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Exhibit 7.18 Net present value of cash flows to Robinson (in millions). Exhibit 7.19 Net present value of cash flows to Robinson, worst case (in millions). Exhibit 7.20 Calculation of expected net present value (in millions). In our analysis we have a 95% chance of obtaining an NPV of $45.05 million and a 5% chance of obtaining a NPV of $4.98 million. Let‟s round these numbers to $45 million and $5 million. We can now calculate the expected value of $43 million (see Exhibit 7.20). Based on the assumptions this project is acceptable. Even more, it has a very high return. The currency risk has been eliminated by the government guarantee. Perhaps the biggest risk comes from fluctuations in the world price for coffee.
There are some at Robinson who recommend that the company borrow the needed funds in Colombia. That way, if a new government seized the assets, the company could default on the loan. If the exchange rate guarantee were ended, the loan would offset the assets and thereby lessen or eliminate any accounting risk. Lesson: We saw a venture with risk but also with exceptional returns. The company carefully considered the potential risks and looked for ways to lessen this risk. It performed the economic analysis in the same manner as it would for any project in the United States. Unknown Rental Cars Borrowing Case: January 1, 1985 Dad: Rodney, let me tell you a true story about a major U.S. corporation. I‟ll change a few details and the name of the company. The case was told to me by someone who lived it. It was set way back in 1985, but the case is as relevant today as it was then. In many ways it is the same as your investment in the English CD. It was December 1984 and Unknown Rental Cars needed to borrow $200 million to finance the purchase of an Unclear Airlines company. The assistant treasurer just made a recommendation about the choice between borrowing in the United States in U.S. dollars or in Japan in yen (¥ or JPY). The loan would begin on January 1, 1985, and end on December 31, 1989. As background, Unknown owned Cheapy Hotels. It was buying Unclear Airlines from a major private equity firm that had purchased it out of bankruptcy. Unclear Airlines would generate about 50% of the total revenue and the remainder was to be evenly split between Unknown Rental Cars and Cheapy Hotels. All were worldwide service companies that generated revenue in many countries and currencies, mainly in the United States, Canada, Latin America, and Europe. If the loan was in U.S. dollars in the United States, company policy required the use of a specific investment banker. This investment banking firm estimated terms of the United States loan as follows: The interest rate would be 11% per year paid semiannually in December and June for five years. The principal of $200 million would be repaid at the end of the five years. There would be a one-time underwriting fee of approximately 0.5% to be paid when the funds were received. Exhibit 7.21 Amount of yen purchased by $1. Source: FXHistory © 1997-2008 by OANDA Corporation. A leading Japanese bank was expanding into the United States as it fulfilled its strategic objective of becoming a worldwide institution. It offered a loan with the interest and principal denominated in yen. The interest rate was 5%, and there were no up-front fees. Both the U.S. and the Japanese loans
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Table of Contents Title Page Copyri
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Chapter 6 - Planning Capital Expend
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For Further Reading Part IV - Manag
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Successful Postmerger Implementatio
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This book is printed on acid-free p
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Syllabus How Chapter Topics in This
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Some of these experts are full-time
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About the Contributors Richard T. B
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Advances in Quantitative Analysis o
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enterprise development. Dr. Zachara
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The left side shows Nutrimin‟s in
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Gail, let‟s go over this balance
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Gail, do you have any questions abo
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11. Not all expenses are cash outfl
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Financial Statements: Who Uses Them
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profitability to keep investing for
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Financial Accounting Standards It i
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Downloadable Resources for this cha
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Next, we explain each of these thre
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liquidity. Or, more simply, achievi
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If these ratios are seriously defic
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The debt-to-equity ratio is evaluat
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year 1 to year 3. The net effect wa
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to rate of return on the equity. Th
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Other types of comparisons of finan
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income/sales), asset turnover (sale
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successful businesspeople should ha
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More than a decade ago, a special c
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companies is used for illustration.
