FALL 1998


Dr. Arthur Gudikunst Thursday Night, 7:45-10:00 pm

Suite G, Room 459, Telephone: 232-6387 E-mail:

Office Hours: Tuesday 3:00-5:00 pm, Thursday 5:00-7:30 pm

Other times by appointment


Texts: Valuation: Measuring and Managing the Value of Companies, 2nd Edition

(VAL) by Copeland, Koller and Murrin, McKinsey and Comp.

John Wiley & Sons, 1996

Case Studies in Finance, 2nd edition

(Case) by Robert Bruner Irwin, 1996


Course Objective:

This is a capstone course for MBA students with a concentration in Finance. The course deals with the highest level of corporate policy and strategy analysis, with particular emphasis to financial strategies and implementations consistent with the goal of increasing the value of the firm. The focus is on firm valuation and the objective of maximizing the wealth of the shareholder. While some in society question may question this goal of the firm, conceptually and by evidence, the economy, government, employees and other stakeholders benefit when the managers of the firm pursue policies designed to increase firm value.

From a financial management perspective, strategic financial policies tend to focus on capital expenditure, working capital, capital structure and dividend decision-making. Allied with those main areas are issues of

        1. mergers and acquisitions

2. organizational restructuring

3. financial restructuring

4. leveraged buyouts

5. initial public offerings of equity shares

6. bankruptcy and reorganization

7. takeover strategies and negotiations

8. defending against takeovers

9. designing and implementing strategies for value enhancement

10. compensation and accounting system design for value.

The 1980's were a period of remarkable activity in mergers, restructurings, takeovers, bankruptcy and leveraged buyouts. From our time now in the mid-1990's, we have the opportunity to study the lessons learned from that period, both the favorable and unfavorable lessons, those that increased value and those that destroyed value. But the course will also endeavor to allow you to explore the application of value enhancing strategic thinking and analysis on case problems drawn from the current environment.



Other Texts on Reserve in Library:

(RCA) Restructuring Corporate America, by Clark, Gerlach and Olson

Dryden Press

(MRCC) Mergers, Restructuring and Corporate Control, by Weston, Chung and Hoag Prentice Hall, 1991

(COC) The Search for Value: Measuring the Company's Cost of Capital,

by Michael Ehrhardt Harvard Business School Press, 1996



Course Outline:

Date: Topic and Reading Assignment: Case Assignment

Sep 3

Company Valuation and the Managerís Mission

Reading: (VAL) Chap. 1-4

Melville Case Study-handout

Sep 10

Valuation and Historical Performance

Reading: (VAL) Chap 5 and 6

(Case) 4 -Oracle Systems

Sep 17

Historical Performance Analysis and Capital Structure

Reading: (VAL) Chap 7-10

(Case) 11 - Atlantic Southeast Airlines

Sep 24

Capital Structure and Debt Policy

Reading: (Case) 29, (COC) Ch 3,4,5

(Case) 32- Johnstown Corp.

Oct 1

Debt Policy and Risk of Debt-Bankruptcy

Readings: (RCA) Ch. 6,10

(Case) 33- Revco D.S.

Oct 8

Financial Distress and Reorganizations

Readings: (RCA) Ch 10

(Case) 48- Caledonian Newspapers

Oct 15

Capital Budgeting and Investment Allocation

Readings: (MRCC) Ch 6,7

(Case) 25- Pan-Europa Foods

Oct 22

Mergers and Acquisitions Policy

Reading: (VAL) Chap. 14, (MRCC) Ch 8

(Case) 42- Brown Forman Distillers

Oct 29

Pricing IPO's

Readings: (MRCC) Ch 12,13 (RCA) Ch 2,12,15

(Case) 27- Morgan Stanley Group

Nov 5

Leveraged Buyouts

Readings: (MRCC) Ch 16, (RCA) Ch 8

(Case) 46- Bumble Bee Seafoods

Nov 12

ESOPs and Employee Ownership

Readings: (MRCC) Ch 15, (RCA) Ch 9

(Case) 12- L.S.Starrett Comp.

Nov 19

Options Analysis in Corporate Finance

Reading: (VAL) Chap 15, (COC) Ch. 8

(Case) 38- Flowers Industries

Nov 26

Thanksgiving-no class


Dec 3

Setting Financial Strategy


(Case) 52- United Telecomm.

