Case studies

The case discusses the operational, strategic, and financial turnaround at Solo Cup, a manufacturer of disposable dining wares. Solo Cup’s troubles were compounded by the acquisition of a larger rival, Sweetheart Company, which had its own problems and presented issues of merger integration that management could not solve. David Garfield, a managing director at turnaround consulting firm Alix Partners, must first recognize Solo Cup’s core competencies in order to determine the appropriate change in strategic course, strip out the assets that no longer support the operations necessary for that strategy, and monetize them in order to rationalize its balance sheet. This case teaches that a three-pronged approach will invariably produce greater results than any one-dimensional turnaround.

Students will learn turnaround techniques necessary to restructure a company operationally, strategically, and financially, and will learn how Alix Partners' relentless focus on “letting data rule” allowed the firm to revive a faltering company.

The case focuses on two major challenges in deal making in emerging market economies---deal sourcing and negotiation---by focusing on a real (but disguised) Indian private equity deal. In 2010 Surya Tutoring was a fast-growing tutoring academy for high school students aspiring to gain admission to the prestigious Indian Institute of Technology (IIT). Surya’s CEO, R. K. Sharma, wanted to expand its reach beyond Kota (a city of 1 million people in the northern state of Rajasthan), which had become the center of the IIT prep school industry and home to tens of thousands of students studying for the rigorous IIT entrance exam. Sharma knew there was vast untapped potential in the teeming Indian metropolises of Mumbai, Chennai, Delhi, and Bangalore, as well as in foreign markets such as Dubai and Australia. Sharma had received term sheets from two private equity firms willing to finance Surya’s expansion. By the end of the month he needed to decide which to accept: the offer from big bulge bracket fund Blackgem, or the one from ZenCap, a small Indian firm based in Mumbai with which he had become intimately familiar during the past year.

After analyzing and discussing the case, students should be able to:

• Identify the differences between the United States and an emerging market such as India when it comes to deal sourcing, negotiation, and financial contracting

• Value a growth equity transaction in an emerging economy, including financial, contractual, and qualitative (social networks, local knowledge, trust) aspects of the deal

Identify the differences between the United States and an emerging market such as India when it comes to deal sourcing, negotiation, and financial contracting

Value a growth equity transaction in an emerging economy, including financial, contractual, and qualitative (social networks, local knowledge, trust) aspects of the deal

Teuer Furniture is a privately owned, moderately sized chain of upscale home furnishing showrooms in the United States. The firm survived the economic recession and by the end of 2012, it has regained its financial footing. Now that the firm is more secure financially, some of its long-term investors have asked to cash out their investments. This will be the first time that Teuer has repurchased its equity; the company has paid dividends since 2009. Chief financial officer Jennifer Jerabek and her team have been given the task of valuing Teuer using a discounted cash flow approach. The discount rate is given in the case, and the students need to build a pro forma income statement, balance sheet, and cash flow statement and then calculate a per-share value for Teuer.

• Estimate firm value using a discounted cash flow approach

• Construct firm-level estimates of the pro forma income statement, balance sheet, and cash flow from assets based on store-level estimates

• Recognize how forecasts of revenues, costs, and capital investment are constructed, how the individual estimates relate to each other, and how the forecasts depend upon the underlying economics of the business

• Evaluate and defend the validity of the firm’s forecasts and the valuation model

Estimate firm value using a discounted cash flow approach

Construct firm-level estimates of the pro forma income statement, balance sheet, and cash flow from assets based on store-level estimates

Recognize how forecasts of revenues, costs, and capital investment are constructed, how the individual estimates relate to each other, and how the forecasts depend upon the underlying economics of the business

Evaluate and defend the validity of the firm’s forecasts and the valuation model

Teuer Furniture is a privately owned, moderately sized chain of upscale home furnishing showrooms in the United States. By the end of 2012, it had regained its financial footing and a number of long-term investors, including several of Teuer’s original non-management investors, now want to sell their shares. At the request of the board, Jennifer Jerabek, the chief financial officer of the company, and her team put together an extensive valuation of Teuer based on a discounted cash flow analysis. When the model was presented to investors, a number of them disagreed with the results. Some investors considered the value too high; others considered it too low. Not surprisingly, some of the differences of opinion were correlated with whether or not the investors wanted to sell their shares of Teuer. Jerabek was instructed to build a valuation of Teuer using a multiples approach instead.

After reading and analyzing the case, students will be able to:

• Estimate the value of a firm using a multiples approach

• Select an appropriate group of comparable firms and defend the logic behind the selection

• Select a correct set of valuation ratios and defend the logic behind the selection

• Compare the valuations produced by a multiples and DCF approach and if the valuations do not match, explain why the two methods yield different valuations

Estimate the value of a firm using a multiples approach

Select an appropriate group of comparable firms and defend the logic behind the selection

Select a correct set of valuation ratios and defend the logic behind the selection

Compare the valuations produced by a multiples and DCF approach and if the valuations do not match, explain why the two methods yield different valuations

Zoe Greenwood, vice president at Foundation Investment Advisors, was glancing through the offering memorandum for a new commercial mortgage-backed securities (CMBS) deal on April 1, 2010, a time when the opportunities for commercial mortgage investors had been bleak to the point of comical. This new CMBS deal represented the first opportunity to buy CMBS backed by loans to multiple borrowers since credit markets had shut the securitization pipeline in June 2008.

