FIN 451

Question 1

How to Study and Discuss Cases from PPT

Answer 1

Start With a Good Attitude

 Personal Initiative, self-reliance
 Curiosity, exploration
 Willingness to take risks
 Patience and persistence
 Discussion
 Trust in the process

Resources (Infrastructure)
Find 
a quiet place to study for 90 minutes 
Get 
a business dictionary 
Read
Read current business news each day; follow the markets
Learn
Learn the basics of spreadsheet modeling
From
Form a study group
Get
Get to know your Professor

Good Execution：

1. Read the case; quickly the first time
2. Read the case again slowly to develop awareness; take notes
3. Define the problem
4. Complete the analysis
5. Take a stand and make a recommendation
6. Participate in class; support your conclusions; be open to new insights
7. Jot down notes, corrections, and questions during or after discussion

Question 2

what is required rate of return

Answer 2

Required rate of return = real risk-free rate + expected inflation + Default risk premium + liquity premium + maturity premium = discount rate = opportunity cost

real return = nomial return - inflation

Question 3

Ben & jerry case

Answer 3

page 1
Ben & Jerry ‘s Homemade:
founder: Perry Odak (CEO), Ben Cohen, Jerry Greenfield
business: super-premium ice-cream, frozen yogurt, and sorbet.

Under the competitive pressure and declining financial performance, many takeovers want to buy Ben & Jerry

debate:
Ben and Jerry maintain the social orientation (to be an independent company)
Perry (CEO) think that selling the selling out the best buyer is best served for shareholders.

page 2
how they run the business at the beginning.
main customer: college student
selling method: ice cream parlor
location: Burlington
competitor: nope (because the summer too short and the rest of the seasons are too cold in Burlington)
business size (In 2000): 170 shelves, it was bought by many supermarket

page 3 how they contribute to the community

caring capitalism: Ben&Jerry’s Homemade, Patagonia (cloth), Odwalla (juice), The Body Shop (Body care products), Tom’s of Maine (personal-care product)

Ben & Jerry social objective permeated marketing, operations, and financial policies.

Donation: In 1985, donating 7.5% of pretax income to social foundations and community-action group

marketing approach: social-value-led marketing, rather than self-promotion-based motivation

marketing: cause-related marketing, the way of foresting cashew & Brazil nuts (the source of favour) by the sustainable ways

financing decision: Ben Cohen solely concern about how a company is doing, in spite of the stock price, go up or down (Wall street transcript)

operating decision: the disposal of factory wastewater(win-win situation to a tricky environmental problem)

Ben&Jerry’s social orientation was balanced with product and economic objective.(product, economic, and social orientation)

But management discovered that three objectives were not always in harmony.

page 5
Greenfield incident happen when they sacrifice short-term profits for social gains

Asset control:
the pursuit of nonprofit-oriented policy required stringent restrictions on corporate control 
corporate charter restrictions 
differential voting rights 
vermont legislature

Question 4

chapter 3

financial planning and forecasting

Answer 4

Financial Planning
Identify projects that a firm needs/wants to undertake

Determine ways to finance those projects

Results in a financial plan

Helps to align operations (short-term) with strategic plans (long-term)

Steps in Financial Forecasting

1. Forecast sales
2. Project the assets needed to support sales
3. Project internally generated funds
4. Project outside funds needed
5. Decide how to raise funds
6. Calculate effects of plan on target capital structure, ratios, and stock price

Is a single sales forecast sufficient?
No

Percent of Sales Method - forecasting
Project sales based on forecasted growth rate in sales
Forecast some items as a percent of the forecasted sales (or grow at the same rate)
Cash
Accounts receivable
Inventories
Net fixed assets (only if at capacity; assets fully utilized)
Accounts payable and accruals
*Notes Payable does not change spontaneously with sales

Percent of sales method (cont’d)
Choose (estimate) other items:
Debt (which affects interest expense)
Dividend policy (which determines retained earnings)
Dividend Payout Ratio = Div/NI
Plowback Ratio (Retention) = RE/NI or (1-Payout)
Common stock

Hold debt and common stock constant when forecasting unless given specific information about changes

Forecasting Interest Expense
Interest expense: based on the daily balance of debt during the year
Three ways to approximate interest expense:
1. Debt at end of year
Over-estimate if debt added throughout the year
(instead of all on January 1)
Problem of circularity
2. Debt at beginning of year
Under-estimate if debt added throughout the year (instead of all on December 31)
3. Average of beginning and ending debt
Accurately estimate if debt added smoothly throughout the year
Problem of circularity

Additional Funds Needed
The Pro forma Balance Sheet will not necessarily balance on the first iteration!

Given previous assumptions and choices, we can estimate:
Required assets to support sales
Specified sources of financing

AFN = Assets – L & OE

Implications of AFN
If AFN is positive, then you must secure additional financing
Decide how to raise needed capital

If AFN is negative, then you have more financing than is needed
Pay off debt
Buy back stock
Buy short-term investments/non-operating assets

Impacts on AFN
Consider each situation separately:
Higher sales?
Higher dividend payout ratio?
Higher profit margin?
Higher capital intensity ratio?
Pay suppliers in 60 days, rather than 30 days?

Example Problem
Pro forma financial statements in Excel
Southeast Chemicals Case

Question 5

body shop case analysis

Answer 5

page 1
In the late 1900s, Body shop is one of the fastest growing manufacturer-retailers in the word.

revenue of growth rate is 20% in the early 1990s, and is 8% in the late 1990s.

problem: the Body shop fail to maintain its brand, and the new retailers come in.

Bondy shop’s image: almost every mall in America, as well as virtually every corner on the corner on Britain’s shopping stress

new retailer’s product: skin-care or hair-care

page 2:
Chief executive officer (CEO):
1. Anita Roddick in 1998
2. Patrick Gournay

the problem persisted despite the CEO change. In 2021, revenue grew 13%, but pretax profit declined 21%
Gournay said this is below our expectation

better strategy from Gournay:

1. enhance strategy through product strategy and increase investment on the store.
2. improve operational efficiencies in the supply chain by reducing the product and inventory cost
3. reinforce the stakeholder culture

task: forecast 2001 spring?
Anita Roddick: strong-willed decision-maker

T-account forecasting
percentage-of-sale
hybrid of above two

page 3:
a pencil-and-paper forecast

input data (B3) = the number of sales increase by