(final analysis due in class)

Dec 10

Final Class Meeting/Exam/Presentations






Course Grading:

Case Studies- Written analysis 40 %

Case Studies- Class Participation 20 %

Term Project 25 %

Final Examination 15 %





  1. You are responsible for reading the case study before the class meeting date indicated on the course syllabus. You should understand the issues of the case, and have a familiarity with the major exhibits supporting the case, and the relevancy of the exhibits to the case issues.
  2. On the assigned date, the instructor will lead a class discussion on the issues of the case, develop a generalized set of questions to guide the case solution, and discuss methodologies for specific analysis of the case.
  3. One student team will be selected to prepare the case solution for the next class meeting. The student team will open the next class with their analysis and conclusions, and the rest of the class will be invited by the instructor to discuss the analysis and conclusions. The presentation team members will submit their final report to instructor. Section A and B students will alternate written analysis of cases, and submit a two page solution/recommendation of the assigned cases (i.e., one case every two weeks).
  4. Students not on case presentation team are fully responsible for case analysis and subject to grading based on participation in case discussion.
  5. The last scheduled case (Case 52) will not have a presentation team assigned. The case will be discussed and solution developed in class on assigned date. Each Student will submit written analysis of case.



Each student will develop a term paper of approximately 4-5 pages in length, plus any exhibits, tables, etc., dealing with one of the questions below ( or another suggested by student and approved by instructor). The paper should be a review of at least three academic journal articles dealing with the topic, and a final

summary of the literature expressing the student's view of the issue. A five minute presentation on the topic should also be prepared for delivery to the class, using suitable presentation techniques.

QUESTIONS for Term Project:

  1. Is the value of the firm enhanced by vertical acquisitions?
  2. Is the value of the firm enhanced by horizontal acquisitions?
  3. Do conglomerate mergers enhance firm value?
  4. Who wins and who loses in unfriendly takeover contests?
  5. Do management defensive tactics against unfriendly takeovers benefit the firm's shareholders?
  6. Do leveraged buyouts enhance the value for the new equity investors in the firm?
  7. Do 'hot' initial public offerings offer long term value for investors?
  8. Do voluntary bankruptcies provide long term benefits to stockholders?
  9. Do firms with ESOP's provide superior returns to stockholders?
  10. Should conglomerate companies spin-off unrelated business units to enhance firm value?
  11. Do firms with high debt leverage provide superior value for the equity investors?



Fall 1998 MELVILLE CORP - Part A


In the spring of 1995, Christel Carrington, the Director of the Department of Education and a trustee for the Rhode Island Public Employees Retirement Fund, was reviewing the performance of the pension plan managers and noticed significant holdings of the common stock in Melville Corporation. The stock had been acquired back in the fourth quarter of 1992, when Melville stock was trading in the range of $53-55 per share. Dividends paid on the stock have been quite consistent at the rate of $0.38 per share per quarter from 1993 through 1995. However, she is disturbed that the price of the stock in June, 1995, is trading at $34-35 per share. While not being a financial professional, she did feel an obligation to prepare for the pension fund trustee's meetings, and arranged for a copy of the Melville Corp. 1994 annual report to be sent for her review.

By the October quarterly meeting of the pension fund, she noticed that Melville stock had slipped further into the $33 range. In addition, the State Treasurer, Nanci Moyers, had just returned from a national convention of state pension plan administrators where the Chairman of CALPERS had talked about his desire to have large institutional investors in poorly performing companies coordinate their corporate proxy voting power to elect new members to the company boards who have a focus on increasing shareholder value. Christel sensed that a vote of the trustees to allow Nanci to work more closely with CALPERS might also be presented, and she noticed that Melville was one of the companies that CALPERS identified as a possible focus for its attention.

Melville was a company that Christel did not recognize before she read the 1994 Annual Report, but immediately recognized many specialty retailers which she saw during visits with her teen age children at the local shopping malls. Melville was the parent corporation for CVS drugstores, Bob's Stores, Thom McAn Shoes, Footaction, Marshall's, Kay-Bee Toys, Wilson's Leather, This End Up furniture and other retail stores. Her sense of disappointment in Melville stock deepened when she considered the overall growth of the economy in the 1990's, and the widespread reports of continued economic growth (now that a Democratic President was moving to a centrist political/economic viewpoint and had been given a Republican majority in both the House and Senate with which to work on reducing the role of big government and getting the government off the backs of the working taxpayers). How, she wondered, could a company like Melville Corp, with such visibility and position in specialty retailing, produce such poor investment performance for its stockholders in general, and RIPERS in particular.

Knowing that you, her next door neighbor, are pursuing the MBA in finance at Brydence College, she has asked for your help in understanding Melville's historical performance, and hopefully giving some insights on how new policies and strategies might be injected into Melville's board of directors if the CALPERS proposal is accepted.

(You have full access to all publicly available information on Melville Corp. in the library. There is a copy of the 1994 and 1995 annual reports on reserve, and ValueLine, Moody's, Standard and Poor's and Compact Disclosure is available. Reference sources on financial ratios in Robert Morris Financial Statement Studies and the Almanac of Business and Industrial Financial Ratios should also be consulted. (In 1996, Melville changed its name to CVS, Inc.)