The offering gave Greenwood a new investment opportunity to suggest to her firm's latest client. She had planned to recommend an expansion in her client's traditional commercial mortgage business, but these new bonds looked intriguing. Could the new CMBS offer her client a superior risk-return tradeoff compared with making individual mortgage loans?

After students have analyzed the case they will be able to:

• –Learn how to construct promised cash flows from both commercial mortgages and commercial mortgage-backed securities

• –Understand the benefits and costs of direct lending versus indirect lending (purchase of mortgage-backed bonds)

• –Underwrite commercial mortgage loans issued by others to identify potentially hidden risks

• –Evaluate at what price a mortgage-bond investment makes financial sense

–Learn how to construct promised cash flows from both commercial mortgages and commercial mortgage-backed securities

–Understand the benefits and costs of direct lending versus indirect lending (purchase of mortgage-backed bonds)

–Underwrite commercial mortgage loans issued by others to identify potentially hidden risks

–Evaluate at what price a mortgage-bond investment makes financial sense

In April 2012 Bill Nichols, a financial analyst at the real estate investment firm Koenig Capital, was about to enter a unique lease renegotiation. One of Koenig's tenants, Hasperat Inc., had sixteen years left on its long-term lease of the Kelley Building, a 165,000-square-foot office building in downtown Cleveland. The lease contained a clause giving Hasperat the option to buy the Kelley Building from Koenig. When Nichols tried to place a mortgage on the property to take advantage of low interest rates, he learned that the existence of this option in the lease contract prevented lenders from offering Koenig their lowest rates. As a result, Nichols had been tasked with renegotiating the lease to remove the option clause. This unexpected event offered Nichols the opportunity to use his financial skills. He needed to calculate the fair value of the purchase option to be able to justify to his superiors by how much they should compensate Hasperat. Students will step into the role of Bill Nichols and apply real options modeling techniques to value the purchase option in Hasperat's lease.

After reading and analyzing the case, students will be able to:

• Apply real options theory to the valuation of a purchase option in a commercial real estate lease

• Identify the common mistakes in applying traditional discounted cash flow (DCF) analysis to financial problems with option components

Apply real options theory to the valuation of a purchase option in a commercial real estate lease

Identify the common mistakes in applying traditional discounted cash flow (DCF) analysis to financial problems with option components

In the summer of 2013, Whitney DeSoto had just been hired as managing director for real assets at the Overton Pension Fund (OPF). Her task was to provide recommendations to the board of trustees to introduce real estate into the fund's portfolio, which to date had been invested solely in stocks and bonds. Combining her knowledge of modern portfolio theory with her institutional expertise in real estate, DeSoto needed to decide what fraction of the fund should optimally be invested in real assets. She then faced the task of deciding whether to invest in public or private real estate. If she thought private real estate belonged in the portfolio, she would need to identify the best investment strategy, the best vehicle, and ultimately the specific investments to recommend.

• Apply modern portfolio theory to the investment decision of an institutional investor allocating its assets between stocks, bonds, and real estate

• Understand the limits of portfolio theory in a real estate context

• Analyze the benefits/costs of investments in both public and private real estate

• Understand the various vehicles in which one can invest in private real estate

• Argue for a set of investments that offer individual benefits/costs relative to a theoretically ideal investment

Apply modern portfolio theory to the investment decision of an institutional investor allocating its assets between stocks, bonds, and real estate

Understand the limits of portfolio theory in a real estate context

Analyze the benefits/costs of investments in both public and private real estate

Understand the various vehicles in which one can invest in private real estate

Argue for a set of investments that offer individual benefits/costs relative to a theoretically ideal investment

The case simulates the experience of a private equity investor evaluating a potential investment, requiring the student to: (1) determine the risks and merits of an investment in Toys “R” Us, (2) evaluate the spectrum of returns using multiple operating model scenarios, and (3) identify strategic actions that might be undertaken to improve the risk/return profile of the investment. The case also discusses trends and participants in the private equity industry.

To understand how private equity firms analyze investment opportunities through application of an LBO model (provided in the case) that summarizes returns and risks. Also, to review private equity participation in club deals, large (and early) dividends, and IPOs.

Although the federal gasoline tax played multiple roles in financing surface transportation infrastructure in the United States, experts did not agree on the tax's purpose. Some argued that it was essentially a fee for users of the nation's federally supported highways. Others suggested that it should play a more prominent role in environmental, energy, and transportation policy by correcting for driving-related externalities. Still others suggested that it should be used to reduce the federal budget deficit. Finally, the tax itself had remained at the same level since 1993, and with the Highway Trust Fund virtually insolvent, many experts believed it was time for an increase. The case presents a background on the U.S. federal gasoline tax, an overview of the market for gasoline in the United States, and survey of gasoline taxes in U.S. states as well as several other countries around the world.

The case can be used to discuss the incidence of the gasoline tax, as well as its role as a Pigouvian tax to deal with negative externalities related to gasoline consumption and driving. There is sufficient data in the case to enable students to analyze the incidence of the federal gasoline tax and to determine the socially efficient level of the tax in light of externalities related to gasoline consumption and driving.

This case asks the student to take a stance on whether an portfolio manager should take a long or short position in the equity of Universal Display Corporation (PANL). The stock is polarizing, in that reasonable arguments could be made for both long and short positions. The case suggests a number of steps that an analyst might follow when valuing a company

Discounted cash flow valuation, comparables valuation, short selling. After students have analyzed the case they will be able to value the equity of a publicly traded company and take a position on whether a portfolio manager should buy or sell the stock.