Introduction
to Financial Management
Fall
2001
PT-MBA
& EMBA
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Case Assignments
Introduction
to Financial Management
Fall
2001
PT-MBA
& EMBA
Week 6: The Super Project:
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In week 6 we will have covered the topics of cash flow analysis, time-value of money, and investment criteria. This will introduce us to Capital Budgeting decisions using an assumed discount rate. The Super Project is a comprehensive example of an investment decision and implements the concepts we have learned. Students are expected to either individually or as a group (maximum of 6 students) prepare this case before the actual lecture. This involves the ability to participate in discussions and present quantitative and qualitative answers. While I will not grade the cases towards your final score in the class, I do grade based on participation. Hence, I expect each student (group) to be fully prepared to discuss or answer the questions below. Additionally, each student (group) is asked to hand in their analysis as proof of preparation. Please be sure to include your name(s) on each document you hand in to receive full credit. There is no need to worry about correct versus incorrect anwers - I will only consider the approach taken in anwering these questions.
Questions:
(i) Comment on the current capital budgeting techniques employed by General Foods.
(ii) Provide a brief discussion on how management should deal with the following issues in the case:
(a) Test-market expenses
(b) Overhead expenses
(c) Erosion of the Jell-O contribution margin
(d) Allocation of the charges for the use of excess agglomerator capacity.
(iii) What are the relevant cash flows of the Super Project? State clearly your assumptions.
(iv) Assuming a discount rate of 10%, what should General Foods do?
In order to answer this use what is called 'sum-of-years digits depreciation' (SOYD - no longer used). Here is how it works. Say you buy an asset for $1500 with a 3-year useful life and a salvage value of $100. Under straight-line depreciation, the annual depreciation expense would be ($1,500 - $100) / 3 =$466.67. Under the SOYD method, it would be ($1,500 - $100) x (# of year left / sum all the years) = $1,400 x ( 3 / [1+2+3]) = $700 for the first year and $1,400 x ( 2 / [1+2+3]) = $466.67 for the second year, etc. Compare this depreciation to straight-line and MACRSP (see notes) depreciation in terms of valuation consequences. Finally, note that costs of goods sold (COGS) include depreciation in accounting statements.
Assume (for example) a 40 and 15-year life for the Jell-O building and equipment. Feel free to make any other assumptions you need - as long as you state and defend your position.
(v)
What are the important strategic factors to consider for General Foods?
If necessary perform some sensitivity analysis.
Week 13: Marriott Corporation:
The Marriott case is an excellent example to implement our knowledge on capital budgeting, particularly related to determining the relevant discount rates for discounting the projected cash flows. Marriott uses the notion of the weighted-average cost of capital (Rwacc) and the capital asset pricing model (CAPM) in its calculations. In preparing the case for class, I expect each group to hand in some work containing a preliminary analysis concentrating on the following questions. Assume that debt is risk-free in terms of beta (beta=0) for Marriott and that the corporate tax rate is 34%. Long-term government bonds can be used as a proxy for the risk-free rate of return over the project's life. Hint: use the 1926-1987 time-series information for determining the market risk premium.
(i) What is the weighted-average cost of capital for Marriott (Rwacc)?
(ii) What type of projects would you value using the weighted-average cost of capital?
(iii) What would happen with Marriott over time, if they would use Rwacc for each of their three divisions?
(iv) What is the cost of capital for the lodging and restaurant divisions of Marriott?
(v) What is the cost of capital for the contract services division of Marriott?
(vi) How are your answers affected by the assumption of a zero debt beta?
(vii)
List some of the assumptions needed in order to use the CAPM and weighted-average
cost of capital in determining the cost of capital?
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