Case Study: CSR & CNR Merged into CRRC in China
Derek Yim et. al, Hong Kong Polytechnic University
China South Railway (CSR) and China North Railway (CNR) are the dominating state-owned enterprises in domestic rolling stock market and major players in global market, each of which almost dominates half of domestic market. They were once the same company. After separation into two competing companies for several years, they merged again in 2015, becoming a new enterprise, China Railway Rolling Stock Corporation (CRRC). In this merger case, we will illustrate the business performance, business strategy and the competition between CSR and CNR, leading to demonstrate the reasons of this merger under the one belt one road big economic development environment. We will also use different valuation methods to analyze this case and its exchange method. Since this merger triggered huge reaction in the stock market, the analysis of its effect on stock market is inevitable.
Forward Premium and Forward Contracts
Halil D. Kaya
This case deals with forward contracts. Students will learn about spot and forward rates, forward premium, long and short forward positions, and the profit or loss associated with a long or short forward position. Students will also learn about the transactions that would take place between the long- and short-parties when the forward contract matures. This is a hands-on practice for students who want to learn more about forward contracts.
Hedging Against Capital Depreciation: A Case Study of BIMB Malaysia Berhad
Raudha Md. Ramli, Shahida Shahimi, Abdul Ghafar Ismail* (Islamic Development Bank)
This case study focuses on study of Islamic hedging mechanism instruments. Hedging is a conservative and prudent approach to manage risk in the market through specific financial instruments. Swap is one of the effectively and efficiently used financial instruments for the purpose of hedging or minimizing risk faced by financial institutions. This case discusses BIMB Malaysia Berhad (BIMB) which is facing heavy losses due to higher provisioning on the huge write-off of Net Performing Finances (NPFs). After the losses in October 2006, Lembaga Tabung Haji (LTH) and Dubai Investment Group (Dubai Financial LLC) emerged as BIMB’s direct shareholders’ through a recapitalization exercise. Following a period of losses, BIMB was recapitalized in October 2006 through a RM1.01 billion capital injection. This case allows students to evaluate BIMB performance since the establishment on July, 1983. Besides that, students can identify on the types of risk management and how to mitigate them in Islamic perspective. This study encourages students to know the purpose of using Islamic hedging to achieve shariah compliance by full filling the requirements of shariah including principles and objectives.
Capital Investment Analysis: Roman Manufacturing Company Case Study
Arthur S. Guarino, Rutgers University
This case study on capital investment analysis can be applied to introductory courses in finance, financial decision making, and corporate finance. Three alternative capital investment projects are available for evaluation. The investment options must be carefully examined and a decision arrived at based on a financial analysis of the information provided in the case using capital budgeting and capital structure techniques.
Arithmetic Average Return versus Geometric Average Return: Which One is Better?
Halil D. Kaya
This case deals with the calculation of investment returns. It teaches students about arithmetic and geometric average returns. Students will learn how to compute these measures and they will also learn when to use these measures. First, they will solve two puzzling examples. After that, they will evaluate an investor’s investment return. This is a hands-on practice for students who want to learn about different measures of investment returns.
Using Common Size Statements to Evaluate A Company’s Performance: An Application
Halil D. Kaya (Northeastern State University)
During the period 2005-2007, Starbucks Coffee Company’s shares had dropped by roughly 40%. This case encourages an examination of the possible impact of competition in the industry on Starbucks’ share price performance. Students will compare the company’s financials to one of its main rivals’ (i.e. Panera Bread’s) financials and determine whether Starbucks had been underperforming compared to its competition. Since the two companies are of different size, in order to be able to compare the two companies, students will need to use common-size financial statements. They are encouraged to explain the areas where Starbucks had underperformed when compared to its rival. As an additional task, students may examine the company’s common-size statements over the 2005-2007 period to its current common-size statements, and then explain if the firm had improved in those weaker areas.
An Application of the Capital Asset Pricing Model
Halil D. Kaya, Northeastern State University
This case deals with the Capital Asset Pricing Model (i.e. CAPM). Students will learn how to draw the Security Market Line using the risk-free rate and the expected market return. They will learn how to estimate the expected return on a stock or a portfolio given its systematic risk (i.e. beta). The students will also evaluate whether the two stocks given in the case are fairly priced, overpriced, or underpriced according to the CAPM. Finally, they will learn about the reward-to-risk ratio and use it to link two stocks’ expected returns given that they have the same reward-to-risk ratio. This is a hands-on experience for students who want to learn more about asset pricing and the CAPM.
