FINN 400 APPLIED CORPORATE FINANCE Spring 2013

Module 4: Financing, Capital Structure, and Dividend Policy Decisions

Session 13 - Case: Debt Policy at UST Inc. Suggested Questions: 1. What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.? Evaluate from the viewpoint of a bondholder. 2. Why is UST Inc. considering a leveraged recapitalization after such a long history of conservative debt policy? 3. Should UST Inc. undertake the $1 billion recapitalization? Calculate the marginal (or incremental) effect on USTs value, assuming that the entire recapitalization is implemented immediately (January 1, 1999). (a) Assume a 38% tax rate. (b) Prepare a pro-forma income statement to analyze whether UST will be able to make interest payments. (c) For the basic analysis, assume the $1 billion in new debt is constant and perpetual. Should UST alter the new debt via a different level or a change in the amount of debt through time. 4. UST Inc. has paid uninterrupted dividends since 1912. Will the recapitalization hamper future dividend payments? Session 14 - Case: AMG, Inc. & Forsythe Solutions Suggested Questions: 1. 2. 3. 4. Should you recommend leasing or purchasing the PCs? Why? Why are the debt rates different for hardware and software leased over the same term? Qualitatively explain if you should choose a rolling or coterminous lease and why. Which is more advantageous, quarterly or monthly takedowns? Explain qualitatively and quantitatively. 5. If you decide on leasing, which payment schedule and leaseline are most appropriate and why? 6. How much would Forsythe make on the AMG deal? 7. What are the key takeaways to remember when determining future lease versus buy decisions of this magnitude?

Session 15 - Case: Dividend Policy at FPL Group, Inc Suggested Questions: 1. What do firms pay dividends? What, in general, are the advantages and disadvantages of paying cash dividends? 2. What are the most important issues confronting the FPL Group in May 1994? 3. From FPLs perspective, is the current payout ratio appropriate? Would a higher payout ratio be more appropriate? A lower payout ratio? 4. From an investors perspective, is FPLs payout ratio appropriate? 5. As Kate Stark, what would you recommend regarding investment in FPLs stock buy, sell, or hold?

Session 16 - Case: Netscapes Initial Public Offering Suggested Questions: 1. Why has Netscape been so successful to date? What appears to be its strategy? What must be accomplished if it is to be a highly successful going concern in the long run? How risky is its current competitive position? 2. Does Netscape need to go public to satisfy its capital needs? What would you estimate might be the magnitude of its capital needs over the next 3 to 5 years? What sources other than the public equity market could be tapped to satisfy those needs? 3. Why, in general, do companies go public? What are the advantages and disadvantages of public ownership? 4. The case points out that the IPO market is sometimes characterized as hot issue market, and that many IPO are viewed in retrospect as having been underpriced. What might explain these phenomena? Should the Netscape hoard be concerned about underpricing? Why or why not? 5. Can the recommended offering price of $28 per share for Netscapes stock be justified? In valuing Netscape, you might find it helpful to use the following assumptions: Total cost of revenues remains at 10.4% of total revenues; R&D remains at 36.8% of total revenues; Other operating expenses decline on a straight-line basis from 80.9% of revenues in 1995 to 20.9% of revenues in 2001 (this would give Netscape a ratio of operating income to revenues close to Microsofts, which is about 34%); Capital expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001 (again, close to Microsofts experience); Depreciation is held constant at 5.5% of revenues;

Changes in net working capital of essentially zero; Long-term steady-state growth of 4% annually after 2005; and A long-term riskless interest rate of 6.71%. Given these assumptions, and starting from its current sales base of $16.625 million, how fast must Netscape grow on an annual basis over the next ten years to justify a $28 share value? 6. As an executive of Netscape, what would you recommend with respect to the proposed offering price? As an investor in Netscape, what would you recommend? As the manager of an institutional fund who was willing to buy and hold Netscapes stock at the originally proposed price of $14 per share, would you willing to buy and hold at an initial offering price of $28 per share?