Case Finance 1 for Business

In this group case we stimulate you to apply the material that you learned in this course to a publicly listed firm of your choice. You can do the group assignment in groups of 3 to 5 students. You will have to form the groups yourself at the beginning of the course and you can do this best during the first tutorials or via the Canvas discussion page. You do notneed to register your group with us as we will only look at the names listed on the case that was handed in. The questions have been organized per week (hence, first question covers material in week 1, second question week 2, etc.). The idea behind the case is that you formulate answers after discussingwith your group members. We advise you to organize a weekly meeting with your group in which you discuss the answers of that week so that you work more or less in the same pace as the course. The case will be graded and will count for 10% of the total grade (see the course outline). 
 
Instructions
• Form a group of 3 to 5 students
• Choose a publicly listed firm (on which financial information is available online). 
• Answer the following 11 questions for this firm using the answer sheet provided on Canvas. 
• Explain each answer in a few lines of text but keep your answers compact (no long texts).
• Include (copy/paste) information about the firm that you’ve used for your answers (ie paste a small section of the balance sheet etc.). Provide a source (description + URL) that indicates where you found this information online.  
• Hand in your work via Canvas before the deadline (see canvas and course outline). 
Questions week 1 (Objective of the firm and financial ratios)
1. Chapter 1: Berk and DeMarzo (2019) argue in chapter 1 that under certain conditions maximization of shareholder value is the appropriate objective of the firm. Hart and Zingales (2017) suggest maximization of shareholder welfare as the correct objective of the firm. Check for your firm on the website or in the most recent annual report, what the objective of the firm is and how this is related to shareholder value and/or shareholder welfare. Use up to 3 quotes and a short description that clarifies which of the two stated objectives (maximization of shareholder value or maximization of shareholder welfare) your firm is closest to. 
2. Chapter 2: Retrieve for your firm the following information for the most recent year that you have data for: Market capitalization, Book value of equity, Interest bearing debt, Cash, Accounts receivable, Accounts payable, Inventories, Earnings before interest and taxes, Depreciation, Net Income, interest payments. Calculate one financial ratio that is found in the textbook of Berk and DeMarzo for each of the four following financial ratio classes: solvency ratio, liquidity ratio, profitability ratio, valuation ratio and also determine the Enterprise value.
3. Chapter 3: Short selling: Determine the short position in your firm’s stock (for example check Yahoo Finance under “Statistics”) and comment on the level (for example by comparing this with a small set of other comparable firms). What type of investors would short the stock and why? Would this be a concern for the management of your firm? Motivate your answer.
 
Questions week 2 (Interest rates and bonds)
4. Chapter 5: Identify for your firm (f.i. in the notes of the annual report) a few loans and credit facilities that the firm has outstanding (type and size of loan). Comment on the interest rates of the various loans: 
• Are the interest rates stated as APR or as EAR? 
• Explain the difference in the level of the interest rates of various loans (or loan classes). You can compare two or three loans and do not have to do this for all loans. Take the most extreme differences and try to explain why these occur.
5. Chapter 6: Does your firm have bonds outstanding? Hint: the easiest way to find this is to google  Pick the most recent bond or the one you can find data on. What is the coupon rate, is it an annual or semiannual coupon paying bond, what is the most recent market price, what is the maturity and what is the yield to maturity? What is the firm’s credit rating. Motivate with one or two partial printscreens of the relevant data.
 
Questions week 3 (Free cash flows)
6. Chapter 8: Determine the free cash flow of your firm for the last two years. For that purpose use the formula 8.5 in the book and clearly state where you found the various components. Present this information in a table (1 column for each year).
 
Questions week 4 (Shares)
7. Chapter 9: Find 3 comparable firms and use these firms to assess on the basis of a multiple analysis whether your firm is overvalued (actual market price higher than valuation based on multiple) or undervalued. Do this on the basis of two multiples:
a. Enterprise Value/EBITDA multiple 
b. P/E multiple. 
Comment on your findings. Which of the two multipleswould you prefer if you have to value a firm? Briefly motivate your answer.
 
Questions week 5 (WACC)
8. Chapter 12: You want to determine the WACC after tax to estimate the enterprise value of your firm. Look up the following information:
• Risk free rate for a period of 20 years
• Beta of the firm’s stock (Source for example: Bloomberg, WRDS, Yahoo Finance)
• Credit rating or beta of the firm’s debt 
Assume that the market risk premium is 5%. Using this information answer the following questions:
a. What is the firm’s Cost of Equity?
b. What is the firm’s Cost of Debt?
c. What is the market value of equity?
d. What is the value of net interest-bearing debt?
e. What is the firm’s Weighted Average Cost of Capital (WACC) after tax assuming a 25% marginal tax rate?
 
Question week 6:
9. Chapter 8+9+12: In week 3 you have calculated the firm’s free cash flows. 
a. On the basis of the free cash flows of the last two years, project these cash flows further into the future assuming a constant infinite future growth rate. Choose a growth rate that you find reasonable.
b. Use the projected free cash flows from a. and the WACC calculated earlier to estimate the current enterprise value for the firm. 
c. Question for extra points: use the Data Table function in excel to estimate how the enterprise value changes for two or three different estimations of the growth rate and the WACC.
Question week 7:
10. Chapter 26: Calculate for your firm the:
a. Accounts Receivables Days
b. Account Payables days 
c. Inventory days 
d. Cash conversion cycle. 
Compare these ratios with a direct competitor. Which firm has a better cash conversion ​cycle? Briefly explain why.  
In your answer, write down the formula you use and your calculation.
11. An innovative financing strategy (in particularly in retail) is the use of so-called supply chain financing (also called reverse factoring). This is not mentioned in the financial accounts, so you have to check online if this applies to your firm. Shortly describe the way this strategy works and whether this would be a useful tool in working capital management for your firm to use.Describe one or two potential benefits and drawbacks of applying this strategy.  
 

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