Case studies

Steel Corp has a large production capacity but a shrinking steel market in Europe. Reaching growing markets like China and U.A.E will be important to sustaining and growing revenue but is tough due to higher transportation costs. In this case, users must identify and use logistics data; logistics customer segmentation and related cost analysis.

The COO for Suape Container Terminal, the largest deep–water port in Brazil's Northeast must consider a proposal presented by the users' council that calls for the establishment of a reservation scheme that minimizes the risk of docking delays. Under this proposal, ocean carriers, on the one hand, agree to pay a reservation fee that significantly increases revenue for Tecon Suape. On the other hand, they expect Tecon Suape to compensate them financially when a berth is not available upon vessel arrival. Tecon Suape's management team must evaluate that suggestion, as the team prepares to enter contractual negotiations with the users.

At three o'clock in the morning on September 10, 2001, Thierry Hautillac, a risk arbitrageur, learns of the final agreement between Pinault-Printemps-Redoute SA (“PPR”) and LVMH Moët Hennessy Louis Vuitton SA (“LVMH”). After a contest for control of Gucci lasting over two years, PPR has emerged as the winner. PPR and LVMH have agreed for PPR to buy about half of LVMH's stock in Gucci for $94 per share, for Gucci to pay an extraordinary dividend of $7 per share, and for PPR to give a two and a half year put option with a strike price of $101.50 to the public shareholders in Gucci. The primary task for the student in this case is to recommend a course of action for Hautillac: should he sell his 2% holding of Gucci shares when the market opens, continue to hold his shares, or buy more shares? The student must estimate the risky arbitrage returns from each of these choices. As a basis for this decision, the student must value the terms of payment and consider what the Gucci stock price will do upon the market's open. The student must determine the intrinsic value of Gucci using a DCF model as well as information on peer firms and transactions. The student must consider potential synergies between Gucci and PPR and between Gucci and LVMH. The student must assess the likelihood of a higher bid, using analysis of price changes at earlier events in the contest for clues.

In early 2012, an equity analyst, was examining the jet fuel hedging strategy of JetBlue Airways for the coming year. Because airlines cross-hedged their jet fuel price risk using derivatives contracts on other oil products such as WTI and Brent crude oil, they were exposed to basis risk. In 2011, dislocations in the oil market led to a Brent-WTI premium wherein jet fuel started to move with Brent instead of WTI, as it traditionally did. Faced with hedging losses, several U.S. airlines started to change their hedging strategies, moving away from WTI. But others worried that the Brent-WTI premium might be a temporary phenomenon. For 2012, would JetBlue continue using WTI for its hedges, or would it switch to an alternative such as Brent?

This case challenges students to apply financial reporting concepts pertaining, most notably, to liabilities and expenses in a specific corporate situation. In the context of an interesting, but noncomplex, technical accounting issue, students debate the best way for Adenosine Therapeutics to present its compensation arrangements in its financial statements. In addition, this case also prompts students to debate the best way for a growing company, with cash constraints, to provide incentive and maintain top employees.

This case raises the question: How does a company reasonably estimate and record entries for uncollectible trade receivables, and under what circumstances are receivables written off as uncollectible? The required accounting transactions for the case involve estimating a receivables allowance both as a percentage of sales and as a percentage of accounts receivable and making specific account judgments under the direct write?off method. The subjective issues involve analyzing and assessing a company's methods of collection and accounting for bad debts.

Students act as outside analysts attempting to determine how Alfin will finance its expected growth based on sales of antiwrinkle cream.

While preparing a financial forecast, the newly promoted CFO of a small and profitable but financially constrained ready-mix concrete company must choose between renegotiating debt obligations, postponing long overdue capital improvements that will prevent more costly future repairs, or reducing the dividend payment to a parent company that just recently purchased the firm.

After having negotiated major financial and operating decisions with its parent company, the CFO of this small ready-mix concrete subsidiary is asked to provide a valuation of the subsidiary. A one-year forecast of financial statements is provided along with information on long-term operating expectations and capital costs. This otherwise straightforward valuation exercise is enhanced by (1) the need to select between the parent- or comparable-firm costs of capital, (2) sufficient guidance to perform an illuminating sensitivity analysis, and (3) a sufficiently clear and rich context in which to illustrate the linkages between operating and financing choices. A teaching note and instructor and student Excel spreadsheets are available.

This case is used in Darden's FY Finance course, but it would be appropriate in any course introducing firm valuation. The case examines the 2012 decision by American Greetings (AG) to repurchase shares. Students can build a simple model of the company's future cash flows and derive an implied value. Because the company is arguably in a state of maturity or decline, a discussion of steady-state economics is particularly germane.