PGP 2011-12 Course: Corporate Finance Case Questions Tree Values (HBS 9-201-031) 1) Assume that the appropriate

cost of capital is 240 basis points above the 10-year govt. bond rate. To calculate the cost of capital, should you add the 240 bps to a 10-year Treasury bond that yielded 6.04% in June 2000 or a 10-year Treasury Inflation Protected Security (TIPS) that yielded 4.14% in June 2000? How do you decide? 2) When would you recommend cutting a 50 year old tree that is 10 inches DBH? Assume no grade changes and that a hypothetical tree takes 5 years to grow one inch in DBH. What if it takes 10 years to grow one inch in DBH? If you would recommend different times to cut the tree, please explain why you reach different conclusions. 3) When would you recommend cutting a 50 year old tree that is 10 inches DBH, grows at the rate of one inch in DBH each 5 years, and also increases one grade with each 2 inches growth in DBH? Is the decision same if the tree is growing at the rate of one inch DBH over 10 years? In the following questions, assume all the trees in Mr. Smiths forest have to be cut at the same time. 4) If Mr. Smith simply lets his trees grow, would they increase in value? When would you recommend cutting the trees if they are simply left to grow? Assume that the trees grow at a rate of one inch of DBH over 10 years. 5) If Mr. Smith decides to thin and manage his forest, how would this affect its value? Assume that half the trees are thinned and that the remaining trees grow at the rate of 2 inches in DBH every 10 years. Also assume that a foresters management costs are offset by the value of the thinned trees. 6) What forest management strategy, if any, would you recommend to Mr. Smith? Blaine Kitchenware, Inc.: Capital Structure (HBS Brief cases 4040) 1) Do you believe Blaines current capital structure and payout policies are appropriate? Why or why not? 2) Should Dubinski recommend a large share purchase to Blaines board? What are the primary advantages and disadvantages of such a move? 3) Consider the following share purchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt bearing interest at the rate of 6.75% to repurchase 14.0 million of shares at a price of $18.50 per share. How would such a buyback affect Blaine? Consider the impact on , among other things,

BKIs EPS and ROE, its interest coverage and debt ratios, the familys ownership interest, and the companys cost of capital. 4) As a member of Blaines controlling family, would be in favour of this proposal? Would you be in favour of it as a non-family shareholder? 5) How does the proposal sketched above differ from a special dividend of $4.39 per share? Midland Energy Resources, Inc.: Cost of Capital (HBS Brief cases 4129) 1) How are Mortensens estimates of Midlands cost of capital used? How, if at all, should these anticipated uses affect the calculations? 2) Calculate Midlands corporate WACC. What are your specific assumptions about the various inputs to the calculations? Is Midlands choice of EMRP appropriate? If not, what recommendations would you make and why? 3) Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why or why not? 4) Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from one another? 5) How would you compute a cost of capital for the Petrochemical division? Whirlpool Europe (HBS 9-202-017) 1) Are all of the benefits of the ERP investment reasonable? Are the costs reasonable? 2) What are the after-tax cash flows for the proposed ERP investment from 1999 through 2007? What is the present value of those cash flows? 3) When valuing the proposed investment, should value be included for possible cash flows that occur beyond 2007? What does it depend on? Explain. 4) Would you recommend the ERP investment? What is your major concern? Explain.