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Courses / FIN 647 /

 

 

 

 

 

 

 

 

FIN 647: Advanced Topics in Financial Management
Homework Assignments, Fall 2007

 

 

 

 

Assignments must be typed and submitted before the start of class on the due date. You can get much of the required information from the Bloomberg machine in W404, the GPACT lab. The graduate assistant on duty there will help you with any difficulties. You may also want to download and print this Bloomberg help file as a reference.

Corporate Governance Project

Pick a US company that belongs to one of the following sectors.  You should stay with this company for the assignments that follow as well.  You must confirm your company selection with me before you start your analysis.

 

Materials

Industrials

Consumer Discretionary

Consumer Staples

Transportation

You can find companies in these sectors by using Bloomberg or a similar program.  The company that you choose should satisfy the following conditions:

  • Make sure that the market value of your chosen firm is at least 0.75 billion dollars.  
  • It should have public debt, preferably publicly traded.

Write a report on Corporate Governance at your company.  Start your report by providing an executive summary. Then, a brief description of the company (about half a page), taken from Yahoo or another source.  Use another two to three pages to present a well-organized report on "Who own/runs your firm."  Make sure to put the important analyses up front; all detailed information, including tables, particularly if they are long, should go at the end as an appendix.  If the table or the graph is small, then you can include it up front, particularly if you're going to refer to the contents of the table in detail.  In any case, you should not include any information in Appendices that you don't refer to at all in the text.

Keep in mind that you are analyzing the company. Providing a lot of data is not valuable, in and of itself. Also, using information and "analysis" indiscriminately from the company's website is also not of much use. Ask yourself regarding anything that you include in the report -- what is this telling me about the company's corporate governance, viz. the structure of the company, broadly defined, and how it affects the optimal working of the company.

And don't forget to use spell check and grammar check!

Some of the questions that you should think about in writing up your report:

  1. Who are the institutions holding the stock?  (Such information can also be found on Yahoo at  http://biz.yahoo.com/hd/m/msft.html for Microsoft -- msft; replace msft with the symbol for your stock.)  What conclusions would you draw from the quality and number of these institutions, as well as the  proportion of the firm's stock that they hold?
  2. How many analysts follow the stock?  What implications would you draw from the quality and number of analysts?
  3. Who are the mutual funds that hold the stock? (Check http://biz.yahoo.com/hd/mf/m/msft.html; replace msft with the symbol for your stock.)  What conclusions would you draw from this information? 
  4. Are there major conflicts of interest in the running of the company that have not been addressed by compensation contracts, etc.?
  5. Have there been major events in the life of the company recently that are indications of conflicts of interest?
  6. Get information on the covenants/bond indentures of the company.  Can you conclude that the bondholders are well protected from stockholder aggression?
  7. How does the company see its role as a corporate citizen?  For example, is it respectful of its social obligations?

You can use the following analysis of Disney, Inc. done by Aswath Damodaran, in 1997.  Focus on the first two sections, Corporate Governance Analysis and Stockholder Composition.  This is a very good model to use.

You can use the following general sources:

For company specific information, 

  • You can search the Wall Street Archive.  
  • You can use the Lexis-Nexis database from the Pace Library homepage (go to http://library.pace.edu, click on Databases, then choose Lexis-Nexis Universe from Complete Alphabetical Listings) to search for information regarding your company.  You can select Business News, then search using your company name, as well as other useful keywords, such as executive compensation or shareholder rights, or other terms that you can come up with based on your reading of Chapter 2 and my webnotes/slides.  
  • Search Lexis/Nexis, focusing on publications such as the Economist, Forbes, Fortune, etc. using appropriate keywords.
  • You can also look at the Annual Report of the company, which you can find at the company website (you can find the company website by searching on Google, or by going to http://biz.yahoo.com).
  • Search on Google using the company name and relevant keywords.
  • Use the information on analysts at http://www.zacks.com 
  • Use information that you may be able to find at http://biz.yahoo.com or at http://www.marketguide.com. 
  • You can get information from MoneyLine; for example, you can get bond ratings by doing the following:
    • log onto Moneyline
    • click on US Markets from left menu
    • click on Corporates
    • click on Bond Ratings
    • enter the information in the dialog boxes

Capital Structure Project

Explain the capital structure of a company satisfying the conditions specified in the Corporate Governance Project (see above.)

Here are some kinds of information that you may want to gather in accomplishing this project.

  • Compute the debt-equity ratio for the firm
  • Look at the kinds of securities that it has used for financing its operations
  • Look at changes in its financing strategy over time.
  • Look at the kinds of assets that the firm owns.
  • Is the firm a growth firm or is it a stable firm?
  • What stage of its life-cycle is it in?
  • What sorts of investors own its securities?

