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The U.S. Supreme Court reconsiders two basically inconsistent prior Supreme Court decisions, overrules one and states that illegally acquired income must be reported.

MCI Communications Corp. is faced with a large need for external financing to support rapid growth and substantial uncertainty due to the AT&T antitrust settlement. The case illustrates the value of convertible debt as a financing instrument in these circumstances.

An appropriations committee's job is often complicated by the conflict between managers who favor hard quantitative techniques and those who prefer a softer qualitative analysis when evaluating investment opportunities. Reliance on quantitative analysis--usually involving discounted cash flow--can lead an organization to invest in projects that have little risk but that are also unexciting to strategists. The answer does not lie in favoring either side over the other. Instead, executives need to adopt a new way of thinking that gives a hard analytic edge to the soft side of the argument. They need to think of investment opportunities as future growth options for the company.

Disequilibrium in the $350 million TiO2 market has prompted Du Pont's Pigments Department to develop two strategies for competing in this market in the future. The growth strategy has a smaller internal rate of return than the alternative strategy due to large capital outlays in early years and positive cash flows arising only in later years. However, it is the more valuable project on a net present value basis for all discount rates less than 21%. Students are faced with the task of converting strategic plans and objectives into free cash flow projections and determining a breakeven discount rate between these mutually exclusive projects. A decision about which strategy to pursue must then be made. Rewritten version of an earlier case by the same author.

Describes the financing problems facing AT&T in 1983 prior to divestiture of the local telephone operating companies on Jan. 1, 1984. Leads up to the decision to issue equity, which AT&T did in early 1983 and which reduced AT&T's market value by $2 billion. The case is intended to illustrate the signalling process involved.

Reviews changes in Du Pont's debt policy from 1965 to 1982. This period ended with a dramatic increase in Du Pont's debt level attendant upon the merger with Conoco. Students are asked to develop a new debt policy for Du Pont in the 1980s.

Spreadsheet Supplement for case 284062

The Noranda Board of Directors is considering four major capital budgeting proposals: development of a new mine, a mine shaft extension, purchase of an existing pulp and paper mill and purchase and installation of a continuous casting mill. A key issue is whether to use one overall cost of capital for the company or individual hurdle rates for each division.

President and CEO of Finning Tractor, has seen the earnings of the company drop below profitable levels because of a deep recession. Several restraint measures were instigated with little apparent impact. The case takes place at the point where a decision is impending on dividend policy with issues ranging from effect on stock price to the fact that the two majority shareholders may be adverse to taking a cut in the over $1.5 million in dividend income they were receiving annually.

A minority shareholder in a new operation has been offered a sum of money by the majority shareholder to buy up his shares. The question is whether or not the price offered is fair, in light of the fact that the market for these new golf clubs is highly unpredictable and the production costs are not truly representative of the actual amounts that will be required.

The president and general manager of a franchised automobile dealership investigates a capital expenditure for a new body shop to replace a smaller, leased facility. The case is designed to test students on their knowledge of capital expenditure analysis, to underline the impact that inflation adjustments have on capital expenditure analysis, and to push students to make judgements on the key analytical figures that may have an impact on the net present value calculation.

The assistant credit manager for a jewellery wholesaler, must assess and compare the credit standing of two of their retail clients. The assessment, which would be used to determine if changes in credit policy were necessary, had to be submitted to both the credit manager and the sales manager in one week. This case provides students the opportunity to calculate financial ratios and use them in decision making. The focus should be on the development of the ratios and trying to appraise one business versus the other. If time is available, the instructor may wish to spend some time on credit appraisal. A follow-up to this case is available, Gardiner Wholesalers Incorporated (B), case 9A84J003.

This case is a follow-up to Gardiner Wholesalers (A) case, 9A84J002, where the assistant credit manager, is assessing the credit standing of two retail clients. Her analysis of past financial performance was complete but a banker friend suggested that the credit report should include projected statements so that the future financing needs of the two jewellery retailers could be estimated. The case provided the retail managers' views on the future of the respective companies as well as some recent trends in the retail marketplace. There is ample information to construct projected income statements and balance sheets.

Examination of the interaction among inflation, capital costs, profitability, growth, and the market value of a company's common stock can determine whether growth adds value for a company's shareholders. Analysis of the expected excess returns, figured on a net present value basis, of Tandy Corp., Xerox, and National Steel illustrates how the gap between market and book value of common stock can widen and illustrates that growth will add value if ROE is expected to exceed the cost of equity capital. But inadequate profitability coupled with the need to finance inflation-induced sales growth can be disastrous for the company's valuation.

The assistant credit manager for a jewellery wholesaler, must assess and compare the credit standing of two of their retail clients. The assessment, which would be used to determine if changes in credit policy were necessary, had to be submitted to both the credit manager and the sales manager in one week. This case provides students the opportunity to calculate financial ratios and use them in decision making. The focus should be on the development of the ratios and trying to appraise one business versus the other. If time is available, the instructor may wish to spend some time on credit appraisal. A follow-up to this case is available, Gardiner Wholesalers Incorporated (B), case 9A84J003.

A truck manufacturer must decide whether to bid on the sale of 120 trucks to a private firm in Costa Rica. If a bid is submitted, a decision must be made on whether to protect against the credit, exchange rate, and sovereign risks.

One way for companies to get reliable information about the economic risk of capital investment strategies is to use the capital asset pricing model (CAPM). It enables them to quantify risk and to link it with the returns they expect. Alaska Interstate, Inc. is one company that has used CAPM successfully to incorporate a consideration of risk into its strategic planning process.

American Home Products is a company with virtually no debt. Students are asked to analyze the company's debt policy and make a recommendation to the CEO. It is likely that adding debt to the capital structure would create some value for shareholders; the CEO is firmly against borrowing.

HCAs ratio of debt to total capital is approaching 70%, jeopardizing its single-A bond rating. Students must determine an appropriate target debt ratio for HCA in light of its growth objectives, its acquisition strategy and its changing regulatory environment.

Focuses on HCAs financing options for reaching its target capital structure. The options include new equity conversion of convertible debentures, a debt-for-equity swap, the sale of assets, and fixed-rate debt. Students must address the problem of market timing and signaling in their choice of financing vehicles.