© 2000 John Petroff
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© 2000 John Petroff |
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Assignments, Cases & Exercises
Research assignments:
R-11A.1 Study the liability and equity of an American or European company of your choice to determine if the funds they represent correspond to the financing needed to operate a business of the size of this firm. Establish that the replacement value of the fixed assets is considerably larger than the amounts shown on the balance sheet. Determine whether the distortion in assets is offset by distortions in current liabilities, long term debt or equity.
R-11A.2 Take a company from a country where hyperinflation has taken place for a few years. Identify where distortions are the largest. Evaluate the adequacy of reevaluation of assets.
R-11A.3 Choose six firms randomly. Read carefully the notes to financial statements and management discussion and analysis of financial position and results of operations to learn if there might be off-balance sheet liabilities. Find information on insurance policies carried by each firm. Summarize your findings in a table. Draw conclusion about potential additional exposure of firms beyond balance sheet obligations.
R-11B3.1 Obtain data on yields of debt and proportion of debt financing in as many countries as available. Test the presence of a correlation between cost of debt and use of financial leverage. Look into explanations related to financial markets and customs in the countries involved, that can negate the merits of financial leverage.
R-11B3.2 From the sample in the previous question, take only the countries that have experienced hyperinflation. Determine whether negative or close to zero real yields have been experienced. Present theoretical and empirical arguments for debt financing attractiveness in these countries.
R-11B4.1 Measure the tax shield on interest payments in large sample of countries (using information of taxation available from accounting firms country profile booklets). Estimate leverage levels in these countries as in question R-11B3.1 above. Test the presence of a correlation between the tax shield and level of financial leverage. Discuss possible conditions that may prevent a relationship to exist.
R-11C2.1 Select a firm that has in the recent past increased its level of financial leverage considerably, compared to other firms in the same industry. Obtain detailed information about each debt instrument (e.g. from copies of bond indentures). Make a chronological list of the covenants and restrictions imposed on the firm. Draw conclusions about the presence of a burden from potential default.
R-11C3.1 Recount the difficulties encountered by a major firm that went through bankruptcy proceedings extensively covered in the press. Preferably choose a firm which demise was brought on by excessive debt. Offer an estimate of the burden of potential bankruptcy.
R-11C3.2 Read the statutes related to bankruptcies of one of major states in the United States (e.g. NY, CA, IL, TX). Summarize the proceedings involved in so far as they affect the running or closing a firm in bankruptcy. Point the necessity of the severity of the controls and penalties imposed. Draw conclusions about the burden of a potential bankruptcy.
R-11C5.1 Duplicate one of the insolvency predictor articles (i.e. Hickman, Beaver and Altman) using recent data. Offer explanations of its applicability.
R-11D4.1 Choose an industry that is known to use much financial leverage (such as those in information and services sectors). Study how firms in the industry mitigate the high level of financial leverage.
R-11E1.1 In the industry with high financial leverage chosen in the previous question, investigate the cost of capital. Tabulate for each company, bond yields, bond maturities, firm's risk measured by BETA, return on equity, weighted average cost of capital and level of financial leverage. Test for the presence of correlation between yields and leverage, and for the presence of a minimum weighted cost of capital.
R-11E2.1 Go over a well documented history of a major corporate giant (such as IBM, Xerox, Boeing). Note the financial strategy in each of the phases of its evolution.
R-11E3.1 Analyze and report the key arguments presented in Modigliani-Miller original article. Comment on the contributions made by subsequent articles addressing the same issue. Outline the thrust of the proposition for financial leverage analysis in different companies.
R-11E4.1 Compile updated statistics similar to those presented in the text, that shed light on the real potential for financial distress. Draw conclusion as to the applicability of Modigliani-Miller proposition for this business population.
R-11F3.1 Gather up-to-date data on firms in which industry, what size and what age, are the most likely to be the most leveraged, either in the United States or another country. Make comparison with the findings presented in the text.
R-11F4.1 Conduct a similar investigation as in the previous question, but on firms that are least leveraged.
Cases for Chapter 11 Capital Structure
Study the use of financial leverage of Viatel, Inc. in Case - VYTL. Compare Viatel's
financial risk with that of other telecommunications companies.
Identify the different sources of financial risk for Viatel. Does
Viatel also assumes operating leverage as well as financial leverage?
What are the consequences for shareholders and for lenders?
Analyze the financial leverage of Big Rock Brewery Ltd. in
the late 1990's, as shown in the tables accompanying Case
- BR. Determine if the level of financial leverage is excessive
in light of the nature of production requirements, the evolution
of the market (e.g. consider the product life cycle phase), the
firm's commercial strategy and the growth of the firm. With respect
to firm size, use RMA statistics or obtain financial statements
from major US or Canadian brewers (e.g. Bush, Miller, Labatte,
Molson).
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