Case Finance 1 2020-2021
Introduction
In this group case we stimulate you to apply the material that you learned in this course to a publicly
listed firm of your choice. You can do the group assignment in groups of 3 to 5 students. You will
have to form the groups yourself at the beginning of the course and you can do this best during the
first tutorials or via the Canvas discussion page. You do not need to register your group with us. The
questions have been organized per week (hence, first question covers material in week 1, second
question week 2, etc.). The idea behind the case is that you formulate answers after discussing with
your group members. We advise you to organize a (bi)weekly meeting with your group in which you
discuss the answers of that week (or those weeks). The case will be graded and will count for 10% of
the total grade (see the course outline).
Instructions
Form a group of 3 to 5 students
Choose a publicly listed firm.
Answer the following 11 questions for this firm using the answer sheet.
Explain each answer in a few lines but keep your answers compact (no long sections of text).
Include (copy/paste) information about the firm that you’ve used for your answers (ie paste a
small section of the balance sheet etc.). Provide a source (description + URL) that indicates
where you found this information online.
Limit your solutions to a maximum of X pages (single sided A4).
Questions week 1 (Objective of the firm and financial ratios)
1. Chapter 1: Berk and DeMarzo (2019) argue in chapter 1 that under certain conditions
maximization of shareholder value is the appropriate objective of the firm. Hart and Zingales
(2017) suggest maximization of shareholder welfare as objective. Check for your firm on the
website or in the most recent annual report, what the objective of the firm is and how this is
related to shareholder value and/or shareholder welfare. Use up to 3 quotes and a short
description that clarifies which of the two stated objectives (maximization of shareholder
value or maximization of shareholder welfare) your firm is closest to.
2. Chapter 2: Retrieve for your firm the following information for the most recent year that you
have data for: Market capitalization, Book value of equity, Interest bearing debt, Cash,
Accounts receivable, Accounts payable, Inventories, Earnings before interest and taxes,
Depreciation, Net Income, interest payments. Calculate one financial ratio that is found in
the textbook of Berk and DeMarzo for each of the four following financial ratio classes :
solvency ratio, liquidity ratio, profitability ratio, valuation ratio and also determine the
Enterprise value.
3. Chapter 3: Short selling: Determine the short position in your firm’s stock (for example check
Yahoo Finance under “Statistics”) and comment on the level (for example by comparing this
with a small set of other comparable firms). What type of investors would short the stock
and why? Would this be a concern for the management of your firm? Motivate your answer.
1
,Questions week 2 (Interest rates and bonds)
4. Chapter 5: Check for your firm in the notes of the annual report what loans and credit
facilities the firm has outstanding (type and size of loan). Comment on the interest rates of
the various loans:
Are the interest rates stated as APR or as EAR?
Explain the difference in the level of the interest rates of various loans (or loan
classes). You can compare two or three loans and do not have to do this for all
loans.Take the most extreme differences and explain.
5. Chapter 6: Does your firm have bonds outstanding (the easiest way to find this; google on
bond + name of firm)? 1 Pick the most recent bond or the one you can find data on. What is
the coupon rate, is it an annual or semiannual coupon paying bond, what is the most recent
market price, what is the maturity and what is the yield to maturity? What is the firm’s
credit rating. Motivate with printscreens of the relevant data.
Questions week 3 (Free cash flows)
6. Chapter 8: Determine the free cash flow of your firm for the last two years. For that purpose
use the formula 8.5 in the book and clearly state where you found the various components.
Present this information in a table (1 column for each year).
Questions week 4 (Shares)
7. Chapter 9: Find 3 comparable firms and use these firms to assess on the basis of a multiple
analysis whether your firm is overvalued/undervalued. Do this on the basis of two multiples:
a. Enterprise Value/EBITDA multiple
b. P/E multiple.
Comment on your findings. Which of the two multiples would you prefer if you have to value
a firm? Motivate your answer.
Questions week 5 (WACC)
8. Chapter 12: You want to determine the WACC after tax to estimate the enterprise value of
your firm. Look up the following information:
Risk free rate for a period of 20 years
Beta of the firm’s stock (Source for example: Bloomberg, WRDS, Yahoo Finance)
Credit rating or beta of the firm’s debt.
Assume that the market risk premium is 5%. Using this information answer the following
questions:
a. What is the firm’s Cost of Equity?
b. What is the firm’s Cost of Debt?
c. What is the market value of equity?
1
If your firm has no bonds outstanding, take the bond of another firm in that industry and answer the
questions further on the basis of this bond.
2
, d. What is the value of net interest bearing debt?
e. What is the firm’s Weighted Average Cost of Capital (WACC) after tax assuming a 25%
marginal tax rate?
Question week 6:
9. Chapter 8+9+12: In week 3 you have calculated the firm’s free cash flows.
a. On the basis of the free cash flows of the last two years, project these cash flows
further into the future assuming a constant infinite future growth rate.
b. Using the projected free cash flows from a. and the WACC calculated earlier,
estimate the enterprise value for the firm.
c. Use the Data Table function 2 in excel to estimate how the enterprise value changes
for different estimations of the growth rates and the WACC.
Question week 7:
10. Chapter 26: Calculate for your firm the
a. Accounts Recievables Days
b. Account Payables days
c. Inventory days
d. Cash conversion cycle.
Compare these ratio’s with a direct competitor. Which firm has a
better cash conversion cycle?
11. An innovative financing strategy (in particularly in retail) is the use of so called supply chain
financing (also called reverse factoring). This is not in the book, so you have to check this on
the internet what this actually is. Shortly describe the way this strategy works and whether
this would be a useful tool in working capital management for your firm to use. Describe the
potential benefits and drawbacks of applying this strategy.
2
If you have never worked with this function in Excel, please check the Canvas site week 6 to find a short video
introducing this function.
3
, Case study Apple Inc.
Final grade: 8.2.
Week 1 – objective of the firm and financial ratios
Q1.
Apple Inc. was long criticized for its unethical business practices and negative environmental
impact. However, in recent years, as shown in Apple’s environmental progress report covering
fiscal year 2020, the company has committed themselves to creating products doing so without
depleting the earth’s resources as well as improving labor conditions and rights. Therefore, Hart
and Zingales would presumably argue that Apple is engaged in the well-being and welfare of
their shareholders. Thus we can conclude that Apple Inc. is closely related to maximizing
shareholder welfare as an objective.
“At Apple, we’re committed to utilizing our resources as an organization to combat climate
change. Our commitment to carbon neutrality by 2030 is both ambitious and necessary. These
efforts require innovations at scale—like designing and implementing new technologies,
mobilizing financing structures, and rapidly deploying renewable energy. Everything we do is
driven by science and the urgency to tackle climate change.” – p. 9
“We believe what is good for the environment is also good business practice. We’ve
demonstrated that meeting our environmental goals doesn’t have to come at the expense
of our bottom line. Our use of low-carbon aluminum reduces our environmental footprint while
maintaining our design standards. We’ve also established investment funds for clean energy and
nature-based solutions, designed to deliver both environmental benefits and financial returns.”
– p. 11
“The well-being of our suppliers, employees, customers, and the planet is a priority for Apple,
which is why we’re committed to using safer materials to create safer products. This requires
diligent work—to build a comprehensive picture of chemicals across our supply chain, to
promote the use of better chemical management processes and safer chemical alternatives, and
to innovate through design for smarter approaches to making our products.” – p. 55
Apple’s environmental progress report covering fiscal year 2020
https://www.apple.com/environment/pdf/Apple_Environmental_Progress_Report_2021.pdf
