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This note discusses cost behaviour, break-even analysis contribution and projected income statements. In addition to the theoretical framework, two examples are presented and analyzed.

Identifies and discusses the major features of the federal gift and estate tax, plus major nontax implications.

Discusses the theory and rules governing the taxation of business combinations (mergers and acquisitions). Related information from state corporate law, federal securities law, accounting, and finance is also provided. A rewritten version of an earlier note.

Involves the management of a firm with a market value of a going concern that is less than its breakup value. How does management maximize value for shareholders in this environment?

Esmark's management sells its most valuable business and its most unattractive business in an effort to reposition itself and maximize shareholder value.

Spreadsheet Supplement for case 283013.

Spreadsheet Supplement for case 283014.

A review of two decades of research shows that debt financing has a far lower payoff than many chief financial officers (CFOs) believe. CFOs determine a sensible debt policy that is in line with corporate strategy by following a recommended policy that considers: a company's particular financing needs; the lending criteria of target sources of capital; the implications of debt policy on strategy, competition, and shareholders; and the ease of implementation. Each CFO should determine the limit of debt's payoffs to the company and should recognize what conditions might push him or her to exceed that limit. Formulation of a solid plan ensures a steady flow of capital and secures top management's commitment to such a plan.

Investments in plant and equipment are sensitive to differences in how managers view the importance of short- vs. long-term issues. Yet most managers depend on highly analytic techniques like discounted cash flow analysis to evaluate capital investment proposals, and these techniques are often biased against long-term investment. Such methods place most of their emphasis on net present value or internal rate of return calculations, and as their use has increased, the growth of capital investment and R&D spending in the United States has decreased. McKinsey Award Winner.

The loan negotiation process between bankers and company managers is not always skewed in the banker's favor. Success depends on negotiating strategy. Managers need to learn to think like the banker and identify the bank's objectives in making the loan, meet those objectives with the least damage to their company's position, order the restrictive covenants by priority so they can give in on one or two without hindering the company's overall objectives, and influence the banker to relax or withdraw noncrucial restrictions.

Massey Ferguson began fiscal year 1981 in default on $2.5 billion of outstanding debt. The company's future depends on the ability of lenders, the governments of Canada and Ontario, and management, to agree on a refinancing plan. The case reviews Massey's performance and position in the industry and raises questions about the company's ability to compete in the long run. Provides information on the firm's claimants in order to focus students on the issues of a refinancing.

Demonstrates the interaction of product market and capital market goals.

The capital asset pricing model (CAPM) is a theoretical representation of the way financial markets behave. It can be used to estimate a company's cost of equity capital in investment management decisions. Managers can also use CAPM to calculate divisional hurdle rates and risks of acquisitions. CAPM is based on specialized assumptions including frictionless markets without imperfections, such as transaction costs, taxes and restrictions on borrowing and short selling. It requires limiting assumptions concerning the statistical nature of securities' returns and investors' preferences, and it assumes investors' agreements on likely performance and risk of securities.

Mr. Stuart Foreman, assistant manager of the London, Ontario branch of the Central Canadian Bank, was reviewing information he had received from Maple Leaf Hardware Limited. Mr. Robert Patrick, president and manager of Maple Leaf Hardware Limited had requested an increase in his line of credit with the bank to cover seasonal working capital needs. Mr. Foreman, who had just received a transfer and promotion to the London branch, realized he would have to evaluate the request carefully.

Mr. Stuart Foreman, assistant manager of the London, Ontario branch of the Central Canadian Bank, was reviewing information he had received from Maple Leaf Hardware Limited. Mr. Robert Patrick, president and manager of Maple Leaf Hardware Limited had requested an increase in his line of credit with the bank to cover seasonal working capital needs. Mr. Foreman, who had just received a transfer and promotion to the London branch, realized he would have to evaluate the request carefully.

Marriott is considering the repurchase of ten million shares. This is apparently at odds with the financial policies that the Board of Directors passed two years earlier. Students must discuss why the policies were passed and why changes are now necessary. Includes a discussion of debt policy, financing policy and dividend policy. Students also discover stock is currently undervalued.

Management must choose between two mutually exclusive bids to build two drilling rigs. Both bids involve attractive export credit financing denominated in foreign currencies.

Several entrepreneurs are considering the purchase of an existing cable TV business with the financial assistance of several investors. They must decide whether to establish the company as a partnership or a corporation, and how to capitalize the company for an optimal blend of tax and other business considerations. Adapted from a case by P.J. Barack.

Describes the development and terms of the largest leveraged buyout up to the date of the case. The main problem is to value the positions of the various participants: lenders, equity holders, investment bankers, and management.

Corporate financial officers (CFOs) who successfully second-guess stock market analysts observe three requirements: they avoid the trap of equating a low price-earnings multiple with evidence of undervaluation; they monitor the leading analysts' perceptions for significant variations from company forecasts; and they translate these forecasts into estimates of economic value. The recommended dividend valuation model uses as its basis a company's fundamental detriments of value, including its prospects for profitability and its long-run investment opportunities. While companies can profit by outguessing the market, corporate management should assume the correctness of market prices unless disproven by the CFO's thorough, fundamental valuation.