Audit Practices for Automobile Dealerships
Paul C. Schauer
One of the most important factors in a successful audit is a well-designed audit plan. The audit plan is a comprehensive process determining how the audit will be executed. One of the significant products of the audit plan is the audit program. It describes in detail the control and substantive tests the auditors will perform during the course of the audit. Audit programs are often designed by selecting specific steps from a standardized audit program that address the risk tolerance for the audit of the current client. When that is not plausible, audit programs have to be developed that address the unique accounting systems of the client. This case study uses automobile dealerships, an industry with which almost everyone is familiar, to provide examples of accounting systems that require unique methods to perform an efficient and effective audit.
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Employees’ Annuity Corporation: Making a Loan Whole
Thomas Patrick* (The College of New Jersey) and Clare Bohnett
This case requires the student to analyze what happens when a borrower is in violation of one of the covenants of its private placement agreement. C&B Foods (C&B), the borrower, has been purchased by a hedge fund and C&Bs indenture requires it to offer to “make whole” its loan if there is a change in ownership. The student is asked to not only determine the present value of the “make whole” offer but must weight several other considerations prior to making a recommendation as to whether or not to accept C&B Foods’ offer to make the loan whole.
Evaluating Mutually Exclusive Projects with Capital Budgeting Techniques (Case Study)
Halil D. Kaya (Northeastern State University)
This case deals with the capital budgeting techniques of Net Present Value (i.e. NPV) and Internal Rate of Return (i.e. IRR). In this case, students will compare two mutually exclusive projects using NPV and IRR, and choose the best project. They will learn about NPV and IRR methods and their advantages and disadvantages. Students will also learn the weakness of the IRR method when comparing two or more projects. Finally, they will evaluate the two projects assuming that the projects are independent projects rather than mutually exclusive ones. This is a hands-on experience for students who want to delve into project valuation.
Global Dental Equipment: How Variance Analysis Can Help a Startup Business Survive Growing Pains
Michael T. Lee (Boise State University) and Celia J. Renner
This educational case study describes an entrepreneurial crisis at Global Dental Equipment (GDE), a company selling used dental equipment. GDE had grown from a startup and reached a volume of activity such that the founder was no longer able to personally manage all of the day-to-day aspects of the business. The evolution of GDE from startup to rapid growth to bringing in outside investors and a Board of Directors is described. During its early years, GDE’s accounting system supported historical reporting, compliance, and taxation requirements. However, GDE reached a point where it needed to use more detailed and relevant management accounting information to continue growing and transition through the entrepreneurial crisis. Such information can be provided by budgets and the variance analysis of actual results against budget. This case study is designed for undergraduate students undertaking their second course in cost/management accounting and/or graduate management accounting students.
Interest Rate Parity and Arbitrage
Halil D. Kaya
This case deals with interest rate parity and covered interest arbitrage. Students will learn about the balance between the forward rate and the spot rate between two currencies, as well as the interest rates on both currencies. The case teaches students how to check for the interest rate parity. If the interest rate parity does not hold, students will devise a strategy to do an arbitrage. They will learn the steps in a covered interest arbitrage. This is a hands-on experience for students who want to learn more about international finance and the balance between different rates like spot and forward exchange rates and interest rates.
On Saving Money
In the consideration to save more money, whether for retirement or say for travel, many focus on the less important activities and ignore some of the more important ones.
The Use of Dividends in Valuation: The Case of a Global Company
Halil D. Kaya (Northeastern State University)
During the July 2015-Jan 2016 period, Apple Inc.’s shares had dropped by roughly 30% (60% in annualized terms). More recently, Apple’s shares are on a bumpy track: it first went up from its January lows, and then, once again, it came down. This case focuses on Apple stock’s price fluctuations and it attempts to estimate the fair value of the company’s shares. It uses the dividend discount model of valuation. Students will first learn about the advantages and the disadvantages of this valuation method. Then, under different scenarios, they will use the dividend discount model to make an investment decision. Under each of these scenarios, they will first estimate the company’s share value, and then compare it to the market value of the stock and then make an investment decision: Buy, hold, or sell. Apple’s financial statements are provided in the case for students’ use.