In order to explain your findings, you may find it useful to refer to the different theories of capital structure that we discussed in class.

  • Use information from Prof. Damodaran's website (Go to http://pages.stern.nyu.edu/~adamodar/; click on Corporate Finance on the left-hand-side menu; choose Corporate Finance (second edition); then pick Chapter 7) and information from the text
  • For how to compute a debt-equity ratio, you can look at these problems and their accompanying solutions:

Among other sources, you can also use:

Make sure your report is well researched, well analyzed, based on theory, and written up in a form easy to understand.  You may submit an Excel spreadsheet to accompany your work, but the main results of the report should be written up in a Word document.

You may use Damodaran's spreadsheets. However, it will be your responsibility to explain each of the assumptions that he explicitly or implicitly makes.

Equity Valuation

To value the stock of the company, Office Max Incorporated (OMX)

To begin with, go over the slides on Firm Valuation, which can be found on the class website. You may also want to read my webnotes on Valuation.

Then get the firm's 10-K for the latest year. (Some of this information may also be available on Yahoo or one of the other sites, as well as on the Bloomberg terminal.)

Compute Cashflow to Equity for OMX for the last four years (2003-2006), using the formula,
FCFE = Net Income + Depreciation - Capital Spending - D Non-cash Working Capital - Principal Repayments + New Debt Issues

(Historical FCFE can be computed using the information in the Statement of Cashflows,
FCFE = Cashflow from Operations – Capital Expenditures – Net Debt paid + Changes in Cash
However, for forecasting purposes, the previous formula is more useful, since we can forecast each component separately and relatively independently.)

Forecast the FCFE for future years.

For your convenience, here are some of the financial statements from Office Max's 10K for fiscal year 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Income (Loss)

 

 

Fiscal Year Ended

 

 

 

December 30,
2006

 

December 31,
2005

 

December 31,
2004

 

 

 

(thousands, except per-share amounts)

 

Sales

 

 

$

8,965,707

 

 

 

$

9,157,660

 

 

 

$

13,270,196

 

 

Cost of goods sold and occupancy costs

 

 

6,656,497

 

 

 

6,960,390

 

 

 

10,588,824

 

 

Gross profit

 

 

2,309,210

 

 

 

2,197,270

 

 

 

2,681,372

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and selling

 

 

1,641,147

 

 

 

1,765,268

 

 

 

2,014,546

 

 

General and administrative

 

 

361,818

 

 

 

368,265

 

 

 

365,466

 

 

Other operating, net

 

 

140,343

 

 

 

54,045

 

 

 

(370,609

)

 

Operating income

 

 

165,902

 

 

 

9,692

 

 

 

671,969

 

 

Debt retirement expense

 

 

—

 

 

 

(14,391

)

 

 

(137,137

)

 

Interest expense

 

 

(123,082

)

 

 

(128,504

)

 

 

(151,939

)

 

Interest income

 

 

89,723

 

 

 

97,272

 

 

 

14,093

 

 

Timber notes securitization

 

 

—

 

 

 

—

 

 

 

(19,000

)

 

Other income (expense), net

 

 

39,335

 

 

 

(1,685

)

 

 

1,456

 

 

Income (loss) from continuing operations before income taxes and minority interest

 

 

171,878

 

 

 

(37,616

)

 

 

379,442

 

 

Income tax expense

 

 

(68,741

)

 

 

(1,226

)

 

 

(142,291

)

 

Income (loss) from continuing operations before minority interest

 

 

103,137

 

 

 

(38,842

)

 

 

237,151

 

 

Minority interest, net of income tax

 

 

(4,083

)

 

 

(2,370

)

 

 

(3,026

)

 

Income (loss) from continuing operations

 

 

99,054

 

 

 

(41,212

)

 

 

234,125

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(17,972

)

 

 

(24,416

)

 

 

(32,095

)

 

Write-down of assets

 

 

—

 

 

 

(28,243

)

 

 

(67,841

)

 

Income tax benefit

 

 

10,639

 

 

 

20,109

 

 

 

38,869

 

 

Loss from discontinued operations

 

 

(7,333

)

 

 

(32,550

)

 

 

(61,067

)

 

Net income (loss)

 

 

91,721

 

 

 

(73,762

)

 

 

173,058

 

 

Preferred dividends

 

 

(4,037

)

 

 

(4,378

)

 

 

(11,917

)

 

Net income (loss) applicable to common shareholders

 

 

$

87,684

 

 

 

$

(78,140

)

 

 

$

161,141

 

 

Basic income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

$

1.30

 

 

 

$

(0.58

)

 

 

$

2.55

 

 

Discontinued operations

 

 

(0.10

)

 

 

(0.41

)

 

 

(0.70

)

 

Basic income (loss) per common share

 

 

