earnings to changes in interest rates and as attractive investment alternatives to conventional securities.

Fremont Financial is an asset-based lender to middle-market companies. The firm has three options to raise capital to finance its loan portfolio. Fremont can (1) extend its existing bank line of credit, (2) issue commercial paper through a special purpose-conduit, or (3) securitize and sell the loan portfolio into the capital markets. The case emphasizes the problems and potential solutions to asymmetric information and moral hazard problems that are endemic to financial intermediation.

Spreadsheet Supplement for case 294054