Currency Risk and Money Market Hedge
Halil D. Kaya
This case deals with currency risk. It teaches students about the risk itself and also about how to eliminate or reduce the risk. They will devise a hedge strategy that would eliminate currency risk. This is a hands-on experience for students who want to learn about international finance, exchange rates, exchange rate risk, and methods to reduce or eliminate exchange rate risk.
A Capital Budgeting Problem: NPV vs IRR
Halil D. Kaya
This case deals with capital budgeting. It deals with evaluation of a project using Net Present Value (NPV) and the Internal Rate of Return (IRR) methods. Students will learn about NPV and IRR methods and their advantages and disadvantages. They will learn how to compute the NPV and the IRR of the project. They will also learn about the problems with the IRR method. Finally, students will prepare the NPV Profile of the project and use it to more critically evaluate the project. This is a hands-on experience for students who want to learn more about capital budgeting.
Infosys (INFY) - A Wealth Creator or Destroyer
Dr. Anupam Mehta (IMT, Dubai)
Infosys an Indian multinational provider of business consulting, technology, engineering, and outsourcing services with revenue of $7,398 million and net income of $1,725 million in the fiscal year 2013, has been declaring Economic Value Added (EVA) in its annual reports since 1996. Why Infosys is declaring the EVA, when it's not mandatory to report such figures in annual report? What purpose does the EVA statement in the annual report serve to the investors? Most importantly, what do these EVA figures reflect for zero debt company like Infosys? The case gives an opportunity to analyze and evaluate Economic Value Added by Infosys from year 2000 to 2012 and to draw interpretations regarding the wealth creation done by Infosys over a period. The pedagogical objective of the case is to make students understand and apply the concept of EVA for financial performance evaluation while drawing interpretations out of it. The case brings out the fundamental concept behind adopting and reporting EVA. The case also aims to compare and contrast the EVA with traditional financial accounting measure - Return on Investment (ROI).
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A Case on Portfolio Risk and Return
Halil D. Kaya
This case deals with the calculation of a stock portfolio’s risk as well as its expected return. Students will learn about the meaning of risk and its relation with expected return. First, they will compute a portfolio’s expected return under different probable states of economy (i.e. recession, normal economy, and expansion). Then, they will compute the expected return of the overall portfolio considering the probabilities of each state of economy. After estimating the portfolio’s expected return, students will estimate the portfolio’s risk level. As an additional exercise, in order to estimate the expected return of the overall portfolio, students will compute each stock’s expected return first and then they will incorporate the portfolio weights. Students will also rank each stock according to its expected return and see if the riskiest stock has the highest expected return. This case is a hands-on experience for students who want to learn about the relation between risk and expected return.
Using the Dividend Discount Model in Valuation: The Case of PepsiCo
Halil D. Kaya and Julia S. Kwok (Northeastern State University)
This case is an application of a valuation method, the dividend discount model, for PepsiCo. In this case, students will learn how to use a company’s dividend estimates in the coming years to estimate its share value. Students will first discuss the three possible scenarios for dividend growth: the zero-growth model, the constant growth model, and the super normal growth model. They will discuss each model’s advantages and disadvantages. Then, they will proceed with their valuation using the assumptions given in the case. PepsiCo’s most recent financial statements are provided in the case for students’ use. After estimating the company’s share value, students will compare it to the company’s current share price to reach an investment decision. It is a real-world application for students who want to learn how to use dividends in valuation.
PLAYTIME Case: Typical Baby Boomer Situation
Hugh Grove* Mac Clouse Darin Good
The case is set at the end of 2012. The founder, sole owner, and CEO of the case company, PLAYTIME Creations, Mike Evans, had earlier in 2012 asked Darin Good, a managing director of Headwaters MB, to find a sales price for PLAYTIME since Mike is thinking about retiring, the typical baby boomer entrepreneur situation these days. Darin has solicited offers from Headwaters’ network of potential buyers and 13 have made offers, ranging from $14 million to $38 million with most in the $28 million to $35 million range. Darin’s tasks are now to make recommendations on price and deal structure for the sell now alternative, including the take-away cash amount, versus the hold and develop alternative. The students take the role of this Headwaters’ investment banker in this case.