$

1.20

 

 

 

$

(0.99

)

 

 

$

1.85

 

 

Diluted income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

$

1.29

 

 

 

$

(0.58

)

 

 

$

2.44

 

 

Discontinued operations

 

 

(0.10

)

 

 

(0.41

)

 

 

(0.67

)

 

Diluted income (loss) per common share

 

 

$

1.19

 

 

 

$

(0.99

)

 

 

$

1.77

 

 

 

 

 

 

 

 

 

 

OfficeMax Incorporated and Subsidiaries
Consolidated Balance Sheets

 

 

December 30,
2006

 

December 31,
2005

 

 

 

(thousands except share and
per-share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

282,070

 

 

 

$

72,198

 

 

Receivables, net

 

 

556,733

 

 

 

596,724

 

 

Related party receivables

 

 

5,795

 

 

 

3,520

 

 

Inventories

 

 

1,071,486

 

 

 

1,114,570

 

 

Deferred income taxes

 

 

129,496

 

 

 

105,820

 

 

Other

 

 

51,264

 

 

 

49,217

 

 

Total current assets

 

 

2,096,844

 

 

 

1,942,049

 

 

Property and equipment:

 

 

 

 

 

 

 

 

 

Land and land improvements

 

 

36,195

 

 

 

38,537

 

 

Buildings and improvements

 

 

359,481

 

 

 

359,481

 

 

Machinery and equipment

 

 

794,010

 

 

 

685,545

 

 

Total property and equipment

 

 

1,189,686

 

 

 

1,083,563

 

 

Accumulated depreciation

 

 

(610,061

)

 

 

(548,118

)

 

Net property and equipment

 

 

579,625

 

 

 

535,445

 

 

Goodwill

 

 

1,216,032

 

 

 

1,218,200

 

 

Intangible assets, net

 

 

201,304

 

 

 

205,232

 

 

Investments in affiliates

 

 

175,000

 

 

 

175,000

 

 

Timber notes receivable

 

 

1,635,000

 

 

 

1,635,000

 

 

Restricted investments

 

 

22,292

 

 

 

22,377

 

 

Deferred charges

 

 

40,439

 

 

 

52,810

 

 

Other non-current assets

 

 

249,512

 

 

 

486,029

 

 

Total assets

 

 

$

6,216,048

 

 

 

$

6,272,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OfficeMax Incorporated and Subsidiaries

Consolidated Balance Sheets

 

 

December 30,
2006

 

December 31,
2005

 

 

 

(thousands except share and
per-share amounts)

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

$

—

 

 

 

$

18,666

 

 

Current portion of long-term debt

 

 

25,634

 

 

 

68,648

 

 

Accounts payable:

 

 

 

 

 

 

 

 

 

Trade

 

 

965,218

 

 

 

949,287

 

 

Related parties

 

 

32,482

 

 

 

42,166

 

 

Accrued expenses and other current liabilities:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

172,632

 

 

 

147,184

 

 

Other

 

 

317,434

 

 

 

352,537

 

 

Liabilities related to assets held for sale

 

 

15,503

 

 

 

9,838

 

 

Total current liabilities

 

 

1,528,903

 

 

 

1,588,326

 

 

Long-term debt:

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

384,246

 

 

 

407,242

 

 

Timber notes securitized

 

 

1,470,000

 

 

 

1,470,000

 

 

Total long-term debt

 

 

1,854,246

 

 

 

1,877,242

 

 

Other long-term obligations:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

287,122

 

 

 

538,830

 

 

Deferred gain on sale of assets

 

 

179,757

 

 

 

179,757

 

 

Other long-term obligations

 

 

350,491

 

 

 

324,853

 

 

Total other long-term obligations

 

 

817,370

 

 

 

1,043,440

 

 

Minority interest

 

 

29,885

 

 

 

27,455

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

Preferred stock—no par value; 10,000,000 shares authorized;

 

 

 

 

 

 

 

 

 

Series D ESOP: $.01 stated value; 1,216,335 and 1,216,335 shares outstanding

 

 

54,735

 

 

 

54,735

 

 

Common stock—$2.50 par value; 200,000,000 shares authorized; 74,903,220 and 70,804,612 shares outstanding

 

 

187,226

 

 

 

176,977

 

 

Additional paid-in capital

 

 

893,848

 

 

 

747,805

 

 

Retained earnings

 

 

941,830

 

 

 

898,283

 

 

Accumulated other comprehensive loss

 

 

(91,995

)

 

 

(142,121

)

 

Total shareholders’ equity

 

 

1,985,644

 

 

 

1,735,679

 

 

Total liabilities and shareholders’ equity

 

 

$

6,216,048

 

 

 

$

6,272,142

 

 

 

 

 

 

 

 

 

 

 

