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Presents data relevant to a major capital expenditure--the construction of a shrimp plant. Designed to test student's ability to identify relevant cash flows, to estimate the cost of capital, and to decide whether or not to invest.

Formal guidelines help companies identify and screen acquisition candidates. Two examples illustrate how the process of developing acquisition guidelines differs in focus and content between related diversifications and unrelated diversifications. In both cases, acquisition guidelines relate closely to corporate strategy. The screening process also provides a critical analysis of differences of opinion and improves the consistency between corporate objectives and resources. The procedure's final step involves comparing the candidate's potential for value creation to the cost of the acquisition as well as to the company's other investment opportunities.

Allison Porter, a loan officer for Chemical Bank, must decide whether to make a construction loan on a 216-unit apartment building to be built in Savannah, Georgia. In teaching this case, one begins by looking at the economics, marketing data, etc., of the proposed apartment building and then one discusses the kinds of terms and conditions the bank should impose.

Spreadsheet Supplement for case 381081

Venturing is serious business, requiring skill, patience, and entrepreneurial flair. Most new ventures involve entering unfamiliar markets, employing unfamiliar technology, and implementing an unfamiliar organizational structure. An approach of particular promise is the new-style joint venture, in which a small company with vigor, flexibility, and advanced technology joins forces with a large company with capital, marketing strength, and distribution channels. The most intensive corporate involvement occurs in the internal venture, in which a company sets up a separate entity within itself in order to enter new markets or to develop entirely new products.

A bank lending officer must decide whether to extend and increase a loan to a small machine tool company. Case provides sufficient data for preparation of cash budgets and pro forma financial statements in order to analyze the lending officer's problem. Other issues that can be addressed include the impact of stock repurchase, dividends, advanced payments by customers, as well as general sensitivity analysis.

Demonstrates how the capital asset pricing model can be used to estimate the impact of financial leverage on the cost of equity capital. The levering and unlevering of betas are illustrated. Also presents a methodology for decomposing the cost of equity into its three components--the risk-free rate, a premium for business, and a premium for financial risk.

A large chemical manufacturer divests a plant that is acquired by a small specialty chemicals manufacturer. The acquisition decision is viewed from the vantage point of the small specialty chemicals manufacturer.

Originally published in the January/February 1964 issue of HBR, this article presents an innovative approach for calculating the risks entailed in projects such as modernizing a plant or launching new products. The technique determines a frequency distribution for each of the factors influencing the rate of return and focuses on specific combinations of variables. Computer runs and data comparisons are an inherent part of the analysis. This approach allows management to understand the nature of the data being used, and thereby results in wiser investment decisions. The retrospective commentary is an informative update on the subject of risk analysis.

Every real-estate transaction is affected by the tax consequences that result from its form and substance. Structuring a transaction without a thorough understanding of its tax considerations is likely to reduce the transaction's potential value. The failure to utilize the available tax benefits eliminates one of the major reasons for making a real-estate investment.

Accurate and rapid analysis of the risks and future benefits of an acquisition is necessary in today's market. The planning of corporate strategy with a view toward the economic and technological environment is the initial step of the analysis. The subsequent search and screen process establishes a list of candidates. The financial evaluation process includes an analysis of the worth and future value of both companies according to several hypothetical scenarios. The "discounted cash flow" (DCF) evaluation technique is useful because it includes the acquisition's added cash flow and the cost of capital. Use of such evaluation techniques can determine maximum acceptable acquisition prices quickly and serve as a catalyst for reexamining a company's overall strategy.

Develops a conceptual framework for financial analysis of real estate investments, taking into consideration the necessity for baseline data, project trends, and forecast discontinuities.

Spreadsheet Supplement for case 379193.

Choosing an equity offering or an offering of straight subordinated debt with a CCC credit rating and a 12.5% coupon.

Examines the interrelationship between the maximization of the share value of a firm's common stock and the minimization of the firm's weighted average cost of capital. Presents a revised version of a case by J.W. Mullins, Jr.

In practice, management makes debt-capacity decisions by drawing on advice from external sources. This method of decision making fails to assess how much risk is actually involved for an individual company. Management must formulate an approach to the measurement of risk applicable to individual corporations. Expressing the limits of long-term borrowing in terms of an income statement of data, rather than the conventional balance sheet relationship between long-term debt and the total of all long-term sources, provides a more meaningful ratio for internal formulation of policy. This article, first published in 1962, is reprinted to include a retrospective commentary by the author.

A survey of Fortune "1000" companies shows that many companies deal with the problem of soaring interest rates by establishing investment centers and using return on investment (ROI) to measure their performance. Profit centers measure their own profitability with net income, pretax income, or net contribution. Investment centers determine profitability in relation to the unit's own investment base. Many companies use both ROI and RI (residual income) to calculate performance. The worst problem in using ROI or RI is that they will increase solely with time as depreciation reduces the investment base. The last calculation is to determine ROI budgets for investment centers.

Involves a $550 million cash tender offer by Kennecott Copper Corp. for all of the outstanding common shares of the Carborundum Corp.

In 1961, Richard Salomon, the sole owner of Charles of the Ritz, decided to issue public shares in his company. The perceived advantages were the possibility of diversification, establishment of value for estate and inheritance taxes, availability of equity, personal satisfaction, liquidity, and the ability to retain control of the business. When the shares were offered, disadvantages became apparent. Closely knit executives began jockeying for positions and personal relations became strained. Short-term results became a priority over long-range planning. Stockholders were primarily interested in share value, expressing opposition to ventures that jeopardized short-term profit for the sake of long-term growth.

Operational budgets usually consist of a projected income statement and a series of supporting statements, such as budgeted sales, production costs and levels, and selling expenses. Budgets play five roles. Three are major roles: planning, motivation, and evaluation. Two are minor: coordination and education. The different roles budgets play in companies prompt three conflicts: planning versus motivation, motivation versus evaluation, and planning versus evaluation. Managerial techniques defuse conflicts inherent in an operational budget's major roles. Six techniques used to reduce the three areas of conflict are: general managers' judgment, a tight-ship policy, contingency planning, differentiation among the levels of the organization as to where managers will be evaluated on the basis of revised or ex post facto budgets, rolling budgets, and regular submission of revised forecasts.