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The identification of nonrecurring
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The Dow Chemical single-step income
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is a pretax measure, but income fro
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Sources: Companies‟ annual report
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Exhibit 3.11 Examples of discontinu
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amortization purposes, the Company
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Examples of nonrecurring items disc
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During Fiscal 2006, inventory quant
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The nonrecurring items of Boston Sc
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The disclosure presented earlier in
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gains or losses that appear as part
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ecurring as for Kimberly-Clark, the
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Summarizing Nonrecurring Items and
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This example of using the SEB works
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Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
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Some Further Points on the Pfizer W
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• It is common to treat items as
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FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
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28 These alternative translation me
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If you need some instruction in Exc
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To solve using Excel, open your Exc
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As you can see from the previous ex
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C6 = 5 • Now enter the “=” si
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Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
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The FV of this first payment into t
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Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
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Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
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The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
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Debt finance is the lower-cost meth
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We don‟t observe many firms whose
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Capital Structure in Practice Finan
Page 172 and 173: are able to observe regularities in
Page 174 and 175: dividends and capital gains. We wil
Page 176 and 177: where EBIT is earnings before inter
Page 178 and 179: Since long-term debt holders have a
Page 180 and 181: accept more investment projects. Re
Page 184 and 185: A beer company is considering build
Page 186 and 187: accounts receivable, and tabulates
Page 188 and 189: profit by the tax rate determines t
Page 190 and 191: Accounting profit often mixes varia
Page 192 and 193: The concept that future cash flows
Page 194 and 195: Like project A, project C also cost
Page 196 and 197: The after-tax interest rate is the
Page 198 and 199: equal mix of debt and equity, its d
Page 200 and 201: The payback period rule stipulates
Page 202 and 203: The IRR rule is appealing in that i
Page 204 and 205: complete with its real options is g
Page 208 and 209: What does it matter that one invest
Page 210 and 211: Exhibit 7.3 Time line in dollars an
Page 212 and 213: There are a number of countries in
Page 214 and 215: eturn of 10% on its investments in
Page 216 and 217: Exhibit 7.12 Summary of exchange ra
Page 218 and 219: and so will the value of the liabil
Page 220 and 221: Source: CIA, World Factbook, availa
Page 224 and 225: equired interest payments to be pai
Page 226 and 227: So if the assistant treasurer was r
Page 228 and 229: This theory is far from perfect, as
Page 230 and 231: The Consulting Firm Jennifer, Jean,
Page 232 and 233: part by a statute, the Uniform Limi
Page 234 and 235: formation in Delaware (or any state
Page 236 and 237: purpose of requiring qualification.
Page 238 and 239: Phil‟s death may terminate the bu
Page 240 and 241: the transfer. This means that if Br
Page 242 and 243: These rules extend to tort liabilit
Page 244 and 245: In the absence of a meeting, stockh
Page 246 and 247: A more detailed discussion on the b
Page 248 and 249: Partnerships If possible, the resul
Page 250 and 251: associated with this arrangement ar
Page 252 and 253: Partnerships are also not separate
Page 254 and 255: For most start-up businesses, howev
Page 256 and 257: form, even at the risk of some unli
Page 258 and 259: likely that our consultants will be
Page 260 and 261: Thus, the corporation and LLC, with
Page 264 and 265: It is not possible to fully describ
Page 266 and 267: usiness corporation for all purpose
Page 268 and 269: a cash-basis taxpayer to be taxed a
Page 270 and 271: The Tax Reform Act of 1986 substant
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limit is the product of the value o
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he would have spent anyway. In fact
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protect Brad from the scenario of h
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paying for the privilege. If the st
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The second tax scenario attaches to
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include that nullity in his taxable
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then the capital gain to be taxed h
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Most relevant to Morris is Section
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To begin with, the ESOP will have t
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general partner of a limited partne
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small businesses) is also subject t
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oth Lisa and Brad would be free to
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Assume that a limited liability com
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corporations, and had been audited
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There is plenty of blame from the c
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• An important study about top ma
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• The federal government made at
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$79.7 million for other services, a
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Budgets offer a variety of benefits
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determine the impact of specific pr
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Exhibit 11.2 Budget variance report
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udget, we just add more to it next
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income statement. The financial bud
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For a manufacturing company, cost o
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C&G‟s Gift Shop has a policy to m
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Meeting cash obligations as they co
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was unusually low, say, due to the
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A fixed budget, sometimes called a
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A large part of the budget selling
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• Centralized resource allocation
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Merewitz, Leonard, and Stephen H. S
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This chapter starts with a discussi
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Interestingly the numbers for quart
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Exhibit 12.4 Scenarion analysis.
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Pitfalls Although this analytic tec
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Exhibit 12.6 Variable cost element
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Variable Cost as a Function of Outp
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If scenario 2 yields a lower profit
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Microsoft certainly does not price
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If it is determined that dumping ha
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Leaving government agencies and not
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transaction processing. Each proces
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Exhibit 13.3 E-commerce transaction
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To summarize the analysis, the busi
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Capacity costs are probably the mos
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which it was, but for the inventory
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They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
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The last type of plan is called a d
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The Business Plan We will progress
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Hook the Reader That means having t
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Industry The goal of this section i
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upscale suburban client who wants p
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Company and Product Description Com
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Exhibit 14.8 shows the competitive
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Exhibit 14.9a Advertising schedule.