 

OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Cash Flows

 

 

Fiscal Year Ended

 

 

 

December 30,
2006

 

December 31,
2005

 

December 31,
2004

 

 

 

(thousands)

 

Cash provided by (used for) operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

$

91,721

 

 

 

$

(73,762

)

 

 

$

173,058

 

 

Items in net income (loss) not using (providing) cash

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from affiliates

 

 

(5,873

)

 

 

(5,460

)

 

 

(6,311

)

 

Depreciation and amortization

 

 

127,812

 

 

 

151,145

 

 

 

354,982

 

 

Minority interest, net of income tax

 

 

4,083

 

 

 

2,370

 

 

 

3,026

 

 

Pension and other postretirement benefits expense

 

 

13,239

 

 

 

25,877

 

 

 

83,261

 

 

Discontinued operations

 

 

5,973

 

 

 

8,862

 

 

 

36,457

 

 

Gain on sales of assets

 

 

(1,004

)

 

 

(410

)

 

 

(387,218

)

 

Non-cash asset write-downs

 

 

9,543

 

 

 

23,062

 

 

 

1,582

 

 

Other

 

 

24,602

 

 

 

38,384

 

 

 

22,027

 

 

Changes other than from acquisition of business

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

29,126

 

 

 

47,517

 

 

 

(490,168

)

 

Inventories

 

 

43,001

 

 

 

32,809

 

 

 

(39,630

)

 

Accounts payable and accrued liabilities

 

 

8,662

 

 

 

(142,582

)

 

 

(15,867

)

 

Current and deferred income taxes

 

 

58,683

 

 

 

(136,629

)

 

 

69,431

 

 

Pension and other postretirement benefits payments

 

 

—

 

 

 

—

 

 

 

(288,772

)

 

Other

 

 

(33,871

)

 

 

(28,881

)

 

 

32,993

 

 

Cash provided by (used for) operations

 

 

375,697

 

 

 

(57,698

)

 

 

(451,149

)

 

Cash provided by (used for) investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(174,769

)

 

 

(152,450

)

 

 

(290,600

)

 

Expenditures for timber and timberlands

 

 

—

 

 

 

—

 

 

 

(7,642

)

 

Investments in affiliates

 

 

—

 

 

 

—

 

 

 

(174,901

)

 

Acquisition of businesses and facilities, net of cash acquired

 

 

(1,500

)

 

 

(34,803

)

 

 

—

 

 

Proceeds from sale of (purchase of) restricted investments

 

 

—

 

 

 

93,259

 

 

 

(113,000

)

 

Proceeds from sales of assets

 

 

12,333

 

 

 

—

 

 

 

2,225,561

 

 

Discontinued operations

 

 

—

 

 

 

—

 

 

 

(9,388

)

 

Other

 

 

—

 

 

 

(3,343

)

 

 

15,078

 

 

Cash provided by (used for) investment

 

 

(163,936

)

 

 

(97,337

)

 

 

1,645,108

 

 

Cash provided by (used for) financing:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

(43,509

)

 

 

(49,817

)

 

 

(51,874

)

 

Preferred stock

 

 

(4,037

)

 

 

(4,379

)

 

 

(12,211

)

 

 

 

 

(47,546

)

 

 

(54,196

)

 

 

(64,085

)

 

Short-term borrowings (repayments), net

 

 

(18,666

)

 

 

8,266

 

 

 

5,121

 

 

Proceeds from timber notes securitized

 

 

—

 

 

 

—

 

 

 

1,470,000

 

 

Additions to long-term debt

 

 

—

 

 

 

—

 

 

 

246

 

 

Payments of long-term debt

 

 

(65,610

)

 

 

(206,933

)

 

 

(1,570,504

)

 

Purchase of Series D preferred stock

 

 

—

 

 

 

(7,229

)

 

 

(123,233

)

 

Purchase of common shares

 

 

(33

)

 

 

(780,417

)

 

 

—

 

 

Proceeds from exercise of stock options

 

 

129,966

 

 

 

24,747

 

 

 

37,823

 

 

Proceeds from adjustable conversion-rate equity security units

 

 

—

 

 

 

—

 

 

 

172,500

 

 

Other

 

 

—

 

 

 

453

 

 

 

(4,164

)

 

Cash used for financing

 

 

(1,889

)

 

 

(1,015,309

)

 

 

(76,296

)

 

Increase (decrease) in cash and cash equivalents

 

 

209,872

 

 

 

(1,170,344

)

 

 

1,117,663

 

 

Balance at beginning of the year

 

 

72,198

 

 

 

1,242,542

 

 

 

124,879

 

 

Balance at end of the year

 

 

$

282,070

 

 

 

$

72,198

 

 

 

$

1,242,542

 

 

 

 

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