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Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
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Leeson bet and lost. Japanese stock
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Between February and April 1994, Da
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LTCM could be picky when it came to
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An investor who wished to invest in
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Similarly, the swaps market has rev
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speculator would suffer losses equa
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American manufacturer will suffer l
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The ease with which futures facilit
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Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
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Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
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can be tailored so that the money r
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Finally, the last step is to choose
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3 Fischer Black, who co-invented th
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not include assets that the firm ha
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Thus, a business valuation will usu
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Negative • Acme is highly depende
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Exhibit 16.3 Acme Manufacturing, In
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Profitability ratios reflect the re
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When we talk about the value of a b
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This example illustrates that with
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Income Approach: Discounted Cash Fl
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Exhibit 16.5 Acme Manufacturing, In
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Victoria explains that the second p
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Victoria analyzes Acme‟s audited
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In summary, the discounted cash flo
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Adjustment for Illiquidity As previ
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51% position sells for a higher pri
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examples. The proper application of
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The subject of this chapter is grow
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Finally, an acquisition can be effe
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M&A activity has been the focus of
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companies continue to make the same
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equals was taking on a distinctive
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Anatomy of a Successful Acquirer: T
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employees kept their original jobs
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where ΔCF t is the incremental cas
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where it‟s ultimately buried. Suc
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The following example summarizes th
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make sure that you are at least awa
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acquisition, there is no immediate
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its vascular business, which was so
Page 497 and 498:
While all employees should be part
Page 499 and 500:
makes strategic and financial sense
Page 501 and 502:
Bhagat, Sanjai, Ming Dong, David Hi
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The 2008 financial crisis underscor
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Source: Plunkett’s Outsourcing &
Page 509 and 510:
To summarize: Trends • Large numb
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Companies are becoming increasingly
Page 513 and 514:
What steps should a company follow
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• Results of meetings with vendor
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• Breach of contract and remedies
Page 519 and 520:
Assuming the project or service rev
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The answer is: profits. The company
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19 Information Technology and You D
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People‟s lives have been turned u
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its self-contained rechargeable bat
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Random-Access Memory (RAM) Random-a
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On laptop computers and PDAs, the s
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Operating System An operating syste
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the spreadsheet software together w
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Exhibit 19.5 Pro forma sales and in
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Database Software A database is a c
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Internet e-mail addresses often con
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Personal Finance Software There are
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There are several different approac
Page 549 and 550:
One of the major attractions of the
Page 551 and 552:
While not a new version of the Web
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industrial revolution, and has occu
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Dummies Inc. has a series of books
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organization. This chapter is desig
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As technology has evolved, the term
Page 563 and 564:
While the software mentioned earlie
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Most of the focus of the investor c
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Data Access and OLAP Before the lat
Page 569 and 570:
Exhibit 20.5 illustrates a differen
Page 571 and 572:
Productivity Tools Workers expect t
Page 573 and 574:
Client-server technology is based o
Page 575 and 576:
Today, most programmers write in C+
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Exhibit 20.6 is a model of a typica
Page 579 and 580:
No treatment of relational database
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Online analytical processing (OLAP)
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server) and the rest on the users
Page 585 and 586:
the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
Page 595 and 596:
According to the results of the sur
Page 597 and 598:
understand the financial situation
Page 599 and 600:
MBA graduates who are hoping to ent
Page 601 and 602:
Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
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Aiming for Your Goals For career ch
Page 609 and 610:
Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
Page 613 and 614:
like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
Page 624 and 625:
Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
Page 630 and 631:
Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
Page 636 and 637:
Application systems ARPAnet Arthur
Page 638 and 639:
Bell Labs Benefit measurement Beta
Page 640 and 641:
goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
Page 646 and 647:
uy/build decision capital budget in
Page 648 and 649:
written resume Careers in corporate
Page 650 and 651:
Cell Center for Research in Securit
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Compensation and ownership Competit
Page 654 and 655:
Corporate culture Corporate debt in
Page 656 and 657:
profit planning from an internal pe
Page 658 and 659:
Data Data access and OLAP Database
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Askin Capital Management Barings Ba
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market approach publicly traded gui
Page 664 and 665:
Electronic data interchange (EDI) E
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Extensible markup language (XML) Ex
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short term liquidity users and uses
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Fourth generation programming (4GL)
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Going private Going private transac
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Hypertext links Hypertext markup la
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Information technology and the firm
Page 678 and 679:
International Accounting Standards
Page 680 and 681:
Last-in-first out (LIFO) vs. curren
Page 682 and 683:
Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
Page 686 and 687:
Motivation to outsource Multiple IR
Page 688 and 689:
Nonrecurring items defined disclosu
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Operational complexity Operational
Page 692 and 693:
Outsourcing metrics Overhead Over-t
Page 694 and 695:
Personal end game Personal expense
Page 696 and 697:
Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
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Relevant range Relevant range assum
Page 702 and 703:
Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
Page 706 and 707:
Spot price Spreadsheet software Spr
Page 708 and 709:
Summarizing nonrecurring items and
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acquisition the business dividends
Page 712 and 713:
Timmon‟s Model of Opportunity Rec
Page 714 and 715:
U.S. immigration quotas U.S. Intern
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discounting with discount rate form
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